Asbury Automotive Group Inc

Greetings. Welcome to Asbury Automotive Group's fourth quarter 2022 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Karen Reed, Vice President and Corporate Treasurer. Ms. Reed, you may now begin.

Thanks, Rob, and good morning, everyone. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's fourth quarter 2022 earnings call. The press release detailing Asbury's fourth quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Holtz, our President and Chief Executive Officer, Dan Clara, our Senior Vice President of Operations, and Michael Welch, our Senior Vice President and Chief Financial Officer. As a conclusion of our remarks, we will open the call up for questions and will be available later for any follow-up questions. Before we begin, we 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 which may include financial projections, forecasts, and current expectations, each of which are subject to certain significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2021, 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. We have posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our fourth quarter and full year 2022 results. It is now my pleasure to hand the call over to our CEO, David Holt. David?

Thank you, Karen, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings call. 2022 was a record year for Asbury. we generated $15.4 billion in revenue, up $5.6 billion from 2021. Our adjusted EBITDA for the year was $1.3 billion, an increase of over $500 million, and we expanded adjusted earnings per share by 38% to $37.66. We sold over 300,000 vehicles in 2022 and hit a milestone in number of cars we serviced at over 3 million, All of this is a result of our long-term trajectory to manage effectively through our growth, even at a much larger size. Looking back to 2017, we were a company with 6.5 billion in revenue. We have grown responsibly to over 15 billion in 2022. We have refined and maintained our operational discipline throughout this period. going from an adjusted SG&A to gross profit profile of 69.1 percent in 2017 to 56.8 percent for 2022. Through continuously enhancing our execution and optimizing our portfolio, we have been accretive and efficient while more than doubling the size and power of the company. Turning now to our results in the fourth quarter. We grew adjusted EBITDA by 71 million to 319 million, an increase of 29%. Expanded adjusted EPS from $7.46 to $9.12, an increase of 22%. Delivered an 8.2% adjusted operating margin. Increased revenue by $1.1 billion to $3.7 billion, and grew gross profit by $196 million to $738 million. Our gross profit margin was 19.9%, and our adjusted SG&A as a percentage of gross profit was 56.7%. For the full year 2022, we generated $987 million of adjusted operating cash flow. an increase of $355 million over last year, which speaks to our robust business model. At the end of December, we had $1.5 billion in liquidity. Even with large acquisitions in recent years, we have been diligent about our debt levels to support our long-term growth. Adjusted net leverage has decreased a full turn from 2.7 times at the end of 2021 to 1.7 times at the end of 2022. Our strong cash flow, liquidity, and balance sheet allows us flexibility and muscle to deploy our strategy. It enables us to be opportunistic with potential acquisitions or share buybacks. As announced, we repurchased 1.6 million shares during 2022 for approximately 300 million. Our board has approved an increase to our share repurchase authorization by 108 million to 200 million. We continuously evaluate acquisition opportunities that make sense for Asbury. We believe, based on the last several acquisitions, that we have shown discipline and held ourselves accountable to our robust criteria for opportunistic growth. In December, we divested the North Carolina stores as part of our continuous portfolio optimization. These nine stores represent an estimated annualized revenue of $590 million. We are opportunistic, strategic, and thoughtful regarding our capital allocation and maximizing our returns for our shareholders. Our guest-centric model also relies on providing a high level of commitment to our team members by offering best-in-class benefits, including equity awards to our teammates in our stores, which is unique among our peers. Our team members have also been giving back to their communities as volunteer hours were up nearly 70% year over year to our volunteer time off program of up to 40 hours per team member. Finally, I would like to thank all of my team members for an incredible year and a strong start to 2023. It is your hard work and dedication that provides a great guest experience and strengthens the performance of our