Good day and welcome to the Q3 2022 Earnings Call. This conference is being recorded. At this time, I’d like to hand the call over to Karen Reid. Please go ahead..

Thanks, operator, and good morning, everyone. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury [Technical Difficulty] third quarter 2022 earnings call.

The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Hult, 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.

At the conclusion of our prepared 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 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've also posted an updated investor presentation on our website investors.asburyauto.com, highlighting our third quarter results. It is my pleasure to hand the call over to our CEO, David Hult.

David?.

Thank you, Karen, and good morning everyone. Welcome to our third quarter earnings call. Before we get started today, I would like to take the opportunity to say that our thoughts are with all those affected by Hurricane Ian. Thankfully, our team members living in the path of the storm are safe. Also, thanks to the preparedness of our teams.

We are fortunate in avoiding any notable damage to our stores and inventories. I will note that although we make adjustments to net income to reflect the effect of Hurricane Ian, we estimate that the store closures had a negative earnings impact of $0.14 per diluted share on our third quarter results.

For the third quarter, we grew adjusted EBITDA by $115 million to $329 million, an increase of 54%. Through adjusted EPS from $7.36 to $9.23, an increase of 25%.

We delivered an 8.1% adjusted operating margin, increased revenue by $1.5 billion to $3.9 billion and gross profit by $288 million to $768 million and drove F&I gross profit per vehicle to $2,480, up $569 from prior year. During the quarter, we continued to integrate our acquisitions, build a strong balance sheet and reduce our net leverage.

Our day supply increased to 19-days, partially due to deliveries delayed by Uurricane Ian, yet still low day supply in inventory affecting overall unit sales. Year-to-date, we have generated $782 million of adjusted operating cash flow. Net leverage has decreased from 2.7 times at year-end to 1.9 times at the end of the third quarter.

Our strong cash flow and reduced leverage enables our focused capital allocation strategy. Currently, the car park average age is over 12-years. We have pent up demand from supply constraints over the past two years and our parts and service revenue continue to strengthen. We look forward to continuing to deliver strong results for our shareholders.

Being outstanding partners with our OEMs to steward their great brands now and in the future and offering an environment where our team members can thrive, while providing the most guest-centric experience in automotive retail. Once again, I would like to acknowledge the hard work and dedication of all my fellow Asbury team members.

It is through your passion and [Technical Difficulty] that we continue to deliver these strong results for our shareholders and to be the most guest-centric automotive retailer. Thank you. I will 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 thank all our teams nationwide for their hard work, dedication and commitment to delivering an exceptional guest experience. Now, I will turn to our same-store performance, compared to the third quarter of 2021, unless stated otherwise.

Starting with new vehicles, in the third quarter, new vehicle inventory continue to remain well below normalized levels and consumer demand outstripped supply. At the end of September, our total new vehicle inventory was $332 million and our day supply was at 19-days, up seven days from the prior year quarter.

Due to supply constraints, new vehicle volume declined 16% year-over-year. However, we experienced a significant increase in our new average gross profit per vehicle, which increased $717 from the prior year quarter to $5,782.

We anticipate new inventory levels to remain low through the end of the year and we are focused on maximizing profitability, while also remaining steadfast in our commitment to our guests. Turning to used vehicles. Used retail revenue was flat to last year.

Our total used vehicle inventory ended the quarter at $368 million, which represents a 30-day supply. Our used to new ratio for the quarter was 120%, up from 112% in the prior year quarter and in line with our second quarter of 2022.

Shifting to F&I, we delivered another strong quarter with an F&I PBR of $2,254, an increase of $339, compared to the prior year quarter. Thank you to our F&I team once again for this impressive result. In the third quarter, our total front-end yield per vehicle increased $307 per vehicle to $5,916. Moving to parts and service.

Our parts and service revenue increased 12% in the quarter. Our customer pay revenue continue it’s momentum with a 15% growth. Jumping to Clicklane, not including LHM and Stevinson, we sold over 6,800 vehicles through Clicklane in the third quarter, a 13% increase year-over-year. In fact, Q3 was Clicklane’s best quarter ever.

