Lithia Motors, Inc. (LAD) Q2 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for this conference, Mr. John North. Thank you, Mr. North, you may begin.

Thanks, and good morning. Welcome to Lithia Motors' second 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 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 pretax margin. Non-GAAP measures do not have definitions under GAAP and may be defined differently 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 non-GAAP financial measures we present improve the transparency of disclosures, providing meaningful presentation of our results from core business operations, because they exclude items not related to core business operations and improve the period of period comparability of our results from non-core -- or 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 website, lithiainvestorrelations.com, highlighting our second quarter results. Presenting on 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 also available in my office after the call for any follow-up questions. It's now my pleasure to turn the call over to Bryan

Thank you, John. Good morning. Today we reported second quarter adjusted net income from continuing operations at $27.4 million compared to $19.4 million a year ago. We earned $1.05 per share in the second quarter compared to $0.74 per share last year for an increase of 42%. All comparisons from this point forward will be on a same-store basis unless otherwise noted. In the second quarter, total sales were up 17%, reflecting increases in all business lines. New vehicle sales increased 19%. On a unit basis, we sold approximately 16,200 new vehicles, an increase of 2,200 units or 16%, which was above the national average of 9%. Our domestic sales increased 14% compared to 10% nationally. Our import sales were up 20% compared to 7% nationally, and our luxury sales were up 16% compared to 6% nationally. Retail used vehicle sales increased 19% in the quarter. We sold approximately 13,500 retail used vehicles, resulting in a used to new ratio of 0.8:1. We sold a monthly average of 54 used vehicles per store, up from 47 units in 2012. We continue to target selling an average of 75 used vehicles per store. Our performance improved in all 3 used vehicles categories in the second quarter. Certified pre-owned continued the momentum from the first quarter growing 39%. Core product or vehicles 3 to 7 years old increased 8% in the quarter. Finally, value autos or vehicles over 80,000 miles increased 30% in the second quarter. For the last few quarters, we have pointed out our ability to increase core vehicle sales. This remains our biggest unrealized opportunity across the company. The recovery in new vehicle sales coupled with increasing numbers of lease returns have eased supply within certify pre-owned inventories. Also, the growth in new and used vehicle sales has been a key source of value auto sales. However, core product is the hardest inventory to source and procure, especially due to the drop in vehicle production in 2009, '10 and '11, which reduced the pool of available vehicles in this category. Our store leaders continue to emphasize the importance of strengthening this area of the business and will work improve our results in the future. Our F&I per vehicle was $1,098 per unit. Of the 29,700 vehicles we sold in the quarter, we arranged financing on 73%, sold a service contract on 42% and sold a lifetime oil product of 37%. Our penetration rates in the service contracts and lifetime oil sales increased 150 and 120 basis points, respectively. Our service, body and parts sales increased 7% over the second quarter of 2012 on top of last year's 7% increase over the second quarter of 2011. Customer pay work increased 5%, which is the 16th consecutive quarter of improvement. Warranty was strong in the quarter, growing 19%. This is the third consecutive quarter where we have seen an increase in warranty work. Wholesale parts increased 6% and body shop increased 3%. Despite the growth that we have experienced over the last 2 years in this business line, our stores still have capacity within their service departments to handle additional work. Our stall utilization rate was under 50% in the quarter without contemplating the ability to extend our work hours or shifts. Our gross profit per new vehicle retailed was $2,257 compared to $2,403 in the second quarter of 2012 or a decrease of $146 per unit. Import margins decreased 120 basis points, domestic margins decreased 20 basis points and luxury fell 80 basis points. Gross profit per used vehicle retailed was $2,757 compared to $2,659 in the second quarter of 2012 for an increase of $88 per unit. Our stores continue to push a volume-based strategy that has resulted in lower gross profit for new vehicles sold. As we have previously discussed, the declining margin from the prior year reduced gross profit by $3.3 million, but the increase in new vehicle sales added $6.3 million in gross profit for a net increase of $3 million. Additionally, increasing the number of units we sell provides more opportunities for additional extended warranties and maintenance plans, generates more trade-ins to our drive, our used car business, and increases units and operations that return for future service work. In the quarter, our stores increased gross profit 14% over the prior year. Driving incremental gross profit dollars into the organization allows us to leverage our scale and gain efficiencies in operations. On a GAAP basis, our overall gross margin was 15.8% compared to 16.3% in the same period last year. Increases in new and retail used vehicle sales 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 purchase stores 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 markets and exclusive luxury franchises in metropolitan markets. Last month, we purchased 3 stores in Salem, Oregon, with estimated annual revenues of $110 million. This brings total new locations added in 2013 to 4, including the MINI store we added in Anchorage, Alaska, earlier this year. We remain focused on achieving the 3 milestones for long-term growth laid out in 2012, which doubles our sales in 3 to 9 years. 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 are on track to achieve the first milestone in 2013, on the shorter side of the 1- to 3-year time frame we have targeted for each objective. As always, this growth is dependent on success in attracting and developing departmental and store leadership and sufficient acquisition opportunities that meet our investment hurdle rates. With that, I will turn the call over to Chris, our CFO.