business. The best is yet to come. Thank you. I'll now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. I would also like to extend my thanks to all our team members for their extraordinary results in 2022 and their commitment to consistently delivering an exceptional guest experience. My remarks will pertain to the same store performance unless stated otherwise. Starting with new vehicles, our new vehicle inventory ended the quarter at $254 million, which represents a 20-day supply. Our day supply fluctuated by segment, with domestic being at 30 days, import at 13 days, and luxury at 21 days. Even amidst continuous supply constraints, our new vehicle volume was flat year over year, while we grew new vehicle revenue by 3%. New average gross profit per vehicle decreased $704 from the prior year quarter. For the full year 2022, we increased new vehicle gross profit by 7% year over year. On a PBR basis, it increased by $1,348, or 30%, to $5,815 for the full year. Turning to used vehicles, used retail revenue was down 5% from the prior year quarter as the expected choppiness to the market persisted. Used retail gross profit per vehicle was $1,842 for the quarter, a decrease of $840 from the prior year quarter. Our used vehicle inventory ended the quarter at $202 million, which represents a 26-day supply. Our used to new ratio for the quarter was 101%, down from 108% from the prior year quarter. Shifting to F&I. We delivered another strong quarter with an F&I TBR of $2,233, an increase of $241 compared to the prior year quarter. In the fourth quarter, our total front-end yield per vehicle decreased on a year-over-year basis by $474 per vehicle to $5,984. Moving to parts and service, our parts and service Our parts and service revenue increased 12% in the quarter. Customer pay revenue built upon its momentum with a 13% growth, and we expanded its gross profit by 14%. Now, turning to ClickLink. Please note that for ClickLink, we are reporting on an all-store basis. As a reminder, this was the first quarter which included LHM and Stevenson sales since our full rollout. We sold an all-time record of over 8,400 vehicles through ClickLink in the fourth quarter, a 67% increase year-over-year, and a 24% increase over the previous best, which was last quarter. For the full year 2022, we generated approximately $1.1 billion of revenue from ClickLink, with over 27,500 vehicles sold via our fully transactional online tool. We expect to generate $2.5 billion in revenue for 2023 from ClickLink across all stores. A key differentiator for ClickLink is our loan marketplace, which works with 51 different lenders, banks, and credit unions to give the consumer the power to select the finance offerings that are best for them. In the fourth quarter, we optimized our F&I menu to 2.0 by presenting a bundle of suggested products. which are tailored to the vehicle, the location, and the customer's usage. This allows the ClickLink consumer to be informed and let them select the best choices for protecting their asset. We are also adding functionality in the first half of 2023 to bring in new features, including enhanced integrations with OEM captive finance arms. During the fourth quarter, over 92% of our transactions were with customers that were incremental to Asbury's leadership network. Average transaction time remained roughly in line with prior quarters, 8 minutes for cash deals and 14 minutes for finance deals. Total front-end PBR of $3,518 and an F&I PBR of $2,001, which equates to $5,519 for total front-end deals. The average ClickLink customer credit score increased quarter-over-quarter to 726. which is higher than the average credit score at our stores. 87% of those that applied were approved for financing. 77% of customers received an instant approval, while an additional 10% of customers required some offline assistance. The average distance of a ClickLink delivery from our dealerships was 18.6 miles, giving us the opportunity to retain our new customers in our parts and service departments. ClickLink customers are converting at more than double the rate of traditional internet leads. And while we won't see the full potential until inventory levels normalize, we are seeing strong early results. Our top conversion rates among individual stores were executed at 20% for domestic vehicles, 28% for imports, and 48% for luxury. In our journey to become the most guest-centric automotive retailer, We know the most important differentiator we have is the level of service we provide. Consistently delivering an exceptional guest experience builds trust amongst our clients, who in return reward us with loyalty and retention. I will now hand the call over to Michael to discuss our financial performance. Michael?

