Lithia Motors, Inc. (LAD) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John North. Thank you, sir. You may begin.

Thanks, and good morning. Welcome to Lithia Motors First Quarter 2012 Earnings Conference Call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially due to certain risks factors, which are outlined in the company's filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements. During this call, we may discuss certain non-GAAP items, including adjusted -- selling, general and administrative expense, adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operations and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. These presentations are not intended to be provided in accordance with GAAP, and should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We have also posted an updated investor presentation on our website, lithia.com, highlighting our first quarter results. Presenting the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and Chief Operating Officer; and Chris Holzshu, Chief Financial Officer. At the end of our prepared remarks, we will open the call to questions. I'm also available in my office after the call for any follow-up questions you may have. It's now my pleasure to turn the call over to Sid DeBoer.

Good morning, everyone. Thanks for joining us. As you can see from the press release, our company continues to perform above expectations, for which we are very pleased. Also, as we announced last quarter, effective May 1 of this year, Bryan DeBoer will take over as CEO. I will assume the role of Executive Chairman. Over the past few years, Bryan and I have worked closely together with the Board of Directors to transition his role to the CEO responsibilities. Bryan's team will continue to execute and expand Lithia's mission. We delivered the best March results in company history as we continued the momentum that was in place at the end of 2011. As I discussed last quarter, a multiyear expansion in the number of new cars sold in the United States remains ahead of us. As a result of the strength in new vehicle sales in the first quarter of 2012, we are increasing our estimate for full year SAR to a range to 14.5 million units. Expanding credit markets, advanced safety features, improved fuel efficiency, new technologies and attractive styling are driving consumer demand. That, coupled with an aging fleet of vehicles on the road and a growing number of households in the U.S., we are confident that volumes will continue to recover and the future is promising. In closing, I’d like to thank our team for the strong performance that has allowed me to move to my new role as Executive Chairman. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Thank you, Sid. Good morning, everyone. I'd like to thank the board, particularly our independent directors, for appointment to CEO. Looking forward, Lithia will continue to build on teamwork, restore entrepreneurial spirit and an awareness of customer need to drive our success. Today, we reported a record first quarter adjusted income from continuing operations of $15.8 million compared to $8.8 million a year ago. We earned $0.60 per share on an adjusted basis in the first quarter compared to $0.33 per share in the first quarter of 2011. We grew our revenues 30% and nearly doubled our earnings per share for the first quarter of 2012 over the prior period. Total same-store sales were up 21% in the quarter, reflecting increases over the prior period in all business lines. All metrics from this point forward would be presented on a same-store basis unless otherwise noted. New vehicle sales increased 25%. This increase was on top of a 40% increase in new vehicle sales in 2011. On a unit basis, we sold approximately 11,600 new vehicles, an increase of 2,200 units or 24%, well above the national average of 13%. Our stores continue to drive new vehicle sales and increase our market share. While our overall new vehicle sales increased in the quarter, our domestic stores increased 32%, while import and luxury stores were up 17%. Our team continues to outperform national results and increase our share in the regional markets. We continue to target a 3% to 5% growth in market share during 2012 on top of the underlying market recovery. Used retail vehicle sales increased 18% in the quarter. We sold approximately 10,800 retail used vehicles, resulting in a used to new ratio of 0.9:21. We sold a monthly average of 45 used vehicles per store in the first quarter of 2012, up from 39 used vehicles per store in 2011. As you recall, our goal is to sell an average of 60 used vehicles per store. In the quarter, value autos or vehicles over 80,000 miles performed well. This segment grew 46% year-over-year and had a gross margin of 20%. Although these vehicles have lower selling prices, overall, the average selling price on our retail used vehicles increased 2% due to underlying market strength. We anticipate continued headwinds in sourcing 3 to 7 year-old used vehicles due to the lower number of cars manufactured in 2008, '09 and '10. We have focused on retailing older used vehicles to offset this shortage. Throughout the quarter, late model used inventory remains scarce, a trend that will continue through 2013. The good news is that the supply’s constraint may spur additional new vehicle sales, as customers convert to purchasing a new vehicle given the increasing market value of late model used vehicles. We are also concentrating on capturing as many trade-in opportunities as possible. The new vehicle dealer remained at the top of the food chain when it comes to procuring used vehicle inventory. We will continue to capitalize on this competitive advantage to maximize our used vehicle retail opportunity. In the quarter, our F&I per vehicle was over $1,000 per unit. On a GAAP basis, we arranged financing on 75% of the vehicles we sold. We sold 41% of our customers a service contract and 37% of our customers' Lifetime Oil product. Of the vehicles we financed in the quarter, 15% were to sub-prime customers compared to 12% in 2011. In addition, our sub-prime closing ratio or the percentage of customers, who successfully obtained financing after submitting credit information, increased 13% year-over-year. Over our entire customer base, the average credit score in the first quarter was 712. In short, credit trends continue to be positive. Our service, body and parts sales increased almost 5% in the first quarter. Wholesale parts and body shops showed significant increases of 11% and 13%. Customer pay work increased 6%, which is the 11th consecutive quarter of same-store sales improvement. Warranty still faces headwind as they have decline 12%. Warranty repair opportunities have declined as initial vehicle quality and reliability continued to improve. Also, we still face difficult comparisons from the declining number of units in operations under warranty. We expect these trends to continue in 2012 and potentially beyond. Despite this, our customer pay increases have been more than enough to offset the decline in warranty work we have experienced in recent quarters. Regarding regional performance. All states performed well, with all but one posting double-digit increases. Montana, Texas, Nevada and North Dakota all delivered increases over 25%. Our gross profit per new vehicle retailed was 24.39 compared to 23.63 a year ago. Gross profit per used vehicle retailed increased to 25.25 compared to 23.86 last year. Our stores remained focused on deal average or the gross profit dollars per vehicle sold rather than the margin percentage. As sales price increases, a decline in vehicle margin is possible despite gross profit dollars per transaction being unchanged or higher than the prior year. We are comfortable with our performance here and continue to believe that margin erosion will not be a significant challenge in 2012. In the quarter, our overall gross margin was 16.8% compared to 17.4% in the same period last year. Increases in new and retail used vehicle sales outpaced our other business lines, and explains the decline in overall margin. Despite a lower margin percentage, overall gross profit dollars increased 26% over our first quarter 2011 results. Now to discuss corporate development. We continue to seek exclusive, domestic and import franchises in midsized markets and luxury franchises in larger markets. Also, we want to reiterate that we remain disciplined on our acquisition strategy to ensure ROE targets that meet or exceed our internal hurdle rates. The acquisition market remained active, and we continue to look for opportunities to purchase stores that fit our strategy. As usual, we do not comment on acquisitions until they close, but anticipate completing transactions in 2012. With that, I will turn the call over to Chris, our CFO, to discuss our financial position, new credit facility and increased guidance for 2012.