Thank you, Bryan. Our Western markets still remain depressed in terms of vehicle sales compared to national results and have not recovered off of historical levels. Using 2006 U.S. SAAR of 16.6 million units as a base. If 2013 full year U.S. SAAR comes in at 15.3 million units, approximately 8% growth remains to return to the 2006 level. However, our markets within Washington, Oregon, California, Idaho, Nevada and New Mexico, which represent over 50% of our revenue, trailed this national recovery. Based off registration data through April of this year, these markets would need to recover an additional 22% to return to their prerecession level. While some of other markets have already recovered to 2006 levels, it's apparent there is still recovery ahead in many of the markets we operate in. Of the vehicles we financed in the second quarter, 11% were to subprime customers consistent with the second quarter of 2012. The absolute number of contracts originated for subprime customers increased 13% year-over-year, slightly lower than the total number of customers financed, which was up 16%. We believe that subprime credit availability is improving. The increase in the number of subprime customers we finance in the future will increase as employment recovers in our communities and lenders continue to loosen lending criteria. We continue to focus on leveraging our expense structure off of an increasing revenue base. In the quarter, adjusted SG&A as a percentage of gross profit was 66%, a reduction of 330 basis points from the second 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 57%. We emphasize prudent cost control around the 2 largest areas of SG&A expense: Personnel and advertising, which comprise 76% of the total in the quarter. We improved leverage on our personnel expense, lowering it as a percentage of overall gross profit by 130 basis points from 45.5% to 44.2%. We continue to invest in reaching our customers to drive traffic to our stores. In the quarter, increased our advertising spend as a percentage of gross profit by 30 basis points from 5.8% to 6.1%. Additionally, as we increase sales volumes across our store base, we gain more leverage on our facility costs. This quarter, we achieved additional leverage on the fixed expense base, lowering it by 100 basis points to 6.3%. We prefer to own our property as it allows for greater flexibility and lower ownership costs over time and estimate we own over 80% of our real estate on a valuation basis. 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 $20 million in cash and $91 million available on our credit facility. Currently, $164 million of our operating real estate is unfinanced. These assets could provide up to an additional $123 million of liquidity in 60 to 90 days. This brings our total liquidity to $234 million, and we remain comfortable with our overall level of available capital. At June 30, excluding new vehicle floor plan financing, we had $301 million in debt, of which $168 million is for mortgage financing. We have no mortgages maturing until 2016. We have no high-yield bonds or convertible notes outstanding. We were in compliance with all our debt covenants at the end of the quarter. Given recent volatility with interest rates, I wanted to discuss our exposure to a rising rate environment. Nearly 80% of our mortgage debt is fixed. We hedged $25 million of floor plan expense as several of our interest-rate swaps expired earlier this year. Our last remaining swap matures in 2016, and we do not currently plan on entering into any new swaps. We estimate for each full percentage point increase in LIBOR that our annual pretax interest expense will increase by approximately $6 million. This assumes no change in inventory days supply or incremental sales. As of June 30, new vehicle inventories were at $598 million or a days supply of 76 days, an increase of 2 days from a year ago. Our new inventory levels remain somewhat elevated due to the platform change over certain truck models. Used vehicle inventories were at 154 million, or a days supply of 51 days. This is 1 day lower than our days supply level a year ago. Our free cash flow is outlined in our investor presentation, was $15 million for the second quarter of 2013. Capital expenditures, which reduced this free cash flow figure, were $16 million for the quarter. We estimate our 2013 CapEx will be approximately $55 million. This budget based on new facilities, facility improvements and remodels, strategically exercising purchased options on leased facilities and other business development opportunities. Based on this CapEx estimate and our full year guidance, our 2013 free cash flow is estimated to be $81 million. We focus on the prudent allocation of capital and believe a balanced strategy of acquisition internal investment, dividends and share purchase 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. We are providing guidance for the third quarter of 2013 of $1.06 to $1.08 per share and raising our full year 2013 guidance to $3.80 to $3.85 per share. For additional assumptions related to our earnings guidance, I would refer you to today's press release at lithiainvestorrelations.com. This concludes our prepared remarks, we would now like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from Ravi Shanker with Morgan Stanley.

So you said that one of the areas you guys can probably do a little bit better is in the late model used sales. What are the steps or what levers do you think you can pull there and what kind of ultimate goals or targets do you have to get that, to get the sales up there?

This is Bryan. The biggest area of opportunity is the 3- to 7-year old because, which we call core vehicles, which are driven primarily off of procurement of vehicles. So the biggest thing that we work on when we're in the stores and our general managers and used vehicle managers are focused on is opening up the 5 basic channels of how do you procure cars: Make sure that we're paying enough to our customers when we take them in on trade, obviously; working with auctions to be able to procure them, whether it's online or in the lanes; working with other dealers; working with wholesalers and then buying cars off the street. And I think we have wonderful reporting that allows us to look deeply into where we procure cars and where we divest cars to make sure that each and every store has those channels open.

Is it more of a training thing or a process thing?

I believe it's more of a training. It's DNA in your people that understand and are acceptant of the risk that it takes to go and find cars because as a new car dealer, it's very easy to get into the mode that trade-ins are the easiest thing and you don't necessarily have to pay full market value because you, to some extent, have a captive customer. So you get lax in terms of what you have to really do to be able to buy cars. And I think that mentality and that DNA is rebuilding in our organization, and we're challenging our teams each and every day to be able to accept a little more risk to go deeper into the market and find the right cars that sell quickly.

Understood. On SG&A, I think you've said in the past that you'd be looking to settle in the mid-60s eventually. You're already there at this point. So do you think you can do better and get in the low-60s, or do you think you're going to be pretty stable at these levels?

This is Chris. I think the mid-60s is an objective that we'd like to achieve for the full year before we kind of start committing to something lower than that. We're doing the things that are necessary to continue to drive down our leverage with people, with facility cost. Obviously, the opportunity that we had in advertising, which as a percentage of SG&A went up but when you're seeing same-store sales comps of 19%, I think that's a trade-off that we're willing to make. So I think at this point in time, we're going to stay committed on the high-60s but there's nothing that right now, we don't believe we could get down below mid-60s longer term.

All right. So then just finally, are you seeing any signs of the acquisitions market opening up a little bit or valuations coming down a little bit?

This is Bryan again. The acquisition market, there is a flood of deals out there. But again, like you mentioned, they're a little pricey. But the good thing is, is there's enough deals that they're starting to come into reality and the longer time goes on, the more we are able to come to agreements with our sellers. So we're pretty confident that the pipeline is full enough that a lot of those deals will come to be.

Our next question comes from Simeon Gutman with Crédit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: First on gross profit per vehicle. The comment made about trading a little bit of volume for margin, which makes sense. And I think the business overall is doing really well, especially when you look at the used side. But I'm curious about, down the road, what type of precedent this sets for gross profit per vehicle? Because if you look over time, it doesn't look like within each -- with each class vehicle, they go back up. And so how do you think about that we have precedent for gross profit per vehicle even going up over them after a period of compression? And down the road, when we eventually level out in SAAR and some of your markets come back, does that mean that the gross profits just keeps moderating from that point on?

This is Bryan. I think the way that we look at the operations in the vehicle departments is primarily based off total growth and our ability to gain productivity and throughput in that department. And what we find, and I think we'll see that in a recovering market or even in a stable market as well, is that deal average, to some extent, drives some of that, and you're seeing margin degeneration in the new vehicle side but its offset by the benefit in F&I and used vehicles and obviously, service and parts. In fact, our deal average, if you look deeper into the financials, was $3,621 this year and it was $3,598. That includes both new and used. So we were up $23. And as long as we can control our expenses at that, it's a win-win situation, and we're able to maintain that plus 50% throughput, which is really what we we're striving for. Now, I would say in a stabilized market where you're not aggressively going after market share, you're really protecting market share to some extent. In that environment, I believe that as long as product is rejuvenating, meaning that they're continuing to find new safety, new sustainability new efficiencies in cars, then you should be able to still maintain or grow margin even in a stabilized market. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then on stair steps because it was mentioned by a competitor or a peer company. Would you characterize the environment as very different year-over-year where you just -- you had a lot of, I guess, stair step in the market a year before, a little bit easier numbers to achieve in it this year or even progressively, it's just going to keep getting harder because the manufacturers see that the volumes are good, that the dealers were doing well and therefore, there doesn't -- the threshold to achieve could just be ratcheted up over time.

Simeon, this is Bryan again. We're not that concerned about stair-step programs. There's only a few manufacturers that really do them. No matter what happens with stair steps, they have to set goals that are realistic and are played by all dealers. So as long as we're able to perform at a higher level than our competitors, stair steps are good for us, and we're not really that concerned about it. What it does is continue to focus us on improvements, which is really how our people are built in our organization. So we're pretty comfortable with it. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then last question on parts and service. The gross margins have been improving now for a couple of quarters. Can you talk about the drivers there?

Yes, I think the biggest driver there is the ability to get new faces through the door and retain customers a longer period of time. It's improving in our stores. I don't want to sit here and pound our chest because I still believe that many of our stores are not to the level of satisfaction or listening to our customers to be able to achieve greatness in those departments but most of the drivers are coming through, again, good cycle times, meeting our customers' needs by having value-priced items, as well as a good OEM parts, and most importantly, getting them in and out of the door as quickly as we possibly can. And I think the better our people are in listening to our customers and then meeting those specific needs, the better we seem to do. And I think a 7% top line and our 16th -- I believe was the 16th consecutive quarters of customer pay growth. Now our units in operations is starting to come back. That's kind of troughed out. We're excited to be able to continue to pull those levers of how to really meet our new customers' demand. Simeon Gutman - Crédit Suisse AG, Research Division: So would you say that the margin per service, oil change or tire, whatever, that is basically constant. It's just your ability to drive either penetration or just, I guess, more I guess older cars even in that system, just a dollar...

Maybe to be a little -- Simeon, maybe to be a little more specific, it's primarily warranty and parts mix shift. That's helped that as well. Now the top line growth, obviously, is -- it's going to come from the things I talked about.

Our next question comes from Rick Nelson calling from Stephens.

In the service and parts, we saw a big jump in warranty this quarter. Is a recall activity driving that?

It was primarily a recall activity in BMW.

Got you. And do you think...

And Honda a little bit as well.

That sort of growth, Bryan, can be sustained or is it more of a 2Q issue?

All right. I think pushing into those double-digit numbers is probably a little bit of an anomaly, but I do believe that the recall activity is growing. It seems like the National Transportation Board is continuing to find new opportunities for us to service our cars and get our customers back. So we still look at that as a very a likely positive number. I don't know that it can sustain at those types of numbers again.

This is Chris. I think just to add on that. The one benefit that we have as a tailwind right now is that a lot of manufacturers are moving towards the maintenance plans that comes with the new vehicle purchase. So right now, BMW and Toyota are big on their 2 first -- including the service, Toyota 2 years and BMW, what is it?

Four.

Four years. GM just announced that they're going to also offer a 2-year maintenance plan as well on all their 2014. So that's going to be a real benefit for us on the warranty side but more importantly, just getting the customer retention back into our store and continuing that customer life cycle throughout that ownership period. So that's something that we're looking forward to as well.

Got you. Bryan, wondering if you can update us on the acquisition opportunity you're seeing in Eastern states? I know you're working with brokers in that part of the country.

Absolutely. So if you recall in previous, we've discussed that we're really looking for a group with some talented people or opportunities that have really high ROEs for us. Both of those things need to be met. So we're still continuing out there. We believe that we'll still find something but obviously, it's a little easier if our people are close by like the Salem acquisition or even a couple others that we kind of have in the hopper right now, where we have people ready to go, or we know the existing market a little bit better or the existing people within the store, where it makes it a little easier to integrate. So again, if we're looking at the East, we need to have, obviously, the ability to find and attract some people and have some of the that same DNA of what we really look for, which is that personal ownership, and more importantly than that, continuous improvement.

And if I could ask you, too, about the CFPB, and if you're seeing any impact to date from the lenders.

Rick, this is Chris. So year-to-date, we've actually had one lender in our entire portfolio that did, I think, 10 deals for us year-to-date that actually went from a reserve method to a flat method. But I think what we're seeing is the CFPB and the lenders are digging into that transaction, they realize that the benefit that the dealer provides as the intermediary and the transaction is both good for the lender and it's good for the customer. And so I think what we're seeing is they're just reinforcing the value that we provide both sides of the equation, and the feedback that I'm getting is, especially from our preferred lenders, which do about 75% of our deals, is they don't anticipate any changes coming down the pipeline. I also just want to point out that when you look at the percentage of our deals that actually pay off reserve, it's only about 50% of our transactions. So half our transactions are already on a flat fee basis. And, so that remaining 50%, the rate spreads that we hold is about 75% bps overall between both the flat and reserves so it's I think 175 bps for the reserve transactions. And we don't anticipate seeing a big change in that moving forward at this point in time.

Our next question comes from John Murphy from Bank of America.

This is Elizabeth Lane on for John. On F&I, you've been grossing about $1,100 per vehicle for the last few quarters, and some of your peers is grossing around $1,200 or even up to $1,300. Is there room for improvement on that F&I per vehicle or is the lower gross a function of your customer mix or other fundamental differences between Lithia and other public dealers?

Liz, this is Chris. I'd say, yes, there's differently opportunity. I mean, like all the business lines that we have, we continue to focus our attention on kind of the bottom third performers. But I think one of the anomalies that we're seeing is as we continue to increase our penetration on our value auto sales, they bring a lower PVR in F&I than our mainline product. And so yes, there's opportunity, but I think some of the push that we've had in some of the segments of the business have also helped us lag our peers a little bit. But it is a focus area for us and we're going to continue to work on it.

Our next question comes from Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Could you guys maybe just talk about units in operation? I know you touched that you're starting to see a stabilization there and maybe a little bit of a jump, but could you maybe talk about how much of that possibly is leading to increased volume for warranty or for a customer pay business and what the outlook there would be for the next year?

This is Bryan. I think when you look at units in operations, we look at it in a couple different ways that can drive business. Obviously, the most obvious and what we really focus on is, what does it do to our service and parts regular customers, the retention rate of what we're able to continue with our customers. And I think that's what really troughed out late last year. It's starting to build again, so we're going to get some natural attrition and customer pay and warranty work from that. The other big driver is that we spoke to a little bit is, it provides those certified vehicles where our UIOs are starting to grow. So that 2-, 3-year old vehicles now are not -- are coming off those troughs of the -- what was it? The $10.8 million SAAR. So those years are now, that $10.8 million a year SAAR is now sitting out what we call the core used vehicles, which is making it harder to find those cars but as we move into a 12 million SAAR a year, and that moves into the core bucket, that helps us a lot. Now, obviously, units in operation is key. But I think what we're starting to find is that even though we're gaining some exposure in units and operations, the biggest thing that we're gaining is these new areas of business that we never played in, which is really value auto, as well as commodity service and parts business. Our segments that we never did really pre-recessionary. And now when the market comes back, we get the benefits of all these things. And that's going to come true in that unit and operation impact.

Just to point to you -- this is Chris. Just to point you to Slide 20 in our investor presentation, we do show the average number of vehicles serviced per month, and that's up about 5% year-over-year. So the key for us is to continue not only to see those units in operation from the increase in sales come into warranty but as Bryan pointed out, retain those older vehicles, that 6 years and older bucket as well. And I think what we needed to continue to monitor is that we just get more vehicles into our shops into the future, and that's where we're focused. Scott L. Stember - Sidoti & Company, LLC: Got you. And on the body shop side, we saw a bit of a slowdown here in the second quarter from previous growth rates. Is that weather-related or anything else going on there?

It's slightly weather-related. I think the primary reason is we had a body shop manager in one of our larger shops in Texas that ended up opening his own body shop, and that shop went down about 30%, and it made a big impact and brought the whole average down. So we've rebuilt that shop, got a new leader in place and it's starting to help. Scott L. Stember - Sidoti & Company, LLC: Okay, got you. And just last question, maybe you can just anecdotally talk about what you guys are seeing in the new and used front in July so far?

Looks on track.

Our next question comes from Brett Hoselton with KeyBanc.

I was wondering about used cars. And so you're doing 54 per dealer today. You've got a target of 75. You talked about some of the things that you're trying to implement. And I guess, my question is, if you were to say, here are the 1 or 2 things that we're looking to change to get to that 75 unit target, what would those be? And then secondly, do you have any sense as to the time frame to achieve the target? Is that kind of a 5-year target, 1-year target? I mean, any thoughts as to the time frame?

Yes. This is Bryan. We haven't really set a date but we'd look at the couple of years and able to do that. The single biggest driver is getting people in the store that understand that. We probably still have over half our stores with teams in place that, one, either built their business off of new vehicles and that focused on gaining market share and new, and they have tendencies to forget about used. The second really being back to that procurement. They're not confident in buying the cars and they really believe that if they have to pay a higher amount for a car rather than take it on trade that they can't make the margin, and they won't be able to accomplish their goals. And that mind block, when you pay people the majority off of net profit, they're very nervous about wholesale losses and the downstream effect of buying a car that is more expensive than their trade-in and the effects of the wholesale loss. Okay, and that mindset takes time to be able to build. And if you recall, back in '04, '05, '06, we took a lot of expertise in our used vehicles out of our company, and we were centralizing these vehicles. We did some things that damaged that DNA. And I think we -- we're still feeling that. What we know is that the facilities, the locations and the abilities within those stores have the abilities to get to that 75 used cars in today's market. So that's even without a recovery of another 10%, 15%, 20% to be able to accomplish that. So I think that driver in getting through to those -- to our individuals and convincing them that they need to be a little more risk acceptant is the biggest road barrier that we have and we're out there every day helping them understand and changing how our policies are to hopefully help open their eyes up to be a little bit riskier on buying used vehicles.

When you think about the changes associated with that risk acceptance, are those changes potentially in compensation or are they changes just in terms of kind of stated performance standards, acceptable losses, those types of things?

Yes, I think you're touching on a couple of different things and I think you're right. It's not just always one thing. I mean the compensation probably isn't the biggest driver because if it was, they'd be doing it because they'd be increasing their pay. They don't get that. They believe that by buying more used cars is going to cost them money. The fundamentally don't understand how you pay $1,000 more than a trade-in to go buy a car, when ultimately, their pricing maybe off the market, they're actually pricing cars more in what they take them on trade rather than what true market is. They maybe have sales people that aren't selling the full value. They may have competitors within the market that are affecting things. There's all kinds of different things that come into that play and each of those needs to move in synchronicity to be able to accomplish that. And that's why it's not as easy as going and changing compensation plans, looking at your merchandising on the lot and just going and buying cars. When you buy the cars, you have to make sure that your customers understand now that you're stocking another level of car. You have to make sure that your salespeople have the ability to sell those cars. And probably most importantly, your management staff has to believe in the cars that they're buying and buy the right cars. And I think that's what we find a lot of times is when we go into stores, we say, "Why don't you try a Subaru Outback, why don't you try a Chevy extra cab pickup," so on and so on. They say, "Well, we've tried that." And then we go look at the numbers and the vehicles that they actually tried, and we find out that it's a late-model vehicle of 2 or 3 years old, and then maybe a $26,000 late-model Chevrolet pickup, and they need to try a $15,000 Chevrolet pickup and it will sell quickly, and they're make the job on their customer and salespeople so hard by buying the wrong car. And that's why I say, this is an expertise, it's not something that you can quickly go in and change. In fact, when we look back at how I operated my used car lot, it took us 2 or 3 years to get to that 3:1 used to new ratio that we were selling, and it came through confidence of your sales staff, consumers, lot merchandising, pricing and a whole bunch of different factors.

Chris, I wanted to talk about throughput, gross profit throughput. Your target of 50%, if we were to kind of extend that on into infinitum, that would suggest that your 66% SG&A as a percentage of gross profit, could eventually go down to 50%, let's say. But that's probably unrealistic. I guess my question is, what are the natural impediments that will start to kind of, let's say, prevent you from maybe bringing that 66% down even lower?

Yes, Brett. So let me first start with the 50% SG&A to gross comment. Really, we could never get to an SG&A to gross of 50% just because of the fixed cost that we have in the stores. So what our goal is for each incremental gross profit dollar that we're generating today to bring that 50% down to EBITDA, and that's something that we're going to continue to sustain. The opportunity that we have is just each individual store. I mean we have stores right now that are doing SG&A gross in the low 60s, but we also have stores that are doing SG&A gross in the 80s. And our job is to continue to focus on those stores in the 80s and the high-70s and mid-70s and work with them to identify where those opportunities are and more importantly, have them work on those opportunities. And I think that's a success that we're seeing is that this isn't really a corporate initiative that's driven by 4 or 5 people at our headquarters. It's the understanding of our stores, it's indoctrinated into our culture that people are going to continue to figure out ways to get leverage in their facilities and with their people and with their advertising. And by doing that, we can continue to drive that number down but it takes a lot of effort and a lot of time.

Brett, one additional piece of information. We talked in the script about the milestones. We've disclosed in the past that each level of the milestones reduces our SG&A percentage by 200 basis points. And we started it just around -- just a little bit under 70% and we're on track to accomplish that. So that can give you some insight into where we believe we can drive leverage and throughput.

, This is Sid. Just to add color on, historically, watching expense ratios and the volume that's produced is a trade-off that you're going to make. There are some bottom that you cut expenses and you lose volume. I mean you've got to find that balance. And in a static market, historically, anything under 70% was terrific in the private dealer world. So this growth gives us this leverage as we grow from where we are. And if we can continue to take market share with volume improvements, even without the market improving, then we can continue to drive it lower, But in a static market, anything under 70% is terrific. And if you get too low, you may miss volume.

