Asbury Automotive Group Inc

Good day and welcome to the Asbury Automotive Group Q4 and year-end 2019 earnings call. Today's conference is being recorded. At this time, it is now my pleasure to turn today's call over to Mr. Matt Petone. Please go ahead, sir.

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's fourth quarter 2019 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's Fourth 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, Dan Clara, our Senior Vice President of Operations, and Matt Petone, our Vice President of Finance and Treasurer. 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 content 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 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 fourth quarter 2019 earnings call. I'd like to start by welcoming our new Senior Vice President of Operations, Dan Clarke. Dan has held the following positions with Asbury over the past 18 years. He started his career selling cars, then worked his way up to general manager, then he successfully ran a market for us, and most recently, he was VP of operations for all of Asbury. Dan's servant leader mentality, knowledge of our business, and his passion for our vision makes him the obvious choice for this role. Now turning to our performance in the quarter and year-end results. We achieved record fourth quarter adjusted EPS of $2.53, up 15% from prior year. This was driven by revenue growth of 6%, gross profit growth of 7%. We also grew our parts and service gross profit 8% and grew finance and insurance by 8%. Since last quarter, we were able to bring down our new vehicle inventory by 10 days. 2019 was a record year for Asbury in a slightly down-star environment. We generated $7.2 billion of revenue, retailed over 190,000 vehicles, serviced over 2 million vehicles, grew our front-end yield per vehicle 1% to $3,140, grew parts and service gross profit by 8%, decreased SG&A as a percent of gross profit by 10 basis points to 68.4%. We achieved an adjusted operating margin of 4.6% and grew adjusted earnings per share by 12% to a record of $9.46. During 2019, we continued building out our vision of being the most guest-centric company in the automotive industry. We continue to invest in our omnichannel initiatives, which are a key part of the foundation to develop the guest-centric retail model. We also continue to invest in our employees. We implemented industry-leading benefits to our frontline associates that we believe will enhance our long-term growth potential while maintaining SG&A ratio at approximately the same level as last year. During 2019, we also continued our strategy of balanced capital allocation, seeking highest risk-adjusted returns through investments in our existing business, acquiring new stores, and returning capital to our shareholders. We invested $57 million in our business, we repurchased $15 million of our shares, and we acquired and integrated six stores. Now turning to 2020. We are excited to expand our footprint in Colorado by acquiring a Chrysler Jeep Dodge and Ram store. This is a well-performing store led by a solid management team and their members. These brands are the perfect compliment to our Subaru store in this market. We have long been attracted to the Colorado market due to its business-friendly environment, moderate cost of doing business, growing population, and attractive demographics. we plan to methodically build out our presence in the market following a similar approach to what we successfully executed in Indianapolis. In addition to our acquisitions, we will continue to optimize our dealership portfolio. Late this quarter, we plan to divest our Mississippi platform and our Nissan store in Atlanta. In total, we are divesting six dealerships, three Nissan stores, one Ford, one Toyota, and one Chevrolet. And finally, we are still on track to close the acquisition of Park Place in late March. As we mentioned in December, this transaction will increase Asbury's geographic mix to 36% of revenue derived from the attractive Texas market and transform our overall portfolio to approximately 50% of revenue derived from luxury brands The professionalism and passion of Park Place team members built a national brand known for delivering exceptional guest experience. We believe that combining what Park Place does best with what Asbury does best will drive significant shareholder value, and it will bring us closer to achieving our vision to become the most guest-centric automotive retailer. After the successful completion, of the Park Place acquisition, our main capital allocation focus in 2020 will be to de-lever. And we are targeting to be around 3.5 times by the end of the year. I will now hand the call over to Matt to discuss our financial performance. Thanks, David.