We experienced a 16% increase in visits to our websites, reaching a noteworthy 10 million visitors in the quarter. Based on the [Technical Difficulty] more legacy Asbury stores, we are on pace to generate approximately $1 billion of revenue from Clicklane in 2022.

We are excited to announce that Clicklane is now rolled out to the Stevinson and LHM stores. We expect to generate $2.2 billion in revenue for 2023 from Clicklane across all stores.

Though sales of new vehicles continue to be constrained by a lack of inventory, we achieved 92% of our transactions this quarter were with customer incremental to Asbury's dealership network. Average transaction time remained roughly in line with prior quarters with eight minutes for cash deals and 14 minutes for finance deals.

Total front-end PBR of $3,450 and F&I PBR of $2,093, which equates to a total of $5,543 of total front-end yield. The average Clicklane customer score increased to 718, which is higher than the average credit score at our stores and demonstrates a robust omni-channel consumer.

The average down payment for vehicle was $9,481, up from $6,713 or 41% versus last year. 81% of consumers seeking financing received instant approval, while an additional 10% requires some offline assistance. 91% of those that applied for financing. 41% of Clicklane sales have tradance with 53% of such trade, recondition and retail to consumers.

And 95% of our Clicklane deliveries were within a 20-mile radius of our stores, thus allowing us the opportunity to retain our new customers in service departments. Clicklane customers are converting at more than double the rate of traditional [Technical Difficulty], but we won't see the full potential until inventory levels normalize.

We achieved almost 200,000 online service appointments, an increase of over 50,000 or 35%, compared to Q3 of last year. 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 [Technical Difficulty] presentation on our website. Overall, compared to the third quarter of last year, adjusted net income increased 43% to $205 million, and adjusted EPS increased 25% to $9.23.

Net income for the third quarter of 2021 was adjusted primarily for the sale of dealerships, which netted to $0.18 per diluted share. Third quarter 2022 did not have a [Technical Difficulty] reduction in EPS due to Hurricane Ian was $0.14 per diluted share.

As David mentioned earlier, we did not include this impact as in to our quarter results, but are providing to help size the Hurricane’s effect.

During the last week of September, we experienced lost business for closures of our 24 stores in Florida, which represents approximately 35% of the same-store unit sales, and we continue to pay our team members while those stores were closed.

We estimate the impact of same-store SG&A as a percentage of gross profit to be 40 basis points, thus 50.4%, when excluding the impact of the Hurricane. Year-to-date, we generated adjusted operating cash flow of $782 million. Excluding real estate purchases, year-to-date we spent approximately $60 million on capital expenditures.

Our balance sheet remains strong as we ended the quarter with approximately $1.2 billion of liquidity, comprised of cash, excluding cash at Total Care Auto, floor plan offset accounts and availability on both our used line and revolving credit facility.

We recently amended our credit agreement to enhance flexibility in supporting our strategic objectives. Also at the end of the quarter, our pro forma adjusted net leverage ratio stood at 1.9 times, down from 2.7 times at year-end and 2.1 times at the end of the second quarter. For 2022, we are planning for CapEx of approximately $120 million.

This amount excludes real estate purchases. For the quarter, TCA made 22 pre-tax income, which included $1.9 million of net investment losses. Excluding the investment losses, TCA would have made $24 million for the quarter. TCA provides us the opportunity to expand horizontally into our F&I business.

TCA has generated $65 million of income year-to-date on the [Technical Difficulty] excluding net losses on investments. We now have expanded TCA into all of our Colorado stores, and we anticipate a full rollout to our existing stores by the end of 2023. As a reminder, we expect EBITDA from this unique asset to hit $185 million by 2025.

Finally, I would also like to thank all of our team members at Asbury, who have dedicated themselves to building a brighter future for ourselves, our communities, our shareholders and all of our stakeholders. I will now hand it back over to David to provide some closing remarks.

David?.

Thank you, Michael. In closing, with our diversified revenue streams, we continue to generate robust cash flow and profits. And with the age of the nation's car park and historic highs and our fixed operations [Technical Difficulty] so strongly, the resilience of this business model continues to deliver solid results.

We've maintained our discipline expense control through significant revenue growth, almost doubling the size of the company in a depressed our environment. We continue driving towards strong execution across these lines, and we are always evaluating and optimizing our portfolio. This concludes our prepared remarks.

