Lithia Motors, Inc. (LAD) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors First Quarter 2013 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, Mr. North. You may begin.

Thanks, and good morning. Welcome to Lithia Motors First Quarter 2013 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 condition and liquidity and development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements on this 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 pretax 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 that the non-GAAP financial measures we present improve the transparency of our disclosures, provide a meaningful presentation of our results from the 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. These presentations should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables in today's press release. We have also posted an updated investor presentation on our new website, lithiainvestorrelations.com, highlighting our first quarter results. Presenting the call today are Bryan Deboer, President and CEO; Chris Holzshu, Senior Vice President and CFO; and Sid DeBoer, Executive Chairman. At the end of our prepared remarks, we will open the call to questions. I'm available in my office afterwards for any follow-up you may have. With that, it's my pleasure to turn the call over to Bryan.

Thank you, John. Good morning, everyone. Today, we reported first quarter income from continuing operations of $21.9 million, compared to adjusted net income from continuing operations of $15.6 million a year ago. We earned $0.84 per share in the first quarter, compared to $0.59 per share last year, an increase of 42%. All comparisons from this point forward will be presented on a same-store basis unless otherwise noted. In the quarter, total sales were up 19%, reflecting increases in all business lines. New vehicle sales increased 22%. On a unit basis, we sold approximately 14,200 new vehicles, an increase of 2,100 units or 18% above the national average of 6%. Our domestic sales increased 18%, compared to 9% nationally. Our import sales were up 19%, compared to 4% nationally. And our luxury sales were up 13%, compared to 7% nationally. Used retail vehicle sales increased 22% in the quarter. We sold approximately 13,100 retail used vehicles, resulting in a used-to-new ratio of 0.9:1. We sold a monthly average of 52 used vehicles per store, up from 45 units in 2012. We continue to target selling an average of 75 used vehicles per store. We have solid performance in all 3 used vehicle categories in the first quarter. Certified preowned continued the momentum from 2012, growing 39% in the first quarter. This is primarily due to normalization of late-model supply, compared to the low levels experienced in the last several years. Our core product or vehicles 3 to 7 years old, increased 13% in the quarter. This category still has the potential to deliver the most upside, as we improve our ability to source product across the 5 supply channels. These channels are vehicles taken in on trade, purchases from private parties, utilization of vehicle wholesalers, sourcing from other dealers and used vehicle options. Finally, the value autos or vehicles over 80,000 miles increased 29% in the first quarter, while producing a gross margin of 22%. Our F&I per vehicle was 1,102 per unit. We arranged financing on 70% of the vehicles we sold. We sold 42% of our customers a service contract, and 36% of our customers a Lifetime Oil product. Our service body and parts sales increased over 6% in the quarter. Wholesale parts increased 5% and body shop increased 12%. Customer pay work increased 5%, which is the 15th consecutive quarter of same-store sales improvement. Warranty was strong in the quarter, growing 9%. This is the second consecutive quarter where we have seen an increase in warranty work, suggesting that the number of vehicles eligible for warranty repair is growing. Our gross profit per new vehicle retail was $2,325, compared to $2,482 in the first quarter of 2012 or a decrease of $157 per unit. Most of the gross profit pressures came from our import brands, as we lapped difficult comparisons using inventory shortages from the Japanese tsunami last year. In the quarter, import margins were down 140 basis points, and domestic and luxury margins were down 40 basis points. Gross profit for used vehicle retail was $2,586, compared to $2,539 in the first quarter of 2012 or an increase of $47 per unit. We continue to concentrate on increasing the absolute number of new and used vehicles sold across our store base, and have to be willing to sacrifice some gross profit dollars per units sold to increase market share. Increasing the number of units we sell provides more opportunities for trade-ins, sell additional extended warranties and maintenance plans, and increases units in operations that return for future service work. To help illustrate the impact of vehicle sales volumes to our service department, we performed an analysis of new and used vehicles to determine the average service life value per vehicle sold. For example, for vehicles sold in 2008, an average of 50% of the new vehicles and 30% of the used vehicles sold return to our store for service work each year since purchase. Further, the 5-year cumulative gross profit generated in our service department per vehicle sold is approximately $550. Said differently, sacrificing $5,200 per vehicle in gross profit to increase unit sales is more than made up by the average gross profit we earn in the service department on each vehicle sold. Driving incremental gross profit dollars into the organization allows us to leverage our scale and gain efficiencies in operations. In the quarter, our stores increased gross profit 15% over the prior year. Our overall gross margin was 16.2%, compared to 16.8% in the same period last year. Increases in new and retail used vehicles continue to outpace 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 midsized rural markets, and exclusive luxury franchises in metropolitan markets. Earlier this month, we opened a new MINI franchise in Anchorage, Alaska. This is the second MINI store in our portfolio, and we are proud to be the only MINI retailer located in both Oregon and Alaska. As we discussed last quarter, we remain focused on achieving the 3 milestones for our long-term growth. Each milestone grows our top line revenue by 25% through a 10% to 15% increase in same-store sales, and a 10% to 15% growth through acquisitions. We believe that we can accomplish each milestone in a 1- to 3-year time frame. This will almost double our current revenue within a total timeline of 3 to 9 years. As always, this growth is dependent on success in attracting and development of departmental and store leadership and sufficient acquisition opportunities that meet our investment hurdle rates. With that, I'll turn the call over to Chris, our CFO.