Yes, Brett, just to add on to that. I mean our goal when we go in and talk to our stores is not about cost-cutting, it's about cost optimization. And whether it's increasing our advertising or increasing our headcount in certain positions, I mean, you need to manage that based on the factors that are impacting each store. And so we don't look at this as a cost-cutting measure. We look it as a cost optimization. And I think that's what's going to help us drive those numbers down long term.

Okay. And then finally, on the capital allocation front, you stated that your preference would be acquisitions and self worth, but obviously in the past, you've done some share repurchase. Kind of at what point is the deal market maybe isn't necessarily as robust? At what point do you start to look at your capital and say, "You know what, let's look at allocating some more capital to share repurchase because the acquisitions just aren't unavailable."

Chris again. We have a 10B-51 in place all the time that when we see a dislocation in our stock price or we see the opportunity to step in and buy shares that we feel like are attractive just like in acquisition, we will do that. And so we don't have any stated goals or objective but there's nothing that's going to prevent us from stepping in and buying our stock back into the future.

Our next question comes from Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: Couple of quick questions. And one, I guess, if you look at new vehicle margins, did any regions or particular product lines change from a promotional level much in the quarter? Have trucks become more promotional or is it still sort of a mid-line imports that are leading charge?

No, it's pretty static still. Not a lot of changes. There's no anomalies happening in any region. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then I guess, would you look at the service and sort of the commodity parts and services, x the warranty, which the independents still compete in, if you look regionally, how does your number stack up against regional growth? Are you seeing yourself gaining share with that mid-single-digit growth?

This is Bryan. I think when we look at commodity and ability to attract and retain a customer longer, we're really talking about the Jiffy Lubes, not the warranty. So it's more, what do we do for batteries, what do we do for oil changes, timing belts, brakes, that simple service that keeps that -- keeps us front and center in the customers' mind and repetitive. What we're seeing in terms of our markets is we're running at about 10% better retention rate than the industry, and that's information that's given to us by our manufacturers, and it's called units in operation retention rates. So we typically run in the mid- to high-50% range, where the industry is more in the 45% to 50% range. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And how do you see yourself in collision? I guess the collision was up 3 -- once you have a feeling for what your general regional collision market look like?

I think it still looks positive. And like I mentioned, that one Texas market, we went down on that one shop and it took a pretty big cut out of a department but we're rebuilding that. We have had 16 consecutive quarters of positive comps and body shop sales despite it only being 3 this quarter.

Our next question comes from James Albertine with Stifel. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: If I can just kind of follow up on sort of a line of thought here that seems to -- it was in your prepared comments and also in the Q&A. Lots of opportunities to go notwithstanding the tremendous gross profit throughput that you had in the quarter. When you're thinking about sort of organic leverage opportunities, so you're obviously, as an organization, a much more efficient operator presumably than a small independent mom-and-pop. So from an organic perspective, how would you prioritize sort of the ability to drive more leverage, number one? And then number two, when you're looking at deals, where are the stark contrast that you're seeing from a mom-and-pop perspective, where are they just not executing and therefore when you bolt on a deal, day one, how much lift can you potentially get from the M&A perspective?

Why don't I take the first part of the question and Bryan can talk about the acquisitions. I mean our opportunity in -- when you just look at our SG&A composition is really in that personnel and advertising bucket. That makes up about 90% of our controllable SG&A, and we're going to continue to work on that with our stores and find opportunities there into the future. And I'd say that it's -- where's the opportunity going forward, if we have another 20% growth rate in overall sales, I think that you could see there another 200 bps or so in reduction there. As far as acquisitions, Bryan, why don't you take that one?

