Good morning. My name is Breka, and I will be your conference operator for today. At this time, I would like to welcome everyone to the AutoNation Fourth Quarter 2022 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Derek Fiebig, Vice President of Investor Relations. You may begin your conference.

Thank you, Breka, and good morning, everyone. I'd like to welcome you to AutoNation's fourth quarter ‘22 conference call and webcast. Leading our call today will be Mike Manley, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Before beginning, I’d like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussion of factors that could cause our actual results to differ materially are contained in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com. With that, I'll turn the call over to Mike.

Yes. Thanks, Derek. Good morning, everyone. Thank you for joining us. 2022 was a great year for AutoNation and the full year marked consecutive record quarters. Tremendous results driven by the entire AutoNation team, and I know many of you are on the call. So my personal congratulations to all of you. Joe is going to take us through the results in detail, but I'm going to just touch on some of the headline numbers. Q4 new vehicle retail industry was up 2% with us posting a same-store 4% increase over the prior year. New vehicle industry declined by 6%, which in my view was significantly driven by constrained used vehicle inventory, which also was a key driver of our used vehicle sales being down 11% in the quarter. Total revenue up year-over-year in the quarter to $6.7 billion bringing our full-year revenue to $27 billion, up 4.4%. So notwithstanding the increased availability of new vehicle inventory in a somewhat choppy used vehicle market, both on the retail and wholesale side, our continued disciplined approach to used unit margin can be seen in the quarter, particularly in our used vehicle margins. This combined with another strong performance from our customer financial services team delivered a total variable per unit margin of more than $6,300, which despite being down from peak levels a year ago, was essentially flat sequentially and an acceptable result in my view, given the market conditions. Now coming into the year, we challenged our aftersales teams to consistently grow their business and their performance. And I'm pleased to report that they are making excellent progress as they delivered double-digit sales growth combined with margin expansion. Now with well-controlled expenses, which Joe will expand on in more detail, we delivered $1.4 billion of adjusted net income for the year with a margin of 5.2%. So when I look back at 2022, I think you can now consistently see as we've discussed before, the business drivers that I consider a structural improvement compared to pre-pandemic levels. These are clearly customer financial services, which is driven by our focus on product penetration, our intense focus on sales effectiveness, our drive for operational improvements in our aftersales business and finally our SG&A control, all of which have contributed to our record results for the year. Now with a focus on cash conversion, which remained at nearly 100%, we generated strong free cash flow for the year in excess of $1.3 billion and this gave us significant flexibility to allocate capital in a disciplined way. During the year, we generated $1.7 billion in cash from operations, we invested more than $0.5 billion in our business, which included maintenance projects to ensure continued underlying performance from our core business, organic growth investments, which included the additional AutoNation USA stores and the acquisition of key assets to expand our business. In addition, during the year, we returned $1.7 billion to our shareholders. Now that return to shareholders was in the form of share repurchases and during the year, we bought back 15.6 million shares at an average price of $110 per share, which I think is an excellent investment in ourselves. And given all our activity and our operational performance, we're able to deliver an adjusted EPS result of $6.37 for the fourth quarter, which is over 10% year-over-year. We often on these calls talk about the future, and I think for the foreseeable future, the retail industry will continue to evolve, including how customers approach vehicle ownership and usage. And that's an exciting time frankly to be in this segment, and we believe the evolving landscape offers many opportunities. AutoNation already has some excellent assets. First and foremost, of course, is our privilege of representing great OEM brands in strong territories, which has enabled us to transact with over 11 million unique customers from nearly 9 million households, another significant undervalued strength of our company. And notwithstanding the fact that we typically add around 300,000 additional customers per year to our database, we know that within our existing customer base, which as I've already pointed out is extensive, there are significant opportunities to grow our business by covering a broader part of the automotive value chain giving us an enhanced opportunity to reactivate inactive customers and significantly improve our retention of new customers with the products and services we offer which increase the frequency with which we interact with our customers. So as a result, in addition to acquiring a select number of additional dealerships, we made three key acquisitions that are focused on expanding and extending the reach of the AutoNation brand. Last fall, we acquired CIG Financial creating AutoNation Finance, and establishing an in-house customer financial services solution for current and future customers. This business, in addition to legacy relationships, is currently focused on servicing used vehicle buyers at our AutoNation USA stores, but will expand to our franchise stores later this year. Obviously, as this business grows, we will have an increasingly more recurring revenue stream. Now this January, we acquired RepairSmith, a mobile automotive repair and maintenance solution. The acquisition expands our range of services and creates meaningful aftersales business opportunities, including utilizing another channel to provide service to AutoNation's existing customer base and introducing additional vehicle owners who have purchased vehicles outside the AutoNation dealer network. RepairSmith also gives our AutoNation USA brand a unique service proposition and customer experience, offering a range of off-the-sales products and services that standalone used car sales competitors frankly just do not have. As you know, we've consistently gone after sales business, which is a more recurring revenue stream with a high percentage of customers bringing their vehicles into service under warranty. The rate decreases rapidly after the warranty period ends. And RepairSmith now expands our reach and provides a very convenient means for customers to service their off-warranty vehicles. Finally, we also improved our digital retailing experience with an enhanced digital storefront and our collaboration with TrueCar. All of these activities are targeted and focused to create a stronger, more competitive business that is less exposed to the cyclical nature of the automotive industry and places us in more control of our destiny. And as I said at the beginning, we're at a great time to be in this segment. Now with that, I'll hand over to Joe, who will take you through the details of our results.