Thank you, Bryan. As we have discussed for several quarters, we continue to monitor the expansion of low-tier consumer credit, as it represents a key driver of increasing vehicle sales. Of the vehicles we financed in the first quarter, 16% were to sub-prime customers, a slight increase from the first quarter of 2012. The absolute number of contracts originated for sub-prime customers increased 25% year-over-year, outpacing the number of customers financed, which was up 20%. We continue to focus on leveraging our expense structure off of an increasing revenue base. In the quarter, SG&A as a percentage of gross profit was 69%, a reduction of 260 basis points from the first quarter of 2012. Throughput or the percentage of each additional gross profit dollar over the prior year we retain after selling cost and adjusted to reflect same-store comparisons was 49%. We emphasize prudent cost control around the 2 largest areas of SG&A expense, personnel and advertising, which comprise 75% of the total in the quarter. We improve leverage on our personnel expense, lowering it as a percentage of overall gross profit by 1% from 47% to 46%. We increased our advertising spend as a percentage of gross profit by 1% from 5% to 6%. As a result, we increased our same-store sales 19%, and believe this increase in expense was a sound investment. As sales increased, we believe SG&A as a percentage of gross profit can remain in the upper 60% range. We continue to use incremental throughput as a way to measure our cost control efforts, and our target of 50% remains unchanged. At the end of the quarter, we had $15 million in cash and $151 million available on our credit facilities, bringing our immediate liquidity to $166 million. We were in compliance with all debt covenants at the end of the quarter. In addition, $149 million of our operating real estate is unfinanced. These assets could provide up to an additional $112 million of available liquidity in 60 to 90 days. This brings our total liquidity to $278 million, and we remain comfortable with our overall level of available capital. At March 31, excluding new car floor plan financing, we had $185 million in debt, of which $165 million is mortgage financing. In the quarter, we retired $26 million in higher rate mortgage debt. As of today 78% of our mortgages have fixed rates, and we have no mortgages maturing until 2016. We have no high-yield bonds or convertible notes outstanding. In the quarter, we repurchased 127,900 shares at an average price of $40.76. We have approximately 1.7 million shares remaining under our current repurchase authorization, and we'll look for opportunities to acquire a stock when appropriate. Today, we also announced that we increased our dividend for the first quarter by 30% to $0.13 per share. Our free cash flow, as outlined in our investor presentation, was $36 million for the first quarter of 2013. Capital expenditures, which reduced this free cash flow figure, were $7 million for the quarter. We estimate our 2013 CapEx will be approximately $55 million. This budget is based on new facilities, facility improvements and remodels, strategically exercising purchased options on leased 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. 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 for Lithia's future. As of March 31, new vehicle inventories were at $552 million or a day supply of 71 days, an increase of 10 days from a year ago. Our new inventory levels remain somewhat elevated as we continue to carry more of certain truck models prior to manufacturer plant platform changes. Used vehicle inventories were at $133 million, or a day supply of 46 days. This is 2 days lower than our day supply level a year ago. We have increased our guidance for the second quarter of 2013 to $0.86 to $0.88 per share, and full-year 2013 guidance of $3.48 to $3.55 per share. For additional assumptions related to our earnings guidance, I refer you to today's press release at lithiainvestorrelations.com. This concludes our prepared remarks. We'd now like to open the call to questions.

[Operator Instructions] Our first question comes from Simeon Gutman with Crédit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: Bryan, I wanted to ask first about volume versus margin in terms of new vehicles. I guess, really any part of the business, but what is the philosophy there of the organization, any specific focus for this year? And then how are incentives aligned with that as far as volume goes within? How do you keep people focused on the gross profit bands as well?