Thank you, Dan. To our investors, analysts, team members, and other participants on the call, good morning. I would like to provide some financial highlights for our company. For additional details on our financial performance for the quarter, please see our financial supplement in our press release today and our investor presentation on our website. Overall, compared to the fourth quarter of last year, adjusted net income increased 24% to $202 million, and adjusted EPS increased 22% to $9.12. Adjusted net income for the fourth quarter of 2022 excludes expenses of $2.7 million related to a significant acquisition that did not materialize, and gains on dealership divestitures net of $202.7 million, primarily related to the North Carolina stores, all of which netted to $6.83 per dilutive share. For reference, we received $322 million in cash proceeds for the sale of these divested stores. Adjusted net income for the fourth quarter of 2021 excludes acquisition expenses and acquisition financing expenses of $28.9 million, or $1.02 per diluted share. Our effective tax rate for the full year was 24.4% versus 23.7% in 2021. We anticipate our 2023 tax expense to be approximately 24.5%. For 2022, we generated adjusted operating cash flow of $987 million. Excluding real estate purchases, we spent approximately $95 million on capital expenditures for the full year. We expect this to be approximately $200 million for the full year 2023 as we continue planned CapEx related to our 2021 acquisitions. Of this $200 million, about $20 million is related to replacement of leased properties. For the quarter, TCA made $28 million of pre-tax income, which included $4 million of net investment income. TCA generated $80 million of pre-tax income for the year. We anticipate a full rollout of TCA products to our remaining stores by the end of 2023. For GAAP, we are required to defer the commission received at dealerships for TCA products over the life of the contract. To maintain comparability, We will continue to reflect the commission received for such sales in the dealership segment at the time of sale and record the deferral of that income in the TCA segment. With the ownership of TCA, while the overall profitability of the transaction is higher, the timing of income recognition is deferred and amortized over the life of the contract. We expect the negative deferral impact to last two to three years. Due to the deferral of the income associated with these store rollouts, we expect TCA to generate $25 million of pre-tax income for 2023. Our balance sheet remains strong as we end the year with approximately $1.5 billion of liquidity comprised of cash, excluding cash at total care auto, floor plan offset accounts, and availability on both our use line and revolving credit facility. Also at the end of the year, our pro forma adjusted net leverage ratio stood at 1.7 times down from 2.7 times at the end of 2021. By generating robust cash flow, we were able to quickly lower our net leverage ratio after our large acquisitions in 2021 and strengthen our balance sheet to provide flexibility to achieve our strategic goals. We'll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio and we will look to return capital through share repurchases. Since the start of 2022, we have repurchased approximately 1.7 million shares for $308 million. As David mentioned earlier, our board has approved an increase to our share repurchase authorization of $108 million to $200 million. Finally, I would also like to join David and Dan in thanking our team members at Asbury. for not only a strong quarter, but another strong year. Your hard work and dedication drive our excellent performance. I will now hand the call back over to David to provide some closing remarks.

David. Thank you, Michael. As we look to 2023, we believe we are well positioned in a market where the average age of the car is over 12 years old and day supply begins to build. Our fixed operations continues to be strong, and we anticipate this will continue for 2023. We are planning our business for a SAR in the mid-$14 million range. We believe with our disciplined cost management and agile expense structure heading into 2023, we can adapt to changing conditions, including one with a recovering, if uneven, day supply for the industry. Our robust cash flow and balance sheet enables us to have both the flexibility and strength for us to be opportunistic when it comes to our well-diversified revenue streams and when it comes to acquisitions and buybacks. This concludes our prepared remarks. We'll now turn the call over to the operator and take your questions. Operator?

Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad and the confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Thank you, and our first question is from the line of Daniel Imbrow with Stevens. Please proceed with your questions.

Yeah, good morning, guys. Thanks for your questions. David, I want to start on the new vehicle side of the industry. Obviously, earlier this week, large OEMs started reporting, talking about carrying 20, 30 days lower inventory than historical levels. You know, your inventory is slowly building up to the mid-20s. I guess, could you update us on how your conversations are going with the OEM partners? How do you think about the trajectory of inventory? Maybe shed light on how you think that evolves through 23 and maybe into next year would be great.

Sure. This is David. I'll do my best. I'll start with the fourth quarter. Our volume numbers are a little deceiving because while the day supply was where it was in the quarter, our largest volume luxury and import stores had single-digit day supply. So that really governed our ability to grow what was there. As we walk into 2023, we still have over 35% of our inventory coming in pre-sold. So it's still a robust pipeline. I think it's going to be a different year for all manufacturers. I think some are going to come back a lot sooner with day supply, and some it'll take them most of the year to catch up to it. So I think it depends upon which brand you're talking about. And amongst our peers and ourselves, it's going to really come down to the mix of brands that we have. So we anticipate a quick recovery in the first half of the year with Stellantis.

um and then in another domestic but it's it's going to be a slower uh uptick uh as it relates to say 300 honda and as we think about the gpu implications of that obviously i think new gpu is better than most expected this quarter you know barely barely declining sequentially um i mean what have you learned about the ability to price as inventory improves and how do you think that relationship, that inverse relationship with inventory shakes out through the year?

