Lithia Motors, Inc. (LAD) Q4 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. John North, Vice President of Finance for Lithia Motors. Thank you, sir, you may now begin.

Thanks, and good morning. Welcome to Lithia Motors Fourth 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, liquidity and development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements in this conference call. We urge you to carefully consider this information and not place undue reliance on forward-looking statements. We undertake no duty to update our forward-looking statements, including our earnings outlook, which are made as of the date of this release. During the 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 margins. 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 the non-GAAP financial measures we present improve the transparency of our disclosures, provide a meaningful presentation of results from core business operations because they include items not related to core business operations 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 website, lithiainvestorrelations.com, highlighting our fourth quarter results. 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 you may have. It is now my pleasure to turn the call over to Bryan.

Thank you, John. Today, we reported fourth quarter adjusted net income from continuing operations of $25.7 million, compared to $19.3 million 1 year ago. We earned $0.98 per share in the fourth quarter compared to $0.74 per share last year for an increase of 32%, a record fourth quarter result. For the full year, adjusted income from continuing operations was $105 million, or $3.99 per share compared to $77 million, or $2.96 per share, in 2012. This was also a record performance as we grew EPS by 35% from the prior year. Our revenue exceeded $1 billion in the fourth quarter and $4 billion for the full year. This is the highest annual revenue in our history and an increase of 21% over the prior year. For the full year 2013, we grew same store revenue 15%. This was on top of same store revenue increases of 23% in 2012, 22% in 2011 and 18% in 2010. From this point forward, all comparisons will be on a same store basis. In the fourth quarter, total sales were up 11%, reflecting increases in all business lines. New vehicle sales increased 11%. On a unit basis, we sold over 16,000 new vehicles, an increase of 1,300 units, or 9%, which was above the national average of 6%. Our domestic sales increased 4% compared to 8% nationally. Our import sales were up 12% compared to 4% nationally. And our luxury sales were up 20% compared to 9% nationally. Retail used vehicle sales increased 16% in the quarter compared to a national increase of 4%. We sold approximately 13,100 retail used vehicles, resulting in a used-to-new ratio of 0.8:1. We sold a monthly average of 53 used vehicles per store, up from 48 units in 2012. We continue to target selling an average of 75 used vehicles per store. Our performance improved in all 3 used vehicle categories in the fourth quarter. On a unit basis, certified pre-owns grew 26%. Core product, or vehicles 3 to 7 years old, increased 4%. And finally value autos, or vehicles over 80,000 miles, increased 12%. Our F&I per vehicle was $1,174 per unit, compared to $1,096 per unit last year. Of the 29,200 vehicles we sold in the quarter, we arranged financing on 72%, sold a service contract on 43% and sold a lifetime oil product on 37%. Our penetration rates in service contracts and lifetime oil sales increased 240 and 340 basis points, respectively. Our service, body and parts sales increased 8% over the fourth quarter of 2012. This was on top of last year's 8% increase over the fourth quarter of 2011. Customer pay work increased 7%, which is the 18th consecutive quarter of improvement. Warranty sales increased 16%, which was also the fifth consecutive quarter improvement. Wholesale parts increased 9% and body shop decreased 2%. Gross profit per new vehicle retailed was $2,325, compared to $2,397 in the fourth quarter of 2012, or a decrease of $72 per unit. Gross profit per used vehicle retailed was $2,570, compared to $2,445 in the fourth quarter of 2012, an increase of $125 per unit. However, as we have previously discussed, our store personnel evaluate overall gross profit per retail vehicle sale to evaluate their own individual performance. To calculate this, we add total gross profit on new and retail used vehicles plus F&I profit and wholesale profit, and divide it by total new and retail used units sold. In the fourth quarter, the blended overall gross profit per unit was $3,621, compared to $3,540 last year or an increase of $81. For the full year, our blended overall gross profit per unit was $3,581 compared to $3,550 last year, or an increase of $31. Our store leaders are maintaining gross profit on a blended transaction basis and, while there has been a shift in the allocation of gross profit by business line within the vehicle sale departments, the overall result is higher. Our overall gross margin was 15.5%, down slightly, compared to 15.6% in the same period last year. Increases in vehicle sales continue to outpace our growth in service, body and parts revenue and this mix shift explains the decline in overall margin. As of December 31, new vehicle inventories were at $657 million, or a days supply of 74 days, a decrease of 2 days from 1 year ago. Used vehicle inventories were $168 million, or a days supply of 63 days. This is 7 days higher than our days supply last year. We remain focused on achieving the 3 milestones for long-term growth that we laid out in 2012, which doubles our size in 3 to 9 years. I am pleased to announce that we achieved our first milestone by surpassing $4 in consolidated earnings per share this year. We anticipate achieving our second milestone of approximately $5 per share and our third milestone of approximately $6 per share over the next several years. However, the next 2 milestone achievements will be driven more off acquisitions than organic growth. Most analysts are predicting a 16 million to 16.5 million SAAR in 2014. This would represent an increase of approximately 5% over 2013. The acquisition market is as active as I have ever seen, and there are a number of potential transactions in play at any given week or month. We continue to seek exclusive domestic and import franchises in midsized rural markets and exclusive luxury franchises in metropolitan markets. In the fourth quarter, we purchased an underserved import franchise in a metropolitan area. We believe acquisitions like this will become more important in future periods as we accelerate our acquisition cadence. During the fourth quarter, we purchased a total of 3 stores in California: Diablo Subaru, Lodi Toyota and Stockton Nissan Kia. For the full year of 2013, we acquired 7 stores, which represents $273 million in estimated annual revenues. 2014 is also off to a strong start, as we purchased our first store in Hawaii, in January, Island Honda, and purchased a VW store in Northern California to expand our presence in the Stockton market. These 2 stores add approximately $50 million in estimated annual revenue. With that, I will turn the call over to Chris, our CFO.