Okay, Simeon, this is Bryan. I think our organization has changed our stance on this over the last 4 or 5 years. What we realized is that the incremental dollars that come from additional volume and market share gains, and I can even share with you some specific numbers, greatly outweighs the loss of new vehicle margin or even a little bit of loss on used vehicle margin, because there's so many benefits to it. Obviously, F&I is a benefit. Service, which is now up 6%, and if you recall, we have 2 less days than last year, which put us close to 9%, if you were to extrapolate that out. We also have a chance then to sell the customers trade that's not really in those numbers as well, when you look at specific margins. And our ability to maintain throughput, even at lower margins, gives us the ability to put a lot of money into our shareholders' pockets. And I think the easiest way to explain is this: if we look at the margins of what we did last year, which were about 80 basis points lower or higher than what we did last quarter, that difference of that 80 basis points is only $3.8 million or about $0.08, something like that. But the difference in gain in the 22% in vehicle increases, along with the F&I, is almost $18 million or about $0.40 in gains. So we think that, that 5x to 6x delta and then combine that with the unknown annuity about service and parts, and being able to keep about 50% of those customers or greater, as well as that ability to maintain throughput, greatly outweighs that loss in margin. Now there is probably a point where maybe the gains aren't there, but as long as we see the same amount of throughput, which means we're finding efficiencies and productivity level increases, we like it. And we believe that that's our philosophy for the future. Now if we go back to your second question on incentives. Incentives are, obviously, a driver to really help balance out our inventory dollars. And I think what you're starting to see now, yes, we have a little bit higher day supply than last year of about 10, I believe. But a lot of that was, to some extent, that gamble that we took on those K2XXs, as well as the Ram 1500s and those appear to be paying off. So the incentive dollars, we think, will come at the tail end, especially in the Ram 1500, which we actually have a little higher day supply than we forecasted on those. However, on the Chevy side, we have a little lower day supply than where we expected. So we're pretty comfortable that, that balance of incentives that the manufacturers provide, to help balance our inventories, will help stabilize our margins in the future as well.

Simeon, this is Sid. Hey, it's really important to know that every store of the incentives internally are all driven by total gross profit produced and net profit produced. So it's not by the per unit or the gross margin. Nobody sits in a store and says, "We have to make 8% or 5% on every deal." It's an average, and they want to make every deal because the total gross generated is what will drive our success. Simeon Gutman - Crédit Suisse AG, Research Division: And that's where I was going when I said I meant employee compensation or incentive compensation. And so the second question, we asked this when SAAR was 12 or 13, the question is, when SAAR goes from 12 or as it goes from 12 to 15, how much expense do you have to head back in the store kind of goes to what the throughput looks like? Now, we're sitting in the mid-15s, and maybe en route to 16s or 17s, wherever we go. I mean, are we at the point where the leverage actually should accelerate because whatever fixed cost base has been added there? Or how should we think about it as we add the next, call it, 1 million or 1.5 million of vehicle to each dealer?

Yes, Simeon, this is Chris. I'd like to say that we're just going to keep the same playbook that we have on our SG&A cost control initiatives, and what we're going to do is continue to look for 50% throughput by controlling the core cost that we have, which are personnel costs and our advertising. I will say, though, that as we continue to grow the leverage that we also get on our facility costs, it's significant. I think in the quarter, we saw about 140-basis-point reduction in overall SG&A to gross because of our leverage that we get on the facilities, and we feel like there's a lot of capacity left in a lot of our stores to carry more inventory, to run more service customers and we think that, that leverage will also continue. The nice thing about that is it's easier to control because the facilities are fixed. So we're going to get to continue leverage of our fixed cost, and we'll continue to work to control our advertising and personnel spend going forward, and look to continue to see 50% throughput. Simeon Gutman - Crédit Suisse AG, Research Division: Okay, and then my last question, can you talk about the markets where there hasn't been a recovery or as much a recovery as some of the other ones, maybe some housing impacted markets? Are you starting to see results change there?

Simeon, this is Bryan again. Absolutely, we spoke the last couple of conference calls about a lot of the Western markets like Boise and Fresno and Spokane. We were actually in Spokane last week, and they're still recessed at about 30% below where they're at. So I think as Chris talks about throughput, we're definitely going to be able to accelerate some of those numbers as we see those markets come back. So I think the biggest thing that we realized is no matter whether there's headroom in markets or not, we know that market share gains can be exorbitant and can be big. We know that in most of our markets, we sell approximately 20% of the new vehicles that are sold in that market. And we know that we can sell upwards of 30%, 35% at times. So I think in the retail car business, as long as you have one of the major franchises, which most of our stores are, we can continue to gain market share.

Our next question comes from Ravi Shanker with Morgan Stanley.

Special thanks to Slide 18, I think it's incredibly helpful to understand it in this way. I also assume that the slide is fairly similar for other dealers as well. And so when you take, say, the present value of that $550 over time, you get to something like the $400 to $450 range. Does that mean you have that much dry powder on the new GPU side to maybe cut margins to grow that business, that's basically your breakeven point?

Ravi, this is Chris. I think if I understand your question, you're asking how much margin we have on the vehicles...

How much lower can you go basically?

Yes, I think that there's a balance. I mean, you could go to 0 if you wanted to, and you could probably go even further if you just wanted to net out even. But what we continue to balance in our stores is trying to get as much gross profit as we can on the front end, and maximize that market share that Bryan talked about so that we see the customers come back in service. So over time, I feel like it is a balance that we work out in each individual stores to maximize the front end gross and the vehicle sales, with the profit that we're going to generate in service. And one thing I want to point out on Slide 18 is we're only showing the $550 in the first 5 years, because that's the data set we have. We extrapolate that out over the life cycle of the ownership -- the ownership cycle of the customer, and we think it's probably another $500 as well. So what we're really looking at is upwards of $1,000 in gross profit for each vehicle that we sell into the service drive.

