Lithia Motors, Inc. (LAD) Q1 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Lithia Motors First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. John North, Vice President of Finance. Thank you. Mr. North, you may begin.

Thanks, and good morning. Welcome to Lithia Motors First Quarter 2014 Earnings Conference Call. Before we begin, the company wants you to know 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 in this conference call. We urge you to carefully consider this information and not place undue reliance on forward-looking statements. We undertake no duty to update our forward-looking statements, including our earnings outlook, which are made as of the date of this release. During this call, we may discuss certain non-GAAP items, such as adjusted net income and diluted earnings per share from continuing operations, adjusted SG&A as a percentage of revenues and gross profit and adjusted 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 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 exclude 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 alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We've also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our first 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. With that, I'll turn the call over to Bryan.

Good morning, and thank you for joining us. Today, we reported first quarter adjusted net income from continuing operations of $27.1 million compared to $21.9 million a year ago. We earned $1.03 per share in the first quarter compared to $0.84 per share last year or an increase of 23%. Our revenue exceeded $1.1 billion in the first quarter, a 19% increase over the prior year. From this point forward, all comparisons will be on a same-store basis. In the quarter, total sales were up 12%, reflecting increases in all 4 business lines. March was a solid month for national new car sales with a SAAR of 16.3 million, which is the highest level since November 2007. March was also the best month in our company's history in units, revenue and pretax profit, which was encouraging after a somewhat tepid start to the year. In the quarter, new vehicle revenue increased 10%. Our new vehicle unit sales increased 8%, which was above the national average of 1%. Domestic unit sales increased 9% compared to 1% nationally. Import unit sales were up 8% compared to 2% nationally, and luxury unit sales were up 7% compared to 3% nationally. Retail used vehicle revenue increased 19% in the quarter. We retailed 12% more used units over the prior year, resulting in a used-to-new ratio of just less than 1:1. We sold a monthly average of 55 used vehicles per store, up from 50 units in the first quarter of 2013. We continue to target selling an average of 75 used vehicles per store. Our performance improved in all 3 used vehicle categories in the first quarter. On a unit basis, certified preowned grew 28%; core product, or vehicles 3 to 7 years old, increased 8%; and finally, value autos, or vehicles over 80,000 miles, increased 9%. Our F&I per vehicle was $1,200 per unit compared to $1,116 per unit last year or an increase of $84 per unit. Of the vehicles we sold in the quarter, we arranged financing on 72%, sold a service contract on 44% and sold a lifetime oil product on 38%. Our penetration rates in service contracts and lifetime oil sales increased 300 and 240 basis points, respectively. Our service, body and parts revenue increased 9.4% over the first quarter of 2013. This was on top of last year's 7% increase over the first quarter of 2012. Customer pay work increased 8%, which is the 19th consecutive quarter of improvement. Warranty sales increased 17%, which is the sixth consecutive quarter of improvement. Wholesale parts increased 8% and body shop increased 7%. Gross profit per new vehicle retail was $2,301 compared to $2,354 in the first quarter of 2013 or a decrease of $53 per unit. Gross profit for used vehicle retail was $2,544 compared to $2,560 in the first quarter of 2013, a decrease of $16 per unit. In the first quarter, the blended overall gross profit per unit was $3,662 compared to $3,605 last year or an increase of $57. As we have previously discussed, our store personnel monitor overall gross profit per retail vehicle sales to evaluate their performance. While there has been a shift in the allocation of gross profit by business line within the vehicle sales, the overall result is higher. Our total gross margin was 16%, down slightly compared to 16.2% in the same period last year. Increases in vehicle sales continue to outpace our growth in service, body and parts, and this mix shift explains the decline in overall margin. As of March 31, new vehicle inventories were at $731 million or a days supply of 69 days, a decrease of 2 days from a year ago. Used vehicle inventories were at $171 million or a days supply of 46 days. This is the same as our days supply level a year ago. As I mentioned on our fourth quarter earnings call in February, the acquisition market remains very active. We continue to seek exclusive domestic and import franchises in midsized real markets and exclusive luxury franchises in metropolitan markets. During the first quarter, we purchased 3 stores in Hawaii: Island Honda on Maui; and Honolulu Buick GMC Cadillac and Honolulu Volkswagen on Oahu. We also increased our presence in the Center Valley of California with the purchase of a Volkswagen store in Stockton. Earlier this month, we acquired Access Ford in Corpus Christi, Texas and opened Lithia Chrysler Jeep Dodge Ram of Wasilla in Alaska. Since October 2013, we have purchased 8 stores and opened 1 location with combined total annual revenues of $380 million, which is nearly 10% of our 2013 full year revenues. With that, I'll turn the call over to Chris, our CFO.