Sure. You know what I'll say? The last few years have been difficult to navigate from a prediction standpoint between COVID and supply chain issues and so on. But I'll tell you, you know, all the conversations the last few quarters have been, you know, when does it get back to 19 levels? I just don't see that. You know, 19 have a 17 million SAR rate. You know, we're forecasting less than a 15 million SAR. You can look back over history. When SARs are below, you know, 16 million, margins hold up pretty well. We think a lot of the OEMs have learned from their day supply, but that doesn't mean you won't have spikes at certain moments in time. I think they've been real comfortable with not bringing large incentives to the market. If inventory does back up on a day supply, I assume they'll come forward with incentives. And again, because the average age of the car is over 12 years, while we think it's not going to be a gangbuster year, we anticipate margins to hold pretty well. It will certainly vary by OEM depending upon day supply, but as we look at Asbury as a whole, we think it will be a pretty good year for new car margins for us.

Yeah, that's great. Last one for me, maybe Michael, jumping over to the balance sheet. You paid down a lot of debt. I think the buyback update was encouraging last week. I wanted to ask just for some color. I mean, you guys were active divesting stores in 4Q. How should we think about cap allocation, but also just the portfolio going forward? Are we done with divestitures? Are you back to being a net acquirer in the market? Any update there on uses of capital as we move over?

This is David. I'll start with it, and then Michael can jump in. Michael referenced in the script that we had $2.7 million in costs from an acquisition that didn't materialize. I've said it for many quarters. We're very focused on our assets and our portfolio of stores that we have, and we're always trying to maximize our opportunities in acquiring things that are accretive to our platform and divesting of stores that might not necessarily be performing at the highest levels. The divestiture of the North Carolina stores was partly due to the anticipation of the new acquisition coming on and making sure we maintained our balance of cash flow and kept our leverage proper. When that didn't materialize, we had already been under contract to sell the North Carolina stores.

David's piece leaves us with a lot of capacity, so $1.5 billion in liquidity. and a very low leverage ratio, so we have plenty of capacity, if acquisitions materialize this year, to deploy that capital, or if, you know, for share buybacks. So it leaves us in a good place for 2023 for capital deployment.

Great. I appreciate all the color guys. Congrats on the results, and best of luck.

Thank you. Our next question comes from the line of John Murphy with Bank of America. Pleased to see your questions.

Good morning, guys. Maybe just to follow up on the GPU question, David, and I know this is a little bit unfair but also kind of fair because it's important. How do you see new vehicle GPUs progressing as we go through the course of this year and where might they ultimately land? And sort of as a corollary to that, how much of the variable compensation that you pay to your sales folks is linked to that dollar gross, meaning there's kind of a natural – Reduction in SG&A is as gross comes down over time.

Yeah, so, John, it's complicated, right? I mean, every year, no one's predicted the year coming. Well, there's been a lot of unique things going on. But what I'll tell you, you know, in the fourth quarter, one of our domestic brands, the day supply, I would say, got back to close to normal levels. And the gross margins with that brand were significantly higher than what they were in 2019. So we have confidence that our margins will be significantly higher in 23 than they were in 19. But certainly you can tell it's fallen off from prior year results. So we think it'll be healthy. We think it'll be well above 19. But it's really going to be a story of how each particular brand comes back and when they come back. But because of a SAR below $15 million and all the things I've stated, we think it's going to be a pretty good year for new car margins.

And, John, on the SG&A side, you're right. A lot of that commission, a lot of the pay in the stores is tied to the gross profit that's generated, and so there's a natural kind of fall-off in the SG&A to match up with that fall-off in the gross profit decline.