Thank you, Mike, and good morning, everyone. Today, we reported fourth quarter total revenue of $6.7 billion, an increase of 2% year-over-year. AutoNation's new unit sales increased by 4% in the quarter, compared to a 2% increase in the retail SAAR. Strong performance in our higher margin premium luxury brands helped support our new unit PBR, which was over $5,600 for the quarter. The overall new market remained very healthy during the quarter as more than half of our vehicles were sold at or above MSRP. This has trended down, but it’s still far higher than historical levels. Total used unit sales were down 9% in the fourth quarter, PBR remains fairly constant from the third quarter and reflected discipline in our pricing strategy. We continue to focus on self-sourcing our used vehicle inventory, which represented 94% of our vehicle acquisitions in the fourth quarter. While good, this needs to increase and we have ramped up our 'will buy your car' efforts to fuel greater used unit sales. After sales gross profit grew 12% year-over-year on both higher revenue and increased margins as we continue to drive robust performance in this area of our business. While underappreciated by some, the recurring revenue stream from after sales alone increased full-year gross profit by more than $225 million to $1.9 billion in 2022 with a strong outlook for the future. Customer financial services performance was also very strong and we continue to lead the sector with PBRs consistently above $2,700. Moving to costs, SG&A as a percentage of gross profit on an adjusted basis was 59.2% for the quarter, significantly below pre-pandemic levels, reflecting permanent structural changes to our cost basis. Year-over-year, SG&A increased by only 1.5%. As expected in the fourth quarter, SG&A as a percentage of gross profit was slightly higher than recent periods, reflecting investments in technology and new business initiatives. Fourth quarter floorplan interest expense of $20 million was impacted primarily by rate and compounded by increased inventory levels. The quarterly expense increased from $11 million in the third quarter and $5 million a year ago. Reported net income for the quarter was $286 million or $5.72 per share. Adjusted EPS of $6.37 was a record for the fourth quarter and an 11% increase compared to EPS of $5.76 a year ago. The adjustments to this year's EPS include acquisition-related expenses, including upfront non-cash reserve recorded at the time of the acquisition of the CIG loan portfolio. Our operating performance and cash flow generation remained very strong with record cash from operations totaling $1.7 billion for the year. This provides a significant capacity to deploy capital into our businesses and return capital to our shareholders. As Mike mentioned, for the full-year 2022, we invested more than $0.5 billion to expand our business. This included the acquisition of CIG Financial and the Moreland dealerships in Colorado, expansion of the AutoNation USA used retail footprint, and meaningful investments to enhance and expand our digital capabilities. We further expanded our business with the acquisition of RepairSmith, which closed last month. We also continue to expand our AutoNation USA footprint adding stores in St. Louis in November, as well as Austin and Albuquerque last month, bringing the current store count to 15. The AutoNation USA stores play an integral part of both our long-term growth plans and the achievement of scale, scope, and density in our markets to better serve and meet the needs of our customers. We have more than 20 additional facilities currently under development with an expectation that we will open 10 new stores over the next 12 months. We also returned significant capital to our shareholders via share repurchase, as Mike mentioned. During 2022, we invested $1.7 billion reducing our share count by 25% to 47.6 million shares at year end. Full-year share repurchases totaled 15.6 million shares, 4.6 million of which were repurchased in the fourth quarter alone. Thus far in 2023, we have purchased an additional 800,000 shares with more than $1 billion of remaining share repurchase authority. We ended the fourth quarter with total liquidity of approximately $1.8 billion. Our current leverage ratio of debt to EBITDA of 1.6 times remains well below our historical 2 times to 3 times range. Looking ahead, we will continue to focus on operational excellence and disciplined capital allocation supporting growth to drive long-term shareholder value. With that, I will turn the call back over to Mike.