Thank you, Bryan. As we previously discussed, we grew overall same-store sales 12% in the quarter. We continue to focus on increasing overall gross profit in order to leverage our cost structure. As a result, our first quarter adjusted SG&A as a percentage of gross profit dropped 60 basis points to 68.5%. This improvement was primarily related to a reduction in advertising expense of 50 basis points and rent of 40 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 comparison, was 41%. This result was shy of our target of around 50% and is primarily due to certain periodic adjustments to SG&A required under GAAP. As our gross profit percentage growth decelerates relative to levels experienced in prior years, throughput becomes more volatile. For example, a variance of $160,000 in SG&A expense will change our throughput by 1%. At end of the quarter, we had $22 million in cash and $133 million available on our credit facility. Currently, $193 million of our operating real estate is on finance. These assets could provide up to an additional $145 million of available liquidity in 60 to 90 days. This brings our total liquidity to $300 million, and we remain comfortable with our overall level of available credit. At March 31, excluding floor plan financing, we had $277 million in debt, of which $163 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 of our debt covenants at the end of the quarter. Using our 2014 guidance, we estimate our leverage ratio is approximately 1.2x, excluding floor plan debt. Our free cash flow, as outlined in our investor presentation, was $32 million for the first quarter of 2014. Capital expenditures, which reduced this free cash flow figure, were $13 million for the quarter. We estimate our 2014 CapEx will be $92 million. This updated budget is based on $17 million in lease buyouts, $24 million in new or remodeled facilities as a result of prior acquisition, $8 million for open points granted by the manufacturer and $43 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 $75 million. Our capital strategy is to maintain a balanced approach to acquisitions, internal investment, dividends and share repurchases. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Given the recent uptick in acquisition activity, we are increasing the deployment of free cash flow the company generates. The 9 stores Bryan mentioned earlier required a combined equity investment of approximately $43 million, still well below the full year free cash flow of $75 million I discussed a moment ago. Given both our ability to generate free cash flow, as well as our sector low leverage ratio, we believe we have the ability to acquire significant revenues in the future. However, we will continue to maintain our strict ROE thresholds required before we commit to deploy additional capital. We have been closely monitoring the availability of credit with our customer base as we believe it is one of the main drivers of continued recovery in SAAR. Of the vehicles we financed in the first quarter, 14% were to subprime customers, an increase of 170 basis points over the first quarter of 2013. Despite this improvement, this is still well below the national average penetration for subprime at 20%. More importantly, the percentage of subprime customers that were able to obtain financing increased 300 basis points from the first quarter of last year to over 18% of the customers who completed their credit application. In essence, both the percentage of subprime to total customers and the number of subprime customers securing lending approval increased. We continue to carefully monitor registration levels in our market to gauge our progress in the economic recovery. While overall, our markets remain 5% below registration levels in 2006 and our Western market registration levels remain 11% below 2006 through December 2013, the most recent data available. We believe this indicates market expansion that will come to fruition over the next few years as credit availability returns and unemployment levels decrease. We have updated our guidance for 2014 and project earnings of $1.18 to $1.20 per share for the second quarter of 2014 and $4.57 to $4.65 per share for the full year 2014. For additional assumptions related to our earnings guidance, I would refer you to today's press release at lithiainvestorrelations.com. Our Board of Directors has also approved an increase in our quarterly dividend to $0.16 per share. This concludes our prepared remarks. We would now like to open the call to questions. Operator?