Sure. I think the biggest thing between the ma-and-pa that we buy and ourselves is typically, it's easy to get comfortable when you make $0.5 million or $1 million, it's pretty good living, right? Is that their sales volumes are typically not the levels that we would see. A lot of times, they're not as risk acceptant again on used vehicles. In fact, the Missoula deal that we had, they had hardly any used vehicles in stock. In fact, they didn't even stock Toyota pickups because they had a Ford store that they stock Ford pickups. So there's some mind blocks that you can quickly get into. Staffing levels is typically a big issue too. There's usually somewhere between 10% and 15% of additional staff that hasn't reached the productivity or it hasn't been expected to, and there's a comfortableness of whether it's friends or whether it's longevity within the stores that we're able to accelerate and help succession planning occur a little bit quicker. There are some economies of scale that we gain from the ma-and-pa. We do typically have a little bit lower interest rates. Some of our benefit expenses are slightly lower. And we have a little bit of centralization that can help things primarily within the office functions. Outside of that, it really comes through building a belief within the stores that the sales teams and the service teams can find more customer base. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: Great. I appreciate all the detail. And if I could a quick follow-up as it relates to your Service business. I think if I'm reading through your slides correctly, there's still some deferral of maintenance, I think broadly speaking, going on. Again, I'm not focusing as much on the warranty or the recon or the body shop side of the world, really more on the customer pay side. Can you just walk us through kind of what you're seeing there and what the impetus is from adding on incremental work as it would seem?

Yes, Jamie, Chris. I think if you go back and look at that Slide 20 again, it shows our service trend. The average sale per RO has gone from about $340 in 2009 to about $250 in 2013. And I think, part of that is our focus on commodities is obviously going to drive our pricing down, but I also think the recovery in the economy is going to continue to help that. There's still a lot of deferred maintenance out there. And as our markets recover, I think customers are going to feel like they have funds to spend on some of that deferred maintenance that's needed on vehicles. And hopefully, we'll see that trend that we've seen over the last 5 years start to improve again.

Jamie, two other little tidbits of information. The average age of vehicles in the U.S. today is 10.4 years. In 2006, it was 7.6 years, which states your average a long ways into this 6 years plus. And I think it's why we focus so dearly on how do we retain that customer past its warranty period and into its second or third ownership cycle. And I think as we begin to sell more used cars, it's critical that we even try to retain those customers.

Our next question comes from Greg Palm of Craig-Hallum Capital group.

It's Greg on for Steve. You've touched on it a little bit but just kind of want to dig into the new vehicle gross margins a bit more. New guidance reflects 6.7% at the midpoint, which I think is down from 7% from previous guidance. Obviously, weakness is kind of being offset by strength in F&I and parts and service downstream. But I guess, where do you see that metric going in the longer term? I mean is this high-6 level kind of a good level to think about over the next few years?

This is Bryan. I think when we look at our business, the gross profit margin has nothing to do with how we operate our store. Our people on the front line aren't looking at a car and saying it's $30,000 and I need to get 7% so I need to make $2,100. That's not how they think. They think about what do they need to do to meet their demand with their consumers and how do we maximize these investments? And when you look at margin pressures, the biggest thing is our -- am I going to take market share and what are the impacts of the entire vehicle department. And that's why we really highlighted that fact that our deal average is up $23. And I think the implications of that, whether new margins go down or not as we grow to that 75 used vehicles? Even if we lose new vehicle margin, you're basically paying to be able to get that trade-in to be able to push your used cars up. And then obviously, the residual effect of that is 3, 4, 5 years down the road in the service and parts department. So we're not really that concerned whether margins are at 6.8% or whether they go to 6.5% or 6.3%. And I think you'll see that as long as we're maintaining throughput, as long as our used vehicle sales are growing, then it's a good trade-off for the organization and for our investors.

This is Sid. One thing that people don't realize is on a trade-in, we assign a purchase price. We don't write a check. And that determines the gross margin on the new car. If we brought in used cars at a higher price, which Bryan has talked about, because we're stealing them in some senses, we buy them below what we'd have to pay at an auction and that gives us a little higher used car margin, but reality is that it shorts the new car margins. So you look at combined new and used car margin, that's the best number to look at because that will tell you whether we're really improving or sliding. I've spoken publicly that 5 years from now, we need a business model that makes a lot of money at a 5% margin and on new car. And I'm still in that camp. I think a lot of factors drive it. A new car is a commodity. And that's the reality. We just got to be better at it and quicker and more friendly for customers and we've got to sell the car to everybody and we need to reach out from every market we're in to get out 200, 250, 300 miles and capture share from other dealers. And that's the reality of what we have to do as a business, and we're confident that that's going to happen.

And ultimately, the operating margin effect of what Sid talked about, it's a win-win for the dealer body too. I mean because the throughput and the impacts of used cars are huge. Now, we're obviously not striving to get to 5%, but I mean if it happens, I think you'll be very pleased with what happens on the bottom line.

Remember, it's a result, the margin is. It's not a goal. It's just what happened based on what we had to do to sell everybody a car that came in the door.

There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

Thank you for joining us, everyone. We look forward to talking to you in a couple of months.

Thank you. This concludes today's conference. All parties may disconnect. Have a wonderful day.