Q4 2019 Earnings Call
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[music].
Good day and welcome to any Asbury Automotive group Q4, and year end 2019 earnings call. Today's conference is being recorded at this time, it's now my pleasure turn todays call. After Mr., Matt Pettoni. Please go ahead Sir.
Thanks, operator, and good morning, everyone welcome to Asbury automotive groups fourth quarter 2019 earnings call.
Today's call is being recorded and will be available for replay later today.
The press release detailing Asbury fourth quarter results was issued earlier this morning and is posted on our website Asbury auto Dot com.
Participating with us today, or David <unk>, our President and Chief Executive Officer, Dan Claire, Our senior Vice President of Operation and Matt Pettoni, Our Vice President Finance and Treasurer.
At the conclusion of our remarks, we will open the call 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 contain forward looking statements forward looking statements or statements other than those which are historical in nature.
Looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements.
Information regarding certain other risks that may cause actual results to differ please see our filings with the FCC 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 express we disclaim any responsibility to update forward looking statements. In addition, certain non-GAAP financial measures as defined under FCC rules may be discussed on this call.
As required by applicable FCC rules, we provide reconciliations of any such non-GAAP financial measures. The most directly comparable GAAP measures on our website. It's my pleasure to hand, the call over to our CEO David 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 Claire.
Dan has held the following positions with Asbury over the past 18 years.
He started his career selling cars and work is way up the general manager.
He successfully ran a market force and most recently he was VP of operations for all of that's right.
Dan 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 yearend 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 up 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 Saar environment.
We generated 7.2 billion of revenue.
Retail to over 190000 vehicles.
Serviced over 2 million vehicles.
Grew our front end yield per vehicle, 1% to $3140.
Uhhuh parts and service gross profit by 8%.
Decreased SDMA 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 omni channel 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.
We believe will enhance our long term growth potential while maintaining SDMA ratio at approximately the same levels last year.
During 2019, we also continued our strategy a balanced capital allocation.
Speaking highest risk adjusted returns through investments in our existing business.
Acquiring new stores.
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're excited to expand our footprint in Colorado.
By acquiring a Chrysler Jeep and Ram stores.
This is a well performing store.
Led by a solid management team and their members.
These brands are the perfect complement to our Subaru store in this market.
We've 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 built 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 as Bruce geographic mix to 36% of revenue derived from the attractive Texas market.
Yeah 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 retail.
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 SDMA.
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 pre tax charge for franchise right impairments or 27 cents per diluted share.
Hey, zero point Sixmillion pre tax charge for real estate related charges or three cents per diluted share and a 0.6 million pre tax gain from a legal settlement or three 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 single midline import brands. This brand alone negatively impacted earnings per share by approximately 10 cents. In addition, we incurred cost associated with the park place transaction of approximately seven cents per share in Q.
I'll turn the 19, 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 2018.
Looking at expenses SG nine 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 repurchased 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 inline with our leverage last quarter.
Our floorplan interest expense decreased by 1.3 million over the prior year quarter, driven by 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 a 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 lease 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 a phenomena.
We believe that we continue to grow our parts and service gross profit in the mid single digit range, we expect SDMA as a percentage of gross profit to be in the range of 68% to 69%. This reflects our balance approach to SG nay 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 now excludes real estate purchases and potential lease buyout opportunities that we consider financing transactions.
Turning to our 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 an annualized revenues, 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 expected to close in February 2020. This dealership generated approximately 77 million an 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 act.
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 one dollar to $1.25 cents, excluding the impact of onetime transaction costs.
We expect onetime transaction costs related to the acquisition to be approximately $20 million to $25 million.
These costs are mainly financing related but also includes legal audit and other outside consulting related fees.
The park place transaction is expected to be funded through a combination of asbury its 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 billion in 40 to 1.350 billion increase our used line from 160 to 200 million and increased our revolver from 250 to 350 million.
Our main focus in 2020 will be to to de lever, 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 per paying.
For the same store performance compared to the fourth quarter of 2019.
Looking at new vehicles.
Our for the quarter was at 16.9 million units.
3% versus last year.
And retail Saar 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%.
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 TV ours, but experienced some pressure in imports mainly due to one brand.