Got it. I'll probably follow-up on that slide as well. Chris, exceptional performance on SG&A, again, but just reading the earnings release, your comments sounded like you're actually not happy even with this performance. And they're probably a few more leverage you can pull in personnel and advertising. Can you talk about any initiatives you might have there, and how much dividends they can give us?

You bet. So the way that we manage each one of our stores is we look for the opportunities that's unique to each store and each market. And when you look across our portfolio of stores, we have stores that are at 60%, 70% throughput, and we have stores that are 15% to 20% throughput. And we're going to continue to do what we've done for the last 4 years, which is identify the opportunities that we have for cost control in the stores that need it and work with them to try and make those moves that either increase gross, which gives you more leverage, or look at your expense structure. I'd also say that our initiatives aren't just set on cutting costs, it's also adding cost into the model to make sure that we gain as much gross, as Sid pointed out, as we can get. And so in certain stores, we actually need to add people so that they can spend more time on each transaction to generate more gross, or in the case of advertising, which we saw up on a year-over-year basis, for getting 22% sales growth, I mean, that's an investment that we're willing to make.

Got it. And just finally, you and some of the other dealers have been crushing it on F&I recently. Can you talk about trends in that business, especially with the adoption of the CFPB rules, what that can mean to F&I gross over time.

This is Chris, again, Ravi. The first thing I wanted to talk about with the CFPB is, you have to step back and say and look at the fact that the majority of the vehicle sales in the U.S. are done by the dealer body. And this a complex transaction that involves a new vehicle sale or a used vehicle sale. There's a trade, there's the budgeting aspect, the figuring out what your payment is and what your term is. And then all the products that we offer consumers and prepaid maintenance plans, they go into that transaction. So that's a complex set of variables that are going into every retail sale that we have. And the lenders see the value in that because they don't have a transaction without the help of the dealer. And I think that whether you look forward and you talk about flats or reserve payments or you look at incentive base comp from our lenders, we feel like the amount of revenue that we get in F&I from that transaction will be stable. It just might shift in how that compensation works over time.

Our next question comes from Steve Dyer with Craig-Hallum.

Several have been answered. Just kind of, I guess, relating to the margin question. I see you tweaked down guidance for new vehicle gross margins quarter-over-quarter for this year. Is that sort of just related -- kind of a conscious decision, again, related to making sale, taking share because the back-end is so much more interesting?

Steve, this is Bryan again. Absolutely. Again, I think we evaluate each individual store. We look at our market share. We look at what we have to accomplish for our manufacture partners, and make sure that we're trending upward. The moment we don't trend upward, we evaluate with the stores where their gross margins are, where their average deals are, what they're doing in capturing after-sales business and so on and so on. And I think that driver, like Chris said, I don't -- we don't know where it needs to be. We evaluate what our market share gains are, look for total gross dollars. And as long as we're maintaining that 50% plus throughput, we're pretty comfortable with gaining market share, because we know that we're building a stronger company for the future with a larger customer base than what we had in the past. Does that make sense?

Absolutely makes perfect sense. Just a question as it relates to potential acquisitions, and you don't have to give me the exact number, but anecdotally, how many targets have you reviewed kind of in Q1? And maybe how does that relate to, I don't know, your Q4 or Q1 last year? In general, trying to get a sense for the appetite and, I guess, the number of opportunities out there.

This is Bryan again. The acquisition market is as active as I've ever seen it in the 20 years that I've been doing it. It's shocking how much pent-up demand there really is sitting there. If we contrast it to last year, it's probably threefold of what the available acquisitions are. The problem lies is that because earnings have come back, the multiples that were being paid during the recession, which were large multiple 5x, 6x, 7x, now that earnings are 2x or 3x what they were during the recession, the amount of dollars that it costs to buy a dealership isn't quite as attractive. So we're having to sift through a lot more deals, and I think we've always said that it's somewhere between 10 to 20 deals for every one that we buy. We're probably looking at close to 20 deals for every one we buy today, which shows you that the pricing is still a little out of whack. But you know what, we're pretty confident that we're going to be able to find some very attractive acquisitions within that disciplined hurdle rate that we have established over the last 4 to 5 years. Now I would add one little caveat. As our market share gains improve and as the relationships with our manufacturers continue to grow and our ability to put net profit to the bottom line, we're in a position to pay a little bit more for acquisitions, and the reason is, we're more confident, and we have a higher probability of success when we do our forecasting and determining our ROEs.

And I think I saw on the deck that MINI store in Anchorage is expected at -- did I see $12 million on an annual basis?

Yes. It's a nice little store sales, but should sell about 20 to 25 new a month, it was an open point. It was granted to us by MINI, and we are pretty excited to have it in our second exclusive state.

Last question. When do you expect the K2XX pickup trucks on the ground?

I believe we're still looking at mid-May to early June.

Our next question comes from Rick Nelson from Stephens.

I'd like to ask you about truck sales in the quarter, and how you see that developing, given new product introductions and some of the incentives. And if you could talk about margins also in the Truck segment?

Rick, let me just touch on the revenues. I'll have Chris touch on the margins. If we look at our truck sales over the last quarter, we were up 21% in truck sales. And believe it or not, our heavier trucks, our domestic truck sales were up similar amount. It wasn't a vast difference. We are pleased to see, though, that our overall truck sales are a little higher than cars at 16%. That's good. The demand for -- and that real gamble that we made on beefing up on our predecessor, the K2XX and the Ram 1500s, it seems to have really paid on the Chevy side of things. And on the light to mid-duty 1500s or half-ton trucks, we do have a little bit of a backlog of heavy-duty 2500, 3500 trucks still sitting out there. But it looks like it's going to balance out nicely as those other trucks begin to really come in, in the June-July timeframe in heavier amounts. We're kind of pleased with that. Chris, you want to talk about margins?

Yes, Rick, I'd say that the margin forecast that we have going forward is reflected in our guidance. So not to see a lot of difference from what we already have in the first quarter. So we've kind of rolled forward with our expectations are for the full-year. And in that growth rate of 15% for new, we anticipate the margins are going to be down just a little bit from our initial guidance at the beginning of the year, but right in line with what you saw in the quarter.

Hey, Rick. One other little tidbit of information we got from Eastern Washington last week, the new pickups that require the urea in the engines, we actually stocked up on a lot of the diesels, and we're assuming that most people would not want to spend the extra time to put the urea into their vehicles. But what we found is in many of the agricultural communities, that urea is already being used in their tractors, so they have vats and stuff to be able to get it very easily. So there is an attraction to this new pickup, and we were a little nervous of what happens in this next generation of product, but it looks like it's going to be accepted pretty well in most of our markets, primarily because a good majority of our markets are agricultural-based, where the urea is already in their tractors.

Also I'd like to ask you about the free cash flow, where you see that. If you could hit your EPS targets and how much revenue that might support the acquisition. I realize it's not in your guidance, but potential upside?

Yes, Rick. We actually have that in our presentation, and we expect our cash flow for the year to be about $78 million with $55 million in CapEx that we have...

About double last year.

Great. And final question on April, any commentary there as to what you're seeing?

Rick, this is Bryan again. We can always give a little bit. We're right on target. We're pleased to see that there's not a large pullback from the strong March sales. And our inventories, like we said, are starting to clear out, which, obviously, will help our overall profitability and should ultimately help margins.

Our next question comes from James Albertine with Stifel. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: So a couple of quick housekeeping items on the Parts and Services side. I think you said it was up 6.5%, so on a same-store basis, year-over-year, including 2 fewer days, but I wasn't sure if I caught the adjusted or unadjusted number. I think you said maybe 9% in Europe in one of your answers to Q&A. Just wanted to clarify.

Jamie, this is Bryan. I was actually the one who said that. So we were -- actual was 6.5% up same-store sales. If you adjust for 2 less days, which you put 2 into about 63, 64 days, something like that, right, you got another 3% or so. So that gets you close to that 9% range. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: And remind us which quarter are we going to see the catch-up? So which quarter will have an incremental day or 2?

I believe it's Q4. We have 1 extra. I think for the year, we actually are 1 day short. We have John and Chris looking. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: We can also circle back on that. And then where are you within Parts and Service? Second quarter in a row of a pretty marked inflection positively for the Warranty business. Can you just walk us through your thoughts there? Is that aligned with your commentary that your sort of smaller markets were harder hit in the recession, have taken longer to recover, and as a result of that sort of delayed recovery, you're now only starting to see warranty tick higher? Or is there something else, maybe recalls or something else, we need to focus on?

Jamie, this is Bryan again. I don't think that it has to do with the size of our market. Yes, we retained a greater portion of our customers because we're really the only game in town. But when we look at warranty, what we really start to see is it appears that the quality of the vehicle has stabilized a little bit. But most importantly, the units in operation are growing again. So as you start to see units and operation grow, we're not on that downhill slide that we were going through in '08, '09 and '10 and all the way into '11, where we started to see it start to stabilize. I think the units in operation is the primary driver, so long as there's not huge quality jumps that are taking away that increase in units in operation. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: That's very helpful. And then my last question is more of a higher-level question. We don't -- certainly, we're not experts on the financing side of the world, and certainly, not experts on CFPB. But there are a few, we'd argue that know or closely tied to the NADA as Sid. So with the benefit of having him in the room, I thought he could give maybe his interpretation of it. Our view based on what we know, would love any sort of qualification of this, first of all, the CFPB doesn't regulate dealers; I believe the CFTC that does. And second of all, the CFPB, a month ago, I thought, had spoken out publicly about the value "the dealers provide to consumers." Not to mention the leverage the dealers have with respect to the lenders and so on and so forth. So our view -- this is actually relatively benign, but we would love to hear from sort of Sid on the matter, if that's possible?