Thank you, Bryan. As it relates to cost control and gaining leverage on our expense structure, adjusted SG&A as a percentage of gross profit was 68.2%, a reduction of 200 basis points from the fourth quarter of 2012. This improvement was primarily related to a reduction in personnel expense of 50 basis points and reducing our facility costs 30 basis points. Throughput, or the percentage of each additional gross profit dollar over the prior year we retain after selling costs and adjusted to reflect same store comparisons, was 55%. For the full year, SG&A as a percentage of gross profit was 67.2%, a decrease of 220 basis points and a record low. As sales increase, we believe SG&A as a percentage of gross profit can remain in the mid-to-upper 60% range. We continue to use incremental throughput as a way to measure our cost-control effort and our target of 50% remains unchanged. Through the lower SG&A expense levels we achieved in 2013 and reduced interest costs and income tax expense, we have generated an adjusted net margin of 2.6% for the full year of 2013. This is an increase of 30 basis points over 2012, when our adjusted net margin was 2.3%, and represents a record result. As we previously announced, during the fourth quarter we renegotiated our syndicated credit facility, expanding it by $200 million to $1 billion in total availability, extending the duration to 2018 and lowering the interest rate. At the end of the quarter, we had $24 million in cash and $160 million available on our credit facilities. Currently, $181 million of our operating real estate is on finance. These assets can provide up to an additional $136 million of available liquidity in 60 to 90 days. This brings our total liquidity to $320 million and we remain comfortable with our overall level of available capital. At December 31, excluding new vehicle floor plan financing, we had $253 million in debt, of which $165 million is mortgage financing. We have no mortgages maturing until 2016. We have no high-yield bonds or convertible notes outstanding. We are in compliance with all our debt covenants at the end of the quarter. Our free cash flow, as outlined in our investor presentation, was $12 million for the fourth quarter of 2013. Capital expenditures, which reduced this free cash flow figure, were $16 million for the quarter. For the full year, our free cash flow was $93 million and our capital expenditures were $50 million. We estimate our 2014 CapEx will be $84 million. This budget is based on $17 million in lease buyouts, $19 million in new or remodeled facilities as a result of prior acquisitions, $5 million for open points granted by the manufacturers and $44 million related to facility improvements and other business development opportunities. Based on this CapEx estimate and our full year guidance, our 2014 free cash flow is estimated to be $72 million. Our capital strategy is unchanged as we balance acquisitions, internal investments, dividends and share repurchases. Our first choice for capital deployment remains to grow through acquisitions and internal investment. But regardless of category, all investment decisions are measured against strict ROE metrics and will be solid long-term investments for Lithia's future. For the last few years, we have discussed the impact of subprime credit availability on our vehicle sales rates. We believe that subprime customers in our markets are still not experiencing credit availability as they were prior to the recession of 2008 and 2009. Of the vehicles we financed in the fourth quarter, 11% were to subprime customers, slightly higher than the fourth quarter of 2012, but below the national penetration numbers of 20%. Given our rural market and domestic brand exposure, we believe our customer base is more dependent on subprime financing than the broader national trend. We anticipate our normalized volume of subprime customers should be approximately 20% of the overall mix of financing and believe there is room for improvement in this area in the future. Specifically in our Western markets, registration levels for new vehicles remain approximately 12% below 2006 levels through October of 2013, the most recent data available. While the market recovery may not be linear, we believe this indicates market expansion that will come to fruition over the next few years. We are contemplating a market recovery of 4% to 6% in our 2014 guidance, which we updated to $0.92 to $0.94 per share for the first quarter of 2014, and $4.30 to $4.40 per share for the full year of 2014. 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 to questions. Operator?

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

I'll ask the obligatory weather question. You guys are probably a lot better situated than most but was there any impact that you saw or anticipate seeing in Q1 from the weather?

Thanks for the question, Steve. This is Bryan. We did have some weather, primarily in the Northwest and a little bit in our Midwest stores. We don't have a lot of presence in the Midwest, so it wasn't too impacting there. We did have 4 days in the Northwest that was a little bit tough, with snow on the ground in about 22 stores and it vapor locked things for about, I'd say 3 or 4 days. It appears, though, that we've recaptured most of that and there were some pent-up sales over the last 7 to 10 days and it looks like we're back on track.