We'll now turn the call over to the operator and take your questions.

Operator?.

Thank you. [Operator Instructions] We will now take our first question from Daniel Imbro from Stephens. Please go ahead..

Yes. Thanks good morning everybody. Thanks for taking my question.

David, I want to start talking about quickly and actually, I think in the slide, you said 95% of deliveries are within 20 miles, do we have enough data yet to track the service attachment on those sales and how sticky they are? Is it the same as the physical sale? Just thinking about the lifetime value of using Clicklane more in-market versus new markets and what you're seeing on the data side there?.

It's a great question, Daniel. It varies by market and depending upon whether it's a metro or a single point market, but it generally lines up with what we're selling out of our conventional stores. The benefit and the focus to stay within a 25 miles to 50 mile radius is really to ensure we capture our parts and service business.

Our intent is to govern sales beyond 50 miles, when possible because, again, the revenue from parts and service is just too important to us..

Got it.

But no data, I don't know whether that's, I guess, working or you're keeping those service sales?.

Yes. It's early on, there are a lot of them are coming up on their first oil changes. And like I said far, we're seeing similar results as if we sold the car in the showroom, compared to Clicklane..

Got it. Got it. Got it. Second one I want to ask on was on the F&I redesign. You guys talked about last quarter. I think that included some bundling and new tools. How is that progressing [Technical Difficulty]? But then obviously, the FTC, I'll tie that in with that question.

They've closed the comment period talking about potentially looking at and impacting the F&I department? So how does that impact your F&I business or some of the bundling and other tools you've introduced there?.

Hey, good morning, Daniel. This is Dan. I'll start with the last question, and then I'll go to the second iteration of our F&I tool. I think we've always done and supported the corporate disclosure and full transparency in the F&I products. That is the right thing to do for our consumers and it is the right thing to do for our business.

So we've always offered under that condition, and we will continue to operate. And we will adjust to whatever the FTC puts out there, again, under the full transparency spectrum. From the second iteration of Clicklane, it's the first quarter where we started rolling it out. We don't have enough data for me to really share with you on what is going.

But what I will tell you is that we continue to tweak it based on what we see from a consumer standpoint on what they like, what they don't like and continue to make adjustments to make sure that we're providing what they want on the digital aspect of the sale..

The only thing I would add to that as it relates to the FTC and pending stuff, we have a tremendous amount of folks that are professionals at disclosing these products and selling them professionally. Traditionally, our mix is 50% products and 30% reserve. Everyone's compliant train, we're constantly tweaking our training to get better at what we do.

At the end of the day, just like I'm sure all our peers do, we strive to only sell products that are needed from our consumers and add value and certainly have a tremendous amount of confidence, whatever the outcome is, we'll maintain our F&I numbers..

And then last one for me. I just want to touch on the SG&A side. I think you continue to lead the peer group staying in the high-50s despite used GPUs normalizing.

Any update on [Technical Difficulty] maybe where that ratio of SG&A to growth shake out either in ‘23 or ‘24 as the industry evolves, given the cost savings you guys have realized?.

Yes. I mean I think the thing there is productivity per employees is one of the key things for us and then also the change in our business in terms of selling some of our cost stores in Mississippi and replacing those with oark Place and then some of the new acquisitions.

We still have ways to go on the acquisitions, but we think when the margins come back to whatever they end up back at, if that's ‘24, ‘23 or ‘24, we're kind of in that 60% range for SG&A percentage of gross to low 60%, but also there's some potential to be able to bring that number back down into that mid-50s range.

Once Clicklane gets enough volume under it, and that will help us change the comp structure in the stores. But that's kind of a second wave when Clicklane gets to be a higher percentage of our sales..

And I would add to that, Daniel. If you look at our same-store SG&A, it was 55%, I think 0.8%, which is pretty solid. And it obviously shows that we haven't reached our synergies yet with our acquisitions. So there's definitely some tailwind there for us to work on over the next 12-months to get that in line with the rest of the company..

Great. Really appreciate all the color today and good luck going forward..

Thank you..

John Murphy, Bank of America. Please go ahead..

Good moening, guys. Obviously, there's a lot of crosscurrents going on here that are a little bit unusual, particularly on the new vehicle [Technical Difficulty] side of the equation.