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

Several questions. I guess, I'll be the first to ask it. So GM, obviously, challenging from a publicity standpoint in Q1. Wondering -- two-pronged question. One, have you seen any impacts sort of on their share or demand or commentary, worry about their product on the new side? And then secondarily, what have you seen, I guess, to date any trends on the parts and service side? And it sounds like that will be a pretty lengthy process in terms of giving all those parts to dealers. Any commentary there on either side of that?

Sid, this is Bryan. Thanks for joining us today. Okay, on the new vehicle side, traffic in our stores hasn't been impacted dramatically. In fact, in the month of March, we were up 14.2% in General Motors. And as a company, we're up 12.3%. So they responded about the same as the rest of market. They did, however, have an EP pricing in that month, which helped generate some additional sales, I would imagine. But we really believe that it has generated some discussions, and hopefully, can generate some additional activities because what's happening in the service side is a lot of customers are calling in. There is concern about what's going on with their ignition switches and other recalls. And I think we're looking at, I believe, it's a September date -- October date to be able to fix most of those. But they've given us enough parts to handle the ones that are most problematic that have that looseness in the ignition switches and stuff, and we seem to be working through those. But I think the thing to remember though, these are customers that we haven't have the opportunity to see in possibly 5 to 7 years. They're outside their warranty period. And this is a time to put our best foot forward to be able to show them that we have value pricing, that we're selling multiple different commodities, that they can come and buy from us, and we can do it in a very quick period of time. So for us, we believe it's fairly opportunistic on definitely the service side, and hopefully, they'll get past the issues on the sales side of things.

Steve, General Motors has a special -- this is Sid, has a special rebate, too, for those people, another $500.

Yes, I was -- certainly, the value is getting those people back in. I'm wondering if you've seen enough of them yet to know if that is translating into other customer pay work and to what magnitude.

I think our initial signs are pretty good on the service end of things.

Got it. On the acquisition front, obviously, very active in the first quarter. Is the thought process for the year generally that you got a lot of them out of the way earlier? Or are you just running into some really opportunistic things and we may continue to see activity throughout the year?

This is Bryan again. I would say this, I mean, we were fortunate to have a pretty good run here over the last 4, 5 months. But it appears that the pipeline is still remaining just as full as it's been. So I don't think there's any intent to do it at the start of the year and then not do many in the second half of the year. We really believe that there is the ripe opportunity to be able to continue with acquisitions. And I really believe that our organization, capital wise and people wise, are ready for the challenge on increased growth. So as long as the pricing remains at levels that meet our ROE thresholds, we plan on continuing to grow.

Yes, that was my next question. It's interesting to hear a lot of commentary about valuations in the industry. What I'm noticing, the multiples you're paying this year are actually in line to a touch below what you were paying last year. What do you attribute that to?

I think a lot of it is related to our acquisition strategy being small to midsized markets, so they're not as competitive. What we definitely have recognized is that the last couple of years, there is a pent-up supply of acquisitions that aren't really selling in those size markets. And then we're able to stay in relationship with those sellers, and hopefully, walk them to pricing that meets those ROE thresholds. And I think that discipline of not jumping in too early and understanding what's happening in the marketplace helps us be able to maintain pricing at the levels that are more traditional.

Okay. Last question and then I'll hop back into the queue. Commentary in the industry, competitors, et cetera, seems to indicate that the momentum from the end of March is continuing thus far in April. Are you -- assuming you're seeing something similar?

Steve, this is Bryan. I mean, we -- what we're seeing in April is an on-target type of market. March was definitely very robust. I mean, it was obviously our best quarter in our history in many different areas. And I think that we expect that as SAAR continues to reach more normality, we should still be able to see increases. But in terms of April, it looks pretty normal.

Yes, Steve. This is Chris. Obviously, we get as much information as possible before we put our final guidance out for the quarter and for the full year. And we did contemplate the way things are happening so far in April in our full year guidance.

The next question is from Gary Balter of Crédit Suisse.