Perfect. A lot of strength out of service, body and parts in the quarter, and particularly given that the weather wouldn't have driven a lot of that. What do you attribute that to? Is that just more uptake, and a lot of the -- kind of the pre-selling of the lifetime oil, et cetera? Or is there something else driving it?

This is Bryan, again, Steve. I really believe that it's primarily driven by that units in operation bubble that's just now starting to come into our service department. And really, our ability in our service lanes to respond our customer's needs and provide them the value, the timing and the benefits that they're really looking for, that our competitors really have been able to provide in the past. But now, with the ability to sell multiple products, to be able to put our service and parts departments more in the forefront of the dealership, where it's more convenient for customers to come in, get in and out and providing transportation, we really believe that we're poised well to be able to capture a lot higher percentage of our customers of this new bulk of business in the future.

Got it, okay. Last question for me and I'll hop back in the queue. You've historically talked about the SAAR and your footprint sort of trailing the national average here, since the downturn anyway. Have you seen that gap closed at all? Or how does that sort of lay out right now?

We have seen it close. So we have about 52% of our stores that we would qualify as being our Western markets that still have about 11% or 12% depressed market over what their peaks were in '05, '06. The other 48% of the country has really recovered. We even see markets like Texas or Montana, where they're beyond the peaks that they were at. Now fortunately, they're still growing and they probably don't have the potential to grow the same as the 52% in the West. But yes, a lot of that has been recaptured and I think, when we look forward, it's going to be a little heavier lifting on our part and we're going to have to conquest market share rather than to really sit back and let the market grow and give it to us.

And, Steve, this is Chris. Just to add onto that. When we talked in our prepared remarks a little bit about the subprime customer and how it affects our customers out in the West, we still see that opportunity. We ran some numbers by state to figure out what percentage of our overall subprime business in each of those states is still available for recovery. And if you look at Oregon, Oregon is 6% of our customers are actually subprime; California, it's 10%; and Washington, it's about 3%. So we know that the recovery that Bryan's talking about on registration is going to come in those markets. Now the inverse of that is a market like Texas, which is really up way above prerecession levels. They've had a lot of good things happening out there in the economies, unemployment is low and the subprime consumer that we have out there is closer to the national average of 20%. So we look for good things to happen for our us out West as jobs recover and customers get back on their feet.

The next question is coming from the line of Rick Nelson with Stevens.

This Joe Edelstein on for Rick. You indicated that the acquisition pace is accelerating. We've also seen you substantially increase the size of the credit facility in the quarter. I'm curious if you could comment, what sort of debt-to-cap levels are you comfortable operating the business with given where we are in the ongoing auto sales cycle?

Yes. So this is Chris, Joe. I think just to answer that, I mean, I'd go back to what our acquisition model looks like. I mean, we're looking to have a return of 20% per year, cash on cash. And from a debt-load perspective, we fully finance our floor plan and we get mortgage financing on any facilities we buy. Right now, our debt-to-EBITDA is 1.6% of the company. It's the lowest in the space. So we're very comfortable for -- with our capital position today and we don't feel like, unless things change dramatically, that, that's going to move much. So I think that answers your question.

It does, thanks. As you mentioned, you've got some pretty high hurdle rates as you look at deals. I was hoping you could just kind of comment, describe the types of franchises that you're looking for. Would you say that you're in the market for fixer-uppers or primarily looking for some high-quality franchises that perhaps the owners are just simply looking to exit because of lack of succession plans?

Hi, Joe, this is Bryan. When we look at acquisitions, because our hurdle rates are so high, we typically are able to buy average-performing stores. We're not typically able to buy the high performers. Fortunately though, there are a lot of dealerships out there that are average performers and, in our model, we really need them to perform at about half of what their potential is for us to be able to buy them at that 3X to 5X EBITDA number or that 20% return that Chris spoke to you. And right now it appears that this last 2 years, of a lot of deals really sitting in our size markets, that things are loosening up at a much faster rate than we expected. We did 4 acquisitions last quarter. We've done 2 so far this year, which we believe are high-quality franchises in single-point markets that have the ability to increase fairly substantially. They're also in Western markets, if you noticed. And many of those markets are even depressed more than that average of 12% like our core stores. In fact, in the Hawaii market, they're still depressed over 30%. In the Stockton market, they're depressed in the mid-20 percentile range. So when you're able to buy earnings at half the potential today and there's a potential of top line growth of 20%, 30% on top of it, and now you calculated in some throughput calculation, you have the potential to have pretty attractive returns and those are going to be really difficult not to say yes to.

Thanks for the details there. If I may just ask one more question, I'd like to ask about the inventory levels. First, could you just break down what the supply looks like across the different categories, volume imports, premium and domestic brands? And then, as a follow-up to that, are you seeing inventory starting to build at any of your local market competitors? And kind of what gives you the comfort that we won't see more gross margin compression in 2014?