Yes. Thank you, Joe. Derek, would you open for questions, sir?

Yes. I think we can, yes.

Operator, can you remind the audience how to queue up for questions please?

Thank you, Joe. Derek, would you open for questions, sir? Yes, I think we can. Operator, can you remind the audience how to queue up for questions please?

Hello, are you there?

We have our first question from John Murphy of Bank of America.

Great. Good morning, guys. Can you hear me?

We can. Good morning.

Good morning. Just maybe a first question on the inventory front. Things are slowly returning to normal, maybe in aggregate, but are still a bit tight. But there are some pretty big dispersions between the D3 getting closer to normal and the J3 maybe being very tight. I'm just curious if you can kind of comment where that stands, did the inventory levels stand for you and what you think the implications may be for GPUs as we go forward and maybe sort of the dispersion in GPUs across the different brands?

Yes. Good morning, John. I'll take this, and then Joe can add his thoughts. You're right; our overall inventory levels and days of supply remain very low. We monitor these metrics across all OEMs and the brands we represent, and our inventory levels are still below national sales figures. From a balance perspective, even those who have managed to replenish inventory more quickly than others are still in good shape. Joe and I have been discussing this in detail as we prepare for this call, and the key for us is not just the absolute inventory numbers but how they translate into days of supply throughout the year. This leads us to a significant question regarding new vehicle volume. Looking at this year, there's a strong possibility that new vehicle volume could exceed 15 million under the right conditions, and I expect we'll end the year with relatively low days of supply compared to previous years. Consequently, there may be ongoing pressures on new vehicle margins. However, looking at the trends from 2022, I believe we'll see a continuation of those trends, somewhat balanced by volume increases across the brands. Apologies for the lengthy response; these factors are all interconnected. Joe, do you want to add anything?

Yes, I would like to elaborate further on the same theme. John, the days of inventories lasting 75 to 90 days are long gone. I also believe that having periods of nine days is not sustainable; we're currently at 19 days. With collaboration from our partners, maintaining an inventory level of 30 to 45 days would be a healthy situation for everyone involved. I’m not sure if we can reach that by the end of this year, but I believe it would be a beneficial level that serves everyone's interests very well, and that’s how we are currently viewing the business.

That's helpful. I have a second question regarding capital allocation and human capital allocation. The finance business is poised for growth, and I want to understand your plans for it. Additionally, RepairSmith is a new aspect that could enhance the aftersales business. Mike, I found your comments about reactivating customers interesting, and I would like to know how RepairSmith factors into that. Then there's also the matter of share buybacks. When considering AutoNation USA, how should we view the flow of your capital and free cash flow towards the finance business, aftersales, and AutoNation USA, as well as buybacks? There are new, adjacent businesses emerging that might require capital, but possibly not significantly. How do you approach this moving forward?

The main consideration for us is determining the most effective use of capital from the perspective of our shareholders. Over the past two years, given the market conditions and the overvaluation of assets, the best return has clearly been to return capital to our shareholders, and we intend to continue that strategy. Our focus will remain on this discipline. To elaborate on your points, our primary strategy is to maximize the assets we currently possess and, where appropriate, to expand into areas that will enhance our geographical reach. We have a substantial customer base that has been built over many years; however, not all of these customers are actively engaged with us, and our share of their spending is relatively small. Their total spending on transportation and mobility is quite extensive, encompassing various needs. Our goal is to grow our business and geographical footprint so we can attract new customers and understand why some existing ones become inactive. This often occurs when their vehicles exceed seven or eight years in age, leading them to believe it’s best to leave a franchise or move beyond a 25-mile radius of our stores, resulting in decreased penetration in aftersales. RepairSmith addresses this issue effectively by providing convenience and overcoming those geographical barriers. They present their services in a way that underscores their value, which makes our customers more inclined to consider them. Additionally, RepairSmith enhances our AutoNation USA stores by offering a unique selling proposition. Customers can purchase high-quality used vehicles backed by AutoNation and also access a skilled team of service providers for the most convenient service options in the used car market. When we evaluate potential acquisitions, we focus on meeting the needs of our existing customers, not to mention the roughly 300,000 new customers we add to our base each year. Our strategy centers on reactivating customers who seek services not typically available from franchise stores, and we're actively acquiring businesses and expanding existing ones to accomplish this. Ultimately, this will allow us to re-engage those customers and broaden our service offerings, which I hope clarifies our strategy. The acquisitions we've made and the businesses we are developing internally are all geared towards this goal.