Our luxury brand saw strong growth with PVR is up $113 to 3600.
And new units up 9% from the prior year period.
Our total new vehicle inventory, excluding inventory in held for sale was 803 million and our day supply was 66 down one day from the prior year.
Turning to used vehicles.
U.S 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, a $1402 down $120 from last year.
Though our gross profit per unit was down it is important to remember the used car volume growth also drives increases in reconditioning parts and service gross profit as well as ethanol business.
On average we generate approximately $4000 of gross profit on a used vehicles sold.
This includes the used vehicle gross profit per unit, the ETF and I per vehicle and reconditioning gross profit per used vehicle.
Please see our Investor relations presentation. So in the long term trend in the growth of our overall front end gross profit per vehicle.
Our used vehicle inventory of 140 million is up 29 day supply down five days from the prior year.
This excludes inventory in held for sale.
Turning to ethanol.
Total ethanol gross profit increased by 4%.
Gross profit for vehicle increased by $52 to $1695 from the prior year quarter.
This demonstrates the professionalism and talent of our team.
Note that when we think about gross profit per vehicle, we look at the total front end yield which combines new use NFV <unk> gross profit.
Provides the best view of work through profit per vehicle sold.
The front end yield was up $7 inter quarter to over $3200.
This is up $650 since 2003.
Please see our IR presentation for the historical trends.
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 Omnichannel 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 140000 online service appointments this quarter up 23% from the prior year.
We continue to make great progress implementing our director for the future at our pilot store in North Carolina.
Based on reviews customers appreciate the transparency and speed of transaction.
We have completed several hundred transactions in 45 minutes with several more completed in less time.
As little less 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 for more 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 health care for our tenure frontline team members that impact the guest experience.
Equity grants education grants.
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 one on your telephone keypad, if using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask an audio question.
And we'll pause just a moment to allow everyone the opportunity to signal for questions.
Thank you our first question would be from Rick Nelson with Stephens, Inc.
Thanks, Good morning.
Correct.
Q.
Matt how we should think about estimated gross.
Incorporating the park place.
Acquisition, how you're thinking about.
Everyone investments.
2020.
That would those be deployed the also into the marketplace.
Sure Rick this is Matt.
For Asbury SG Nay, we're guiding to 60% 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 needs to be very similar to ours, if not better when we combine to both of them naturally for the first year as we get in and as we begin to incorporate divest of what they do with the best of what we do it will take us a little while to.
Incorporate into vault and apply all those synergies combined back offices and really.
During the two companies together, but we would expect the S. Una over the next year to to be better than ours.
Due to the fact that they're large luxury stores.
Yeah, no and in Rick just to touch on your question.
But our Omnichannel initiative.
That is continuing to grow and steady and same investments will be made in 2020, probably a little bit additional which will absorb without noticing it in our rest in a.
We've 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.
Yes.
Denver or was it had some turning.
Kevin that works prior to park.
I'm curious about your acquisition appetite now with pardon players 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 works.
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 didn't really do anything from a leverage ratio standpoint doing the acquisition. So we move forward with it and thought it was a nice.
Nice accretive deal for our market.
And your appetite.
For a new one.
Snowmobiles like that.
Pardon.
Yeah, I would say the main focus for 2020 is de levering 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.
To advance to chair side, where those stores profitable if you could speak to the multiple one.
Are they sold into games.
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 for our from our standpoint to professionally managed 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 deal 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 will be.
Stronger with all the divestitures the Nissan store in Atlanta.
For the big investment in Capex, a while back and incentives with different things are going on differently with the brand.
It has not been a well performing store lately.
Nothing due to the our associates there, it's just more to do with the economics circumstance with the brand right now.
And we felt it made sense when we had an opportunity to get out of it.
Take that capital deployed and better areas.
Okay, great timely it's hard to ask.
To follow up on that.
News, how on remains a headwind 10 cents.
Called out this quarter is there.
I'm a bit total any changes.
The way, they're comping saving dealers to target.
No.
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 there bright people bill they have good products coming so eventually they'll figure it out.
We looked at it from a standpoint of our overall portfolio.
Maybe we were too heavily invested in the brand.
This made more sense to divest and really the last 12 months, we've divested of four Nissan dealerships.
Okay.