Overall, compared to the prior year fourth quarter, revenue increased by 6%, gross profit increased by 7%, Gross margin of 15.9% was 10 basis points higher than last year. SG&A, as a percentage of gross profit, increased 10 basis points to 68.3%. Adjusted operating margin increased 10 basis points to 4.6%. Adjusted income from operations increased by 6%, and adjusted EPS increased by 15% to $2.53. Net income for the fourth quarter 2019 was adjusted for a $7.1 million pretax charge for franchise right impairments, or 27 cents per diluted share, a $0.6 million pretax charge for real estate-related charges, or 3 cents per diluted share, and a $0.6 million pretax gain from a legal settlement, or 3 cents per diluted share. Net income for the fourth quarter 2018 was adjusted for a 3.7 million pre-tax charge for franchise right impairments, or 14 cents per diluted share. Our performance this quarter was impacted by a single midline import brand. This brand alone negatively impacted earnings per share by approximately 10 cents. In addition, we incurred costs associated with the Park Place transaction of approximately 7 cents per share in Q4 2019, mainly related to accounting and legal fees. These were not adjusted in our numbers. Our effective tax rate was 23.8% for the quarter, compared to 25.3% in the fourth quarter of 2018. Looking at expenses. SG&A as a percentage of gross profit for the quarter was 68.3%, an increase of 10 basis points over last year. With respect to capital deployed during the quarter, we did not repurchase any shares as our focus was on preparing for the Park Place transaction. Our remaining share repurchase authorization stands at $66 million. In 2019, we invested $57 million in our existing business through capital expenditures and real estate acquisition, returned 15 million to shareholders through share buyback activity, and we acquired six new stores. At the end of the quarter, our total leverage ratio stood at 2.9 times, and our net leverage ratio stood at 2.2 times, in line with our leverage last quarter. Our floor plan interest expense decreased by 1.3 million over the prior year quarter driven by a decrease in inventory levels and lower interest rates. From a liquidity perspective, we ended the quarter with $4 million in cash, $132 million available in floor plan offset accounts, $100 million available on our used vehicle line, and $237 million available on our revolving credit lines. Before I pass the call over to Dan, I would like to make a few comments regarding our expectations for 2020, excluding the Park Place transaction. We are planning our business for a declining SAR with an expectation of approximately 16.5 million units. We expect front end yield per vehicle to remain stable with any pressure on vehicle margins being offset by F&I. We believe that we can continue to grow our parts and service gross profit in the mid single digit range. We expect SG&A as a percentage of gross profit to be in the range of 68% to 69%. This reflects our balanced approach to SG&A with disciplined spending while investing in our future. We expect our tax rate in 2020 to be between 25% and 26%. We are planning for CapEx of approximately $50 million. This amount excludes real estate purchases and potential lease buyout opportunities that we consider financing transactions. Turning to our 2020 acquisitions and divestitures, we acquired a Chrysler Jeep Dodge Ram store in the Colorado market in late January 2020 and expect this store to generate approximately $124 million in annualized revenue. We signed an agreement to acquire Park Place, We expect it to close in late March 2020 and generate approximately $1.9 billion in annualized revenues. We signed an agreement to divest all five stores in the Mississippi market and expect it to close in March 2020. These dealerships generated approximately $334 million in annualized revenue. We signed an agreement to divest our Nissan Atlanta store and expect it to close in February 2020. This dealership generated approximately $77 million in annualized revenues. Excluding Park Place, we expect these acquisitions and divestitures to decrease annualized revenue by $287 million. If you include the two acquisitions made in Q3 2019, we expect annualized revenue to decrease by approximately $100 million. We believe these acquisitions and divestitures will strategically make Asbury a stronger company. The acquisition of Park Place, assuming an end of March close, is expected to be accretive to 2020 earnings per share by approximately $1 to $1.25, excluding the impact of one-time transaction costs. We expect one-time transaction costs related to the acquisition to be approximately $20 to $25 million. These costs are mainly financing related, but also include legal, audit, and other outside consulting related fees. The Park Place transaction is expected to be funded through a combination of Asbury's existing credit facilities, cash flow from operations, and committed financing arrangements. Asbury has secured committed financing, which it expects to replace with permanent financing prior to closing. On Friday, we signed an agreement to our senior credit facility. This amendment upsizes our facilities. It will increase new vehicle floor plan from $1,040,000,000 to $1,350,000,000, increase our used line from $160,000,000 to $200,000,000, and increase our revolver from $250,000,000 to $350,000,000. Our main focus in 2020 will be to deliver. We expect our net leverage ratio to be around 3.5 times by the end of 2020. With that, I will hand the call over to Dan to walk us through our operating performance in more detail. Dan?