Bryan or maybe Chris, you may have mentioned this. The SG&A, you mentioned that you're 41% gross profit throughput and you said there were some SG&A recorded under GAAP that caused that to be a little bit different number. What is that? And what would you -- like internally, are you looking -- are you looking closer to the 50% that you'd like to be at?

Yes, Gary, Chris. So our target is going to continue to be around that 50% range. But when you start to see our gross profit moderate just because our sales rates aren't as high, the small fluctuations that we have with some accounting adjustments, whether the 2 that we talked -- or kind of pointed to were related to some vacation accruals and some insurance adjustments that we made. I mean, they're going to have a bigger impact than they have historically because the gross margin changes isn't as much. What I would say is that our focus is going to shift to that SG&A to gross number. And at 68.5%, any throughput above, let's say, 33% is going to continue to bring that number down. And so that's going to continue to be our focus, and we feel optimistic that we're going to continue to get leverage out of the model.

Okay. And then just following up on the parts and service, you had a great warranty number. Is that -- we've modeled out and you tell us that we're on the right path, but given how young your -- especially your car sales because you're a little bit behind the sector, are -- that number should look like it should continue to be pretty strong going forward. Is that a fair way to think about it?

Gary, this is Bryan. I think that is fair because if you look at that 3- to 5-year bubble of cars that are now coming into the end of their warranty periods, people do have tendencies to come in a little bit more. That 17% that we saw this quarter, if you extrapolate what's happening with UIO, we don't see any big reasons to be concerned about weakness in that area and similar patterns should continue.

And is there a worry though on the other side with the parts and service given that now you're anniversary-ing the '09, 2010 weakness? Like with the -- I'm sorry, with the customer pay parts and service?

No, I don't think we expect any weakness there. And I think -- I mean, customer pay somehow seems to continue to increase, and I think it speaks to this ability to be able to be many things to many people and be more proactive to our consumers' needs when it comes to values and time. And when we repeat that time and time again and I think it is really as simple as that. And I think if we can continue to meet our customers' needs, we know the base of business is bigger than it used to be, so we should be able to continue in that arena as well.

We will get a list out of those warranty recalls, too, I am quite sure, and particularly, in General Motors.

The next question is from Rick Nelson of Stephens.

Bryan, looking at Eastern markets now in terms of acquisition opportunities for a bit now, I'm wondering if the pipeline includes anything out there. And does the pipeline also include premium luxury, which you're under weighted today relative to some of your peers?

Yes, I think we're, what are we, around 9% in luxury, which is a little bit higher -- a couple of percentage points higher than national average. But in relationship to our peer group, we are a little lighter. There isn't a specific focus to grow in luxury. However, obviously, we do target many stores in that arena. Now if we're looking at the Eastern market, I think we always balance things to be able to look at what our time commitments are and what our ROE thresholds are. And if there's not that differences, then our prerogative would be to fill in, in areas that we already have management staff and we don't have to spread our wings quite as far. We don't have anything active really in the East at the current time. However, we still believe that there is going to be an opportunity to be able to buy a group that comes with some people. And I think that's how we've always been discussing at the last few years, is we have to find a group that is much like we were that has the ability to grow people and really just needs the capital injection to be able to expand their footprint. And so far, it hasn't quite come to be, but we are still actively looking and I think we'll still be able to find something in the future. And then in the interim, if things come up in the West, it probably means the ROE rates were much higher than what we're still seeing in the Eastern markets.

$75 million in free cash flow, you've got opportunities to put on some leverage over and above that. How much revenue do you think that, that would support in terms of acquisition? And how much do you think the organization could absorb in any 12-month time frame?

Yes, Rick, this is Chris. I'll take the first part of the question. As Bryan said in his prepared remarks, we used about $43 million in equity to purchase about $380 million in revenue, which is really consistent with what we've seen over the last 3 to 4 years. So yes, 10% to 15% of revenue is the equity infusion. So it's $75 million in free cash flow, which includes a lot of the CapEx from the prior acquisitions is included in that number. We feel that we could pick up between $700 million and $1 billion in revenue a year off our current cash flow that we have.