Thanks, a lot and good luck.
Thank you Rick.
Our next question will be from John Murphy with Bank of America.
Hi, good morning, guys.
Just a first question I mean, obviously you are kind of alluding to the new vehicle market remaining.
Under pressure from a volume perspective.
You know in profitability is is okay, you did pretty good job on it in the quarter being as you look at growing the used in parts and service business really structurally.
Just curious how much more room, you think there is and if we think about the age bucket that you're you're focused on your how how.
Wheat or how old can you go in the age bucket to potentially grow those businesses.
John This David I'll do my best to tackling that one.
I would tell you know when you think about no 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 and the logical question is why aren't you are growing at double digit rates, if there's that much capacity out there it's.
To come very competitive market space technicians are at a premium.
Did you 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 you know from our standpoint, the software that we've implemented a few years ago.
We're able to communicate and be more transparent with their customers.
We're testing them their service builds their service work there npis that are done and texting them a linked to pay their bill and and handle things that way so were faster more transparent.
We think we're really set up for the future. So I would tell you we could keep growing at mid single digit in numbers for years.
And this tremendous potential out there and then given my own personal opinion, which were electrification is going I actually see the OEM or the dealer body service retention numbers going up.
I think you're going to get the normal incremental lift and then you're going to as the electrification comes in is 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 are only dip in pre owned when Saar comes down is acquiring vehicles.
Most dealers.
Get their vehicles from trading customers trading in their vehicles and when you purchase cars or have to purchase cars for your soul inventory. So to speak your margins are going to be a lot more compressed.
Yeah, 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 and then I would say that's kind of the lever that were mainly focused on right. Now is from an acquisition standpoint on pre owned.
Thank you. Our next question will be from Bret Jordan with Jefferies.
Good morning, This is mark Jordan on for Brett.
Thinking about the U.S retail segment performed well during the quarter highlighted by some strong growth and units.
You talk about what is what is driving that growth.
Yeah. This is David marketed I would tell you.
The first half of the year, we underperformed in pre owned and weren't is focused on as we should have been and we've really been more focused on it in the fourth quarter and and I would say theres a lots of selling more vehicles. You also inventory aging wholesale losses reconditioning dollars fine installs is a lot to think about when doing it.
So that growth that what were most proud about.
It really came through CPL vehicles.
So we're not out buying a lot of cars with keeping a lot of cars internally getting a lot from our OEM partners. Our CTO sales in the quarter alone on a same store basis were up 16%.
So were up 10% overall, but 16% and CPL. So we see CTO is 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 CPR products.
Okay, great and I'm thinking of those CPL volumes would that be the main driver of the U.S retail GPU erosion during the quarter.
Yeah, I would say.
No not necessarily know.
I would say, it's a little bit more of a focus and with some of the brands to increase our volume.
Sometimes when you when you increase volume that much PVR takes a little bit of a hit again.
Generally from our our peer group, we tend to be at the top of our peer group are used car margin, except one I believe and I think they put their reconditioning dollars into 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 rig.
Conditioning dollars and the ethanol as and when you think about an overall profit on a used car of around $4000.
That to us is pretty healthy.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question will be from Armintas Syncopation with Morgan Stanley.
Great. Thank you for taking the question.
For the new vehicle side Gpus are quite strong you mentioned luxury as.
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, we should be thinking of.
We start in domestic as well.
I believe our PVR and domestic was up $200 occur.
Or little bit over 200 occur in the quarter.
So we've had and 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 on a.
Was it just.
A more discipline or how are the incentives.
Structured today and how are they during the quarter just to be thinking about going forward.
Good morning, or Martha's This is Dan Clara I.
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 from the Oems and.
For the for the month of January.
Seems pretty consistent.
Specifically on the domestic side.
It was.
We had 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 see OSI and other things and we were able to captured most of that money, which really increased our PVR.
Okay, and then on the parts and services mid single digit growth into next year can 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 take the 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 a month and and how it all pans out, but I would say months will will travel between five 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.
Your way off in either direction, but it's really hard to predict warranty.
And internally as we 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 all baked in gets a said mid single digits.
Okay much appreciated.
Thank you.
Thank you. Our next question will be from Chris Bottiglieri with Wolfe Research.