The other thing I'll add, John, and you're talking about new, but I'll bring up used as well, it costs us X number of dollars to do a transaction. So to chase volume with lower gross really deteriorates or hurts your SG&A. So we're very thoughtful about not necessarily chasing volume, but really looking at each one of these cars as an asset and trying to get a fair return for it while not letting aging catch up to us.

Got it. Okay. Yeah, that's definitely helpful. And then on Quicklane, I think you said two things that were kind of sort of opposite. You said, I think, that 92% of the customers of transactions were new to Asbury, but then you said vehicles were delivered within 18 miles, which could indicate they're already in your market. So I'm just curious where the Quicklane customers are coming from. Was that statement correct? Maybe I misheard something there, that 92% were incremental. And if they're within 18 miles, it sounds like they're just coming from another brand as opposed to another dealer maybe. I'm just trying to understand where these folks are coming from because it sounds like you're going to have a good bump up here in potentially incremental revenue from Clicklane.

So, John, I'll do my best to answer that. If you need a follow-up, please take it. That 92% incremental means these are local customers that were doing business with other dealer groups that chose to leave the brand or the dealer that they were doing business with to come over to us. We believe they made that decision because of the ease and transparency of being able to transact online instead of sitting in a showroom. At some point over the years, that number will fall off a little bit as the market catches up with transactional tools. But we love the fact that it's local. We don't want to sell a car 500 miles away. We will on certain occasions, but the parts and service business, the retention, the relationship is really what we're into. So we focus on really a 50-mile radius around our rooftops and we try and do our Clicklane transactions within that space. So 92% new customers to us, meaning they were doing business with other local competitors that we compete against in that market.

Okay, so just to follow up then, I mean, you're saying 1.1 to 2.5 billion on Clicklane year over year for 22 to 23, right? So 1.4 billion incremental, just shy of 10%, that's about 9% incremental coming from Clicklane alone. Do you expect that to remain, that incremental in 23? Because, I mean, that's almost a 9% increase in your base revenue for 2022. It's kind of a big statement.

Some of it's timing. We added LHM and Stevenson in the fourth quarter. We didn't have them in the click lane numbers most of the year. We've been on click lane software for a couple years. Anytime a store or a market goes on click lanes, it takes them a full year to get the conversion rate up right. So you're catching up to the conversion for the stores you added. We're assuming SAR is going to increase a little bit. We're going to have a higher day supply of new at some points during the year, which is going to increase the sales as well. And as we're experiencing with the tool and our sales incrementally going up, it's just logic-based. If you could spend 15 minutes purchasing the car very transparently from your living room. Would you rather do that than spending two and a half hours in a showroom? So the additional $1.4 billion, if you will, is the full company being on it for a full year, the legacy stores improving slightly on conversion, and the other new acquisition stores increasing their conversion rates throughout the year.

Yeah, I appreciate you being humble, but it is $1.4 billion incremental, and it is a question of timing, but it is incremental, so it's a pretty impressive performance. Just lastly, on the net leverage, I think you guys just said you were at 1.7 times at the end of 22. You've been at 2.7 times at the end of 21. How should we think about where you want to target that and where that could go to if there was another large deal that came available to you?

So we're comfortable at three times if we have the right deal out there. But something that kind of two and a half times is probably our ideal place in this margin environment.

And I would say, John, we're not aggressively trying to acquire things. 80% of the things that are put in front of us, we don't even look at. We're really very disciplined about looking at acquisitions that are created for us. So we're not going to feel the force of having to acquire things to hit a certain target. It's more important that we add value assets to the portfolio that certainly benefit our shareholders.

Great. Thank you very much, guys. I appreciate it.

Thank you.

Our next question comes from the line of Ryan Figdahl with Craig Callum Capital. Please issue with your questions.

Good morning, guys. I want to focus in on used vehicles. So pricing seems to be somewhat stabilizing here in January. One, do you think that's sustainable? And then two, what do you think kind of trends are as you look out over the next several months this year?