Thanks, Matt. My remarks will pertain to our same store performance compared to the fourth quarter of 2019. Looking at new vehicles. SAR for the quarter was at 16.9 million units, down 3% versus last year. And retail SAR was down 2% for the quarter. Our new vehicle gross profit was down 4% from the prior year period. Our new unit sales decreased 5%. And the gross margin rate was 4.3%, flat from the prior year. However, We were able to grow our new vehicle gross profit per unit $20 from the prior year period. We saw strong growth in both luxury and domestic PVRs, but experienced some pressure in imports, mainly due to one brand. Our luxury brand saw strong growth with PVRs up $113 to 3,600 and new units up 9% from the prior year period. Our total new vehicle inventory, excluding inventory in-home for sale, was 803 million, and our day supply was 66, down one day from the prior year. Turning to used vehicles. Used retail gross profit was up 1% versus the prior year period. Unit sales were up 10% from the prior year. Our gross profit margin of 6.3% represents a gross profit per vehicle of $1,402, down $120 from last year. Though our gross profit per unit was down, it is important to remember that used car volume growth also drives increases in reconditioning parts and service gross profit, as well as F&I business. On average, we generate approximately $4,000 of gross profit on a used vehicle sold. This includes the used vehicle gross profit per unit, the F&I per vehicle, and reconditioning gross profit per used vehicle. Please see our investor relations presentation showing the long-term trend in the growth of our overall front-end gross profit per vehicle. Our used vehicle inventory of $140 million is a 29-day supply, down five days from the prior year. This excludes inventory in held for sale. Turning to F&I. Total F&I gross profit increased by 4%, and gross profit per vehicle increased by $52 to $1,695 from the prior year quarter. This demonstrates the professionalism and talent of our teams. 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 the best view of our true profit per vehicle sold. The front end yield was up $7 in the quarter to over $3,200. This is up $650 since 2003. Please see our IR presentation for the historical trend. Turning to parts and service. Our parts and service revenue increased 5% and gross profit increased 4%. This was achieved with a 4% increase in customer pay, a 3% increase in reconditioning, and a 5% increase in warranty. And now, an update on our omni-channel initiatives. Since investing in this strategy, we have seen strong growth. Our push start online sales for the first time now represents 10% of total retail sales in the quarter. We continue to grow traffic utilizing our digital parts and service scheduling tool, and we reached a record of 140,000 online service appointments this quarter, up 23% from the prior year. We continue to make great progress implementing our Dealership of the Future at our pilot store in North Carolina. Based on reviews, customers appreciate the transparency and speed of transactions. We have completed several hundred transactions in 45 minutes, with several more completed in less time, as little as 36 minutes. And in fixed operations, we have been able to decrease cycle time by 32%. We calculate service cycle time from when we accept the keys from our guests to when we hand them back. In addition to our omnichannel strategy, an important part of our continued success is our people. As previously announced, at the beginning of 2019, we put together an industry-leading benefits package for our frontline associates, including premium free healthcare for our tenure frontline team members that impact the guest experience. Equity grants, education grants, a four-day work week, extended vacation time, and paid maternity leave. This enhanced benefits package is continuing to have a 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. And I would also like to welcome all of our new teammates in Colorado. We will now turn the call over to the operator and take your questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask an audio question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will be from Rick Nelson with Stevens, Inc.

Thanks. Good morning.

Good morning, Rick.

I wanted to ask you, David or Matt, how we should think about SG&A to gross incorporating the Park Place program acquisition and how you're thinking about omni-channel investments in 2020, and would those be deployed also into Park Place?