Just curious, I mean, it seems like you guys had slightly lower volume, but higher grosses, and it seems to be kind of varying between group and conversely, some slightly better volume, but lower grosses, but still very strong grosses in general.

I mean when do you think this is going to normalize? I know you guys said you think it will stay tight through the end of the year. But it seems like it's going to stay relatively tight well into next year, which should be supportive of grosses well into next year.

But what is your take on this? And how do you manage this? Do you just keep taking much higher grosses and fight through this? Or I mean, how you're thinking about it and how do you manage it?.

John, this is David. I'll start and then Dan can jump in. This is one of those deals where they're not all going to come back at the same time. I think generally, a lot of the domestics with the supply will come back late first quarter into second quarter. And the imports and luxury, it really could be the second half of the year at best.

Still hard to tell. When you look at our quarterly results in the tables and where the unit sales came from, the vast majority of the volume comes from import.

And when you look at a couple of the import brands that represent 25% of our import business that we never had a five-day supply of cars in the quarter, that's why you're seeing such strong margins. I think those brands are still going to struggle into the first half of next year and get back to a normalized days supply.

So we're still selling -- preselling into our pipeline percentage-wise, a little bit less than prior quarter, but still really great results of pre-selling cars that are coming.

So the demand is still there, and I can't stress enough point on the script, with the average age of the car around 12-years, there's just that natural attrition or benefit that we're going to have it even whatever headwinds come our way, we feel like that we'll maintain better than most sectors.

So, do you want to add?.

No, I have nothing to add..

And then to follow-up on that, I mean we're going to be in a constraint. It sounds like we'll be in a constrained environment then well into next year. And even a reasonable recovery on the new side is going to take a long time to restock the one to six year-old car fleet.

I mean it might take three years plus at least before you even get a recovery there.

Does that bode well for your parts and service business? And can you push growth there further? Where as your cap you -- in your service base? And is there an opportunity for you to really grow that much faster to offset what might be a still continued constraint on our used vehicle business?.

Yes. John, I'll start with the parts and service piece first. One person's opinion, not guidance, but I think the next 10-years part and service has a tremendous opportunity to have tremendous strength. You think about the number of combustible engines on the road, electric cars coming.

This quarter is no different than the previous four quarters for us, our highest repair order dollars per ticket were on electric vehicles. So the first generation warranty work is going to be strong in those vehicles as they enter into the market.

So between combustible engine, higher retention numbers, electric business coming back to us for retention, larger dollars generated, we think parts and service is going to be in a great space for a while. When you look at our used business, we were backwards 10% in the quarter, we’re backwards pretty good in PVR.

But when you break down the PVR and you look at what we normally generate for gross profit on our tradings, we were $2,300, $2,400 a car, which was significantly higher than what our overall number was.

And it's because of your point, the used market has been so depressed for so long, cars haven't been available when you're buying cars in the open market, you only get them if you pay more than anybody else. So that certainly has been bringing down our margin. We think over time, it will normalize, but it's going to be a ways out.

I mean it's probably a good 18 to 24 months out before we start to really get some of our trade business back normal..

Got it. And then just -- I'm sorry, just one last thing, David, you had mentioned something about Clicklane and that you didn't want to go much beyond a 50-mile radius around stores, because you don't retain the consumer for parts and service.

I'm just curious, is there a normal physical radius for the normal physical stores before we get into Clicklane that you think it might be 10 or 20 miles, and it's now larger because of Clicklane of 50 miles? Or is it just Clicklane will garner a higher market share in that 50-mile radius, and it's kind of the same as what you think about with a normal fiscal store?.

Yes, I'll start and then Dan can jump in. I think what's been consistent through the quarters, which has been a little bit surprising to me, is that north of 90% of the customers that have purchased live in our communities, but haven't done business with our stores. So I look at that as a couple of things.

The independents or the private capital we're dealing with in the markets don't have the full transactional tools. The consumers with the strong credit scores see the value and time saved, and we're gaining these customers for it.

I think we're going to continue to see strong penetration for the next few quarters until the private side catches up with the technology. But it's just logic based. I mean if you could purchase a car in 14 minutes, compared to sitting in a show for 2.5 hours, what's a better use of your time. We think that will continue to grow.