Yes, Jamie, Sid here. We've been working at NADA very, very hard to try to explain the transactional basis for a dealer profit in that area. We are the lender, and that's misunderstood. They often think of it as the -- that we're the fee generator and that we're more like a broker in a deal. In reality, we originate the loan. And the loan is made between our store and the customer. So it's actually, we negotiate an interest rate. AutoNation has a really good slide on how that works, and they actually have -- I think we have something similar now in our F&I department. So that's a bargain rate and you get to negotiate for the best rate we can give you, and that's pretty much the dialogue that goes on with each customer. But we're originating loans, and how to regulate that? We have no data that indicates whether someone, what rates they are, or what -- we have the data relative to their credit score, but we don't have other data. So it's really a monster to try to get control of that. And that's why, obviously, we were not included in their realm of control. So I think you're right in saying it's probably benign if it does turn to a flat, and the break is dictated by the finance source, then I don't know where that goes. I don't think finance sources are going to really like that, but if it goes there, I don't believe -- I think the amount may be very similar to what we currently earn, because we all have caps on that, and they all have caps on what we can charge a customer. So, hopefully, over time, we get -- come to an understanding about it. I think it's good, the pressure there, to be sure dealers don't overcharge a customer, and I think that's really valid. So, we've always been very much in control of that. I mean, we monitor it, actually have criteria internally to look at what each customer is charged and the margin in it. So I don't believe it's a big problem. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: Just a follow-up and to be clear, making sure we didn't miss something, there have not been any enforcement actions dictated or taken on the part of the CPV today. It's really just been, as far as we can surmise, bulletins and discussions publicly. But there have been no enforcement actions. Is that correct?

Yes, certainly no enforcement actions against us. I'm not aware of any others.

Our next question comes from Bret Jordan with BB&T Capital Markets.

This is actually David Kelley in for Bret this morning, and it looks like most of my questions have been answered. But just a couple of quick follow-ups. Looking at the used retail side of the business, it looks like we're seeing some solid, consistent growth, if you're looking to the metric of used vehicles per store, per month. Just wondering if you guys had any timeframe set on when you're targeting that 75 used per store per month? Or if that's just more of a longer-term goal at this point?

Good question, David. This is Bryan. It's one of my real love in the business, and I think that 75 is, obviously, maybe a little ways out there. I think there's couple of things that play into that. We were actually out in Spokane, and I keep speaking to this, but it was an enlightening trip. We had one of our used car managers that talked about this idea of is it a first-generation trade-in or is it a second-generation trade-in. And I think that's how we look at driving our used vehicle sales is how do we get those cars and that sourcing of the product. So, I think, to me, when we look at moving from the low-50s into the mid-70s in terms of per unit per store, we look at that ability to find and procure cars is the primary driver. Now, obviously, there's merchandising on the lot. There's, obviously, pricing and competitiveness. There's customer awareness. There's your sales team that has to be very in-tune and have the ability to sell Conquest products, as well as your in-brand products. But I think, also, you can layer in at a $50 million SAAR or $40-plus million used car SAAR, you start to look at how do we get to 75. And I think it's within a couple of years, realistically, to be able to get there. And if we're able to procure cars and find more of those first and second generation trades, we're going to get there even quicker. And I think when we go to our stores, we see how refreshing it is that they get it. They still haven't opened up all those 5 channels yet, but once they do, the rewards will come in, ultimately, greater unit sales.

David, this is Chris. And just keep in mind, in our guidance that we've laid out, we specifically talked about 11% growth in used vehicle sales. So we anticipate that we'll be in the high-60s by the end of the year. And as Bryan pointed out, we would love to see that done sooner, but that's kind of formally what we've laid out for you.

Great. And that's just -- I really appreciate the commentary, and that kind of leads in to my second follow-up in the same matter. Just looking at the value segment of the used retail sales. And just wondering your thoughts on -- we've seen significant growth over the last couple of quarters that you mentioned, it was plus 29% or so in the first quarter. Any thoughts on where that could be a year from now? Are we going to continue to see plus 20% growth in that segment?

David, this is Bryan again. We actually -- this was a new segment for us, if you recall, 3, 4 years ago. We believe that it can continue to grow, and I think the main driver of this is that ability to find core product, which is a 3- to 8-year-old vehicle, just above in price the value auto vehicle. And as we continue to get better at that, we take more of these value autos in on trade. Combine that with the fact that our Service and Parts departments are getting very good at reconditioning these cars to a level that's competitive in this new sector. The other shocking thing, which I personally was never able to accomplish when I was a used car manager, we have many of our stores today that are actually now out procuring Value Auto vehicles. We never looked at that as a key driver. And now that we are, it kind of busts the ceiling back off and allows you to grow at an even a greater rate. And I think we're finding many pockets in the country to be able to procure those vehicles as well. So I think you're going to see similar increases for an extended period of time.

Our next question comes from Brett Hoselton with KeyBanc.

I was hoping to talk to you a little bit about your guidance to begin with. Just as I look at your earnings growth rate, it's -- based on the guidance, looking to de-accelerate quite significantly from a 40% increase in the first quarter to a 14% increase in the second quarter to, roughly, a 10% increase in the back half of the year. And my question is, are you seeing some changes in your business that might be driving that? Or is that potentially just being low on the conservative side?