Hey, this is Jay closer on for Chris Thanks for taking my question.
Correct.
Okay.
Yes.
Let's start had kind of stalled around.
8% of units for a few quarters in a row, so that jumped to correct.
Impressive can you talk about what you might have done differently to re accelerate adoption there.
Yeah, I would tell you the biggest single chains that took place is was in the conversion the traffic volume on that on the tool is large the conversion is what's growing and we and I mentioned this a quarter or two ago, we created a loan marketplace and where the first dealer group to do with there may be others at this point I'm not aware of.
But basically it's like a rocket mortgage like experience the customer to traditional car dealership. They felt that it credit application online. It comes over is the lead the dealer had 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 consumers filling out the credit application online within 30 to 45 second.
There are seeing right back from the lenders, what they'll do for them rates and terms and everything so that transparency and has really helped our conversion rate.
Got you that's helpful and then just following up.
Not sure if youve talked about this in the past, but how does push adoption compare between.
New unit sales and used unit sales.
So it's interesting we havent talked about it lately when we launched the tool our expectation was it would be a majority of pre owned in low on the new inside in the beginning it was just the opposite.
There was a lot of new cars.
What I would call commodity fast moving low margin cars.
And it was a smaller percent in use its actually now flip.
Just the opposite where a larger portion of the sales are coming through pre owned.
Than they are new car.
Hi, really interesting thank you.
Thank you our next question.
Well be from Ryan fiddle, with Craig Hallum capital grade.
Hey, guys. Congrats on the good quarter I'm, just a couple from us. So what have you mentioned, what a pro forma leverage ratio will be kind of Q1. After the transaction Park place what your gross and net leverage will be.
This is Matt it should be right around four times.
Great.
And then secondly, it kind of 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 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 are doing the transaction online, but really what it comes down to is.
Cars, a complex I think they want to come to the location, where they're buying it from they want to meet the people that want to meet the people in the parts and service or they're going to service their vehicles and they really want to professional delivery for someone to go over their car well I mean, as we all know nowadays so much technology and cars. It takes a while to go through that professionally.
And just one follow up on that you mentioned kind of me to the team and whatnot. It's the retention for parts and service any different from the push started omni channel customers as it is for.
Everyone else, we're too early to tell.
It's not too early to tell it's trending above 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.
It's a more trends transit.
Trends in area, it's a little bit lower and for the secondary markets and less trends in 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.
Good day.
JP Morgan.
Hey, Thanks for taking my questions and congrats on the quarter.
As well.
All make it just trying to this too I just had just wanted to start off you know just following up on the Nissan question earlier.
Yes, and recently announced that they might be scaling back down.
The U.S. operations.
Going onto a couple of store divestitures.
Do you think we could expect more.
In the near term.
Just on the Nissan front and then.
And then following up on bad just on the leverage targets will be yard, which we and a half times does not anticipate any for the divestitures or not and I will follow thanks.
Sure.
We Miss anything Roger please bring it back.
I I, it's very difficult to predict the future.
Would you know where.
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 in 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.
There are a little bit behind others is that the timing cycle with new product coming so when the new product comes I'm sure they'll get a spring back they've had some change in management teams over the last year to 18 months. So 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.
Got it 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 seem to be strategically the best move for us and when you looked across this with a peer groups. We you know weve percentage wise floated a little bit higher with the Brandon.
Having the opportunity to change the mix to luxury the way we are with very large profitable stores. It seem to make the most sense at that time.
Right and this is Matt concerning the leverage so we'll start off at about four times and mainly through free cash flow generation will be able to get down to 3.5 times by the ended 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 too right around 3.5 by the end of the year.
Got it and just existing lease and the Denton Teddy into December 4th quarter, Julie We continue to get a little bit of that next couple of quarters before you start lapping that.
How should we think about just the margins for imports in the near term yet.
So when you think about it from our perspective.
We find about we find out about the February incentives at the beginning of February we don't know what they're in January and we certainly don't have a clue, what they're going to be in March.
I 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 thanks, and then just on the turning to any earnings.
These bridge puts and takes you've talked about.
While containing says you know you wait gold I mean, you've given a little color on that side.
Used vehicle volumes seem pretty healthy I mean, any any color on you know how should we think about you asking why and then.
Even in the U.S, making side.
Overall gross profit perspective, how should we expect strange ready to jump just trying to get broad overall.
Thanks.
And that this is Matt so our guidance the way we're thinking about it for 2020 is we guided to our front end yield to be slightly up.
Yes, typically what we've seen is margins pullback, but we've been able to more than offset it with really strong growth in RF, an eye and that's the way we've been really trying to think about it and look at it because of what we've seen over the past couple of years is that that ethanol growth has really outperformed.
The new and used car margins, we actually put a really good slot in our IR deck that takes a look at.
The new vehicle PBR as all the way back to 2003, and it's really interesting because you see the front end yield going from about 2900, all the way up to 30 150, and really interesting is that we added reconditioning and so you can see how that trade in reconditioning work really adds to our gross profit that's gone from.
30, 160 to all lift about $3800. So we're trying to refocus the way we think about our margins really look at it on a front end yield and we're guiding to about.
To up on the front end yield.
Hi, Raj I would say David Jin generally speaking about operations.
We believe that we can control parts and service up an eye in used cars.
And not so much new cars. We also believe that 2020 based on the way we see today, we should have some incremental lift.
And we're very hopeful for 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 a use 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 like that consumer continues to hold up nicely. It's a nice used vehicle markets, maybe talk about how you plan to continue to have nice growth and that Sam.
Point any competition or investments that you're seeing.
Just as we look to 2020 that'd be helpful. Thanks.
Good morning, Stephanie This is Dan Clara.
The used car market from a competitive standpoint.
Its a.
I don't think that its change drastically.
We do.
Beyond 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.
Lenders.
Potentially getting a little bit, but very very little stricter on.
Providing we're asking for steps on your secondary market, but overall it is a very very healthy.
And just as a follow up.
Our subprime is between eight and 10% of our overall business.
Great. That's really helpful. And then I guess, just going back on a different investment standpoint, and this ties a bit to the a lot of your online capabilities as well just your ability to kind of gain shares so much emphasis on them. So much of the consumer starting on.
In line and are you finding that as more and more of the business.
There appears.
The big used.
Use players are switching moving more online a seeing price transparency is picking up or you're having to invest more to make sure. You are popping up in search engines. This 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 or for 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 United spend this way for a few years, where it's similar to new.
Everyone has market information into the markets kind of dictate what the prices on what the values are.
To us it's not just about selling a car.
We look we don't see the car, we kind of think how much money, we investing in whereas the return and we look at the three areas what can we make with financed with this car what can we make in the service department in Where's the margin going to be upfront.
So again, it's not just growing volume, but its thoughtfully growing it to make sure Theres a return there on the invested capital.
But that's essentially.
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, it's what generates our business.
Oh very helpful. Thank you so much.
Thank you.
Thank you. Our next question will be from John Murphy with Bank of America.
Thanks, Paul just my line drops earlier.
Just two quick follow ups first I know if you guys have discussed the opportunity on on floor plan by eight in 2020, both from a sizing of inventory plus.
The rate benefit I'm, just curious if you could give us some insight there is how you're thinking out for plan in 2020.
John This is Matt we do expect mainly to the decrease in LIBOR rates to see our floor plan expense decrease and.
As we talked about earlier at the beginning of the our inventory was really high and were able to really nice job at the back half of the are getting it down. So we would expect to see into next year that the two prong benefit of lower rates and the decrease in inventory levels. So it should be nice tailwind into 2020.
Okay. That's helpful. And then just one other question and you may have covered this and you talked about in the past, but on recon on on used vehicle sales or what is the average dollar.
The revenue and gross and you're getting on the re kind of that use eagles you're selling.
It generally runs about 1000 to 1200 and from a gross perspective.
And we recognize that margin at a 100%.
But John again, you know because the differences in brands. It can literally a low and a high can be anywhere from 600 to 2000.
Got it and do 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 overtime dollars wise.
On the complexity of the cars again, we all know this the average age of the cars over 11 years.
So there anything that old needs. It's a good of a fair amount of work.
So I don't see that changing.
Great. Thank you very much.
Thank you.
This concludes todays discussion we appreciate your participation on the call today have a great to.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.