Additionally, at $300 million, you can obviously buy somewhere in the $1.5 billion to $3 billion in revenue, if you were fully to lever up. But at those kind of numbers you start to look at 1 to 1.5x additional turns.

All right. And just finally, if I could ask, a number -- or a couple of your peers are opening freestanding used car stores. I know you launched a concept and the recession came. Are you giving any thought to restarting a project like that?

Rick, this is Bryan, again. I really believe that in our size markets, we have so much space capacity within our existing lots and they sit in prime locations. Our issues with used car growth is more about procurement, so it's not about space or exposure to the consumer. So we really believe that if we can find more used cars, we'll put them on our existing lots with no additional capital expense. So in terms of Lithia's opportunity to grow used cars, we believe that's in our existing footprint of stores. And obviously, primarily based off the ability to find those cars and as supply increases on those lower SAAR rate years, and that's why we're starting to see these increases in certified at a higher rate than core and value auto. We're starting to have some years come back that are more normal years at 14 million, 15 million SAAR are now used cars. Well, as those push into what we would call core products in 3- to 8-year-old vehicles, now we got more supply of those cars, which are the cars that really generate the profit and the trade-ins of value auto vehicles that generate that third generation. So we're pretty excited about that and we don't think we need to change our existing new car footprint. We can offer those opportunities to our customers where we currently are.

Rick, this is Sid. If you do the math, I mean, if we had 100 stores is what we have and every store did 20 more used cars, that's 2,000 a month more sales times $18,000. It's a lot of growth.

And we're currently doing 55 per site and we've set that target of 75, which is a pretty sizable growth for the next couple of years to be able to not add any capital expenditure to do that.

We have a little bit of inventory but I think we learned our lesson on standalone for now.

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

Just a first question. As we look at the strength in same-store sales, I'm just curious how you guys feel like you're executing in the stores and if there's need to potentially add back some variable costs. I'm just trying to understand how much more room you have to flex up in your facilities before a lot of cost creeps back in?

John, this is Bryan. I would say this, I mean, we have this general concept of managing by thirds. This concept of high-performing stores, performing stores and opportunistic stores, for some reason, 5 years ago, even in the recession, it was still about 1/3 of our stores. So we still have 1/3 of our stores that we believe perform at considerably less than their potential. And when we talk about potential, it's typically about top line growth and market share and the ability to grow your customer base in service and parts is where most of those opportunities come from. And in such, that 1/3 of stores, or 25, 30, 40 stores, really will gain throughput by increasing their gross profit within that store. We also believe though that as we penetrate the market deeper, as a larger organization, that can gain some economies of scale that even our performing store and high-performing stores have the ability to find some synergies. And I think this is why, when we talk about trying to reset 50% and how do you maintain a 50% throughput, that we believe that there's still potential in those arenas as we find productivity increase in other economies of scale that come through the model. So we still believe that despite a, what, 68% SG&A in the first quarter, which is our best first quarter in our history, but there's still dramatic improvement opportunities in not only SG&A, but top line, that it will come not only from the marketplace that's still recessed in our western market but will also come through continued throughput increases.

John, this is Chris. Just to add on to that. In the quarter, we saw about 70 basis points in improvement in SG&A to gross as a result of rent and facilities charged the leverage that we have. And so if we continue to see the growth rates that we had in gross, whether it's in 1 to 2 years, we feel like we're going to get that again just because we don't have an intensive capital deployment need in our current facilities.

Okay, that's great. And maybe specifically, can you talk about capacity utilization of your service bays and what levels do you think those are at? Are you running 2 shifts or 3 shifts? Or how do you think about the capacity in your service bays and what's left to go?