Brett, this is Chris. I'd just go back to the fact that for the last 4 years, we've had a consistent philosophy in the way we've laid out our guidance, and that is, we look at each individual store in each market. We look at the kind of the trends that we're seeing. We look at store leadership. We look at the inventory pipeline, and we extrapolate what that looks like for the rest of the year. And then when you aggregate that, it comes out to the numbers that you're looking at. So we feel pretty good about the guidance that we've laid out. It's a 20% increase on a year-over-year basis. And 15% new, 11% used is definitely outpacing what's happening nationally. As far as your specific commentary on the quarter, I just say that we had some pretty big comps that were lapping over next year. Our overall sales in Q2 of 2012 were 26%; in Q3 were 25%; in Q4 were 25%. So I'd say that when you just add the numbers up, what you're seeing on the deceleration isn't anything that we were concerned about. It's just the way the numbers line out on a comparative basis year-over-year.

Brett, one additional guidance that might help you. If you look at last year and the comparatives to what our guidance was to what our actuals were, you may see similar happenings, and I think, there is no question that we are slightly conservative at times, but we believe that is the best way to manage our business and maintain 50% throughput in the future. Once you start getting your expenses ahead of things, it's funny how quickly that leverage goes away.

Brett, we talked a little bit about this earlier, but when you think about the way the quarter played out for us in the first quarter, I mean, January and February, I'd say were just right on pace. And we just had a bang-out March that really helped to deliver the results that you heard. And so it isn't easy to predict, really, what's going to happen on a monthly basis or even a quarterly basis. And as Bryan pointed out, what we wanted to do is lay out the guidance that has a high probability of success. But things can change pretty rapidly in this business. And we're going to do what we can to meet the number or beat the number as we've laid it out.

Fair enough. And switching gears, talking a little bit about acquisitions, I think during your last conference call, you'd just gotten back from the NADA conference, if I remember correctly. And you seemed fairly optimistic that you'd be able to find some acquisitions. As you kind of reflect today on what you're thinking as relative to your expectations, versus 2 or 3 months ago, are you more or less optimistic that you're likely to find acquisitions? I know you've talked a little bit about pricing earlier on the call here.

Brett, Bryan again. I'm actually more optimistic because there's so many more leads that are out there than we had 3 months ago. But, again, when prices are high, in our size markets, because we don't have a lot of competition with other buyers, we can kind of sit back, and I think that will help bring the price back into our ROE comfort levels. So it can take a little bit longer time, but I would definitely say that there's an acceleration over the last 3 months. And I think we can expect something in the coming months and quarters.

[Operator Instructions] Our next question comes from Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Bryan, from time to time, you give a statistic about the SAAR rate that your markets are running, compared to where the national average is. It seems like we've had little bit of a pickup in the markets. Can you maybe update that -- those statistics?

Yes. I think last quarter, we said it was around $13 million SAAR. In our size market, it's accelerated a little bit. I would -- now this is somewhat of a guess, but it's appearing that it's somewhere around $13.5 million. So similar to that 6%, 7% increase that the nation is seeing, we're seeing some of those increases as well. There's still -- we're looking at like California, still down 21%; Idaho, down 24%; Nevada, down 24% from their peaks; New Mexico, down 16%. I think if you extrapolate that against national, that's still considerably further recessed than what national levels are. Scott L. Stember - Sidoti & Company, LLC: So plenty of headroom for recovery here, obviously.

Absolutely. Scott L. Stember - Sidoti & Company, LLC: And just last question on brand-specific items here. It seems like in March, price or sales, industry-wide, had a nice pickup. Could you talk about how some of the new Ram products did for you in -- later in the quarter? And also maybe talk about the new Jeep that just came out, and maybe, specifically, the diesel model?

Yes, this is Bryan again. The -- we're very pleased what's happening with the brand in Chrysler. I mean, there's no question that we're regaining consumer trust. There's new product that's exciting. Our pickup is being very well-accepted. And I think Chrysler seems to have figured out that oversupply is bad for the dealer body and it has other ill wills that come from it. And I think they do have us on pretty difficult year-over-year comparisons when it comes to their incentive programs. But I also think a lot of our margin pressures come from that. And our stores have figured out how to increase that volume and bring it through to the bottom line as well. In terms of the new Jeep, we're pleased with what's happening there. Their new diesel product is looking great. And I think the Jeep line is a real home run for us in most of our markets that are snow-belt markets.

Being the Chrysler guy, this is Sid, that Cherokee is being overlooked. I mean, that's going to be a home-run vehicle. It's the best of anything in that segment. Unique 9-speed automatic transmission, 2 engines and both high fuel economy, and the 4-wheel-drive system they put in unique in that range to have a low range 4-wheel-drive in that model, because everybody else is really just all-wheel drive. And they've got a disconnect setup for the drive train to get better fuel economy. I mean, this company is a frontrunner now on engineering. They're not just meeting what others are doing, they're surpassing them. I mean, I think that unit's going to sell really well, and their prepped to make a lot of them. So hopefully, that's a lift for us. Because we've had a little bit of a headwind with Jeep because of production, they stopped making the Liberty quite a while ago, and this changeover has been very expensive for them, and we have loss of volume with Jeep because of it. So I don't mean to overspeak. There aren't any diesels available yet on the Grand Cherokee. They're still not able to order them. So there's still fussing over getting that to work. There's not going to be a lot of them, so I don't think it's a huge lift. The Grand Cherokee itself stands out in its segment and continues to gain share. They're building all they can, and there's a lot of demand.