Good morning, Ryan. This is Dan. Yeah, we are seeing the U.S. core valuation and pricing stabilizing. We've also got to keep in mind we are approaching our selling season, for lack of a better term, and also, you know, what comes with the – So we feel that the big valuations that we saw, Q3 into Q4, will definitely stabilize. And now there's still going to be pressure from an availability standpoint, but we believe that the market has stabilized in some capacity, but still some depreciation is still coming along.

And then for my follow-up, just curious on interest rates, if that's having any impact, either favorable or not, on attach rates for the financing.

Ryan, this is Dan again. You know, we have not seen a major impact. Obviously, there's always concern when you look at the average payment to own a car across the nation. And when you try to add... whether it is whatever you want to protect the asset with from an F&L product. It does put pressure on a monthly payment, but we have not seen any negative impact that is of concern at the store level. One of the things that I mentioned on the call was we have our loan marketplace. We not only deal with our captive lenders, but we also deal with local lenders, institutions, and credit unions. So that gives us the flexibility to be able to provide the best rate out there for our consumer.

Great. Thank you. Thank you.

Our next question is from the line of Adam Jonas with Morgan Stanley. Please just share with your questions.

Hi. This is Daniela Hagen on for Adam Jonas. So Tesla came out with a 20% or so price cut. And while that doesn't necessarily compete with all the nameplates you're selling, in some of the stores you might have some comparable products. So we're curious to see whether you saw any real-time impact on prices, demand, or showroom traffic whatsoever after those cuts.

Yeah. Good morning, Daniella. This is Dan. You know, when the first thing when we saw that announcement was take a real quick, assessment of what kind of inventory that we have from a Tesla standpoint across the stores. The good news, it was below 60. So in most cases, there were fresh trades where we were able to adjust. We did adjust the pricing of the cars to make sure that it was brought down to the current market condition and paying a close emphasis on retailing those cars. As far as impact on EVs that we sell. Respectfully, I believe that just speaks to the strength of the franchise system and the integrity that we have within the system selling EVs and being a good distributor for the end consumer.

We haven't seen any material impact on EV sales with any of our brands. because of the repricing of Tesla. Not to say it won't come at some point in time, but we also anticipate incentives to come out throughout the year as well.

Great. Thank you.

Thank you. The next question is from the line of Rajat Gupta with J.P. Morgan. Please proceed with your question.

Good morning. Thanks for taking the question. I just want to follow up on the SG&A comment. I understand there was some seasonality from 3Q to 4Q typically, but it looks like expenses were down $20 million quarter-over-quarter on a $30 million gross profit decline quarter-over-quarter. Is this kind of a general rule of thumb to think about when looking into 2023 and as GPUs moderate? particularly on the new vehicle side, just trying to understand, like, how should we think about that drop-through and based on whatever assumptions we make on GPU. And I have a follow-up. Thanks.

This is David. I would say, you know, we have a history of being very disciplining and cost-efficient. We've been working for years at our legacy stores at productivity per employee and really getting our transactional cost down per sale. All of our new acquisitions naturally aren't at the same level that we are from an efficiency standpoint. So we look to work in 23 to really get all those efficiencies that we have in the legacy stores, which we believe is a potential slight tailwind for us.

Got it. And maybe on parts and services, strong growth again here in the fourth quarter. Curious how we should think about the percent takes for 2023. You know, what is likely to be the key limiter to growth? Is it still technician hiring? And also pricing has been a key contributor to growth last couple years. And with parts supply improving and maybe some cooling and inflation, how should we think about or how are you planning in terms of growth for that particular business segment this year?

It's a great question. I assume most like us, we never have enough techs, and we can always use more. I think what you're seeing with the dollars increasing has more to do with the aging of the car. As the cars age, they need more work, and certainly parts costs go up every year. So as we look at 2023, From a growth standpoint, at least at this point, we think it's going to look very similar to what our results were in 22 as far as growth. We don't see it slowing down or leveling off. People are holding on to their cars longer, and if the jobless rate increases over time, that will certainly have an impact on parts and service, but we believe that will be a positive impact.

Got it. Just one last one. You reiterated the $55 EPS plan. We're still in a somewhat weak use for demand backdrop. You mentioned $14.5 million SAR. It seems like getting to $55 from $38, 50% EPS growth, it would need a pretty sharp recovery in the industry, both new and used. So I'll sort of quickly, you know, what else gives you confidence in this current backdrop, you know, where prices are still high, rates are high, you know, due to supply for use cards like to get tighter in the medium term. What gives you confidence in those targets? And is it reasonable to assume that you see an earnings decline this year before moving higher again, or you don't see that happening, you know, to that path to $55? Thanks.

Richard, if I miss a piece, please come back. You know, we think that, you know, 90% of the market are stores that are opportunities for acquisition. That it's really only 10% of the market that's owned by large groups like ourselves. So there's plenty of potential for acquisitions. We also think naturally over time in the next few years, this store will continue to grow. So between the combination of the SAR growth over the next few years, the opportunity with acquisitions, the efficiencies with Clicklane, and our ability to lower SG&A over time, I wouldn't say so much in 23, but over time, with the use of software and tools to become even more efficient, we think all those things still give us the potential and the opportunity to get there. Fast forward out, if acquisitions aren't great the next few years and SAR doesn't recover, Your point is valid. We just don't, we think it's too early to make that call and we still see the next three years growing SAR and our opportunity to acquire more stores and get better with our software.

Got it. But maybe just on 2023, you know, your comments on parts and services, you know, consistent growth, you know, 14 and a half million SAR and still relatively strong GPUs. Is it safe to assume that earnings might not decline this year with that kind of backdrop?

You know, it's a fair question. You know, you have the interest rates. You have your floor plan costs. You have different things that will come up on you. Naturally, your health care costs go up every single year, so your costs for employees go up as well. And as I sit here today, I don't have a guaranteed timeline for 2023. how each manufacturer is going to recover with day's supply. As we sit here today, we truly believe that the new car margins will hold up well throughout the year, but that could be altered. I mean, it's been an odd last three years. On the used car side, you've seen margin fall pretty good, but we don't think it's going back to 19 levels because you still have a supply issue in the marketplace where it's been depleted the last few years. So while we think It may not potentially be quite as strong as it was prior year. As we sit here today, we don't think it'll be far off of 2022. Understood.

Thanks for taking the questions.

Yes, sir.

Our next question is from the line of Brett Jordan with Jefferies. Please proceed with your questions.

Hey, good morning, guys. On the parts and service, could you talk about traffic versus ticket in the quarter, sort of what was price versus volumes?

Sure, yeah. Brad, good morning. This is Dan. You know, part of it was price, but we also saw an increase in our customer pay, our roll count throughout the quarter. You know, when you look at just break it down by the different segments. Every segment saw an increase, and domestic was relatively flat, maybe down 2% from an RO count. So we're seeing the traffic coming into the stores, and we keep our schedulers, online appointment schedulers, wide open, for lack of a better term, so that we can service the customers when it benefits them and not when it benefits us. And we're seeing the results out of that.

And Brent, one thing I would point out, because we're a relatively small company a year and a half ago, we almost doubled the number of rooftops we have in a year. And we spent years working on the legacy stores to really get up to production and efficiency within our shops. We now have that same opportunity with all those acquisitions. So we think we've got a nice tailwind over the next couple of years, working with our great teams out in those markets and becoming more efficient and growing that business.

Thank you. And then on SAR, your forecast of mid-14s, is that more production constrained or demand constrained? I guess when you think about the puts and takes, is the normal with a natural SAR be higher if vehicles were available, or do you just sort of see a smaller group of buyers able to afford in this environment?

It's the question to ask, and it's a tough one to answer. You know, I made the comment you know, over 35% of our incoming product is pre-sold. You know, you go back to 19 levels, you are nowhere near that number from a pre-sale standpoint. So still selling, pre-selling 35 plus percent of your inventory before it hits the ground tells you the demand is still pretty good. I don't want to be a broken record, but again, that average age of the vehicle being over 12 years creates an opportunity. And you have a resilient job market and with that average age of the car and them not being able to purchase cars the last couple of years because of availability, we think that there's an opportunity to continue that steady growth. We don't think we get back to the 17 million SAR because production won't be there. There's still supply constraint issues that are out there, and you still have a lot of OEMs converting R&D and working on a lot of launches of EV vehicles over the next 12 to 18 months. So I think it's a combination of a lot of things. Certainly the economy could shift and change where demand drops dramatically. We're just not seeing that at this point.