Sure, Rick. This is Matt. For Asbury's SG&A, we're guiding to 68% to 69% for the year. With the acquisition of Park Place, being that it's 10 luxury dealerships, we would expect over the next year to two years for their SG&A to be very similar to ours, if not better, when we combine the both of them. Naturally, for the first year, as we get in and as we begin to incorporate the best of what they do with the best of what we do, it'll take us a little while to incorporate and develop and apply all those synergies, combine back offices, and really bring the two companies together. But we would expect the SG&A over the next year or two to be better than ours. due to the fact that they're large luxury stores.

And, Rick, just to touch on your question about our omni-channel initiative, that's continuing to grow and steady, and same investments will be made in 2020, probably a little bit additional, which we'll absorb without noticing it in our SG&A. We made some material increases in our numbers in the fourth quarter with it, And we're excited with our software partners and seeing new developments coming in 2020 to enhance it even further.

Great. Thanks for that. The acquisition at Denver, was that something that you had in the works prior to Park Place? And I'm curious about your acquisition appetite now with Park Place coming into the fold.

Sure. It was similar in timing. We started conversations with the folks in Colorado similar to the same time as the Park Place folks. It's a one-store acquisition. Again, it fits our criteria, well-run, great return. We think it's a nice tuck-in, and it really didn't really do anything from a leverage ratio standpoint doing the acquisition, so we moved forward with it and thought it was a nice accretive deal for our market.

and your appetite for doing additional deals like that with Park Place?

Yeah, I would say the main focus for 2020 is delevering and getting our costs down and getting our leverage ratio back to our comfort zone. I don't think you'll see much in 2020, but our focus is really paying down debt. Certainly soon after that, we'll be looking hard at the Colorado market and looking for opportunities.

Thanks for that. And on the divestiture side, were those stores profitable? And if you could speak to the multiple, are they sold at a gain?

Sure. The best way I would phrase it is we purchased the Colorado stores at a lower multiple than what we sold the Mississippi stores for. So the deal made sense to us. We looked at Mississippi as we have a lot of great long-tenured teammates there, but our returns haven't been what the company averages are, and it's been difficult from our standpoint to professionally manage that market to the level that we think is a good deal for our shareholders. We think this was an opportunity for us to sell it to a private cap dealer that will probably have better success with it and for us to reinvest in areas that are will be more accretive for our company. We actually believe we'll be stronger with all the divestitures. The Nissan store in Atlanta was a big investment in CapEx a while back, and incentives were different, and things were going on differently with the brand. It has not been a well-performing store lately, nothing due to our associates there. It's just more to do with the economic circumstance with the brand right now, and we felt it made sense when we had an opportunity to get out of it and take that capital, deploy it in better areas.

Okay, great. Finally, if I could ask you to follow up on that. Nissan remains a headwind 10 cents. You called out this quarter. Is there any light at the end of the tunnel, any changes in the way they're compensating dealers to hit targets?

Every manufacturer, like every dealer, has their ups and downs and their cycles. I don't see it right now. I'm sure they'll figure it out. They're bright people. They have good products coming, so eventually they'll figure it out. You know, we looked at it from a standpoint of our overall portfolio and that maybe we were too heavily invested in the brand, and this made more sense to divest. Really, in the last 12 months, we've divested of four Nissan dealerships.

Great. Thanks a lot, and good luck.

Thank you, Rick.

Thank you. Our next question will be from John Murphy with Bank of America.

Good morning, guys. Just a first question. I mean, obviously, you're kind of alluding to the new vehicle market remaining under pressure from a volume perspective, and profitability is okay, although you did a pretty good job on it in the quarter. I mean, as you look at growing the used and parts and service business really structurally, I'm just curious how much more room you think there is. And if we think about the age bucket that you're focused on, you know, how late or how old can you go in the age bucket to potentially grow those businesses?

John, this is David. I'll do my best at tackling that one. I would tell you, you know, when you think about, and I've said this before, the average dealer in the United States retains less than 55% of the service work for every car that they sell. So upside potential across the industry is huge. The logical question is, you know, why aren't you growing at double-digit rates if there's that much capacity out there? It's a very competitive market space. Technicians are at a premium. The amount of technicians you add to your staff have a direct impact on the growth of the business, so to speak. I would tell you from our standpoint, the software that we've implemented a few years ago, we're able to communicate and be more transparent with our customers. We're texting them their service bills, their service work, their MPIs that are done, and texting them a link to pay their bill and handle things that way. So we're faster, more transparent, and we think we're really set up for the future. So I would tell you we could keep growing at mid single digit numbers for years and there's tremendous potential out there. And then I'll, you know, give you my own personal opinion, you know, with where electrification is going, I actually see the OEM or the dealer body service retention numbers going up. So I think you're going to get that normal incremental lift. And then you're going to, as the electrification comes in, it's going to really push the retention up even higher for the dealer body. So I think it's great. On the pre-owned side, You know, your only dip in pre-owned when SAR comes down is acquiring vehicles. Most dealers get their vehicles from customers trading in their vehicles. And when you purchase cars or have to purchase cars for your sole inventory, so to speak, your margins are going to be a lot more compressed. We're very focused on this and really trying to connect more directly with the customers, whether they're buying or not buying, to acquire their trade-ins. And I would say that's kind of the lever that we're mainly focused on right now is from an acquisition standpoint on pre-owned.

Thank you. Our next question will be from Brett Jordan with Jefferies.

Good morning. This is Mark Jordan on for Brett. Thinking about the used retail segment, performed well during the quarter, highlighted by some strong growth in units. Can you talk about what is driving that growth?

Yeah, this is David, Mark. I would tell you, you know, the first half of the year we underperformed in pre-owned and weren't as focused on as we should have been. And we've really been more focused on it in the fourth quarter. And I would say, you know, there's a lot to selling more vehicles. You also, you know, inventory aging, wholesale losses, reconditioning dollars, finance dollars. There's a lot to think about when doing it. So that growth of what we're most proud about, you know, It really came through CPO vehicles. So we're not out buying a lot of cars. We're keeping a lot of cars internally, getting a lot from our OEM partners. Our CPO sales in the quarter alone on a same store basis were up 16%. So we're up 10% overall, but 16% on CPO. So we see CPO as a really value option for our guests and something that we're going to continue to take advantage of. And we also think it's a differentiator between us and the independents that can offer these same CPO products.

Okay, great. And speaking of those CPO volumes, would that be the main driver of the used retail GPU erosion during the quarter?

Yeah, I would say not necessarily, no. I would say it's a little bit more of a focus with some of the brands to increase our volumes. And sometimes when you increase volume that much, PVR takes a little bit of a hit. Again, you know, generally from our peer group, we tend to be at the top of our peer group or used car margin, except one, I believe, and I think they put their reconditioning dollars in the PVR. So we're maintaining what we think is still, based upon our peers, a healthy margin. Certainly could be better. But again, we also look at that parts and service reconditioning dollars and the F&I dollars and when you think about an overall profit on a used car of around $4,000, that to us is pretty healthy. Okay, great. Thank you very much. Thank you.

Thank you. Our next question will be from Armentis Sinkvicious with Morgan Stanley.

Great. Thank you for taking the question. For the new vehicle side, GPUs are quite strong. You mentioned luxury as a As a tailwind, Nissan continues to be a headwind. Was it just really the mix towards luxury that drove strength in new GPU? Or is there something else that we should be thinking of?

We saw it in domestic as well. I believe our PVR in domestic was up $200 a car, or a little bit over $200 a car in the quarter. So we definitely were backwards in domestic volume. but traded a little bit of that for PVR. So to be up $200 to us was significant, but the pressure was midline import.

Okay. And then, you know, on a, you know, was it just, you know, more disciplined or, you know, how are the incentives structured, you know, today and how are they during the quarter just to, you know, be thinking about going forward?

Good morning, Omar. This is Dan Clara. You know, the incentives, some of the midline imports, some of those change quite a bit from previous quarter year. But overall, I think that we saw a little bit more incentives being provided down from the OEMs. And for the month of January, it seems pretty consistent.

Specifically on the domestic side, we'd made decisions with some of the brands not to chase the volume and work on our margin. And some of them had fairly good incentives out there. Again, not to chase volume, but more tied to different things around CSI and other things. And we were able to capture most of that money, which really increased our PBR. Okay.