Any intention on that financing?

If I could just add.

Yes.

Let me – yes, Joe. Let just add a kind of boring finance answer to some of this. Because strategically, Michael, I think very clear in particular as to what we're trying to do. When you match that with the financial or capital strategy, we have a first-class problem. We have robust cash flow on a very strong balance sheet. So then the question is how do we utilize that and maximize the benefit of it? And it's not surprising to most it's an IRR-driven approach and we look at what the return is on each opportunity. We have obviously, as Mike mentioned in the recent past viewed share repurchase as an extremely attractive opportunity. As we look forward, we have found some opportunities that offered very, very compelling returns. And as we think about capital going forward, we will deploy it in a similar fashion in identifying where there really is truly incremental value. And I think you were going to ask about the finance business and I think we've been very clear that one, we're going to be delivering this growth and we will utilize facilities that we are not funding all of that directly from our balance sheet. As is typical in some ways similar to the way you think about floor plan. So we're not going to be putting dollar for dollar behind the capital business at the expense of other opportunities.

And let me just follow-up on that. So I think, Joe, in the past, John, last year when we think about CID, was clear that we are going to grow that business. That business has been around 35-years and has been successful during that period. And our intention is to grow that business at a speed that we believe is very manageable on pace with the growth of our AutoNation USA businesses predominantly. We have good relationships in our franchise businesses with our OEM captives and that will continue. So we really wanted to focus on the work of AutoNation USA, so it's going to grow slowly. And it will grow deliberately and it will grow in a way that we think is manageable. RepairSmith is a phenomenal start-up business. It's a much younger business and full of dynamic people really trying to forge a new way of trying to provide convenience and great service to their customers. But they are there, they're a start-up business. They've grown well, I think they've been very deliberate in terms of their growth. But there's a lot of things that need to continue to happen to make that business grow to scale. So again, don't expect RepairSmith in the course of the next two, three, four quarters to start to become a dominant force. It's about a deliberate, progressive approach to growing our business in ways that we think will deliver over time a really good balance result.

Mike, just real quick to follow-up. It's fair to say that these are good incremental opportunities that are not going to be very material calls on capital that would crowd out share buybacks that have been a big part of the story and there's probably room for everything. Is that a fair way to think about this?

Actually, I think that's more eloquent way than I could have put it. So thank you for your answer. Thank you, John.

Thank you. Your next question comes from the line of Daniel Imbro with Stephens. Your line is open.

Yes. Hey, good morning, guys. Thanks for taking the questions. Joe, I wanted to follow-up on one of the answers to the last question. I think you talked about confidence in OEM partners, maybe just the high 30s to 40 days. I'm just curious what gives you guys the confidence that the OEM partners are going to be disciplined this cycle? Historically, if I think do it, maybe they've been a little less disciplined as supply comes back online. So curious maybe what's changing in the conversations? What gives you confidence in that? And then to a dovetail onto it, if that is what you expect, kind of where would you expect new GPUs to shake out maybe for the year? Or what's the exit rate you're planning on for 2023? Just based on that days supply outlook you provided?

We do not have daily conversations with the OEMs regarding the complexity of inventory levels; instead, we engage with them periodically to understand their goals for market share and production. Interestingly, there was an unexpected industry-wide correction in inventory that caught everyone off guard, as individual OEMs were hesitant to act due to fear of negative consequences. This situation led to a collective reset within the industry. Historically, my focus has been on maximizing production efficiency and driving sales volume, but now there seems to be an opportunity for a reset. People are starting to grasp the importance of supply and demand dynamics, which I believe benefits everyone involved. While I wouldn’t say I have complete confidence, I trust that the OEMs are intelligent and capable of navigating the complexities of their businesses. I'm optimistic that they will maintain that balance moving forward.