Scott, this is Bryan again. I think if you look at the overall brands that are out there, there's an acceleration in new products that are coming out. I think it's going to be a very attractive and compelling offering to the consumers to be able to attract back that pent-up demand that's still there to get us back to that $16 million [ph] $7 million SAAR, and I think the product is one of the things that's going to be able to help with that.

Our next question comes from Adam France with 1492 Capital Management.

Bryan, could you speak to -- when you talk about your units per store per month on the used side, how much of your system is, I don't know, let's say, within 10% or on that target already?

So let me think through that. We actually had -- we had 20 of our 88 stores that sold 90 units or greater. We had probably around high-teens that sold 40 units or less, okay? That may frame it up a little bit. I think the thing I haven't really spoke to yet is our ability to attract people on this realm, because used vehicles, yes, it's technical, but it is an art on how to find and get -- and dispose the vehicles, and our ability to attract people and grow people in this segment, that DNA is starting to reside in our organization, and I believe it's really building good momentum. So I think what you're going to find is that we will have a greater percentage of stores that help carry us into that 75-unit range. But more importantly than that, they're starting to realize, and that's why I spoke to that 90-unit-plus stores. Last year, we only had 6 stores that sold more than 90 units. We have 20 this year. They're starting to realize that there is no real cap to how many units you can sell used cars. Now you may be precluded by size of markets or distance of reach as you start to enter the Internet, but many of our stores now have figured out that it's really about procurement and then disposing of those late-model Conquest that sit on the lot for 2x or 3x as long as our value and core product does.

This is Sid, I can't help but add. The decentralized entrepreneurial atmosphere that we've created at every store is attracting more and more of those people who have the capacity to grow used car sales, because that is a key talent that the best managers in this business have, because it is a skill set. It's not something you can do at corporate.

Just to follow up there. Anything interesting that you guys have to do from a health care perspective? I don't know if you need to cut back hours to just below that threshold level for ObamaCare. Anything I should know about from that perspective on running your business?

Yes, this is Chris. Obviously, with 5,200 employees, we fall in the large-employee category as far as what's required to be provided under the Affordable Health Care. And our goal is to continue to provide competitive benefits to our employees. That's something that's very important to us. It's been important to us for a very long time. And we actually don't think there's much changes at all that we need to do to our insurance structure in order to meet the minimum requirements. But minimum requirements I don't think are where our focus are. If we're going to track the right people and retain the right people long-term, we need to add as much as we can to our benefits. And that's something that's important to us. With that said, I will say in 2014, one of the things that you might see is a few more dependents coming on our plan, because the cost of individual insurance will go up with the idea that pre-existing conditions can't be screened. So we are budgeting a little bit of an increase in 2014 for additional dependents, but that cost is pretty minor in our opinion, because usually, what you're going to pick up are those healthy dependents that may actually help your plan. I would say, too, that -- just to add to that, we are self-insured on our plan up to a deductible level. So the premium cost is something that we're able to manage, I think a little more effectively than those that aren't self-insured.

Our next western from Jordon Hymowitz from Philadelphia Financial.

Of the finance and insurance revenue, the $1,116 per car, how much is financed versus insurance or other products?

Jordon, this is Chris, That's not a number that we've disclosed. I've heard others this week speak to a number that's about 35% of the overall F&I profit. But we don't disclose our number specifically.

Jordon, I would add this. This is Bryan. We believe in a transparent sales process. We've really developed that. Our people in the stores get it. We're not very concerned about what happens here. If it becomes a flat rate or if it comes a reduced rate, we sell our product through sheer transparency and through selling the cost benefits of those things. And I think most consumers, and I think the leveraging our size with our lenders, no matter what happens in this arena, it's going to turn out to be good for our consumers and good for, ultimately, our profitability.

Okay. And on the transparency side, do you break out then on any of the dealer forms or anything? What percent is paid to the dealership versus paid to the lender, as this Dodd-Frank is required in the mortgage space at this point?

What we do, Jordon, is we actually have an internal rate cap, so there's no such thing as gouging it with the motors. And I think that keeps it very clear and transparent for our consumers. So when they walk out of our dealership, and they got 7% on their contract, they're not going to be able to walk down to their credit union or to their bank and get 5% or 5.5% or 6%. It's going to be in a relative realm to what their credit substantiates. And I think that's the important thing to keep in mind.

And what is that rate cap?

2%?

2.5%.

2.5%.

So it's similar to that NCLC settlement of 2002?

You're right.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you for joining us today, and we look forward to updating you in July on our Q2 results.

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