And then on the parts and services mid-single-digit growth into next year, can you walk us through some of the puts and takes? How are we thinking about customer pay versus warranty versus reconditioning in order to bridge to get to that mid-single-digit growth?

Yeah, I would say customer pay is going to ebb and flow. It's a little seasonal depending upon the number of days in the month and how it all pans out. But I would say, you know, months will travel between 5% and 10% growth in CP. Warranty is very difficult to predict, so we tend to look at it from a flat basis and then see where it ends up. Sometimes you're way off in either direction, but it's really hard to predict warranty. And internals, kind of like the fourth quarter, we're looking at internal gross profit growing in the low single digits from a year-over-year perspective. which gets us, you know, all baked in, gets us to mid-single digits. Okay. Much appreciated. Thank you.

Thank you. Our next question will be from Chris Buttiglieger with Wolf Research.

Hey, this is Jake Moser. I'm for Chris. Thanks for taking the question.

Hey, Jake.

So by our math, it looked like push start had kind of stalled around 8% of units for a few quarters in a row, so that jumped to 10%.

Correct.

Pretty impressive. Can you talk about what you might have done differently to reaccelerate adoption there?

Yeah, I would tell you the biggest single change that took place was in the conversion. The traffic volume on the tool is large. The conversion is what's growing. And I mentioned this a quarter or two ago. We created a loan marketplace, and we're the first dealer group to do it. There may be others at this point I'm not aware of. But basically, it's like a rocket mortgage-like experience. The customer, traditional car dealership, they fill out that credit application online. It comes over as a lead. The dealer has to submit the application and get back to the consumer. We've created a loan marketplace with the large lenders that we have. So when that consumer is filling out the credit application online within 30 to 45 seconds, they're seeing right back from the lenders what they'll do for them, rates and terms and everything. So that transparency has really helped our conversion rate.

Gotcha. That's helpful. And then just following up, I'm not sure if you've talked about this in the past, but how does push start adoption compare between new unit sales and used unit sales?

So it's interesting. We haven't talked about it lately. When we launched the tool, our expectation was it would be a majority of pre-owned and low on the new inside. In the beginning, it was just the opposite. It was a lot of new cars, what I would call commodity, fast-moving, low-margin cars, and it was a smaller percent in used. It's actually now flipped, just the opposite, where a larger portion of the sales are coming through pre-owned than they are new car.

All right, really interesting. Thank you.

Thank you. Our next question is, will be from Ryan Sittle with Craig Hillam Capital Group.

Hey, guys. Congrats on the good quarter. Just a couple from us. So, one, have you mentioned what the pro forma leverage ratio will be kind of Q1 after the transaction with Park Place, what your gross and net leverage will be?

This is Matt. It should be right around four times.

Great. And then secondly, kind of on the omni channel, just piggybacking off of that, What trends have you seen? I guess what percent are home delivery versus pickup in store and then kind of how have those trends progressed over the last several quarters?

You know, it really hasn't moved much. It's still running close to 80% pickup, not delivery. And we kind of expected the opposite where these folks were doing the transaction online. But really what it comes down to is, you know, Cars are complex. I think they want to come to the location where they're buying it from. They want to meet the people. They want to meet the people in the parts and service area. They're going to service their vehicles. And they really want a professional delivery for someone to go over their car well. I mean, as we all know nowadays, there's so much technology in cars. It takes a while to go through that professionally.

And just one follow-up on that. You mentioned kind of meet the team and whatnot. Is the retention for parts and service any different from the push start omni-channel customers as it is for everyone else or too early to tell?

It's not too early to tell. It's trending about the same, maybe a little bit higher, but I'll be honest, it's more to do with the geographic area where they're living. If it's a more transient area, It's a little bit lower, and for the secondary markets and less transient areas, it's trending a little bit higher.

Great. That's it for me. Thanks, guys. Good luck.

Thank you.

Thank you. Our next question will be from Rajat Gupta with J.P. Morgan.