Got it. And then Joe any follow-up question on kind of where you expect GPUs to end this year given that inventory, kind of, expectation?

So obviously, we're not going to predict an absolute level. And obviously there was some talk about the expectation of some level of pressure as inventory builds, but consistent with a view that the business can be run at 30 to 45 days, that's consistent with an expectation that profit per retail vehicle while moderating are going to be above pre-pandemic levels. And that should be a sustainable model provided everyone cooperates in much of the way that Mike kind of alluded to. The work process is pessimistic, but also very pragmatic about the whole thing.

Got it. Makes a lot of sense. Maybe just a follow-up on something more in your control on the used side of the business. It does feel like you guys have improved your sourcing, kind of, customer sourcing last few years, maintaining higher GPUs, but unit sales were a bit light there kind of relative to the group. So kind of curious is it becoming more difficult to buy from consumers as vehicle equity normalizes? Or what are your expectations there around your ability to continue self-sourcing enough units to drive outside used growth in the future?

I have 100% confidence in our ability to self-source there, because I think in Q4, Joe, we have something like 94% sales or about a 90% anyway.

I have absolutely confidence in that. But that's not the real answer to the question, I don't think. First, I do think you're going to see an increase in new vehicle industry as we talked about. Obviously, as a large player in the franchise new vehicle retail business that's going to help us in terms of our sourcing and that's a competitive advantage against those standalone used car players, which I think has been pointed out most times. But the reality is that roughly 90% of all of the vehicles that are sold, used vehicles that are sold either to franchise dealers or publicly traded used car dealers are under 10-years old, roughly 90%. Of that, 40% of those vehicles are sold between two and three-year old vehicles. And those vehicles have to be put in the market two and three years old—two and three years ago to be available. So it's absolutely clear that unless the sales profile has been in the used car market in the United States for years is going to dramatically change. We are entering a period of tight supply of two and three and four-year old vehicles, which makes up the majority of these car sales. And that's going to impact wholesale prices and ultimately retail prices, margins I think are going to be fine. They're going to bounce in and out through the bandwidth that they always bounce in and out, because as wholesale prices move, retail prices move, you all know the dynamic. But the reality is that those vehicles are going to be in short supply for a period of time, which will impact those prices. So for us, what we're going to do is we're going to obviously continue on our strength that we buy your car, continue to maximize the trading that we get through our franchise new vehicle sales. And make sure that what we're doing is appropriately playing in that market to get what we hope is more than our fair share of those vehicles to maintain our sales velocity. We won't overpay, we will maintain hopefully a 30-day-ish, 35, maybe 40-day-ish supply on used vehicles. So that we can be reactive. And what that may mean is that our volume may come down, but in response to that our teams know that if your volume is coming down, your margin better reflect that scan supply. So that's the dynamic that we're in. It began, I think, a few months ago, it's going to continue into this year. The bad news, I don't think it's bad news, because if we see the same net price that we're seeing, net transaction price on new vehicles, a solid used vehicle wholesale and retail price is going to help bridge that balance to pay for our customers. So I think it's just the reality of the business and it's one that we'll be facing for the next six months. But not bad news, it is what it is. You just react to it.

Really helpful color. Appreciate it and best of luck.

Thanks.

Your next question comes from Rajat Gupta of JPMorgan. My apologies. Our next question comes from Bret Jordan of Jefferies.

Hey, good morning, guys. Could you talk a little bit more about RepairSmith, and maybe what the scope of services that you can offer on a remote basis are? And are there any regional restrictions there, you know, as far as, you know, outdoor work or driveway repair, how you sort of envision that?