Sure. So we ended the quarter with a little bit lighter days supply on total new vehicles than last year. And on used vehicles, we ended a little bit higher. Since then, inventories in used have come back in the line over the last 45 days or so. So we're just a touch higher than we typically are in used. Now to get into a little more detail on new. Our domestic days supply is about 90 days, our imports 54, and our luxury is about 64 days supply. And that is -- again, this is typically the peak levels of inventories within the year and as January and February and then obviously March, which is a typically robust month, they start to lean things out and balance inventories heading into the spring and summer months. Sid, do you want to add something?

Yes. I'd like to add something. This is Sid DeBoer. Historically, when there's an oversupply in vehicles, the manufacturers ramp up incentives and our gross margin in the past did not deteriorate because of an over-inventory supply. We are not the manufacturers. Their costs go up when there's too much inventory. But as a retailer, we benefit from increased incentives.

The next question is coming from the line of Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: A couple of quick questions. And one of them, did you comment earlier, in prepared remarks, that you were going to be focusing more on traditional-model, luxury franchises in metropolitan markets?

No. We did purchase a Subaru store in the Bay Area. It's actually in Walnut Creek, which was a pilot but we believe it's an underserved import in that market and have a very good track record with Subaru and we thought it was a good chance and the return was extremely high. If we're able to do some of those things it sure opens up some additional opportunities in the future. But no, our core strategy is not to grow with non-luxury franchises in metropolitan areas.

Sid, again. This is Sid again. Subaru is like a luxury in many ways because it is an over dealer. It really makes sense for us in some opportunities and we have a great partnership with them. Bret David Jordan - BB&T Capital Markets, Research Division: Yes, I understand that. I misheard. I thought you were buying Honda dealers in Atlanta.

No, absolutely not. Good clarification, Bret. Bret David Jordan - BB&T Capital Markets, Research Division: All right. And then one question on subprime. Are you seeing much sequential change? I mean you talk about subprime penetration at 11 versus the national average. Are things changing the sort of on a more recent basis in any of your markets that give you visibility towards getting towards the national average?

Yes, Bret. This is Chris. I'd say, yes, we're up a little bit. I mean, year-over-year, I think we said our subprime penetration was up about 10% -- from 10% of our portfolio to 11%. Obviously not where we want to see it long term. And our registrations are in a similar format. Our registrations in the West have improved a little bit but we really believe that there's some fundamental changes that have to happen out here to see big job growth and then increased sales and increased subprime consumers getting financing. So we're anticipating that's going to happen in the next 2 to 3 years, and it's baked into our guidance to some extent. Bret David Jordan - BB&T Capital Markets, Research Division: And then one last question. It's sort of rounding error but you said collision was down 2%. Is that driven by the drought conditions on the West, since you've just had less precipitation out there? Is there anything changing in the collision space that would be a headwind?

Bret, this is Bryan. I think it is a combination of the drought conditions in the West but I think, more importantly than that, we had 2 of our large body shops that we had personnel issues with. It's our fault. We'll get it back.

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

Before I start off, just looking at Slide 26, and I was looking at the acquisition revenue growth and the milestones down at the bottom and it's 0.4 and I'm thinking that -- I just want to make sure. What that seems to suggest is that you're targeting about $400 million in acquisition revenue in 2014. Am I correct in that understanding?

Yes. Hi, Brett, this is Chris. No. What that is, is that's the acquisitions that we completed in 2013 and early 2014, with Hawaii, that are rolling in throughout the year. So we forecast out those stores and they're rolling forward into 2014. We never bake any anticipated acquisitions into our guidance.

Good, that's what I thought.

Brett, one additional thing, as well. You have to remember that acquisitions do have a 12 to maybe even 24 months lag when it comes to earnings. So those milestones will always lag. So we'll need to ramp up acquisitions a little ahead of what those targets are so they correspond with internal growth.

Now, as I look at Slide 25, and I look at the annualized revenue, $250 million in '11, $265 million in '12 and $273 million in '13. Kind of taking a step back, thinking about your comments, it seems like that pace is probably a likely pace in 2014. I know you're not necessarily baking that into your guidance. That's not necessarily a formal expectation, per se, but it doesn't sound like things are slowing down. Is that a fair characterization?

This is Bryan, again, Brett. I think that, that pace is sustainable in 2014. We do currently have 4 deals under contract, as well as another 2 open points, one of which will open in the next 4 weeks, the other opening in Q4. And it seems that there is a robust pipeline to be able to sustain that upper $200 million number.

And then, talking -- thinking about your used vehicles, your guidance on the used vehicle side. You're looking at same store growth of current [indiscernible] around 8%. So as I think about your target of going to 75 units per store, you're currently at 53, that's about a 42% increase. I'm not sure what time frame you're thinking about but, if it were over a 4-year time frame, that would be 10% per year. If it be over a 3-year time frame, even more like 10% to 15% growth per year, which is obviously above the 8% expectation that you have in your guidance. My question is are you -- is your guidance potentially conservative and there's potentially some upside? Or are you expecting some sort of an acceleration as you move into year 2 and year 3?

Brett, this is Bryan, again. We really believe -- there's 2 major factors when you look at our ability to get to the 75 units. One is our people and our talent within the stores, which still have lots of opportunity. The second is supply and as these 14 million and 15 million SAARs start to become 3- to 7-year-old vehicles, it starts to loosen up the supply of those vehicles. Right now, our 3- to 7-year-old vehicles have a blend of a 10.8 million SAAR to a 14 million SAAR, and it makes it difficult to get those cars. So yes, I believe that even though we're expecting an 8% increase in the coming year, it will accelerate for us to be able to achieve that 75 units within the coming couple of years. And I think there's some compounding effect in that number, as well.

Hey, Brett, Chris. Just to add onto that. When you contemplate your guidance for full year '14, keep in mind that one of the things that we're dealing with is this idea of mix shift, where our certified units were up 26% in the quarter but the gross profit margin on those is 10%. So while we guide an 8% increase in sales, we're thinking more normalized on that core product, which is over 50% of our business, and our margins are more normalized at the 14.5 million, 14.7 million range. So if you're going to push an increase above that, that comes from certified units, then you got to contemplate the impact that's going to have on overall margins, which in the end -- what we're really looking for is gross profit dollars in the stores.

That leads to my final question, which is, if I calculate the gross profit per unit, using the methodology that you used, that new, used, F&I combined, I'm kind of in that mid-3,000 range, which is kind of where you've been for the past 2 years. As you think about that number going forward, is there any reason to believe that it's going to shift materially in your mind?

Brett, yes, this is Chris, again. I think in the quarter, our same store deal average was $3,621, so a little bit higher than $3,500. But going back, our philosophy on setting guidance, what we look at is our -- what our current performance is. And so while we know we have opportunity in areas, in really all aspects of the business, we're focused on improving that number but we don't bake that into our guidance. We look at kind of what our normalized run rate is on margins and, really, gross profit dollar per unit. And that's what we bake into the guidance that we have.

Yes, and I'm not necessarily looking for the upside, Chris. I guess what I was simply asking was, I know that over the past few quarters, you've kind of talked about, let's say maybe taking a little bit shorter deal on the new car side because it generates a lot of revenue, gross profit per unit, in the parts and service and used cars and so on and so forth. And I'm kind of just looking -- thinking about your overall, is there any reason to believe that, that's potentially going to deteriorate as we move over the next year or 2 by any significant amount? Is that your expectation? Or is it, "Look, we kind of just think we're going to stay steady-state here"?

Brett, this is Bryan, again. I mean, there is some validation. If we look at our guidance and we're saying we want to grow 8%. We are willing to sacrifice some margin to be able to capture additional market share because the 8% growth rate, I think the world's really predicting about a 4% to 5% growth rate, which means we have to conquest 3% to 4% from our competitors within our local markets. That may mean, at times, that we need to sacrifice a little bit of front end margin. However, we really believe that the F&I growth, and if you notice we were up $80 a unit, is a way that is not marketable visibly to all of our customers. We can make that money whether or not we advertise it or not. That's a residual effect of selling the new or used car at a -- at the same margin or possibly even slightly lower margin. But I think, as Chris stated, that $3,621, we believe we can grow that slightly, okay. And we've been showing that over the last number of quarters and really believe that there is demand there and there is supply to be able to support that. And I think as incentives increase or decrease, as well, what we really see is it helps spurring possibly lower pricing to consumers and at times there's anomalies that don't match up with local markets. And you're then able to capture margin again without having to push it in marketing dollars or additional costs.

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

Apology for bringing up the 2014 guidance again but the 1 number that you guys don't give us in the guidance is the SG&A growth. So can we just talk about what we can expect there for 2014, especially because if we put in your revenue and gross margin assumptions, it kind of points to something pretty punitive on the SG&A line to get your full year EPS guidance.

Hey, Ravi, Chris. A couple of points on that. First, obviously we're going to continue to focus on that idea of incremental throughput. But as sales start to moderate a little bit, the incremental growth that we're getting, I think, becomes a little less important and what we need to focus on is really net profit retention. And when you look at our overall SG&A to gross by store, it's a really fat bell curve, where we have stores that are in the mid-50s and then we have stores that are in the high 80s. And so what we need to do is work on those stores in the high 80s and bring them closer down closer to the average. And we should do exactly what we said, which is continue to generate leverage in that 65% to 70% range. I will say that one of the opportunities that we have is we have $450 million in acquisition revenue coming in, in the year. The integration of those tends to take 12 to 24 months to get them back to that average number. And so, that's going to be a focal point for us and that's going to put a little strain on leverage -- or on SG&A, as well as a couple of things like Affordable Care Act. I mean, that took $0.04 to $0.05 out of our personnel cost just by the number of participants that jumped on our plan and a few other things that we're doing to enhance some of our benefits for employees that's going to roll through this year. But all in all, Ravi, we know we have opportunity. We're going to continue to bring that SG&A number down and focus on it as a company.

Ravi, one additional thing. If you recall, and I think we've talked about this in the past, we originally discussed that each of our milestones of 1 to 3 years, if we're able to accomplish those top line numbers, it has an effect on SG&A of about 200-basis point reduction on each of those milestones. So you may be able to extrapolate some things that way, as well.

Understood. It sounds like there's certainly some dry powder there. Also want to talk about F&I per unit, which seems to be ticking up pretty nicely both last quarter and this quarter. What are you doing there to drive that? And is that something that we can potentially extrapolate over time?

Yes, Ravi. So -- this is Chris. Yes, we definitely know we have opportunity. I mean, if you look at our slide deck, where we show our F&I per unit compared to our peer group, we definitely fall on the wrong side of that chart and we're doing a number of things right now to enhance that, a lot based on products. So if you look at our product penetration, both in our service contracts and our lifetime oil plan, we're up 200 basis points year-over-year in penetration there. And a lot of that is just making sure that we have the right product with the right deductibles for the right term that we offer our customers at the right price. And so we've been piloting some things in different stores and changing some things around that give our F&I team, we think, a better product to sell. And we did just raise our guidance, I think, in F&I from $1,100 to $1,125. And obviously we'd like to keep bumping that number up throughout 2014. The other piece of that is just the demand that we're seeing for finance contracts is -- our penetration on finance is up, again, 200 basis points year-over-year. But the demand for our contracts is high. I mean, people want an asset-backed loan that's proven to provide a higher return and incrementally, both on a flat-reserve program and a participation program, we're seeing more profit come out of those deals.

Understood. And then, lastly, I'd love to get your thoughts on the diesel Ram 1500. There's been some reports that the initial demand's been pretty strong. Is that something that you think is going to be pretty popular in your regions? Or do you think it's more of a niche product?

Hi, this is Sid, Ravi. It sounds like that they're going to have a capacity constraint. So it should help gross margins on that vehicle. I know there were 8,000 orders immediately. And I don't know how many they can actually make but it's a great rig, great gas mileage, and Dodge and Ram continue to win awards with that truck. So it's got a lot of momentum.

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

I just had a couple of follow-up questions. Just first, on the guidance. I mean, it does look, like you guys sort of just alluded to that you're being reasonably conservative on '14, on the flow through. I mean, our numbers are kind of indicating you're looking at sort of a 35% flow through and you're targeting more like 50%. I mean, is this really just conservatism? Or is there -- are there really a lot of costs that are coming in for the acquisition integrations?

Yes, John. This is Chris. Our target of 50% is on a same store basis. So the acquisitions definitely drain that down because their first-dollar flow through is equal to their SG&A to gross. So that's kind of, I think, what you see. And, I think, in the quarter, our same-store throughput was 55% but if you just looked at it on the financials it was about 45%. So it has a pretty big impact overall. And the more acquisitions we do, the more strain it's going to put on that number. But again, I mean, what we're focused on is really that net profit margin and we feel like there's opportunity there to continue to generate leverage in a lot of our existing stores as well as new acquisitions. And we're going to continue to drive our profit margins up and increase our leverage.

John, this is Sid. Hey, those gross margins on those stores as they come in, I mean, the SG&A is 85%, 90% on most of them because they're underperforming stores. So they hurt us to start with in terms of the aggregate but we'll try to get those so they improve quickly and then hopefully they'll generate growth in their same store number 1 year from now.

I guess the worse they are when you get them, the better you can make them and the bigger the delta and the cheaper the deal, right?

Absolutely, right.

That's the deal, John. You got it.

That's the game plan. Second question, when you look at these weather events that you guys have had and the industry have faced. I mean, isn't it typical that the sales are just delayed and you see a pretty big catch-up 1, 2, or 3 months after? Is that kind of the standard pattern?

Absolutely. This is Bryan. I mean, I think you get the catch-up within the first couple of weeks, maybe there's a lag into a month period of time but, really, all of ours happened in this quarter. So we don't really see that it's going to be impactful.

Okay. Got you. And then just on a last question. Who did you guys sell the L2 assets to in Denver? Or do you still hold the land and some of the buildings there?

We've actually divested all 4 of the L2 properties. I don't recall who it was in Loveland. Did we sell it to Moreland? We sold it to Doug Moreland.

He put a Hyundai store in there. This is Sid.

Our next question is coming from the line of James Albertine with Stifel. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: I wanted to follow-up, if I could, on a question that was asked earlier as it relates to sort of the ramp in used. Just so I understand it, some of your markets, given sort of the late -- maybe harder hit during the recession, late entry into the SAAR recovery on the new side. Does that follow through with respect to sort of the longer-tailed ramp on used? Or is there something, sort of, maybe nuanced about the markets, where used is a little flatter than perhaps in some of the bigger metropolitan areas of the country?

Jamie, this is Bryan. The used perform almost in synchronicity with the new performance. So if the new's depressed, it's very likely that the used are. We don't see huge anomalies there. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: And if i could extend that maybe argument, that sort of late entry of your markets in the new recovery, to parts and service, it stands to reason, I guess, that warranty is now starting to ramp and perhaps -- if a longer-tailed growth rate from a customer pay perspective, perhaps a higher-margin part of your parts and service business. What are your thoughts there?