Thank you, Bryan. At the end of the quarter, we had $9 million in cash, $17 million available on our revolver and $76 million in unfinanced new vehicle inventory. Therefore, our liquidity totaled $102 million. As many of you know, we executed a new $650 million credit facility last week. This is a 5-year syndicated facility that provides for $500 million in new vehicle floor plan, $100 million in used vehicle floor plan and $50 million in a working capital line of credit. As a result of this new facility, our liquidity will increase by $50 million to over $150 million in total, which should provide ample capacity for internal investment and acquisition activity. The facility can be upsized to $800 million to provide for future expansion as needed. Strengthening our balance sheet with lower cost and longer duration debt financing remains a priority for 2012, and we believe we have additional opportunities to drive down our weighted average cost of capital over time. At March 31, excluding floor plan, we had $286 million in total debt, of which $201 million is mortgage financing. We have no mortgages maturing in 2012. As a result of our new credit facility, an acceleration clause was triggered, reclassifying $8 million in mortgage financing to current portion. Despite this, our mortgage debt maturities remain manageable, and we anticipate refinancing this debt over the next 2 quarters. We were in compliance with all debt covenants at the end of the quarter as well. Our free cash flow, as outlined in our investor presentation, was $18 million for the first quarter of 2012. We continue to estimate the number to be approximately $43 million for the full year 2012 due to increased revenue, offset by planned CapEx as we continue to invest in projects that grow our business. Our capital expenditure estimate is $43 million for the full year 2012. This budget is based on new facilities, facility improvements and remodels, the consolidation of our headquarters facilities into a single location and other business development opportunities that are currently in progress. We continue to focus on the prudent allocation of capital, and believe a balanced strategy of acquisitions, internal investment, dividends and share repurchase is appropriate. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid, long-term investments in Lithia's future. Now to discuss cost control. In the quarter, adjusted SG&A was a record low of 72.2% of gross profit. For the quarter, incremental throughput or the percentage of each additional gross profit dollar over the prior year we retained after selling cost, adjusted to reflect same-store comparisons, was estimated to be 56%. We continue to believe that incremental throughput is the way to measure our cost control efforts. The target of 50% incremental throughput remains attainable for the remainder of 2012 and beyond. As of March 31, new vehicle inventories were at $417 million or a day supply of 61 days, an increase of 1 day from a year ago. Used vehicle inventories were at $115 million or a day supply of 48 days. This is 1 day higher than our day supply level a year ago. Import inventory levels are back to normalized levels at the current time, although late model used vehicles remains scarce. We're also continuing to monitor the situation with resin production for PA12. Based on the current information from our manufacturer partners, we have not heard of any disruptions to production, but would also caution you that it remains a fluid situation that is still being assessed. I'd like to provide a few comments on our increased guidance for 2012. Our EPS estimate for the second quarter is in the range of $0.60 to $0.62, with an increased full year expectation of $2.45 to $2.53. We anticipate growing new vehicle same-store sales 16% and used retail same-store sales, 13%. These increases are 20% higher than our early 2012 estimates, and are in line with our expectation of increased market improvement and additional share gains in our stores, as Bryan outlined. Based on sales volumes through April, our performance is on track so far. For additional assumptions related to our earnings guidance, I would refer you to today's press release at lithia.com. This concludes our prepared remarks. We'd now like to open the call for questions. Operator?