I think the other aspect is within our tool. If you're buying a car in New York and you're buying it from one of our stores in Atlanta, when you purchase the vehicle, you’re typing your address where you want the car delivered to it and it's almost like Google Maps.

We map out in real time exactly how many miles it is to you and what the cost per mile is or the overall cost to shift the car to you. So you have to factor that in to that delivery, if you will, that cost to deliver the vehicle is being passed on to the consumer. We don't have it marked up.

We have a national transportation company that services us well and servicing those customers well, but it's an additional expense to the consumer. So it's not to say that we haven't shipped cars 500 or 1,000 miles we have. We just don't like to do it, because we want to retain the relationship..

John, good morning. The one thing I'll echo what David is saying is going back to the primary market area responsibility that we are by our OEM partners, it's key to maintain that. And as you -- as I mentioned in my script, we had -- we reached close to 200,000 online service appointments.

And when we look at convenience, which is really what the -- ultimately what the consumer wants within the primary market area that we service. I think that, that has given us the competitive advantage.

And that's what we're seeing that model ratios stay right within our PMA and reaping the benefits of it from a retention standpoint and the entire domino effect..

Very helpful guys. Thank you so much..

Thank you, John..

Ryan Sigdahl from Graig-Hallum Capital Group. Please go ahead..

Good morning, guys. I want to start on Clicklane, so solid metrics, the Board continues to get better there.

But curious on the 2023 guidance for $2.2 billion in sales, I think I caught that right in the prepared remarks, but growth has been slowing sequentially on a unit basis there? I guess, what are the main drivers to more than double sales year-over-year next year?.

Yes. It's -- Ryan, this is David. A couple of things I'll point out. The 6,800 sales were really just the legacy stores. And year-over-year, we were backwards in new car volume, but yet Clicklane was up 13%.

So I think there's a huge delta between the amount of transactions that increased on Clicklane, compared to the decrease in the number of units that we sold. The increase to next year is a simple math. It's taking the same -- we added over 70 stores on top of the legacy stores.

So it's taking those stores and extrapolating out the same conversions that we have in the other stores to get to that number. So the big increase is all the LHM, Stevinson, Arapahoe and Carlo stores that we've added in the last year or end of ‘21 that are going to be in that number now for ‘23..

Makes sense, helpful. Then just on capital allocation. Any change to how you think about that given kind of all the crosswinds and current conditions, both potential M&A line, as well as current business, stock, et cetera.

I think you were the only public franchise dealer not to buy back stock in the quarter, but just how do you think about that?.

Yes, it's a great question, Ryan. We've been fairly disciplined on making sure that we get our leverage down to $2 before we did anything. We're there at $1.9.

We believe, like I'm sure all our peers do, that we're trading at a really low multiple and people don't appreciate the cash generation that we offer and how strong this model will be going into a recession or not. It's now time for us to focus on that, and we're going to see what the best returns are for our shareholders.

It might be a combination of repurchasing stock and making acquisitions. We don't feel the gun to our head to grow stores. We really are looking at our portfolio.

And we've turned down a lot of stores that we've looked at, and we really want to focus on the stores that we think will culturally fit into our organization and be accretive to us on day one. Otherwise, naturally, our highest returns will certainly be repurchasing stock.

But we also, as Michael pointed out briefly in the call, and you'll see this in ‘23, we're going to have a fair amount of capital expenditures catching up with these new acquisitions in their facilities over the next couple of years..

Thanks, David..

Yes..

Thank you. We will now take our next question from Bret Jordan from Jefferies. Please go ahead..

Hey good morning guys..

Good morning..

I got on a little bit late, you already talked about this, but did you comment on sort of trajectory longer term and new unit GPUs? I mean, obviously, one of your peers said possibly pre-COVID levels before stabilization and others sound like we might be structurally higher forever? Do you have -- did you give color there?.

Sure. This is David. I'll start and Dan can jump in if he wants. I've said this a few times, so I'll stay with this, Bret, but then I'll try and give a little bit more color to it. [2019] (ph), we didn't have the large luxury stores in Dallas or Park Place. We had a platform of stores in Mississippi, that was a drag on the company.