Hey, thanks for taking my questions, and congrats on the quarter, and congrats, Dan, on the appointment as well. Thank you. You know, just wanted to start off, you know, just following up on the Nissan question earlier. You know, Nissan recently, you know, announced that, you know, they might be scaling back their U.S. operations. You've announced a couple of store divestitures. Do you think we could expect more in the near term just on the Nissan front? And then, you know, and then following up on that, you know, just on the leverage target for the year for three and a half times, Does that anticipate any further divestitures or not? And I have a follow-up. Thanks.

Sure. If we missed anything, Raja, please bring it back. It's very difficult to predict the future. You know, our job is to look at what's the best way to deploy capital and what's going to give the strongest returns for our shareholders and strategically what's going to balance our company to be stronger in the future. We think the acquisition of Park Place, what we're doing in Denver, the divestitures in Mississippi and Atlanta truly make Asbury a stronger company overall. But certainly no one can predict the future. Nissan's a good manufacturer. They make a good product. They're a little bit behind others just at the timing cycle with new product coming. So when their new product comes, I'm sure they'll get a spring back. They've had some change in management teams, you know, over the last year to 18 months. I think there's a lot of factors that come into play for them, but I'm sure they'll figure it out and I'm sure they'll get back on track. Because again, it's a quality company and they make a good product. It's just for us with what's going on right now, this seemed to be strategically the best move for us. And when you looked across us with our peer groups, we percentage-wise floated a little bit higher with the brand and having the opportunity to change the mix to luxury the way we are with very large profitable stores. It seemed to make the most sense at that time. Roger, this is Matt.

Concerning the leverage, so we'll start off at about four times, and mainly through free cash flow generation, we'll be able to get down to 3.5 times by the end of the year. So no divestitures. Because we're buying such high-quality assets, our free cash flow generation will be very big, and the majority of that is going to go down to paying down debt, which we believe we'll be able to get to right around 3.5 by the end of the year.

Got it. And just on the Nissan, the 10-cent headwind that you saw in the fourth quarter, I mean, do you think we continue to get a little bit of that in the next couple of quarters before we start lapping that? How should we think about, you know, just the margins for import in the near term?

Yeah. So when you think about it from our perspective, you know, we find out about the February incentives at the beginning of February. We don't know what they are in January, and we certainly don't have a clue what they're going to be in March. I would tell you from what we can see right now, I don't see anything materially changing. However, I'm sure at some point in time, they'll come up with something that makes sense to get the volume going again and get profitability back. I just couldn't tell you when that is.

Got it. That makes sense. And then, you know, just on the 2020, you know, earnings, you know, earnings bridge, puts and takes, you've talked about thoughts and services, you know, I mean, you've given a little color on that side. I mean, used record volume seems pretty healthy. I mean, any color, you know, how should we think about F&I? And then even on the used record side, I mean, from overall gross profit perspective, like how should we expect 2020 to turn out? We're just trying to get a broad, you know, overall earnings ratio. Thanks.

This is Matt. So our guidance, the way we're thinking about it for 2020 is we got it to our front end yield to be slightly up. typically what we've seen is margins pull back, but we've been able to more than offset it with really strong growth in our F&I, and that's the way we've been really trying to think about it and look at it because what we've seen over the past couple years is that that F&I growth has really outperformed the new and used car margins. We actually put a really good plot in our IR deck that takes a look at the new vehicle PBRs all the way back to 2003, and it's really interesting because you see the front-end yield going from about $2,900 all the way up to $3,150. And really interesting is that we added reconditioning in so you can see how that trade-in reconditioning work really adds to our gross profit. That's gone from about $3,160 to all the way up to about $3,800. So we're trying to refocus the way we think about our margins to really look at it on a front-end yield, and we're guiding to up on the front-end yields.

Roger, I would say, David, generally speaking about operations, you know, we believe that we can control parts and service F&I and used cars and not so much new cars. We also believe that 2020, based on the way we see it today, we should have some incremental lift. And we're very hopeful for a solid 2020.

Great. Good luck. Thank you so much.

Thank you.