[Operator Instructions] Our first question is coming from Rick Nelson of Stephens.

I was flipping through the slide deck and looking at same-store growth from Chrysler for the quarter, up 44%. That comes on top of 62% growth a year ago. It doesn't seem like you're having any trouble lapping the tough comparison. I'm curious what you see ahead for that brand from a sales standpoint, and are you seeing any resistance at all to gas prices?

Rick, this Bryan. We're seeing in our regional markets, if you recall, that the demand for SUVs and trucks remained strong, and Chrysler has actually moved into the small car market. They also have the Dart coming in the next number of months, and we don't see a lot of resistance. It seems like our consumer base, when it comes of fuel cost, they're more willing to trade in a car that gets poor gas mileage and upgrade to something that gets good gas mileage than we've seen in the past, and we're excited about the perspective on that.

As you look at the 3 segments of your business: Domestic, midline import and luxury and your 16% same-store new vehicle sales estimate, where do you see the best growth coming?

We still see the domestics being slightly better than the imports with the luxuries lagging a little bit.

Got you. Also like to ask about April sales, both new and used. Are you seeing any pull forward into the first quarter because of the weather and presales on the Japan product?

Rick, this is Bryan again. No, April looks right on forecast. We're not seeing any differentiation from what we've been seeing.

Got you. And the new vehicle gross profit, really solid. As inventories now start to normalize how do you see that shaking out? Any incentive programs, are those stepped up now that the J3 of normalized inventories?

I think it's pretty fair to say that the battle's on. Everyone's pushing market share, and centers are pretty consistent. They're not quite like there was when there was a lot of flux from the tsunami last year. But now it's more of a head-on attack, where all manufacturers are trying to stabilize their market share, continue to grow their market share. So we think that it's going to be a pretty stable incentive market throughout the summer months and into fall.

Got you. And then finally, sub-prime, you noted was 15% of, I guess, of transactions. How does that compare to the years when we were tracking 16 million, 17 million units? And is there opportunity to further grow that sub-prime segment?

Hey, Rick. This is Chris. Great question. Our current sub-prime segment, as you pointed out, is about 15% of our overall portfolio. Prerecession, that level was closer to 25% of our overall sales. So still a lot of opportunity for us to continue to find financing for our sub-prime customers. Now with that said, it’s something that we monitor very closely. And we're seeing on a year-over-year basis right now our availability to arrange financing for sub-prime customers is up 13% to 15%. So we're, I think, optimistic about what we're seeing with the credit availability, both in our ability to get sub-prime customers financed, but also to continue to expand the advantage that we get on our loans, which allows us also to provide additional back-end product for our customers. So yes, things are getting better, but definitely not the prerecession levels yet.

Rick, this is Bryan, again, as well. If we talk about sub-prime customers additionally, it's about the supply of vehicles that fit those customers as well. That segment wasn't a segment we were heavily into prerecession. Now we're heavily into it. So I would say that there's a lot of pent-up demand there despite the fact that it's 25% what we used to be. It may become a bigger portion of that because now we're definitely attacking it with our value auto vehicles, and our stores are very aware of how to get those cars onto the front lines and available to those sub-prime customers.

I got you. Yes, that seems to be a nice driver for the business.

Rick, this is Sid. I had one other thought on the gas prices. Did you see the appendix item on how our sales dropped historically during 2 of those cycles, where we had a spike in gas prices? And as soon as they stop going up, we saw a response and the market seemed to return on those vehicles that were impacted. So we've already seen that -- the gas prices begin to recede again now. So hopefully, this worry that we've had about gas prices impacting SUV and truck sales is behind us.

The new product seems a lot more fuel efficient too and...

Absolutely.

It could impact -- be a stimulant to sales.

Our next question is coming from Simeon Gutman of Credit Suisse.

Just a couple of variants on what was asked. Can you talk about gross profits per new? What's driving your confidence there? I think it stands out so far among the industry, and I guess, the outlook, which is pretty strong too. So can you talk about what's driving the forecast?

Simeon, this Bryan. I think the main driver is typically why we stand out is our rural-protected markets and our model of Lithia, purchasing and operating stores in those more secluded markets. Now I also believe that the way that we're building our teams in the stores, where they're definitely understanding and learning and listening to our customers in a way that it's building value, helps create gross margin as well. And I think the better we get at meeting those needs, the easier it is to maintain margin.

And what about the mix of J3 coming back? Because you do have some exposure there. That, I guess, assumes that, that range that you're giving captures that mix shift as well?

It does, it does. And I think we were up 17% or so within our import brands, which is still considerably better than what the market was. [indiscernible] are carrying a lot of that weight as well. We're also gaining market share within our individual markets, which I think is really the true test of whether or not your model is operating, whether your people are getting it done, and it sure seems like we're improving in both.

And so far, Chrysler has been the standout among the domestic this year in holding its own because I think you've seen the others, not returns, it's just the other one, the J3 starting to take some share back. Are you seeing anything, any signs in those brands? Anything that you think may evolve or the J3 will take some share back from the Chrysler brand? Or do you think that stays strong?

I mean, I personally believe, and I haven't seen any signs yet of any declines within Chrysler or the other domestics. I think what we saw was some happenings last year, where the domestics were able to get back what they lost from the previous 2 or 3 years during their financial woes. And I think now, it's just stabilizing out and it’s a normalized market again where I don't see big gains from any one manufacturer.

Okay. And then how would you characterize the incentives at least from the back end, things that the consumers don't see? Because, I guess, generally, that tends to be a better environment for the dealer group as opposed to when the dealers have to put some incentives on top of deals.

Simeon, this is Sid. When you look at the incentive plans out there, I mean, it's one the reasons I think Chrysler is getting a lift both nationally and with us because they're all focused on having every dealer sell a lot more cars, and all the incentives rewards you to do that, and is retro back to the first one sold. And I mean, I got to hand it to them. They know how to get a dealer motivated to sell more cars, and it's working. And it's still where the strength of the retail model is, is at the dealership. It's not with some national marketing strategy. It's at store-by-store, salesman-by-salesman, meeting with customers, finding a way to get a guy in the car. And they're just doing it and really well. Reid Bigland, who took over about a year ago now, has had that whole forecasted formula, and others are copying that to an extent, but I mean, we're getting the most lift from Chrysler, and I think a lot of it comes from these dealer incentives.

Our next question is coming from Scott Stember of Sidoti & Company.

Can you guys maybe talk about the magnitude of the increase in Chrysler car sales? I think you guys said it was up 88% in the quarter. I know that it's a big increase percentage-wise, but it’s still a small piece of your overall business. Can you just talk about what you're seeing with the new 300 in particular and their potential upside that we can see as the year progresses as this rate of sales continues?

That 88% is just the Chrysler brand, and I think a lot of that was fleet in reality. The 300 is doing very well. We're actually -- we can't get the 8-speed, 31-mile per gallon one in any volumes, and there's a lot of market there and they're advertising it very well. So yes, it's a great strong product. That hp transmission is coming now in the Dodge truck, I mean, the Ram truck as well and that's -- they stepped up on it. They're the only domestic with a real transmission like that. They are using the same one that BMWs is using, I think. I mean, it's -- and it really helps both performance, gas mileage. You drive one of those, you want it. I mean, because the car just responds to every little touch of the throttle, and puts you in the right gear, and I think it's very effective. So the new Dodge Ram, I mean, the new -- I got to quit saying Dodge, but the new Ram is going to be out this fall, and they've completely revised so many things. The fuel economy is going to be better. All the interior features are continuing to be -- it's probably going to be the finest truck out in America. So yes, I think that -- I always go to the truck because it's more of our business than the car part. But the reality is they're going to take share with that car, and I don't know if you guys have seen this Dart, but that's going to be a home run, the way they're doing that. It's got many choices. You can get that car in a multitude of colors and interiors, and they're going to accessorize it. And the interior in -- has got a bigger interior than any compact that I've ever sat in. And so it's really not a compact, but it is and it's going to be priced right, and gets great mileage, and I think they've done a great job with that too. So we're going get -- start getting more and more lift, I think, out of the car brands. But Chrysler itself, a lot of that was fleet, the 200 they do a lot with fleet, but it is selling too. Compared to the Sebring, it's up at least 100% at retail, that one model, because they didn't sell many of them in retail before.

Okay. And moving on with 2, parts in service, the collision or the body shop side, it was up nicely in the quarter. Could you talk about how you did that despite the fact that there was the impact of normal weather and fewer collisions?

Scott, this is Bryan. I would say this that 2 years ago and even last year, we had a few leadership issues in a couple of our stores in Texas. And really what we did is just focus in those markets. Our general managers helped us find some talent there and some promotions, and it was a lot of people moves in Texas that really made the biggest difference in body shop revenues.

Okay. And lastly, did you give the SUV pick-up mix in the quarter versus the year ago?

No, we didn't. I can get that for you afterwards. Scott, I'll call you offline.

Our next question is coming from James Albertine of Stifel, Nicolaus.

I wanted to just focus on 2 topics, the first on the new car side and then the second on the used car side. I want to understand a little bit more detail, I mean, obviously, the headline numbers for Chrysler are significantly higher than many other manufacturers. But what's the sense that you get on the ground level of the conquest-ing that's going on? Are there really customers that are shifting away from other brands that are coming to Chrysler? Or are these really -- people weighing the necessity of buying a car versus cars that are breaking down and determining to stay with Chrysler just happening, given the average age of vehicles ramping to impact results as of late?

James, this is Bryan. There's a couple of different things that are occurring. I think there's definitely conquest-ing going on within the Jeep brand. The Wrangler and the Grand Cherokee are wonderful products that haven't been available in quantities that they are now. So we're starting to see some impacts there. I believe, additionally, many of our stores are built around teams that are more capable than the competition within those markets. And they believe, and as Sid said, they respond to incentives more readily than a typical Chrysler dealer because our numbers are up considerably more than what Chrysler's numbers are. And I think a lot of that comes from an awareness in the stores and the ability to sell that brand better than they can sell the peer groups. So yes, we are conquest-ing throughout and as well as within Jeep.

Okay, that's very helpful. I appreciate that color. And then secondly on the used car side, very strong performance, obviously, on the comp unit sales. But also, I noticed the growth on the average price per comp units. And in light of what you said with the mix shift to the older vintage of cars, I'm just wondering, is it the dislocation because of the lack of late model that's allowing prices for the older vehicles to stay a little bit higher? And what are your sort of thoughts on pricing for the used segment and how it impacts ultimately gross profit going forward?

This is Bryan, again, James. I think the average price, there's no question that the shortage in vehicles across the board, not only within those -- really those 3-, 4- and 5-year old vehicles that we talk about, it affects everything that occurs in the used car market. So everything's come up in price. What we've found that's nice is when we have high new car sales, we obviously take in a car in about every 2 out of 3 trade-ins, right? We take in a trade in. And of those, we keep about half of them. Well, when we sell more new cars and we sell more later-model used cars, those seem to ramp-up the entire line of things and where, fortunately, they're now to be able to filter through and get those vehicles within the pipeline. So that value auto really isn't a conscious effort to go externally find those. It's more of a reaction to that top line higher level new and used vehicle. Does that make sense?

It does. And then so to be fair then, the -- you're getting essentially better at purchasing, and that's what's helping the gross profit per comp unit line item more than it is just the elevated pricing?

Yes, if we're working in the 1- to 5-year-old vehicles, we're definitely getting better at purchasing those. We're able to buy them off the street, find them at auctions, so on and so on and take them on trade, which is the single best source typically for used cars. And I think that's why being at the top of the food chain with new car sales, you automatically have a even flow of trade-ins, which is your main pipeline to your used vehicle sales, and it's why we've been able to continue to grow upon our past same-store sales increases.

Our next question is coming from John Murphy of Bank of America Merrill Lynch.

My first question and a follow-up on the Chrysler stair-step program that you're seeing out there. Has there been a change in that program in the beginning of this year versus what they were doing last year? Or are they running the same programs? And in absolute terms, are the incentives to you increasing versus where they were last year from Chrysler?

John, this is Sid. No, they haven't really changed them. In fact, they have hedged back a hair. They're being very effective at seeing that every dealer has a fair objective, and there's a lot of discussions about that. I'm on that National Dealer Council, and we worked our tails off to try to make it effective. But everybody has to sell more cars to hit those numbers, and I don't really call them stair-step because it's really -- it's a doable thing, particularly, for dealers that haven't performed very well. I mean, they really get in the money quickly, and it's created that whole level. And one of Chrysler's strength is that they still have 2,300 dealers, where Toyota has 1,200 or 1,300 [ph]. And that's all in those small markets, so they're getting lists out of that small dealers. And as you know, lots of our dealerships are small dealerships. So I think that whole mix is really working. Reid laid his plan out, I think, in the fourth quarter or third quarter of 2011, I mean, 2010, and he stuck right with it. And I mean, I think they're -- that's a big part of why they're so successful right now, and don't take anything away from the product. They did as much with their product plan as you could done with a limited amount of planning that had gone in prior to bankruptcy and the limited amount of dollars they could commit, I mean, they reworked every model, and made it so much more acceptable, and a lot of it was in the interiors. And now this moves with transmissions and engines and gas mileage. And I mean they're going to be a front-runner in all those areas. It's a -- I mean, it's a remarkable case study of how an individual like Marchionne can change an organization and how he can respond. You can never underestimate. No one knows 10 years from now who's going to be leading the pack.

Yes, it is impressive in short order. But Sid, you also mentioned that you thought that there could be some mimicking or parallel of programs that would put out -- be put out by other automakers. I mean, what would be the hurdle? Or what's unique that Chrysler's doing that those other automakers might not be able to do with these kind -- with the same kind of program?

I hope they all do it. I mean, it doesn't hurt us if others do it. We'll only get more lift in the new car business, and that just gives us more trade-in and grows and gets us to 16 million units quicker because the customers are out there. They want to buy automobiles, and it's just being able to afford them and get them financed. Those are still the issues. I mean, we're still -- I mean, that's not where ever it was before. And even when that bad paper, which you could call bad paper, was at 25%, 30% of our business, that stuff worked its way out. They didn't take flux our repos. So we will see a trend towards buying more and more loosely because they can do it and still have it work out. It wasn't a collapse like the housing industry. So I think, I mean, that's a really big point. And if you look at any single thing that will determine how well we all do, it's how much credit can we get for our customers.

And that takes me to my second question here. As you look at the used vehicle market and the pricing that is really just still at all-time highs, you kind of had alluded to some of these used car buyers tripping into buying a new car because the value equation actually make a lot more sense to buy a new car versus the late model used car at this point? Are you actually getting consumers that are coming into your showrooms to buy a late model used car? They just see the price, has sticker shock and say, "Okay, let's talk about a new car because that may be on a monthly basis, even cheaper than buying a 1 or 2-year-old used car."

Yes, definitely. And that's a wonderful format for our business model because we can sell them a new or used and we're going to go wherever they want -- the markets makes the most sense. And right now, a 1 or 2-year-old car doesn't make anywhere near as much sense as a new car does.

So you're actually converting used car buyers into new-car buyers directly?

Simply because we don't have many of the 1 or 2 or 3-year-old cars. So it's really important that we convince them that it's really a good investment to buy a new car, look how much you can really save over a lifetime relative to the depreciation, and everything's brand-new when you buy a new car.

John, this Bryan again. Our Lithia model and our stores are pretty indoctrinated into the fact that you always have had to be very careful about 1- to 3-year-old used vehicles because of that price differential being so tight as it is. Our main push has always been the 3- to 7-year-old vehicles. And then obviously over the last couple of years, those value autos that are the 7-plus year-old vehicle. So our guys aren't -- they're not playing that game. However, there's definitely conversions that are occurring because of that tighter, narrower difference now.

That's helpful. And Bryan, you had mentioned, as we think about gross profit for the new vehicle business, we shouldn't be so focused on percentages. We should be much more focused on the dollar per unit, and that makes a lot sense to us. But as we look at the gross profit per unit, it's kind of been traveling in the $2,500 to $2,600 range for the last few quarters or actually almost like the last 8 quarters or so. That's up from where it has been historically. As we look forward and we get this -- we're seeing this recovery in demand, do you think that absolute dollar number could potentially continue to veer [ph] higher, forget about the percentages?

We are actually -- we're not forecasting it to go up much more. We're up about $100, I believe, is that right, Chris, over last year, a little bit more on new than unused. But I think that's a pretty normalized level and especially as the used car market recovers and supplies recover, there's going to be enough used vehicles again. And remember, a lot of our sales come from that 3- to 7-year-old vehicle, which is a $10,000 to $20,000 vehicle that we make $2,500 on, which has pretty good margins, obviously, at the 15%, 16%.

And I'm sorry, Bryan, I meant on the new vehicles side, was -- is there room for those absolute dollars on your gross profit per new vehicle? I'm sorry, I didn't mean new -- I mean used. I meant new vehicle gross...

There's probably some upside. I mean, I really believe the deal average isn't just built from incentives or products. It's built from your relationship with the customer, and it's how well you sell the values and how well your competitors do to some extent to be able to combat that. And I think that's where our improvements come from. And as we grow better people within our stores, I think that's where we're seeing a lot of the improvement is purely from great staffing and great customer service.

And then just lastly on the parts and service business, customer pay was particularly strong this quarter. It's been the case for a while now. I'm just curious as you look at the customers that are coming back, are they doing more heavy maintenance? Are you writing larger tickets as opposed to there being higher volume? Or are you actually getting more volume in your service space? And sort of secondarily, are you seeing customers coming back with a 4, 5, 6-year-old car that they have bought new from you and just coming back to you for a longer period of time for a longer -- for more service over the ownership cycle of the vehicle?

John, Bryan, again. You nailed it. There's no question. We're getting a longer period of retention of the customer than we had in the past. There's -- we're also able to provide them many more services than we did in the past. So it's not that heavy maintenance like we typically had. We typically have a little bit smaller tickets that maybe aren't quite as much margin, but we're getting them in more often, and they're retaining their vehicles for a longer period of time.

And John, this is Chris. Just to add to that, when you look at an 11% decline in our warranty business, that's about $1.5 million in revenue in the quarter. The 6% increase in customer pay was about $2.5 million and an increase in revenue. So while we are seeing a big percentage decline in warranty, the fact that we're keeping those customers and a higher gross profit segment of the business for us is fixed, is definitely a positive for us.

Our next question is coming from Steve Dyer with Craig-Hallum.

Just a couple of things that haven't been asked. Great revenue quarter, brought up the EPS guidance quite a bit left, left -- the revenue guidance relatively flat. What sort of the thought process there? Is that a mix shift? Or what am I missing? Or is it just conservatism, I guess, going forward?

I think more than anything, Steve, is that our comp still get a little bit more difficult towards the end of the year as inventories came back in new vehicles. And you know what, it's -- we always like to keep our wits about us, so we're able to maintain our cost structure and achieve that 50% plus throughput. So I mean that's kind of the Lithia Way and we don't plan on changing that much.

No, I think we all appreciate that. So as it relates to financing, how are you finding the leasing market now, relative to maybe a year ago and maybe even relative to pre-downturn in '08?

Steve, it's Chris. Leasing is definitely becoming a bigger segment of the business that we have, but I still think pretty immaterial to the overall finance deals that we do. I mean, the manufacturers and their programs are pushing additional leasing, but we found that in our markets, it still isn't something our customers are looking for or are used to. So all in all, I think leasing is big for the manufacturers, especially the luxury manufacturers. But in our markets, we continue to get the majority of our deals financed through traditional sales.

Okay. One final question. I may have missed it. How many shares were repurchased in the quarter?

Pretty light amount, less than $25,000.

Our next question is coming from Brett Hoselton of KeyBanc.

Credit availability, so I'm looking at Slide 18, and it looks like we continue to see a slow steady improvement in the sub-prime area. But my question is, as you're talking to various sources of credit and so forth, do you see anything on the horizon that suggest that you're going to see a more material improvement in the sub-prime availability? Or do you see it as just kind of at this point being a slow steady improvement from where we're currently at?

Good question. I think when you go back to what our sub-prime segment is as far as our overall retail sales at 15% and you go back to prerecession levels, north of 25%, I mean there's definitely room for upside there, and we're optimistic that that's going to get better. Now I think normalized levels in the future will probably be closer to the 20%, 25%, but that still leaves a lot of opportunity for us to continue to penetrate that sub-prime segment.

And do you see any sources coming into the marketplace, knocking on your doors or anything on those lines and saying, "Hey, look, we used to be in the sub-prime and we dropped out. Now we're coming back and we're going to be back in a big way. Sign these papers." That sort of thing? Or is it just again just kind of traditional sources slowly seeing improvement there?

No, we're seeing new banks enter the market all the time that were very present back in 2007, 2008. They basically disappeared 2009, 2010, started coming back in 2011, and we're definitely seeing a lot more interest from those banks to do business with us in 2012 now.

Okay. And switching gears. Just -- I was going to ask you acquisitions, on the acquisition front, can you talk a little bit about what are your expectations for 2012 on the acquisition front? And you obviously have been a nice steady acquirer of dealerships and so forth. Do you see kind of a steady pipeline of acquisitions potentially through 2012? Do you think there is potential for a more aggressive acquisition going forward? Or do you think it's going to go through a period of may be a lull or something along those lines? What are your thoughts as far as the outlook for 2012 going forward?

Brett, this is Bryan. It's shocking that we always look back at what occurred in acquisitions and look forward and it always seems to be pretty static. The availability of stores is typical, and it's based off the age of really the dealer, okay? And as they age, you really then have opportunities that arise. And I think most importantly from Lithia, we don't set quotas. What we do is basically approach things in a disciplined fashion and have very high ROE targets that we have to achieve. And if those things are out there, then we'll continue to grow. And if they're not, we'll sit and hold our cash and grow when that age of the dealer body comes into play. And I think if I look forward on the horizon, it seems like it's the typical flow of acquisitions that we've had in the past. And obviously, we have some relationships with manufacturers, where we're able to grow without goodwill by getting open points or working through reinstatements of dealers and those type of opportunities as well, which obviously are a lot more cost-effective.

Our next question is coming from David Whiston of Morningstar.

First of all, on the results for the quarter, you're now coming at $0.60 and in late February, you were guiding into the low-40s. So were you guys just at the time being very ultraconservative? Or was March just way ahead of expectations?

David, that's a great question. This is Chris. When you think about how optimistic we are about our recovery in sales, both new and used going forward, that definitely prevails in this space. But it's definitely not a linear trajection. So what I'm saying by that is when you think about Q1 for us, our January results were just a little light of where our expectations were, and then we started pacing a little ahead of expectations in February. So when we guided in February, we felt pretty good that we were on track. And then coming into March, we had a record March. I think it was the best month that we've had in, since 2005 as a company, we broke records on all kinds of levels other than in volume. So I mean, our cost control measures, our discipline that we've had in deploying our capital, all of those things are really taking hold. And so it's hard, really, to forecast out on a month-by-month basis. You can kind of look at the overall year and give guidance. And I think when we increased our guidance from 216 top end to the 253, I'm mean, that's a 20% improvement over where we were 60 days ago, and we feel like that's something that is fairly aggressive. But at the same time, it's our goal to give you guidance that we're confident we can achieve.

Okay. That's helpful. On the credit, the new credit line, with that now in place, should we be expecting financial leverage to materially increase this year or early next year?

Good question again, David. I think it all depends on what happens with acquisitions. I mean, we have the liquidity available of about $150 million, which is very ample for us to do a number of acquisitions. But as Bryan stated, we're going to stay disciplined in that and unless we need to use that leverage, we plan to just maintain this discipline, look for acquisitions, look for opportunities to deploy capital internally, continue our dividend, which we just raised to $0.10 and we'll look for opportunities to buy back shares. So I think it's a balanced approach, and we don't really have quotas for any of those.

Okay. And on used vehicle retail, generally, what percent of your unit volume is in the value channel?

David, this is John. It's about 1/4 of the volume.

About 1/4? Okay. And finally, on Chrysler, 2 questions there. I mean, one, you've talked in the past about getting your overall price or mix down, say, was 25% or at least below 30%? But given the renaissance that firm is having now, are you rethinking that reduction?

David, this is Bryan. We're actually pretty comfortable at that 30% level that we're at now. Now we're not actively out pursuing because we do have a fair amount of stores that are Chrysler. But you know what? In terms of what is out there today and what we foresee for the future, in our size market, Chrysler fits. So when we look at a Chrysler store or a diversification, it really boils back down to our mitigation of the real estate cost, okay, or the lease exposures that are out there. And as long as we don't add a lot there, we can add Chrysler to our mix without adding a lot of risk. And I think we'll be looking at some of those in the future as opportunities arise. But I don't think our percentage as a whole should be increasing other than what hopefully they continue to exceed the marketplace in terms of same-store sales. And I think that's where we're getting a lot of our increase in percentages in Chrysler.

Okay. And finally on the Dart, I agree it's a great looking car. But most Lithia consumers, well, they're probably more still after the truck than a compact, right?

Well, I mean, a truck customer is not typically the Dart customer. So we have an opportunity to conquest other manufacturers, including imports and the other domestics. And I think having a vehicle in that space and having the talent that we have in our stores provides value and I don't think it really -- I don't think it affects the truck or the SUV market. It's really the ability to compete now in a space that we hadn't in the past.

David, this is Sid. A lot of history here, but remember, when the PT Cruiser came out, Chrysler absolutely killed the market with that, and they didn't have any customers normally coming in for a small car like that, and that thing just rocketed. We were sold out, getting over-retailed for those for like almost a year. I don't know if the Dart's in that category. But when they come out with innovative new products, people aren’t loyal to a brand anywhere near like they were. They want the latest raging thing and we could pick some lift.

[Operator Instructions] Our next question is coming from Adam France of 1492 Capital.

Sid and Bryan, based on your comments you made about the acquisition pipeline, I guess, maybe it's best question for Sid, knowing the mindset of these local dealership owners. But do you think any of these folks get more motivated in the back half of '12 to talk to you based on an increased tax bill if they hang on till 2013 or do you not put much stock in that?

One of my major rules continues to be to find guys that I think need to sell, and I pitch them around those 3 basic premises. Taxes are never going to be cheaper, that you don't have an exit strategy, and there's never a better time to sell them when things are improving because you can probably get more, than when they're going down and there's plenty of money available, we actually can write checks for your store, and we just keep preaching that. But I don't waste my time any longer with some guys who got a strong family that's in the business. I'm looking for the guy that doesn't have anybody because they're out there, and there's a lots of them, what, 17,000 dealerships in the United States, 5% of them will turn this next year. And who's going to buy those? We're certainly the prime guy to buy them in the markets we're in and then also all those markets we targeted. So it's a role I get to keep playing. And all I do is hand them off to Bryan and his team if I can get them interested. So I mean, that's going to be a big part of my play and what I've got that I get to do yet in this business. So I mean, obviously, those are the things that I'm pretty good at. I understand the psychology and I understand I'm kind of in that bucket. I'm an older guy that kind of knows how those guys feel.

From the ground level, we definitely heard that comment. We're hearing it from their tax planners as well as their attorneys. It's a big driver and we hope it accelerates things and hopefully, it's that final straw that breaks the camel's back, so they finally decide to sell.

The biggest handicap is these guys remember some price that the real estate used to be worth. And it's just like everything, all of us, our houses, everything, everything is worthless. So you say, "Gee whiz, it will come back". Well, we don't think it will. I mean, these are the realities of the world, and you need to take advantage of it while you can. It doesn't do any good to think about what it used to be.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Thank you all again for participating with our company. And as before, we never want to disappointment. We're going to charge ahead in this group. I'm so proud of Bryan and the team, and I'm so pleased that I'm able to let go of being actually the CEO. But I still get to play a major role, and I'm going to enjoy the next few years. This is going to be a great time to be a car dealer. Thanks, again, for listening.

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