Yes, it's a great question, Bret. I mean, obviously, there's a limited range of services and repairs that can be carried out on someone's drive or in a car park or those elements and those, but it's still incredibly broad if you think about servicing oil changes, filter change, cabin change, all of those things they can do repairs, a whole host of different repairs, which includes vehicle diagnostics. They can also provide free. There's a lot of business, I'll give you one of the things that to me is always a great area. There's a lot of business of private, one guy selling a car to another guy or one girl selling the car to another guy, those are private sales. Some of those people actually wouldn't mind their technician turning up for a relatively competitive fee and doing a quick diagnostic on the car they're buying, gives them a lot of protection in that used—in that C2C market. So there's a whole host of things that RepairSmith are exploring and working on. They also have great relationships with lead companies, because it's incredibly convenient for these large fleet operators to have their van, their transport vehicle serviced at night when they're not using them. So I mean, the breadth of services that they can provide is phenomenal. They add back to all of the physical infrastructure that we have. All of the physical infrastructure that we have. So if you turn that up at your house, for example, and you've asked us to come in to do a diagnosis and actually you need a new transmission, we're going to do that on the side of the road, that's clear. But RepairSmith now have access to tens of thousands of ramps around the country where they can go and do that for you. So you did the benefit is if they're able to repair at your door, they can repair at your door, they could certainly diagnose it for you so you know what you're in, and by the way, if necessary, we can get you to a ramp. So I don't actually see many limitations based upon what you've said with the exception of obviously the further north you go in winter, and the less, I would say, likely you are to do what I would call prolonged jobs. But again, if you look at the person's current footprint, our current footprint, how we're going to grow together, that's obviously been part of the thought process.

Okay, great. And then one quick question, you've commented that 50% of transactions were at or above MSRP. Could you give us the percent above MSRP and maybe what's the cadence in that mix?

It’s above MSRP has really not changed, really through the entire business…

We need to clarify this; there have never been 50% of transactions done above MSRP.

No, at MSRP.

No, your comment was 50% at or above and I was trying to get the above.

Yes. So good clarification. My mistake, very clear above MSRP, really the pandemic has never been much above 3% and today is slightly below 2% and that is really a company policy and approach, which we've maintained. So think of 50% of their bucks at MSRP and less than 2% a buck. So thanks for clarifying that.

Perfect. Thank you.

Thank you, Bret. Your next question comes from Colin Langan of Wells Fargo. Your line is open.

Great. Thanks for taking my questions. Can you just go into what drove the new GPU decline, I think it was down about $300 quarter-over-quarter. Is that customer mix? What is causing that decline? And how should we think about that as we go forward, is that rate going to continue?

I think the reality is that new GPUs are never going to be sustained at the level. And we've been talking about it for a long period of time that as new inventory levels begin to restore in the franchise network that you're going to see a better balance. And I say better because it brings some volume back here in GPU's drop, but ultimately what you're trying to do is maintain the overall level of profitability. So it was really driven by the fact that inventory levels, of course, certain manufacturers began to recover. And I would say, well expected moderation of new GPUs. That's how I would describe it. And I think you will see that in this year as well, and I don't think it should come as a surprise to anybody.

Got it. How should we think about F&I? Some dealers are worried that with rising interest rates, people may scrutinize that payment. Are you experiencing much pressure this quarter? How should we consider this as the year progresses?

So I think what you'll see when you get rise in interest rates and it gets passed on, sort of, F&I rates with staff and these penetration levels begin to drop a little bit, because other providers become more attractive and I think that's what happens. Often it gets mitigated by an extension of the term, or an increase in terms of deposit. The good news for us is our big focus really has been our focus on additional products within our CFS performance, so that we have a very balanced performance that as you've seen in our results consistently, consistently has been at what I think is great levels. So as interest rates continue to go, you see movement up the FICO range away from being subprime up to mid and into prime, you see, obviously, the lights passed on. I think it's for locomotive, the industry, I think about 2% of rate is now embedded in all of the finance that's written in the United States. And you see a mitigation on penetration levels from captive or pseudo captive finance companies. But that's how you should think about it. And that just reinforces our focus on the additional products that add value to our customers that are not linked to an interest rate.

Yes, the only thing I would add just to further clarify, more than 70% of our CFS is actually coming from product rather than financing. And as Mike indicated, is a real focus on increasing penetration, increasing profit per product is clearly our focus and I think underlies the confidence we have in being able to maintain that going forward.

But just to be clear, those products in addition to the financing, those are still embedded into what the person pays. So when someone's shopping the payment to keep those products, the payment would still be higher, right?

In most cases, yes.

Yes, I think they buy on standalone.

Okay.

Thank you.

Thank you. Your next question comes from the line of Danielle Haggen of Morgan Stanley. Your line is now open, Danielle.

Hello, this is Danielle on for Adam Jonas. So we heard you talk about the dynamics that play in the used car market. We've heard similar things with our conversations and industry contacts and recent Mannheim prints, including the print from this morning. You mentioned tighter supply, is that the sole driver of this kind of 180-degree turn in the used market? Are there other dynamics at play? Are you seeing anything on changes in consumer demand heading into kind of a macro uncertainty this year? Thank you.