And then we just bought some high operating margin stuff of West between the Miller organization and Stevinson. So materially, Asbury is a different company, so even if I've got draconian and we went back to those margins of ‘19, we would never get there, because we're a different company.

I would say, going forward for the next few years, because of the average age of the car being over 12-years and the pent-up demand that's there and we're still selling over 25% of our inventory before it ever gets here. We think margins are going to stay healthy through 2023.

The question will be how it impacts me to some of my peers? It’s going to be based upon what level of brands we have percentage-wise and what their inventory comes back within a day supply. If you look at it, we put in the table some pretty good numbers, our luxury sales important domestic sales, imports the volume numbers.

And there's two import brands that dominate the percent of that mix for us. And we're extremely low they supply with no line of sight of it coming back. So as we sit here today, we think next year is going to have very healthy margins. We think we're going to continue to see extremely strong growth in parts and service..

Great. Thank you.

And then I guess on the TCA business and the legacy stores, could you talk about the penetration, you have the trends you're seeing in the Larry Miller stores since you've owned it?.

Sure. And if I don't get this question right, please come back around. Generally speaking, the LHM stores have higher penetration numbers than the legacy Asbury stores and selling products. It's taken us a while to get our network linked and get TCA aligned with our legacy stores.

So it was literally last month that we started rolling out the legacy Asbury stores with TCA. We started with our Colorado stores with Stevinson and Mike Shaw and Arapahoe, Hyundai. You know, our next date will be Texas, and then we'll continue to roll them out. It will take us to the end of ‘23 to get there.

Philosophically, we're aligning with LHM with the rest of legacy Asbury, as far as compensation, how we pay our folks and using their methodology to get hopefully the same increase in sales that LHM has experienced.

It's too early on it to say that there's any track record there yet, but I'm hopeful in our next earnings call, we can have that conversation give some factual data for you..

Great. Thank you..

Yes..

Rajat Gupta, JPMorgan. Please go ahead..

Great, Thanks for taking my question. Just wanted to follow-up on one of the F&I questions earlier. At $2,500 today, $1,800 pre-COVID, where do you think F&I settles down at an normalized level for the company, including the impacts from D&A.

Could you help us bridge that gap from pre-COVID to that normalized number or maybe from today to that normalized number? Thanks and I have a follow-up..

Yes, this is Michael. I just want to kind of -- from a numbers perspective, if you look at the dealership operations, we were at [Technical Difficulty] $2,200 for F&I PVR.

And then on a consolidated basis, we're at that $24,800, that kind of gives you a little bit of a color on the impact of TCA on the numbers, because the difference between that dealership number of $2,200 and the $24,800 at the TCA impact. But [indiscernible] that TCA impacts only on a portion of the store, so just on the LHM stores.

So that should help you maybe do a little bit of math on what that's worth in the future. But we don't see any reason that F&I goes backwards at the store level. And the TCA will just continue to improve that number..

And I would say Rajat, just to add on to that, the cost of sale, as you well know, over the last 18 months has gone up dramatically. F&I numbers flowed up with that, both in the reserve that you're getting, because you're financing more in the products that you're selling.

So it is all of a sudden, the sudden decrease in the cost of sale, that could be a headwind for F&I numbers. But as we look into the future with electrification, more expensive cars coming and what we're seeing in the propensity of consumers to spend on products, we think that there's more opportunity for us to grow F&I.

I don't say that the significant dollars there by any stretch, but I think there's room to improve a little bit more..

Got it.

Where are you in terms of product penetration levels today versus pre-COVID? And where do you think that can go?.

It's a great question. Currently, we're right around 70% for products and 30% for reserve. As we start to sell, and I would say it's probably more ‘24 than ‘23, but a larger portion of electric vehicles. It will be interesting to see if that product mix changes at all or it sustains at that level.

We would like to get to a 75% product and 25% reserve, but we're not there..

Got it, got it. And maybe just a follow-up on SG&A. In the past, you had mentioned that you're slowly working to pivot your personal expense or just the headcount structure to more fixed versus variable, particularly for the Clicklane transaction.

Curious where we are on that path, any metrics you could share on what changes have already upward? And where do you see that settling in over the next three, four years?.