Okay. And then one quick question on leasing, something that obviously has not been a hot topic in the last couple of years, but as affordability from an outright purchase standpoint gets to be more challenging, do you think there's likelihood the OEs sort of step in and facilitate more leasing to drive volumes, or is that just not a topic lately?

Selfishly, I certainly hope so. That leasing business is important to us because we retain the customers in the brand. And it's important to the OEMs because they retain them within their brand as well. There hasn't been that incentive in leasing because the product hasn't been out there and it hasn't been available. And it's been a way for the manufacturer to retain the earnings, which was great. We think over time, leasing has to get feathered back into it. When does it happen? By what brand? It's really going to depend upon availability. But naturally, your luxury segment would be the first to benefit from leasing returning.

Great. Thank you.

Thank you.

Our final question is from the line of David Woodson with Morningstar. Please proceed with your question.

Hi, everyone. Going back to, David, you had talked about wanting to get the most out of every vehicle, but just looking at the new vehicle category, the three new vehicle categories, looking at imports, it looked like more of the opposite happened there in that only import had unit growth, but GPU percentage-wise fell the most. And just given the tight Toyota hot inventory, I was a little surprised by that. Are you not going as high in pricing there? Could you want to preserve some import volume?

Yeah, I wouldn't say it plays out that way. You have a lot of brands within the segment. The brands with the single-day supply had extremely high margins, so we don't think that was a major issue. I get your point as far as the gross profit falling off, but we still think for import that's $3,800 or in that vicinity is a very strong number on imports. So, again, it's going to be a competitive market. I don't see Toyota and Honda having a high day supply this year, so that will equate to higher margins. But there may be some other brands within that import segment that have a higher day supply. But, again, as you can see, to your point, with a falling margin like that, we're still generating over 8% operating margin, and we still have a very efficient and healthy SG&A%.

And with Toyota and Honda, their inventory has been an issue for a long time now, industry-wide. I mean, how much communication are they giving you? And is it purely chip shortage? Is it chip plus still some COVID absenteeism? I mean, what do you think is driving it mostly?

Sure. You know, look, it's frustrating to us. It's frustrating to our consumers. And it's quite honestly frustrating for them. We're fortunate to represent these brands. They communicate really well with us as best they can. And it's typically in 30-day increments as to what we'll see. And then there's conversation and talk about what potentially we could see in the first half of the year. Sometimes they hit those targets, sometimes they don't. Unique things come up with supply chain issues. A lot of these parts come from all over the world, and depending upon what's going on, it could have a negative impact at a moment in time.

And I know you said demand still. Still strong, but just curious, how worried are you? Maybe back end of the year, do high interest rates become an issue at that point?

It's a great question. I can only answer it this way. If the Fed raises one or two more times at 25 basis points, we think we'll be just fine. I think something catastrophic would have to happen in the marketplace for us to alter our belief in what's going on. if there was another war out there or something significantly got worse, if COVID came back to extreme levels like it did when it launched, you know, that would dramatically change things. But as we sit here today with all the things we've already discussed, age of the car park, the job market, we believe it's, you know, not that, you know, retail automotive won't be affected like other industries. We think we'll fare better than most throughout the year.

Okay, and just one more, if you don't mind. On acquisitions, you referred to that deal that fell through as significant in size. And just generally speaking, I know you can't comment on a specific deal, but when you tell us something like we're pursuing a large acquisition or a significant acquisition, should we still assume that it's significantly smaller than Larry Miller's size?

I'll try and navigate this one the best I can. Most acquisitions, Opportunities aren't the size of LHM. They're extremely rare. You know, so you have everything between one rooftop and 60 rooftops. This probably would have been somewhere in the middle of the two. It was a very healthy size acquisition, but not the size of Miller.

Okay, appreciate it. Thank you.

Okay. This concludes today's discussion. We appreciate your participation and look forward to speaking with you after the first quarter. Have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.