Hey, Danielle. Firstly, Adam is well. And that—you're not on because he's ill, but when you talk to him, give him my regards. There's obviously a range of things that impact it, one of which is the availability. And as you've seen, we saw used car prices begin to drop at the end of last year and that has now kind of mitigated and stopped. But it's also being impacted on the demand side, because depending on the age and the profile of the customers buying it, there is no doubt that what we've seen in terms of interest rate increases also affects the demand side of it. So it's a combination of things. I think when I—my opening comments really when we look and obviously do it on a very regular basis when we look at our performance and we—I try and identify the key driver. For us, it was around that very tight supply and not wanting to buy deeper at the expense per se of gross, so hopefully that's an answer.

Thank you. Your next question comes from Rajat Gupta of JPMorgan. My apologies. Our next question comes from Bret Jordan of Jefferies.

Great. Thanks for taking the question. I had a question on this SG&A going forward. Obviously, that the GPU trajectory is a bit uncertain and how to predict. But how should we think about the SG&A drop through as those gross profit dollars come down over the next 12 to 18 months? And maybe if you're willing to, can you give us a range of SG&A gross profit that you're thinking about for 2023? And I have a follow-up. Thanks.

Sure, Rajat. Good talking to you. So SG&A as you kind of saw in the release in my comments, maintain strict discipline. As we think about it, you obviously have a fluctuation primarily in comp associated with GPUs. Think of the flow through your SG&A per dollar growth is somewhere between $0.25 and $0.30 per dollar. Beyond that, what we're trying to do is obviously be very efficient in our advertising and marketing and you can see relatively flat sequentially and then really controlling the store and corporate overhead, which again was essentially flat sequentially. Results of that, as you can see, it's still below 60%, I think there is some slight pressure on that going forward, but in a strong intent on maintaining our discipline. And then I mentioned the investments, which was maybe 100 basis points as a percentage of growth this quarter. I don't see that getting much beyond 200 basis points in the course of 2023 as we make what I think are absolutely essential investments to ensure the longevity and well positioning down the road. And I can kind of give you a range, I mean, we clearly intend to stay below 65% this year with a target to be at the lower end of kind of the 60% to 65% range. And that will fluctuate somewhat with the GPUs. But the other measures including overhead and advertising in our elements that we're going to maintain strict discipline on. So that's how we think about it and that's how we manage it every day.

Got it. Got it. That's helpful color. Maybe just to follow-up on the prior question around like the Mannheim print and like just used car prices turning. Are you able to comment on how first quarter for January and February months to-date has been in terms of demand or like just unit comps for you, both new and used?

I'd say the interest in buying a used car is very strong. That converting into sales is, as I mentioned, still being and will continue to be impacted by availability of inventory, particularly in those age profiles that historically have been the bulk of used vehicle sales for franchise and public dealers. So we're seeing that. Joe mentioned it in his opening remarks, we have—we like, I think, all of our competitors are recognizing this and we've redoubled our efforts. That redoubling of efforts means that prices have stabilized, and you'll see some upward pressure on prices. I think ramping is going to necessarily impact margin, because it's just a relatively short time before that hits retail. But what we saw in Q4 continues in Q1 and it's an area of great focus and we've got our teams focused on that every day, but that's how it started. Hopefully that helps.

No, that's helpful. Great, thanks for taking the question and I'll get it back in queue.

Thank you. We have time for one more question. Our final question comes from David Whiston of Morningstar. Please go ahead. Your line is open.

Thanks. Good morning. I guess, first looking at the segment income, domestic was down especially hard about 25% and just wondering kind of related to that, you've got a large brand mix decline from Ford, but then at the overall segment level for domestic, was there just lack of inventory from Ford or others, or is it more due to unfavorable pricing?

Well, there's no data, you had some interesting movements in—from all of the domestic, both up and down. I think there are three things that play. For sure inventory, there's no doubt about that inventory still was for those areas really that their mainstream brands, I'm not talking about the premium parts of their brand, Lincoln, Buick and Cadillac, but the main parts of the brand. You had pockets of inventory that are not available. You had movement in terms of net price position and it's incredibly competitive. And I also think all of the OEMs are adding towards the end of the year and what they like to do—look to do is to plan not just the end of the year, but how they're going to start the year. And those dynamics resulted in what we saw. So we've already, I think, seen some of the OEMs talk about how they finished off the year. That will be wrapped up. And then I don't want to comment for them on how the year the New Year started. But the great thing is that invariably there is not just one silver bullet that they did it and that's why this business is beautifully complex.