Rajat, this is David again. I would tell you as it relate to compensation, nothing has changed. And I don't anticipate any change starting on our end until we get to what I would call critical mass with Clicklane.

And the target we have in our mind is between 45% and 50% of our sales will have to come on Clicklane for us to start changing how we compensate people, how we staff stores and ours.

We think from a productivity per employee level, we're pretty good, and that shows in our same-store SG&A number of 55.8%, especially in these high interest rate markets are higher than what we're used to. So we feel confident that we're running lean and mean.

We still feel, as we sit here today, two to three years from now, which will achieve that 45% to 50% number. And if we get there, then that's when we'll start to see opportunities with SG&A..

Got it. Great, thanks for all the color..

Yes, sir..

Thank you. [Operator Instructions] Our next question comes from David Whiston from Morningstar. Please go ahead..

Hi everyone. Going back to same-store new vehicle unit volume declining, I get that your -- the profitability is the focus for GPUs, but the -- a year ago, inventory for the industry was incredibly low. Yes, you guys were still down year-over-year.

So is that because now in ‘22, there's a huge decline in midline import availability? Or is there something else going on there?.

Yes. I would say, and I haven't had the chance to study our peers. But when you look at our brand mix, while we finished with the 19-days [Technical Difficulty] those midline imports were single-digit day supplies and most of them were around five days. So I think that was the material impact there for us.

The luxury car business, we sell a lot of luxury cars in Florida. A lot of those deliveries got held off, because of the Hurricane. So they fell into the fourth quarter, if you will. So I would say some of it is a timing issue on our standpoint.

But at the end of the day, we were still back with a fair amount on inventory, but Clicklane was a positive number. So you take the puts and the takes. You don't want that massive Hurricane like that to hit your largest state, if you will. But we think we're thankful our folks weather did well and that the business did.

And we think that, that just means there's some pent-up demand, hopefully, for the fourth quarter with Florida..

Okay.

And on the credit availability, is there any pullback in that being available for both new or used customers?.

Zero. We're seeing real healthy down payments, real strong credit scores. I'm not saying that won't change at some point, but it hasn't yet there's still a good amount of cash out there and the credit is holding up really well from what we see.

And just as a quick reminder, David, we -- when you look at our portfolio of business, our subprime business is a low of 8% and a high at 10%. So it's certainly a meaningful piece of our business, but it's a smaller piece..

Okay. And on the consumer behavior question, I guess, compared to the start of the year, we've obviously got much higher inflation now. People's food budgets are getting squeezed, vendor still remains low.

Are you seeing consumers perhaps more tired of waiting for inventory? Or is it more the opposite where they're just basically saying, well, we'll just take what we can get..

Yes. David, this is Dan. I think we see a mix of it. Some consumers, and I'll attribute it more maybe to the luxury business where there may be a little bit of a frustration. But that customer knows what they want and they're waiting for it.

The other domestic and imports, whenever there we do see some shift to maybe take in or letting go of a particular option that they wanted just to be able to get what we have in stock were coming readily available within the next truckload. So it's a mix.

But overall, I think that also, if you think about the whole pandemic that we went through a shift to consumers' minds as well. And as before, it was all about right now, right now, right now, it's just about whatever you try to buy out there that you have to wait.

So it's conditioned that consumer to be more patient and work with us as that product becomes available..

Okay. And last question on F&I penetration, you talked about the product, if I heard you right, going up to 75%.

Where is the opportunity on product penetration? What [Technical Difficulty] in particular?.

Yes. So we'd like to get to 75%. We're not there. And it's done all that. It's -- I'll just use a round number of 100 stores. If you take the bottom half and get them averaging the top half, you get to that 75% number. Our main core product that we focus on the most is our service contract business.

People keeping their cars a lot longer, it’s a great value-add product for a consumer. It's a great product for us from a retention standpoint. So that's the number one product that we focus on..

Okay, thanks everyone..

Thanks for your time..

Thank you, as there are no further questions in the queue. I'd like to hand the call back over to our speakers for any additional or closing remarks..

Thank you, Operator. This concludes today's discussion. We look forward to discussing our fourth quarter results soon. We appreciate your time today and participation in the call. Have a great day..

Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect..