Lithia Motors, Inc. (LAD) Q4 2012 Earnings Report, Transcript and Summary

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

Thanks, and good morning. Welcome to Lithia Motors Fourth Quarter 2012 Earnings Conference Call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. Forward looking statements are not guarantees of future performance and our actual results of operations, financial conditions and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements in this conference call. We urge you to carefully consider this information and not place undue reliance on forward-looking statements. We undertake no duty to update our forward-looking statements, including our earnings outlook, which are made as of the date of this release. During this call, we may discuss certain non-GAAP items such as adjusted net income and diluted earnings per share from continuing operations, adjusted SG&A as a percentage of revenues and gross profit and adjusted pre-tax margin. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not comparable to, similarly titled measures used by other companies. We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures. We believe the non-GAAP financial measures we present improve the transparency of our disclosures, provide a meaningful presentation of our results from core business operations, because they exclude items not related to core business operations and other noncash items, and improve the period-to-period comparability of our results from core business operations. This presentation should not be considered an alternative to GAAP measures, and full reconciliation of these items are provided in the financial tables in today's press release. We've also posted an updated investor presentation on our website, lithia.com, highlighting our fourth quarter results. With me on the call today are Bryan DeBoer, President and CEO; Chris Holzshu, Senior Vice President and Chief Financial Officer; and Sid DeBoer, Executive Chairman. 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 that you may have. It is now my pleasure to turn the call over to Bryan.

Thank you, John. Good morning. Today, we reported record fourth quarter adjusted income from continuing operations of $19.3 million compared to $12.7 million a year ago. We earned $0.74 per share in the fourth quarter compared to $0.48 per share last year, an increase of 54%. For the full year, adjusted income from continuing operations was $77.4 million or $2.96 per share compared to $52 million or $1.95 per share in 2011. This was also a record performance as we grew EPS by over 50% from the prior year. For the full year 2012, we grew total same-store revenues 23%. This was on top of same-store revenue increases of 22% in 2011 and 18% in 2010. Most automotive analysts believe a multi-year recovery in auto sales remains ahead of us, and many of the Western markets we do business in are still significantly below peak registration levels experienced in 2005 and 2006. Our store leaders continue to challenge their teams and remain driven to improve store performance in 2013 and beyond. All comparisons from this point forward will be presented on a same-store basis unless otherwise noted. In the fourth quarter, total sales were up 25%, reflecting increases in all business lines. New vehicle sales increased 31%. On a unit basis, we sold approximately 14,200 new vehicles, an increase of 3,300 units or 30%, well above the national average of 10%. Our domestic sales increased 25% compared to 5% nationally, our import sales were up 41% compared to 14% nationally and our luxury sales were up 24% compared to 18% nationally. Used retail sales increased 20% in the quarter. We sold approximately 11,500 retail used vehicles, resulting in a used-to-new ratio of 0.8:1. We sold a monthly average of 46 used vehicle per store in the seasonally lower fourth quarter of 2012, up from 40 used vehicles per store in 2011. We continue to target selling an average of 75 used vehicles per store. The key to our success in accomplishing this objective is to grow our core vehicle offerings, which increased 11% in the fourth quarter. In order to increase sales in this category of 3 to 7-year-old vehicles, we focus our stores to effectively source and procure inventory. This is an ongoing effort that we'll focus our attentions in 2013. As we have more success in selling core vehicles, we will, in turn, generate more inventory in our value auto category through the trade-ins received on these sales. Success in core vehicle drives our performance in the rest of our used vehicle offerings. As new vehicle sales continue to recover, certified preowned vehicles sales continue to increase. This category grew 21% in the fourth quarter due primarily to normalization of late-model supply compared to the low levels experienced in the last several years. In the quarter, value autos or vehicles over 80,000 miles performed well. This segment grew 38% year-over-year with a gross margin of 21%. Our F&I per vehicle was $1,104 per unit. We arranged financing on 70% of the vehicles we sold. We sold 41% of the customers a service contract and 34% of our customers a Lifetime Oil product. Our service, body and parts sales increased over 8% in the fourth quarter. Wholesale parts and body shop showed increases of 6% and 14%. Customer pay work increased 7%, which is the 14th consecutive quarter of same-store sales improvement. Warranty had a strong performance for the quarter, growing 11%. Our gross profit for new vehicle retail was $2,399 compared to $2,577 in the fourth quarter of 2011, a decrease of $178 per unit. Gross profit per used vehicle retail was $2,465 compared to $2,334 in the fourth quarter of 2011, an increase of $131 per unit. We continue to grow unit sales volume, which allows us to take additional vehicles in on trade, provide financing, sell extended warranties and maintenance items and increase units in operations that return for future service work. Additionally, our stores are focused on total gross profit dollars generated in each department, not just gross profit per unit, while increasing market share for new and used vehicle sales. Our gross profit on a same-store basis increased 21% over the prior year. Driving incremental gross profit dollars into the organization allows us to leverage our scale and gain efficiencies in operations. Much of this is due to effective cost control, which Chris will discuss in more detail in a few minutes. In the quarter, our overall gross margin was 15.8% compared to 16.2% in the same period last year. Increases in new and retail used vehicles sales outpaced our other business lines and explains the majority of the decline in overall margin. The acquisition market is active, and we are optimistic that we can generate acquisition growth in addition to the organic growth we are forecasting in 2013. It is important to note that over 90% of the dealerships in the United States are still privately owned, and that long term consolidation remains in front of us. We seek exclusive domestic and import franchises in mid-sized rural markets and exclusive luxury franchises in metropolitan markets. In October, we acquired a Toyota store in Missoula, Montana, with estimated annual revenues of $45 million. We also sold a Chrysler Jeep Dodge store and Hyundai store near Seattle, Washington in the fourth quarter. Our guidance has been updated to reflect these changes. As we look ahead to 2013, I wanted to share with you some important milestones that we have developed as a roadmap for the future. Last year, we laid out 3 sequential milestones, each milestone grows our top line revenue by 25% through a 10% to 15% increase in same-store sales and 10% to 15% growth through acquisitions. We believe that we can accomplish each of the 25% growth milestones in a 1- to 3-year time frame to almost double our current revenue within a total timeline of 3 to 9 years. These milestones are primarily dependent upon our success in continuing to develop additional talent in our stores and sufficient acquisition opportunities that meet our investment hurdle rates. When this revenue increase is coupled with the operating leverage in our model, incremental EPS growth that is generated has a potential to drive significant increases in net income and EPS. We are excited by the challenge to reach each of these objectives and look forward to updating you on our progress in future quarters. With that, I'll turn the call over to Chris, our CFO.

Thank you, Bryan. As we have discussed for several quarters, an important driver of recovery in auto sales is the expansion of consumer credit, particularly for lower tiered customers. Lenders are committed to increase their portfolio of automotive loans and are loosening their lending criteria to accomplish this objective. The vehicles we financed in the fourth quarter, 13% were to sub-prime customers, consistent with the fourth quarter of 2011. The absolute number of contracts originated for sub-prime customers increased 26% year-over-year. We anticipate continued improvement in sub-prime credit trends as we look ahead to 2013. Over our entire customer base, the average credit score in the third quarter was 729. As Bryan mentioned, we have challenged our store leadership to increase the absolute number of gross profit dollars produced. We also challenged them to retain as many of these dollars as possible through prudent cost control around the 2 largest areas of SG&A: personnel and advertising expense, which comprise 74% of the total for the full year 2012. We accomplish effective expense management through consolidated information systems, the standardized reporting structure that allows management at all levels to quickly see opportunities for improvement. For the full year, we reduced personnel expenses as a percentage of overall gross profit by 2% from 47% to 45%. In addition, we aggressively invest marketing dollars when prudent to increase individual lines of business. As a result, our advertising spend as a percentage of gross profit increased on a year-over-year basis. Our full year same-store sales increased 23%, validating the investment we made to increase customer traffic. In the quarter, SG&A as a percentage of gross profit was 70%. Throughput, or the percentage of each additional gross profit dollar over the prior year we retain after shelling cost, adjusted to reflect same-store comparisons was 53%. For the full year, SG&A as a percentage of gross profit was 69.4%, a record low. We have targeted SG&A as a percentage of gross profit below 70% on a full year basis for several years and have achieved this objective. Looking to the future, we believe SG&A as a percentage of gross profit will be in the high 60% range as sales increase. We continue to use incremental throughput as a way to measure our cost control efforts and our target of 50% remains unchanged. Through the incremental throughput we maintain in 2012, and reduced interest cost and income tax expense, we have generated an adjusted net margin of 2.3% for the full year of 2012. This is an increase of 30 basis points over 2011 when our adjusted net margin was 2%. During the fourth quarter, we increased the capacity on our syndicated credit facility by $150 million to $800 million in total availability. The facility allocates $575 million to new vehicle floorplan financing, $80 million for used vehicle floorplan financing and $145 million to our revolving line of credit that matures in April 2017. At the end of the quarter, we had $43 million in cash, $120 million available on our credit facilities which brings our immediate liquidity to $163 million. Currently, $102 million of our operating real estate is unfinanced. These assets could provide up to an additional $77 million of liquidity in 60 to 90 days, this brings our total liquidity to $240 million and we remain comfortable with our overall level of available capital. At December 31, excluding floorplan, we had $295 million in total debt, of which $193 million is mortgage financing. In the quarter, we refinanced $17 million of mortgages, extending the maturities and fixing the interest rates. We also retired $1 million in the higher rate mortgage debt. As of today, 67% of our mortgages enjoy fixed rates, and we have no mortgages maturing until 2016. Finally, we were in compliance with all debt covenants at the end of the quarter. Our free cash flow, as outlined in our investor presentation, was $34 million for the full year of 2012. Capital expenditures, which reduced this free cash flow figure, were $65 million for the full year of 2012. We estimate our 2013 CapEx will be approximately $55 million. This budget is based on new facilities, facility improvements and remodels, strategically exercising purchase options on lease facilities and other business development opportunities. We focus on the prudent allocation of capital, and believe a balanced strategy of acquisitions, internal investment, dividends and share repurchases is appropriate. The first choice for capital deployment remains to grow through acquisitions and our internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid long term investment for Lithia's future. In the fourth quarter, we repurchased 25,000 shares at an average price of $31.98, and we have approximately 1.9 million shares remaining under our current repurchase authorization, and we'll look for opportunities to acquire our stock when appropriate. As of December 31, new vehicle inventories were at $563 million or a day supply of 76 days, an increase of 14 days from a year ago. Our new inventory levels remain somewhat elevated as we ordered in advance of the buildout of certain truck models prior to the manufacture plant platform changes when production is halted and a normal supply of vehicles is not available. Used vehicle inventories were $131 million or a day supply of 56 days, this was 4 days higher than our day supply level a year ago. We have increased our guidance for the first quarter of 2013 to $0.69 to $0.71 per share and a full year 2013 guidance of $3.25 to $3.35 per share. For additional assumptions related to our earnings guidance, I'd refer you to our today's press release at lithia.com. This concludes our prepared remarks. And we now like to open it for questions. Operator?

[Operator Instructions] Our first question is from the line of Steve Dyer of Craig-Hallum.

Question on the new margins there, at 7% are lower than anything I think I've seen, kind of, looking back here a couple of years. Was there anything sort of -- and that's not specific to you, it seems like the other dealers saying similar things, was that anything anomalous in the quarter just in terms of promotional activity before year end or is that just sort of more of a new level here?

Steve, this is Bryan. We don't see anything really different than what we typically see in the fourth quarter. You're usually more aggressive to clear out inventory at the end of the year, and it's pretty typical as it's normally been.

Okay. In the inventory levels overall, it sounds like the implication being kind of GM ahead of the K2 launch, is that at pretty comfortable level such that you guys have an inventory right now?

Steve, you if you recall, we beefed up on inventory about 3 months ago at the end of the last quarter, and it's primarily in the Chevy 1/2 ton, as well as the Dodge 3/4, if you recall, Chevy was -- their plants were down for, I believe, 5.5 months. So I think that those moves were a good decision. We're starting to see that inventory in Q1 start to clear out and move a little bit quicker, and we're starting to see some of the margins and stuff start to stabilize, which is what we were expecting.

Okay. And then a question on the acquisition environment. What are you seeing out there right now, pricing, availability of different dealerships relative to expectations?

Great question. Because we actually -- we thought that there would be a little bit of a flurry at the end of last year. And it never really happened because prices seem to be adjusted upward because they thought that they could at that time because they thought that there was going to be a frenzy to some extent. However, I will say that after the start of the year, it's probably the most active acquisition environment that we've seen since we've been public. However, a lot of the deals are priced again at higher numbers. Many of the sellers, maybe even adjusted for the 5% or 8.8% increases that came through taxes. But we still believe because of the quantities, there's probably an oversupply of deals. We'll be able to buy them at our pretty stringent ROE thresholds. It just may take us a little bit longer than what we expected, but it's very active.

Our next question is coming from the line of Ravi Shanker of Morgan Stanley.

Can you talk about your SAAR expectation for 2013, as well as the SAAR in your particular markets because your geographic footprint is so different?

Ravi, this is Chris Holzshu. I think generally speaking from a SAAR perspective, based on the feedback that we get nationally, we expect SAAR to be between $15 million and $15.5 million in 2013, and as we've stated, our goal is to always outperform what happens in our markets. And as you know, each market in the U.S. performs differently. And as we've stated, we have a lot of markets that are performing well below the recovery that we've seen at the national level and we feel like that's an opportunity for us going forward to continue to see upside, especially in our Western state markets.

Do you see those markets catching up in 2013 or do you think it takes longer than that?

No, I think when you look at what we guided, we expect new car sales to be up about 12% in 2013. So generally speaking, SAAR should be up around 5%. We want to outperform the market at 5%. So it's really hard to predict when those markets are going to pop, but right now, we baked in a 12% improvement in sales. And if the markets recover quicker, unemployment recovers faster, then we will see an improvement above our current guidance.

Ravi, this is Bryan again. One additional quick thought. We believe that we could have up to 3 years of this type of improvements before we actually see the full recovery in many of those markets.

Can you comment on Chrysler's performance in the quarter? I mean, what's the market reception like to the products right now? And also, at their last earnings call, Chrysler announced that they were delaying a number of new products by 1 year or 2, including the next Ram. So I was wondering what you thought of that, if you look at the combination of the delays in products as well as the expanded product range do you think that's a net neutral for you?

Ravi, this is Bryan again. We're pretty confident with the pipeline of vehicles coming from Chrysler. They did discuss a few pushbacks, but right now, we're sitting pretty nicely with new products. We think that can carry us for the next few years. If you recall, our domestic sales were up 27%, Chris will give you the specific numbers. National was only up 5%. So in our market, in regional-sized markets, the domestic sales were able to still take market share because of that impact with the SUVs. Chris, you want to give him the specific numbers?

Yes, you bet Ravi. When you look at the actual performance, our domestic sales in the quarter were up 27%. As Bryan said, import was up 43% and our luxury brand was up 26%. And so our domestic franchises actually didn't keep pace with our overall improvements in new car sales, not that they didn't have a great quarter, but we saw some great performance in Toyota, which was up 46%; BMW, which was up 32%; Honda was up 48%; Subaru was up 65%; and we've got a lot of successes in other franchises that we could talk about. Chrysler specifically was up 35% in the quarter.

And lastly, when you talk about the potential to double revenues in the next 3 to 9 years, can you remind us again what the big moving parts are there? And is there going to be a ramp or is it going to be a steady trajectory to get to that point?

This is Bryan, again, Ravi. We believe that it could be pretty steady. The key components are basically broken down into 3 milestones. Each milestone is broken into 2 different parts. One is organic growth, which we believe we can grow at a 10% to 15% over each milestone. If you look at what our current earnings are, we're saying that we'll be up somewhere in the 8% to 9% in total revenues. That's a blend between new, used and fixed operations obviously, right. The other part of the milestone is external, which means acquisitions. We believe we can find 10% to 15% acquisition growth. Now obviously a typical acquisition may take between 12 and 24 months to get ramped up to a typical Lithia type of a performance. So there is a little bit of a lag on that part of the formula on each milestone. And those 3 milestones then compound to, if you add them together, it's 75%, if you -- it's about 83%, almost double our current size if we compound them.

Our next question is from the line of Rick Nelson of Stephens Co.

I'm interested, if you hit your earnings targets for 2013, where do you see the free cash flow and what sort of revenues do you think that would support the acquisition?

Yes, Rick, this is Chris. On a free cash flow basis in 2013, if we hit these numbers and also follow through with the CapEx that we lined out, we expect to be between $55 million and $60 million in free cash flow. And as far as acquisition growth off that number, Bryan, I think you can answer that better, but I think it's $300 million to $700 million in revenue, just depending on the store, to franchise and location.

And if you could comment on the pipeline, I guess, I'm most interested in what you're seeing in the Eastern markets, I know you have some new relationships with brokers there.

That's a great question. If you look back at that $300 million to $700 million, Rick, real quick to finish up on the other question, this is Bryan again, that is about double the rate that we need to grow at to reach each of our milestones if you notice, right. And we can use capital for other things if we choose to. Now in terms of the Eastern markets, like we've mentioned before, we have strong activity with brokers. We spent some time in NADA with people and dealers that we weren't familiar with in the past and had some good appointments at NADA. We believe that something in the next 6 months or so should occur in the East because it is fertile for us because we've never really spent a lot of time there. Now I will say this, the East is obviously a growth opportunity, but the West we're by no means, saturated, I mean, we're only in about 1/3 of the markets that we want to be in the West. So I think you'll see some Western markets that may even come in prior to that.

I'm also interested in what you're seeing in terms of sales trends in early 2013.

We're right on target. It's -- I mean, it's definitely looking nice like the $15 million to $15.5 million SAAR is going to take shape nicely and we'll be able to put a lot of it to the bottom line in 2013.

So these payroll and taxes don't appear to be having impact?

They have a slight impact but with a SAAR recovery of 7%, 8%, you're able to offset them. And obviously, our efforts in 50% throughput in reducing those SG&As and looking for new opportunities and ways to find efficiencies and higher productivities in our teams, I think that they can absorb those increases.

Our next question comes from the line of Simeon Gutman of Crédit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: My first question is regarding throughput and efficiency. You guys have been closer among industry leading for a while, and this quarter was no exception. And thinking about how you get better, do you think there's going to be more improvement coming from some of the best stores, which, I guess, can only get marginally better? Or are you seeing it from some of the underperforming or lower performing stores and are you actually seeing that progress today?

Simeon, this is Chris. Good question. I think it's a mix of both. When you look at the improvement that we saw in overall SG&A gross, on a year-over-year basis, a big piece of that came from our personnel cost and the focus that we've had in making sure that any incremental adds that we have in personnel is driven by the productivity that we see. And if there's no new tools that we're trying to implement, this isn't a new strategy for us, this is the same strategy that we had back in 2007, 2008, 2009. As we went through the recession, we used these tools to identify how many people we needed to minimize in each of our locations. And as we recover in each store, they're using the same tools to determine when it's safe to add back people. And I think that's key, and I think it's kind of a foundational tool that we have in our business that has allowed us to continue to leverage cost. So I think we're going to continue to see that opportunity there. The other big improvement that we saw on a year-over-year basis was just our basic facility cost. I mean as you know, dealerships carry a lot of real estate and leveraging those costs is critical as we continue to recover and improve sales. There's no change in the number of times you turn on the lights. There's no change in really other than general increase that you see in property taxes. And so we saw about 100 basis point improvement year-over-year in our overall facility cost that also led to that leverage. And all I can say is we expect that to continue. We're focused on that 50% throughput number on a same-store basis, and we're confident we can continue to deliver that over the long haul.

Simeon, this is Bryan. I have 1 quick thing to add that will help you with your model. At a 10% top line growth and 50% throughput, which is each of the milestones that we spoke to, correct? It's an approximate reduction in SG&A of approximately 200 basis points. Simeon Gutman - Crédit Suisse AG, Research Division: Got it. So if you take the whole network of dealers, of locations, as everything improves, I guess, the threshold for what's underperforming probably changes as well, but do you find that the mix of stores that are below whatever threshold that should be earning, is that decreasing, where maybe it's 1/3 of the stores or is it maybe 20% or 15% of stores today?

I mean, this is Bryan again, we have something called managing by thirds, but those buckets of thirds and the thresholds for performance have changed dramatically. I mean, I would say that our bottom 1/3 of stores used to be 3 or 4 years ago more like what a middle performing store was acceptable. Our bar of performance is increasing all over the place, and I think whether it's SG&A or whether it's top line sales efficiency numbers, what we see is there's a dramatic variance between top performance and bottom performance. An example is we have stores in SG&A that are in the mid-50 percentile range. We also have stores here in the high-80 percentile range, maybe even low 90 percentile range in certain quarters and months. So it's definitely variability, and I think that ability to manage each one of those thirds to improve each of them, is our ability and why we'll be able to accomplish that 50% overall throughput, which will eventually continue to reduce SG&A. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then a follow up on gross margin. I think the full year came in at about 7.3%, the guidance mid-point is just a tad beneath that. Is that more a reflection of the inflation that's expected on the ASP side or what's the embedded view on the pure margin within that -- on the pure gross profit dollar per vehicle within that margin outlook?

Simeon, this is Chris. I think the key to look at there is twofold. I mean one, our revenue growth up 31%. It's obvious that our stores are pushing for volume, which is something that we really believe in. I mean, we want new vehicle sales to grow so that we get incremental opportunities with used vehicle trades, we get the opportunity in F&I, we develop relationship with customers that then funnel back into the service drive long term. And so the margin that we're seeing right now, we guided that it's sustainable into 2013. We're not concerned about it especially when you look at the growth rates that we've seen in vehicle sales.

Our next question is from the line of James Albertine with Stifel, Nicolaus. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: I wanted just to ask sort of a higher level question, dovetailing off of a prior question that was asked, with respect to your markets underperforming, the broader, kind of, U.S. trajectory on SAAR, again, you've got great sales performance on your new and used vehicle side, but also I think it's worth noting again that your customer pay business, I think, outperformed the rest of, sort of, your peer group at least among the publics this quarter. So we're all sort of grappling between discretionary and nondiscretionary demand and sort of looking at different publics to try and extrapolate what's going on. What are you seeing in terms of driving new vehicle sales but also driving the increase in customer pay work that you cited earlier?

Jamie, this is Bryan. I think what we're seeing that may be a little different is our markets are definitely more depressed than much of the country. And our markets typically are not built off of the same type of disposable incomes that metropolitan areas are. So small dollars make big impacts pretty quickly in our size market, so as our local SAAR recover, we get to see the effects of that in a much more dramatic way, and I think the fact that our customer pay was up 7%, which was a good number, we've had similar numbers to that, but also we're starting to see that our warranty was up, I mean, we had our first quarter that our warranty was up 11% year-over-year. That's a huge difference for us, which means that our UIOs have finally stabilized and are trending back the right direction, which is also good indications of what's coming next, which is additional customer pay, because they spent their warranty dollars first, right? And then they eventually move into heavy customer pay as their warrants start to deteriorate. So I think we're pleased, and because of that incremental change in the disposal incomes within our smaller lower income market, as well as the press markets, these small incremental changes that are occurring make big changes to us in our service and parts wins, and I think eventually it starts to bleed in to our new vehicle and used vehicle wins, which we still haven't seen all of that take shape yet. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: I appreciate the additional color and detail there. And looking at your slides, I think that's what you're alluding to the 41% mix of 6 plus-year-old vehicles up from 36% last year. Is there a similar mix or breakdown that you can provide on the used retail side sort of the quality ABC or ABC tier vehicles as you see it?

Sure, we have that. So our mix on core vehicles, which is our biggest segment, and that's what we really drive, what's 58% of our mix and that's that 3 to 7-year-old vehicle. And we say why we always look at that as our ability to differentiate ourselves in the competition, because that's all about finding the right cars and going in mining the cars that we've talked to you before, and it also generates the trade-in for certified. Our certified was about 25% of our mix, and then our -- excuse me, our value auto was about 17% of our mix, and our certified was 25% of our mix, which is a 1 to 3-year-old vehicle. The value auto is the trade that comes off of the core products, excuse me. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: And the 58% core products, it relates to what last year same quarter?

Let's see here. Do we have that, Chris?

13% revenue growth on a year-over-year basis.

That's all I needed.

Yes. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: And then last question, just a housekeeping item, the advertising expense increased year-over-year, I apologize if I missed it in the prepared remarks, I just wanted to understand what's going on behind there and then I'll get back in queue.

Advertising is one of our 3 major items in SG&A obviously, right? We are seeing growth in advertising, it's not growing at the same rate as our top line sales, so we are seeing a little bit of leverage. We still believe that as we get market saturation, which we're a long ways away from, that we're going to be able to retain some of those advertising cost. So it grew as well, but it didn't grow at the same rate at what our top line sales grew at.

Our next question is coming from the line of Brett Hoselton of KeyBanc Capital Markets.

Acquisitions, maybe start off with that one. In 2011, you did $250 million, 2012 you did $260 million, you're kind of talking about 10% to 15% of revenue, which seems to put you kind of in the $325 million to $500 million. And so as I kind of look at all that, I'm thinking it seems reasonable to expect that you'll be able to get kind of a net $250 million to $500 million worth of acquisitions each year over the next 2 to 3 years. Is that unreasonable? How would you respond to that?

Brett, this is Bryan. You nailed the numbers. I mean, we need to grow a little bit bigger than we have the last couple of years. Our previous history has shown that we've been able to grow at that $500 million to $600 million range. But remember, our ROE thresholds are extremely steep, okay? And we're not modifying those, which means we have to find a bigger pond, that's why we're moving into the east because we don't want to relax our ROE threshold to find the right acquisitions. More importantly than that, the Lithia model is all about small to medium-sized markets, right? Now in luxury, we'll go into metropolitan areas, but we want franchise exclusivity, which means we have to expand our wings. We think that, that $325 million to $500 million is very doable, I think more importantly than that, we don't want to get acquisitions ahead of our ability to grow people. However, we currently are growing people at a rapid enough rate. We can fill all 3 of the milestones at the current trends that we're having in terms of growing our people. And I think there's a fine line between getting ahead of your people and then finding ROE because even if the acquisition pipeline seem to come through and we're able to do $700 million, $800 million, would we do that? It'd be difficult if we didn't procure some of that teams that were in those stores. And I think that's the delineation if we find stores in the East that have good people and we're able to relate with and integrate into our team. It makes it a lot easier to grow at a faster rate, okay. But we're building the model that no matter what happens with the existing people, our people can populate stores, if necessary, to be able to grow at that $325 million to $500 million.

Brett, this is Sid. Just to weight in, historically, we do find that we don't necessarily make it in 1 year, and then in another year, I mean, we'll get one once in a while that is way above the average for the year. You're going to see that happen, I'm quite confident. Bryan and the acquisition team are so focused on finding the right mix of people and the right mix of brand, and finding that return on investment on an analytical basis way better than we used to be in terms of acquisitions. So we don't want targets that have a deadline. We want to just average those things out, and I'm quite confident this team is going to perform on the acquisition side, as well as, and probably a lot better even than we did in the past.

The F&I, in the third quarter, you were $1,100 in the fourth quarter, you were essentially at $1,100, your target for 2013 is $1,100. But in the prior 2 years, you guys have seen an improvement in your F&I of about $45 in '11 and $58 per unit in '12. So you're kind of averaging an improvement of about $50 per year, you're below your peers in terms of F&I per unit and so all of that seems to point to conservativism in your $1,100 target. Is there some reason to believe that you're not going to be able to continue to improve your F&I?

Brett, this is Chris. When you look at our guidance philosophy, what we tend to do is line out kind of the current trends that we see, and look forward with those trends. And we know we have a lot of opportunity in F&I in a lot of stores. Just like Bryan talked about when we look at SG&A in our bottom 1/3 stores, we have a number of stores that are underperforming in F&I. So yes, it's a focus area for us. We're doing a lot of things, looking at different products and services that we can offer in F&I to improve that number. It's a goal of ours, but our guidance is based on what we're seeing right now today. The one caveat I would say when you compare it with our peer group, just keep in mind that the value auto segments, which does make up 18% of our used cars sales has very low F&I penetration, it's just a lower priced vehicle, generally basic transportation, and the F&I per unit on that product is about 1/2 of what it is on our core product and our new car sales. So it does bring our average down, and again, it's all about gross profit dollars, and we believe the gross profit that we make on the front end and the back end on the value auto product still brings incremental growth to us. But it does make our F&I number look a little small. But if we have opportunity, we're going to continue to focus on it.

Our next question is from the line of Scott Stember of Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Most of my questions have been answered, but could you talk about on the parts and service side, the pretty sharp jump that we saw in warranty? What is driving that and are these trends sustainable for the future?

This is Bryan, Scott. We believe that they are sustainable, and I think the main drivers when it comes to warranty is your units in operation, and we've definitely propped out and are heading back up. This is again, it's the first quarter that we were positive, we're up 11%. And remember, the days this year and last year were exactly the same. So there's no anomaly that can happen quarter-over-quarter. So we think that it's sustainable, we think if anything it will grow at a continued rate. Scott L. Stember - Sidoti & Company, LLC: Great. And going over to some of the new products that are out there, the Ram 1500 with the 8-speed transmission and 6 cylinder engine that has begun to sell, what are you guys seeing on that and if you could just comment on that?

It's an exciting product. I mean, we're glad to have it. Our consumers seem to be excited about it. It's definitely a little bit of a niche, but it gets the ability and gets the torque that's needed to be able to meet a lot of our customer's needs.

We think, this is Sid, Scott, we think there's lift, too, coming from that diesel in the 1/2 ton. They're going to have the only ones for a while. I don't know how many of those they can produce and [indiscernible] and that's going to be another winner.

Our next question is from the line of John Murphy with Bank of America.

I just had a follow up on this units in operation in the parts and service inflection. You've started the year with plus 4 and finished with plus 8 in the fourth quarter. You're talking about the units in operations really kind of turning the corner, which makes a lot of sense. But just curious, your guidance is only for plus 5% on parts and service. Is that mainly conservatism in your outlook or is there something going on with units and operation we're kind of missing here?

Yes, John, it's Chris. I will say, I mean having a great quarter, up 11% in warranty was a big win for us. But after 14 quarters of negative comps, it's hard to bake that in to what the full year's going to look like this early in 2013. So we believe there's opportunity for us and the key is not only to continue to get those units and operations into warranty, but also retain the customer pay business, which as vehicles become more technologically advanced, they do make our locations a lot more appropriate for people to bring their vehicles to. And our belief is through just commodity sales, focusing on the service drive, new advertising, that we're going to be able to not only retain the customer pay business, but also grow that warranty business with UIO.

Just a little bit of color, John, this is Bryan. We did an evaluation on our service and parts department a month or 2 ago, and what we saw was that our high performers have this huge retention rates on our units in operations and our customers and it was reflected in their total gross profit within the stores. We had 60% of our stores that we felt had considerable opportunities in the neighborhood of 10%, 20%, 30% top line growth that they have the ability to attract and re-attract customers that they haven't seen in the past. So despite the fact that we're starting to see a 4% increase and then a 6% increase in overall service business, and now 8%, we believe that there's still a lot more there despite the fact that the warranty has been a little bit weak. We're starting to see nice trends in all areas of the business.

John, this is Sid. There's a lot more recall activity than there ever was as well, which we benefit from immensely. There's a real sensitivity out there to be sure you recall your cars, I mean, Toyota learned a real lesson, kind of just doing it quietly, and so that's driving volume on warranty as well.

And when you think about sort of the attached rate of holding a consumer for a longer period of time, maybe up to 7, 8, 9 years in this parts and service base, have you done any studies as to what sort of the proclivity or likelihood is that, that consumer then comes back to buy another used car, new car to you because holding on to the consumer, as you guys know, through the lifecycle of ownership whether it be new or used, is really the ultimate key to the model. I'm just trying to understand if you hold on to the model, what the, like, more of these sort of the greater propensity is for them to come back to your store to buy a new or used vehicle or a new vehicle.

John, there's 2 points. This is Bryan again. What we do know is that our ability to increase the speed and improve the value of the customer's experience within our service lanes, has increased the average car that comes into our lane by just over a year. I think it's about 14, 15 months. We didn't -- we weren't in those businesses pre-recessionary time, but we're definitely going to be able to keep those customers for a longer period. The conversion rate to used vehicles or new vehicle sales happens at all different times through the life cycle, and I would agree 100% with what you said that the propensity for them when you have the ability to see them more often and to develop relationships, you then have the ability to convert them. I don't have specifics with this on what those conversion rates are, but I've got to think that it's part of why our core product sales are improving in used and why our new vehicle sales continue to take greater market share.

And then one question on the financing. You said that terms were sort of easing in general. You did mention you had 13% penetration in sub-prime in the fourth quarter of '12, which was equal to fourth quarter '11, so I'm just curious what else are you seeing in the financing of your customers that is actually really easing, and if that's coming from the captive finance subs or you're seeing third-party lenders as well dive into the equation?

John, this is Chris. So I think it's a little bit of everything that you said. I mean, one, we're seeing more lenders that are entering into that sub-prime space again. They realize that there's a high return rate in loaning money to sub-prime customers because your vehicle is what you tend to pay first before all your other bills, and I don't think that was proven pre-recession, and then so we're seeing a lot more entrants come in that market. With that said, at 13%, we still feel like there's a lot of opportunity for that sub-prime business to recover. We think more normalized levels should be 18% to 20%, which means that we have another lift in vehicle sales of 5% to 7%. So I think there's still opportunities there, and we're going continue to push to get as many lenders as we can into our stores in that space. But we're definitely seeing things move in the right direction. I think the one comp that we didn't see, that we looked at in Q4 was that our sub-prime growth was up 26% and our total sales growth was up 30%, so it didn't keep pace with what we saw in new vehicle sales, but that was generally due to the strong fourth quarter that we have with both our luxury brands and our import brands. So I don't think it's a big anomaly, but something that we want to continue to see recover in 2013.

Yes, that's a very high class problem to have with having up 30% and up 26%. Last question just on the Chrysler incentives. Obviously, sort of there's a lot of scuttlebutt about stair step programs in the last really 2 years, and it sounds like some of that has eased. I'm just curious what you're seeing from them specifically, have those stair-steps really eased and what are you replacing it with and are they still very aggressive in the market? I'm just trying to understand what they're doing on the incentive schemes now.

John, this is Bryan. I mean, they are aggressive numbers. That also keeps us focused on volume and I think it's an important thing in retail that you are always trying to improve and living our value of continuous improvement. I mean, the numbers that they gave us for the first quarter were pretty steep. I mean, they had to be better than the previous year, is that correct? Better than the previous year, and something else to get to the highest level. And I mean we're coming off some pretty strong years, but somehow, we've seen to be able to find customers and be able to conquest sales from the other domestics and imports to be able to achieve those. So we're challenged by them.

This is Sid again. I'm on that National Dealer Council with Chrysler, so privy to their planning and what they're trying to do with those stair-step, programs, and more than 93% of the dealers hit the big money in January, and they did pick up market share, and they're willing to spend money to get market share. I don't know if you heard Michael Jackson at the NADA conference talk about somebody asking what stair-step things are really bad and NADA has got a big push on it. The problem is they work. And so as a growing company that's taking market share, we can benefit from stair-steps, a guy that's deplete and is not doing well, he gets hurt by it. And so we want to be on the front of all of that, and I'm not going to be a voice that say they're great, but I think as a whole, Lithia benefits from stair-step programs.

And then maybe just one other follow-up to the stair-step questioning. It sounded like coming out of NADA and to some of the scuttlebutt around NADA was that the stair-step programs were not just being tied to or the dealer incentives were not necessarily being tied to just pure volumes, there is also sort of facility enhancement in CSI scores and other stuff. It was a little bit less focused on volume and more focused on just becoming a better partner to Chrysler and the automakers in general. Is that something that you're seeing that you're getting some more support if you are investing more in facilities?

John, this is Bryan again. There is no question that over the last 2 years manufacturers have tied some of their incentives to facility improvements. We're, as a company, pretty much through them, even though we've allocated we're finishing up a few of the Chevrolet projects that we have a couple of small Chrysler projects, and there's a couple of small manufacturings that are still coming down the pipe. But I think ultimately, what we like is a lot of scuttlebutt over stair-step incentives because when they go back and they're with their own dealerships and manufacturers change them, and the fact that we're hitting most of our stair-steps and planning on growing them and looking at them as positive opportunities to get more income, that we don't mind them being negative about it, but we think that they're okay for the industry, and like Sid said they do work.

John, this is Sid again. Chrysler has no incentive money related to CSI or store improvements. They killed all that program 1 year ago, and we lost revenue from that. I mean, that was a decent incentive program that they took away. So they're not going back to that at least that's the plan currently. I happen to be on the subcommittee related to that, I mean, I'm going to put money on it. General Motors has something on their EBE program that does require you to improve your facilities. And you do earn money from that. So it's basically, though, a payback for the expense of improving the facility. So I don't think there's any trend that's going to be coming on stair-steps, except volume growth.

The next question is from the line of Bret Jordan of BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: Most has been asked, but a couple, just sort of follow up here on the service question. I think you had stated that your used car buyers are usually retained as a service customer for 14 to 15 months? Did I get that correctly?

No. What's happened -- this is Bryan, Bret. Our service customers, because we now sell windshield wipers, we sell value parts, which are less expensive than certain OEMs, we provide a broader offering of services, our average service customer is retained in our service department for 14 to 15 months longer than it was pre-recession. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. How long are you retaining your used car buyer as a service customer, assuming his vehicles are off warranty and he's opting between you and an independent pricers. How sticky is that business in customer going?

Let me try and answer that differently. I mean when you look at our F&I performance both for new and used vehicles, we have penetration rates on our service contracts sales and our Lifetime Oil program, which is a prepaid maintenance program over the ownership cycle of the vehicle of a blended average of about 40%. So that's a very important product for us to keep the customers coming back into our service drives during the ownership cycle, and we've proven that whether you've attached one or both of products to the vehicle sales that you're going to see those customers several times throughout their ownership life cycle. And so the exact number is hard to give you, but I can tell you that we're focused on making sure that upfront on a vehicle sale, we push products that help us retain customers on the service drive. Because we know that when they're in the service drive, getting the vehicles repaired that they're probably out in the lot looking at new vehicles and that's very important to us.

Bret, this is Bryan. It's fair to say also, when you have -- I mean this is now our third year in a row of 20% approximate top line growth. I mean, those are big numbers and our ability to retain customers is such an extremely higher rate of what it used to be. The 8% that we had in same-store sales growth in service and parts, we believe is the start of this ability to attract and retain, and I think your question on used vehicles and our ability to attach them into service and parts, I think it's primarily is brand dependent, I mean, obviously if you're selling a certified car, you're selling a late model or mid-year 3 to 7-year-old of the same product you sell new, you're going to keep that customer at a 50%, 60% rate whereas which is very similar to what would be on new, right? But when it comes to our products, if you're a domestic store and you have imports, we can keep 20% to 30% of those with the right type of presentation initially with the customer introductions into the service lanes, what we call service walk-throughs, and the ability to get to know and start that relationship by providing these Lifetime Oil type of thing. And remember, we have exclusive franchises in most of our markets, right? That ability on those products means that we're the only place when you're doing your maintenance within a 40, 50-mile radius and people don't drive that far, they would typically spend $100, $200, $300 on maintenance. Bret David Jordan - BB&T Capital Markets, Research Division: Great. And then one last question. I think you'd said your average credit score is 729 in the quarter. How does that compare to, say, a pre-recession credit score? It seems like credit is freeing up here, but just put it in perspective.

Well, I think that's still a little bit higher. As we focus on continuing to try and get the sub-prime customer back into our stores, you're going to see that number come down. I don't think it's drastically different. I think the swing in credit scores pre-recession has been 50 points. So I'm more interested in looking at each segment individually and looking at the opportunities, and I can say that the sub-prime customers is still an opportunity for us today.

Our next question comes from the line of David Whiston of MorningStar.

Just 2 question, one on Value Auto and one on trucks. On Value Auto, I think, Bryan, you said gross margin was 21%. And can you just remind me what is was a couple of years ago when that program started? I remember it being lower back then.

No, that's similar. That's similar. I means it's typically an $8,000, $9,000, $10,000 car. So you make your typical $2,000, right? And then you get to the 20% to 25% gross margin. It's a great business.

Yes, definitely. On the GM trucks, I guess, one, can you share any feedback you've been getting from; consumers in terms of are they really excited or really not excited about 2014, and then how would that sentiment impact your ability to draw down the 2013 inventory you have?

David, this is Bryan again. I think as a retailer, no matter what the product is, our stores are excited about it, and they're going to get consumers excited about it. But the truth be told, on the General Motors part, the consumers are excited about it. It's pretty muscular looking, they're responsive to it, the new interiors are incredible, it seems to be moving out the doors, and we're hearing things that are positive elements about that truck. So I think it's going to work out well, especially once we get some real volume in there.

The next question is from the line of Jordon Hymowitz of Philadelphia Financial.

You mentioned that used-to-new ratio, which is always very good for you guys, and highlighted that again. A couple of the other retailers this quarter have kind of pooh-poohed that ratio a little bit. Do you think that ratio is becoming less important or do you just think you're doing it better?

This is Bryan. It's a relevant ratio. It is dependent a little bit on new car volume, and obviously, we were at 0.8:1, which is below our one-to-one expectations. But when you get spikes in new vehicles that are higher than the used vehicles, you're going to have anomalies in that. So more importantly to us, is our ability to get to that 75 units per site, okay, and we sold about 46 in a seasonally low quarter, okay? We were running at about mid-50s in the third quarter. So we believe that, that's a more important sign of our ability to capture market share, is just looking at a pure number of 75 units per site. And we think we can accomplish that in the near term.

Jordan, this is Sid. Just in using that reference, it does demonstrate the opportunity. And I think that's why we want to measure and track it, because we have stores that have the potential to do 3 used cars for every new, including the one Bryan used to run. So I mean, I just don't want to take a focus off of that huge opportunity to take share in the used car market. It doesn't cost us hardly any overhead. We get great leverage out of it. And so it's critical that this company focus on it, never pooh-pooh it, because we're on our way to being better at used cars than we even are to date.

But again, I guess, to strengthen what you're saying is that even if the ratio is not what it is today because new car sales are spiking, that's the opportunity because when new cars stabilize at the higher level, then the used cars will catch up and if the eye is taken off that ball, then we'll never catch up.

You got it, Jordon. That's exactly right. Jordon, this is Sid again. It's really easy for a store manager to relax on the used car site because he's doing really well on new and hitting store performance expectation but he's missing something. And so we just keep hammering on it.

There are no further questions at this time, I would like to turn the floor back to management for closing comments.

Thank you, everyone. We look forward to speaking again in April.

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