Okay. And on service, that's—from a growth perspective that's a positive outlier. And I'm just curious is a lot of people—are there just a lot of people coming back to the market now who have deferred for a long time? And is the growth mostly customer pay or warranty?

Yes, growth is coming mainly to customer pay, but it isn't about significant volumes of additional customers coming into your dealership or dealership at least. I think it really is a reflection of the fact that they have been more miles driven, there's a direct correlation between miles driven and expense to keep the vehicles on the road in a safe fashion. So what you're actually seeing is you're seeing the revenue and the gross per repair order actually drift up for a largely stable number of customers that are coming in. It's obviously very dramatically dealership by dealership depending on their penetration of their aftersales part, but broadly across the piece, that's what you're seeing. And internal work as well, which obviously has an impact, is continuing to improve as well. So broadly, as I said, more miles driven, more repair and maintenance.

And Mike, just a higher-level question. Having worked at both OEMs and dealers, I'd love to hear your perspective on contrasting the direct sale model that the EVs were doing to the franchise model that you guys do. In your opinion, where is the key value for in having the dealer franchise model versus a direct to sales model, direct to consumer model?

Well, when you buy me four beers and dinner, I'll give you an answer to that question. Because it's an incredibly complex question. But what I can tell you is that dealers are an invaluable part of the supply chain not only are they connected to the community, but the reality is that customers, given the amount of money that they are spending on vehicles and that price is going up and up having a relationship that they can trust on a local level where they know that their needs are going to be looked after whether there is an emergency service repair or something else at significant value. And at the end of the day, each of these OEMs are establishing their own individual brand position and those brand positions are enhanced and developed by their dealer bodies and therefore dealer bodies—the dealers and how they work with their OEMs in my opinion is invaluable and will always be invaluable and will not be replaced with a car turning up on the back of a truck.

Well, I appreciate that and I have a bar in my living room. You're welcome anytime.

Thank you. Just email me the address. It's obviously—and I say and I don't mean to be flipping it, it's obviously a complex question, but I think there are lots and lots of OEMs have talked about the valuable nature of their dealer body and working together our ambition as partners of our OEMs is to just make sure that the customer journey is as seamless as it can possibly be that it really does represent the brand that the OEMs have spent years and billions of dollars to develop and it's done in a transparent way. That means the customer feels that they continue to support it, not just through the purchase, but through the aftersales experience as well. And there's always moving pieces, but that's my genuine view on it. So with that, I think we are done. That was the last question. Is it right?

Yes.

Again, thank you all for joining us. And our fourth quarter results that we've just discussed were capping off a record year for us. And we've really focused this year, not just on our earnings, but also on our customer experience. And I'd like to just say to our associates who are on the call thank you for the things that you have done. There's no doubt we continue to perform in this current environment, but we are also taking the steps that I touched on at the beginning, so that we can really be a big player and take part of the industry transformation that is coming. So the expansion of our footprint, the additional transportation solutions, how we thought about our cash flow and the investments that we've made, including return to shareholders, I think, are all examples of that. Now one of the things that we launched in our organization last year with all of our people was a mantra 'go be great'. And we like that because what it means is it means go be great whether that is in your performance in the business and the way that you deal with customers and also how you get involved in the communities that we're in and that's a big strength for AutoNation. And I've said very openly, when I joined this company now nearly the last maybe year and a half, maybe a bit longer than that ago, understanding the culture in the organization and how they constantly are looking to give back to communities, whether it's through their Drive Pink initiatives or whether it's just through the engagement that they have in each of the individual markets. It's been for me a fantastic part of the organization. And frankly, last year, I think the guys and girls in Drive Pink over $35 million and these things I think are important. These things are important. And notwithstanding the fact that this is a quarterly call, I think it's important that we call those things out, because it isn't Mike Manley doing that. Nothing to do with me, it’s grassroots from our people getting involved. So thank you all. With that, I'll give you the days back. Thank you everyone. Bye-bye.

Thank you. This concludes today's conference call. You may now disconnect.