You bet, John. This is Bryan again. So we're at about 55% stall utilization based on our current hours of operation. So without extending past our typical 7:00 to 6:00 hours in a, let's call it, 80% open on Saturday, there's still 45% more potential upside, which, I think, if you look at that in a capacity basis, at 55% utilization, you can grow like 70% based off our current hours. Now fortunately, our customers aren't really -- they have become accustomed to those hours but it's not as customer friendly as we should be. So we now have stores that are starting to talk about late-night hours like 10:00, 11:00 at night. We're also looking at Sunday hours to be able to divert some of our reconditioning and even some customer work to Sundays when our consumer bay is actually not working. And these are things that can even increase capacity beyond that. I think when we look at capital projects in service and parts, it's more about the front-end visibility of how do we invite our customers in and help them know that we're not just a warranty station, that we're a quick lube station and we're a quick commodity experience and we're value priced and those type of things. But in terms of capital expenditure for stalls to be able to produce work, we believe that we have plenty of stalls for our future.

That's very encouraging. And then just lastly, on the subprime comments, when you mentioned 14% of your sales were to subprime and the national average were at 20%, is that inclusive of used vehicles, so that's new and used, not just new vehicle sales? Or is that just new vehicle sales?

Yes, John. This is Chris. That's combined.

Okay. And do you guys have a breakout roughly of what it is in new and used? Because my understanding is that new was closer to sort of a 7% to 8% range and used was much higher than that, in general, the national average.

Yes, I think your numbers are close. I'd have to pull them out to find them. But yes, I mean, I think it's around 60%, 70% of our subprime customers are buying used vehicles and it's about 30% or 40% on new. So I think your numbers are close.

The next question is from Scott Stember of Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Can you maybe talk about the gross margin on the new car side of the business? We've seen, at least in this quarter, the rate of decline in that business start to slow down. And can you maybe talk to the discipline of the OEMs in some of the programs that are out there? Is it that? Or is there any company-specific things that you're doing with, let's say, the bottom 2/3 of some of your stores bringing them up to the average?

Scott, this is Bryan. I think when we look at gross margin, I made this comment in our -- in the script as well, we look at it as an all-inclusive, how much do we make per deal and margin is less important. We also try to train our people to understand the waterfall effect of selling that new vehicle. So to us, it's not as critical. However, I think your comment on that lower 2/3, absolutely. If we're trying to gain market share and we're trying to help people explain that, we're trying to maintain our throughput. Throughput is driven off of that top line. So it's more crucial to us to get that volume because that's what's keeping our earnings growing. So as we really look at the future, it's probably less important to us whether or not margins are declining even though I think pricing went up 2%. Is that right?

Yes, pricing was up 2%.

Was up a couple of percent, which obviously is going to then affect margins. But I guess, from a ground-level execution standpoint, the mental mindset is more we need to sell that new car so we can get that first trade-in, second trade-in, and then third trade-in, and then hopefully, get most of those customers back into our service and parts department over the next 3 to 5 years. Scott L. Stember - Sidoti & Company, LLC: Got you. And Bryan, I missed the breakout of the used same-store sales, certified versus core versus the value. Could you just give that again?

Sure. So unit growth in certified was up 28%, primarily a function of those bigger SAAR numbers coming through now that are 1 to 2 years old. Core product was up 8% in units, and value auto was up 9%. Scott L. Stember - Sidoti & Company, LLC: Okay, got you. And last question, on parts and service, it looks like the body shop posted a pretty nice rebound after about 3 quarters of lower numbers. And I think on the last call, you had talked about maybe a few locations that were underperforming. Can you just talk about what drove the nice sequential increase in the first quarter?

Yes. I mean, you're exactly right, Scott. This is Bryan again. We had 3 body shops, of which 2 of them we were able to reposition management to be able to get things back on track. And a lot of that comes from relationships with the insurance companies and those type of things that are finally starting to take hold. So believe it or not, we don't have any real body shops in those weather-impacted states. So it wasn't really weather. We really believe, in this case, it was the people that we spoke to last quarter.

The next question is from Brett Hoselton of KeyBanc Capital Markets.

Looking at used vehicle sales, 19% increase in the first quarter same store, your guidance up 9.5%, you obviously bumped that up a bit here. But are there -- is there some particular reason why you're thinking that might slow down? I mean, certified preowned seems like, for the next 2 or 3 years, we're going to see a pretty steady increase of off-lease vehicles and that should be a fairly nice tailwind for you. But what might be some of the headwinds you're expecting in the back half of the year?

Yes, Brett, this is Chris. Good question. What we're really seeing is the volatility in ASPs as we see a shift in those buckets between the certified core and value auto segments. And it makes it really hard for us to forecast going forward what ASPs are going to do and what that top line revenue growth will look like. What we focus our energy and time on is really looking at the gross profit per unit number for used, which has stayed relatively consistent around that $2,500 mark and then what do we expect units to do in total. And so if you look, we've maintained a pretty consistent forecast in our used vehicle units, which should be in that 8% to 10% range. And we think, relatively speaking, gross profit dollar per unit is going to stay level.

And then as we think about kind of the acquisition outlook here, can you kind of talk about deal flow, the level of deal flow that you're seeing today versus 3, 6 months ago or so, where you're at in terms of valuations? And what are your expectations going forward?

Brett, this is Bryan again. I think, if we look at a comparison to 3 to 6 months ago, we really believe that the supply of deals out there continues to grow, believe it or not. I mean, we just went through a pretty good run. There's a lot of deals out there. It's just whether or not they're selling and they don't appear to be selling. I would say this, we don't set quotas on how many we expect to accomplish. We balance our capital structure with our expected ability to buy deals with our dividend rates, what are stock price is on share buybacks and then make those decisions. And as long as there's opportunity and it's in balance and stride with the development of our internal people that can operate those stores because we do buy average-performing stores typically, then we're going to move forward on those. But it's not a quota-based system. It's more of a ROE threshold hurdle rather than a quota. But to recap, there is supply out there and we really believe that our future holds a number of acquisitions just like what we've been running at.

And then switching gears, wanted to just talk a little bit about F&I gross profit per unit. And just you've obviously done a nice job pushing that up. You're maybe still $100, $200 below some of your top-performing peers. Can you talk about how your markets may differ versus your peers? And do you think that you can get your F&I gross profit per unit up in that $1,300 to $1,400 range over the longer term? Is that even a target?

Yes, Brett, this is Chris. I think we're really looking at taking each quarter and each year one at a time. Some of the differences that we have, I think, may be just because of our used and new mix. I mean, our new vehicle has generated about $1,400 in PVR. Our used vehicle has generated about $1,000 in PVR. Part of that difference is just due to the number of value autos that we sell as is cars where we sell about half the PVR and F&I than we do in our normal core product and certified product. But all in all, I mean, we've talked about this now for several quarters. We know it's an opportunity, it's something that we're working on. We're starting to see some positive trends improve related to our penetration rates, and we're satisfied that at least moving initially up $84 per unit year-over-year is a step in the right direction. And we bumped our guidance a little bit for the full year to take that into account. But we're going to continue to execute on it. We know there's opportunities there and we'll continue to work on it going forward.

The next question is from Bret Jordan of BB&T Capital Markets. David Lee Kelley - BB&T Capital Markets, Research Division: This is actually David Kelly in for Bret this morning. Just a couple of quick ones here, mostly follow-ups. But just want to ask you, I think you mentioned at the start of the quarter, I think you threw out the word tepid for the first month or so. I'm just trying to get some additional color on what you were seeing in January. Had that carried over into February? Was it more of a seasonal weather impact we're seeing here or just a consumer slowdown after holiday spending? Just want to get some additional thoughts on that.

David, this is Bryan. I think it would characterize the quarter, January and February were on target and March was phenomenal. So I mean -- and the beat really came from March, not from January and February. I think we weren't impacted by weather very much in January and February. I mean, we really had about 12 stores in Northern Oregon, Central and Northern Oregon that got impacted for 4 or 5 days, that had the biggest impact in February. It was primarily in service and parts, which hurt us a little bit. And whether we got that back in March, that is productivity losses that are hard to recover. But when it comes to the new vehicle operations, I mean, in used vehicle operations, you get those back in, I really believe, in the next couple of weeks once the snow melted and the ice was gone and we were good to roll again. So that kind of is the synopsis of the quarter. David Lee Kelley - BB&T Capital Markets, Research Division: All right, great. And then just a quick follow-up on -- I think you mentioned the ASPs on the used side can be volatile quarter-to-quarter. And if we get an increase here in certified preowned, assuming that bumps up the ASPs, are the -- is the value auto segment now a big enough piece of the pie here where, if that -- if values swing high enough year-over-year, that that's what's going to drop that ASP or has the potential to increase the volatility over the next 2 to 3 quarters?

David, this is Bryan. I really believe it's pretty balanced. And I think what we're seeing is there's a pretty substantial difference. I mean, we were up 19% in revenue and only 12% in units, which is 6%, 7% in pricing, right? And when we start to look at value autos, we're starting to creep a little bit in what is considered an as-is vehicle, which probably means our guys are able to recondition cars a little more often and they're looking at some little bit higher-priced cars occasionally. And so I don't know that you can exactly extrapolate that there'd be a correlation between value auto and certified, balancing each other out. I would say this, that as supply increases, which we really believe that, that supply in that core is starting to creep in now, that should stabilize pricing some to allow us to increase our supplies on the ground, which we really believe is the biggest delineator between future growth and achieving that 75 units per site.

The next question is from Bill Armstrong of CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: What drove that huge increase in CPO sales? And is there a material difference in the gross profit per unit between CPO versus the core or the value of used vehicles?

Our certified margin is actually lower. It's 9.8% with an average of 13.6%. And just to contrast the opposite side of the spectrum, value auto has a 22% gross margin. We believe that the certified primarily was driven based off increased supply and availability from better SAAR years that were 13.5 million, 14 million SAARs rather than 10 million and 12 million SAAR years. William R. Armstrong - CL King & Associates, Inc., Research Division: Well, that sounds like that should be pretty sustainable then for a while.

I think you're right. And as those big SAAR years start to push into core and 4, 5 years from now, they start to push through in the value auto, it's real win-win for organizations that have the ability to capture that downstream business.

The next question is from Steve Anderson (sic) [Andersons] of Venator Capital Management.

I guess, Brett, a couple Brett's ago, actually asked most of my questions, but when you say you're buying average dealers in that channel, what's the differential from an EBITDA perspective or a throughput perspective that you expect to achieve a year into these acquisitions?

I think -- let me quickly, Steve, this is Bryan, speak to the potential in an acquisition. On an average or underperformer, I mean, we typically look at that there's 2x to 3x profit potential in there in the entirety and that doesn't just come through throughput. It usually comes through volume increases and used vehicles and new vehicles and then eventually, obviously, in service and parts because I think we typically state that it takes us 2 years to get those acquisitions to equalized state. Chris, do you have any color on throughput or EBITDA in relationship to where they're performing?

Yes, I mean, generally speaking, what we see on an EBITDA basis is maybe 3%, 3.25%, and we're running near 5%. And then on an SG&A to gross basis, when we're at 68%, we see typical dealers running in the high 70s, low 80s. And so we run an assessment when we're running our performance on acquisitions to really identify where that opportunity is. Starts with gross and then from there we work on cost control. And the numbers Bryan laid out are right in line with what we're seeing.

And Chris, sorry, maybe you can just clarify one thing for me. How many of your dealerships currently are operating underneath that 68% on throughput?

Yes, we don't disclose that specifically. I mean, I think what we do is we look to identify the opportunities and that number is hard to find because if you do it on a rough top basis, you start looking at some of your smaller stores which have really high SG&A to gross but wouldn't have a big impact if you moved them below average. And at the same time, the bigger stores are the ones that we stay focused on. I'd say that the best stores that we have are operating SG&A to gross in the low 50s and the worst stores are above 90. And one of the data points to consider when you look at what the potential is coming off of March, our SG&A to gross in March for the month was in the low 60s and so sustainable long term. If we can do a March every month, that would be great and we're going to continue to work on that. I'm sorry?

That would be great for all of us.

Yes, exactly. But I think it just highlights what that opportunity could be and we're going to continue to work on bringing our SG&A to gross down.

We have no further questions in the queue at this time. I would like to turn the floor back over to management for any closing remarks.

Thanks, everyone, for joining us today. We look forward to updating you again in July.

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.