Jamie, Bryan again. We -- you're right. You're absolutely correct. I mean, we're right now starting to grow that 5 to 7 year UIO. I mean, we've been saying for a couple of years that we're really kind of at the bottom. Really, we only have a couple of years dropping off that are good but now we're adding on better years. So I think there's a lot of upside in service and parts and I think the early indications on warranty are the same thing that's occurring. And I think -- I don't like to promote the National Transportation Board but it sure seems like the idea of recalls is becoming more and more prevalent, which fortunately helps us as new car dealers and warranty sites. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: Well, some OEMs call recalls semantic argument about recalls, I've been told. But if you remotely diagnose apparently it's not a recall. Yes, that's very helpful. And then, the last sort of -- and this is a very high level question, just wanted to get any color we could on what you're seeing in terms of customers need for vehicles. Is it still something, as you would characterize it, that tends to be more of a discretionary purchase in nature? Meaning fuel-economy driven or taking advantage of credit markets? Or are you starting to see, quite frankly, the average age of the vehicles and neglected vehicle fleet start to break down and sort of underpin more of a need-based purchase intent, if you will?

Jamie, Bryan. I think if you -- you could probably correlate it exactly with our Texas, our energy-based states. I believe in the energy-based states, there is an element of, it's really a -- it's not so much a need-based market anymore. There's enough disposable incomes in those markets, the markets recovered well enough. But those are truly -- they're buying vehicles for the fun of it rather than for work vehicles. I would relate that back to the West, where the West truly is, I believe, still buying vehicles of need, that helps get them to work or helps them perform in their jobs that they're currently in. And I think that will continue and I think the Western markets will act more like they did 7, 8 years ago, prerecession, once that recovery of that additional 12% is captured again.

Hey, Jamie, this is Chris. If you look on Page 20 of our slide deck, we show what the age of the service vehicles look like. And if you look back in 2009, the 6-plus year bucket was about 30%; in 2013, that's 40%. So that goes in lockstep with what Bryan's saying, is that there's a lot of customers that are holding onto their vehicles longer and we are seeing them in the service drive but, over time, we anticipate that will shift.

Jamie, this is Sid. One of the biggest things that I don't -- you left off the list, because all of those things are impacting consumer demand for new vehicles, is the innovation that's taking place in technology and features and safety. There's a lot of reasons to buy a new vehicle. I mean, you wouldn't want to drive around in a 12-year-old vehicle with no airbags anymore.

Our next question is coming from the line of Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: I just wanted to ask a question about the parts and service. You had very strong growth in the customer pay and warranty, yet the overall blended margin was off by 50 basis points. Were there any special promotions, tires higher or something used to drive volume in there? Or could you just explain that?

Yes. I think the biggest shift that you see, Scott, is warranty. I mean, when warranty is up 17%, 16%, I mean, that's going to drive your overall margins down just a little bit. Our highest-margin business is customer pay, and so it's just a mix-shift issue. Scott L. Stember - Sidoti & Company, LLC: And next question, a bigger picture kind of question. You've talked about managing the business in thirds and trying to bring the bottom 2/3 from a -- total operational performance up to the top 1/3. Just referring to -- from an expense standpoint, can you talk about what the opportunity there is going forward? Have we plucked a lot of that low-hanging fruit already? Or is there still a nice opportunity to bring some of the bottom performing stores up?

Scott, this is Bryan. This is what we do, probably 2/3 of our days, is discuss growth opportunities within our stores and our current talent to be able to challenge them to do better. And I think it's funny. We look back 5 to 7 years ago and we had these thirds and they were really poor performing in the bottom 1/3. Well now, they're not horribly performing but we still have opportunities to grow our customer base within our stores and I think it really boils back down to helping our stores find opportunities to become aware -- better aware of their customer's needs and to proactively respond to that. No matter how good or bad we are, there's always a large portion of our stores that don't have the responsiveness that's necessary to become a top 1/3 dealer in our eyes. And I think that ability and that trust that we've built with the stores allows us to challenge them to find new opportunities without them being defensive and really shutting down and proving that there is no more opportunities. What we want to do is open their minds up and help them see the opportunities. And believe it or not, there is a ton of low-hanging fruit still and we really believe and, I think, as you look at SG&A and throughput and those types of things, without that low-hanging fruit and those underperforming stores still out there, it would be very difficult to continue to have to put up 53%, 55% and reduce SG&A beyond the 67.3% [ph]. I mean, those are difficult things without sloppy stores and I think those will come into the play and it's a continual battle of growing our teams and replacing our people if necessary.

Scott, this is Sid. Hey, one of the things that's really remarkable is when you look at our improvement, a lot of the lift comes from the stores that are in the upper 1/3. They don't want to stop. I mean, there's continuous improvement and a culture in this company and it's just great to see that. So it does move the mark. It's going to get harder and harder to move from the lower 1/3 to the top 1/3. Hopefully, the whole boat is going up. Scott L. Stember - Sidoti & Company, LLC: And then, just last question on the Jeep product, the new Cherokee. Could you talk about how that's doing within your market?

This is Bryan. It seems like it's right on track. Sid, do you have anything else on that?

It's a home-run, the vehicle is. There is actually a little bit of a supply constraint. We're hoping they get more lift out of the Dart, too, because that's a very great car and as the Avenger goes away, that has to fill that bucket. So, I mean, it's exciting new product, the Cherokee. Some people grumble about the look but, overall, it's brought us a whole new customer.

Our next will question is coming from the line of Bill Armstrong with CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: Just going back to subprime. There's a lot of financing available, obviously, for subprime car buyers throughout the industry. And I was wondering if you're seeing any trends on that score either maybe more availability or less that may be changing the competitive dynamic and either making it difficult or perhaps easier for you to increase your penetration in subprime?

Yes, Bill. This is Chris. I mean, just going back to kind of what we touched on earlier. Our Western markets still have opportunity. We believe it's related to jobs. Unemployment in a lot of our markets is still high. And as customers get jobs, especially in a lower credit tier, they have the ability to get financing. And so the banks are there but the customer profile needs to change in a lot of our markets in order to improve their options in getting financing. Any I think that's going to drive the market recovery that we talk about in California, Idaho, Nevada, Oregon, Washington. William R. Armstrong - CL King & Associates, Inc., Research Division: Right, but do you see other competing dealers getting more aggressive in trying to capture share with those subprime consumers? And maybe making things a little bit tougher for you guys?

Bill, this is Bryan. I think the big thing here is who captures the shares, who has the car. Once the market comes back and the consumers have the ability to buy a car or get financed, even as a subprime customer, it's about finding the car. And I think -- always remember that we're at the top of the food chain. So we have that 3 generations of used cars, first generations are certified, second generations are core products and third generation is the value auto, which is the most attractive car to that subprime customer. Well the way we get those is to sell more core product because they come in on trade. So I think if we look at the competitive environment and who's going to capture those vehicles, it's who can sell the most of those core products or the upstream used vehicle sales that take those on trade and has the ability to obviously recondition them and get them to the front line safely.

The next question is coming from the line of David Whiston with Morningstar.

On used vehicles, I wanted to follow-up with an article in Automotive News recently that talked about how many dealers buy prepackaged software to manage their used inventory but you guys do it in house and I was just curious what benefits you get from your software that's unique?

David, this is Bryan. We actually partner with a company with -- called First Look, on -- in most of our stores. Now we allow our stores to do different things with their used car management software but there's an underlying basis that is similar across our stores so we're able to transfer vehicles or do our internal auctions and prepare those things. We do have some internal IT solutions when it comes to the auction site or DMV and trading of those vehicles. But outside of that, we use outside items as well and I think the biggest thing of what they do is they give you a history of what either you sold within your stores or what the market sold and try to help guide you as to what you should sell, if you take it in on trade and it's the wrong vehicle, but more importantly, what should you be looking at to go buy and where are the margins within those vehicles and how does that relate to consumer demand and pricing in terms of what's out there competitively on the Internet.

Helpful detail, thanks. Staying on used, do you guys procure inventory at all from rental fleets?

Absolutely.

And are you at -- given your rural market focus away from larger airports, does that put you at any kind of disadvantage on costs or any [indiscernible] ability?

Not really. I mean, the only disadvantage is time to front line, right. I mean, we probably have an extra 2 or 3 days. Most of our stores are within 300 miles, which is typically a day commute on a transport. I would say that there is no monetary difference other than that additional transportation because we're able to buy those cars at auction or we're able to buy them in bulk because of our size and distribute them throughout our stores to keep it competitive. So monetarily to the consumer, I don't think there's really much delta there.

And we talked earlier on the call about Chrysler doing so well with things like Jeep, and that momentum's been going on for a long time. And Sid or Bryan, I'd really just be interested in what's your opinion on what are they doing well?

This is Bryan. I think they keep their head down and focus on what matters. I mean, they're building good product, they're providing us with fairly lucrative incentives. Sometimes they're a little beyond our reach, I would say, but it keeps us focused that volume is what drives the rest of the profitability within the dealership and I think because of that, I mean, our Chrysler stores are fairly profitable and fairly lucrative, earnings wise. I mean, they seem to keep it simple and don't over complicate what the formula is on automotive retail.

And just 2 quick ones for Chris. In your prepared remarks you mentioned subprime back in '06 and I missed that percentage. Do you have it handy?

Yes. We feel like it was close to 20%.

Close to 20%? Okay. And with acquisitions driving a lot of growth going forward, do you think you're going to be carrying a balance on your revolvers throughout the year going forward?

Well, I think when you look that we're going to generate over $100 million in free cash flow, we can probably buy most of the acquisitions that we need from that. However, if Bryan puts a big deal together, we're definitely prepared from a balance sheet perspective. So I'd say no.

Thank you, ladies and gentlemen. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any concluding comments.

Thank you. We look forward to updating you again after the first quarter.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.