Thank you. Our next question will be from Stephanie Benjamin with SunTrust. Hi, good morning.

Thanks for the question. I wanted to circle back on the used environment a little bit. Maybe you could speak a bit about just competition and filling the need for any kind of stepped-up ad spending or anything. I think the consumer continues to hold up nicely. It's a nice used vehicle market. kind of talk about how you can plan to continue to have nice growth in that standpoint in any competition or investments that you're seeing, you know, just as we look to 2020. That would be helpful. Thanks.

Morning, Stephanie. This is Dan Clara. You know, the used car market from a competitive standpoint, it's, I don't think that it's changed drastically. We do feel that there is still the opportunity to grow. As in any business, we have some of the bottom performers, and that's what we're focusing on. And we believe that we can achieve improvement in those stores. From a credit perspective, the credit seems pretty healthy. We are looking at lenders potentially getting a little bit, but very, very little stricter on, you know, providing or asking for steps on your secondary market. But overall, it is very, very healthy.

Just as a follow-up, our subprime is between 8% and 10% of our overall business.

Great. No, that's really helpful. And then I guess just going back on from an investment standpoint, and this ties a bit to a lot of your online capabilities as well, just you know, your ability to kind of gain shares, you know, so much of the consumer is starting online, and are you finding that as more and more of the business, you know, with your peers and those that they've used, the used players are moving more online, are you seeing price transparency is picking up, or you're having to invest more to make sure you're popping up in search engines? Is anything there, if that's changed, or if it's kind of the status quo as you've seen the last year? Thanks.

Sure. I would tell you one of our strengths is our marketing department. We generally have the lowest cost per car for ad dollars spent, and we're growing traffic year over year, and that's completely a credit to them. From a used car perspective and in pricing, it's been this way for a few years where it's similar to new. Everyone has market information. The markets kind of dictate what the prices are and what the values are. to us, it's not just about selling a car. We don't see the car. We kind of think, how much money are we investing and where's the return? And we look at the three areas. What can we make with finance with this car? What can we make in the service department? And where's the margin going to be up front? So again, it's not just growing volume, but it's thoughtfully growing it to make sure that there's a return there on the invested capital. But that's essentially it. Our marketing is We're very proud of it. It's very strong. It's very efficient. And it continues to grow. And naturally, if the traffic wasn't growing, we would certainly be spending more dollars because traffic is what generates our business.

All very helpful. Thank you so much.

Thank you.

Thank you. Our next question will be from John Murphy with Bank of America.

I apologize. My line dropped earlier. Just two quick follow-ups. First, I don't know if you guys have discussed the opportunity on floor plan in 2020, both from a sizing of inventory plus the rate benefit. I'm just curious if you could give us some insight there as to how you're thinking about floor plan in 2020.

John, this is Matt. We do expect mainly the decrease in LIBOR rates to see our floor plan expense decrease, and As we talked about earlier, at the beginning of the year, our inventory was really high, and we were able to do a really nice job in the back half of the year getting it down. So we would expect to see into next year the two-prong benefit of lower rates and the decrease in inventory levels. So it should be a nice tailwind into 2020.

Okay, that's helpful. And then just one other question, and you may have covered this and we've talked about it in the past, but on recon, on used vehicle sales, what is the average dollar rate? that revenue and gross that you're getting on the recon of the used vehicles you're selling?

It generally runs about $1,000 to $1,200 from a gross perspective, and we recognize that margin at 100%. But, John, again, because of differences in brands, a low and a high can be anywhere from $600 to $2,000.

Got it. And did you think that would roughly be something that would be reasonably consistent going forward or, or might there be an opportunity maybe if you get into a little bit older vehicles or maybe less of an opportunity? How do you, how do you think about that?

No, I don't see that number changing at all. It may actually increase a little bit over time dollars wise on the complexity of the cars. Again, we all know that the average age of the car is over 11 years. So, you know, they're, Anything that old needs a fair amount of work. So I don't see that changing. Great. Thank you very much. Thank you. This concludes today's discussion. We appreciate your participation on the call today. Have a great day.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.