Asbury Automotive Group Inc (ABG) 2013 Q1 法說會逐字稿

Good day and welcome to the Asbury first-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead sir.

Thanks Alicia, and good morning to everyone. Welcome to Asbury Automotive Group's first-quarter 2013 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's first-quarter results was issued earlier this morning and is posted on our website at asburyauto.com.

Participating with us today are Craig Monahan, our President and Chief Executive Officer, Michael Kearney, our Executive Vice President and Chief Operating Officer, and Scott Krenz, our Senior Vice President and Chief Financial Officer.

At the conclusion of our remarks, we will that the call for questions. I will be available later for any follow-up questions you might have.

Before we begin, I must remind you that certain -- the call today is likely to contain certain forward-looking statements. These forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time to time, including our Form 10-Q for the year ended December 2012 and any subsequently filed quarterly reports on our Form 10-Q and our earnings releases issued earlier today. We expressly disclaim any responsibly to update forward-looking statements.

It is now my pleasure to hand the call over to our President and CEO, Craig Monahan.

Good morning everyone and thanks for joining us. We are pleased to once again report record quarterly results.

EPS from continuing operations increased 43% from the first quarter. January and February developed in line with our expectations, but March proved to be a blowout month. In March, our stores produced the highest level of monthly operating income in our history.

Our new vehicle unit sales significantly outperformed the industry, increasing 11% due to the strength of our brand portfolio and excellent sales execution. Revenues were up 15%. Gross profit was up 12%. We improved our cost structure, producing SG&A as a percentage of gross profit by 290 basis points, and we achieved record income from operations with a margin of 4%, placing us among the leaders in our industry. These results clearly demonstrate the operating leverage we are building into our business. I couldn't be more proud of what our team is accomplishing.

Now I'll turn it over to Scott.

Thank you Craig.

Our record first-quarter results of $0.77 continued to demonstrate our powerful operating leverage. Once again, this quarter's results include no adjustments for non-core items.

Our SG&A to gross profit margin was 71.6% for the quarter, a 290 basis point improvement compared to the prior-year period. We are proud of the progress we have made with our cost structure, but we will continue to focus on future productivity enhancements. Excluding rent expense, which we view as a financing decision, our SG&A as a percentage to gross profit ratio was 67.4%. Our strong cash flow generation during the first quarter allowed us to continue investing in our business and to support our ongoing share repurchase program.

During the first quarter, we spent $7 million on CapEx. We are budgeting approximately $45 million of CapEx for 2013 as we continue to upgrade our stores, expand service capacity, and invest in important technology enhancements. Our CapEx numbers exclude lease buyouts and real estate investments.

We raised $12.5 million through a mortgage with one of our captive financing partners in the first quarter. To take advantage of the current low rate environment and considering the amount of unencumbered real estate on our balance sheet, we will consider mortgaging more of our properties throughout 2013. We will also continue to evaluate other ways to capitalize in the current low interest rate environment.

We ended the quarter with a total debt to adjusted EBITDA leverage level of 2.3 times. This puts us at the low end of our peers and provides us with significant financial flexibility.

During the first quarter, we repurchased $7 million of our common stock, or 213,000 shares. We have $43 million remaining under our authorization, and we will continue returning capital to our shareholders in 2013.

We ended the quarter with total liquidity of $312 million, which includes $225 million under our revolving credit lines, $100,000 in cash, and $87 million available in floorplan offset accounts. We continue to execute our plan of allocating capital in a balanced and disciplined manner to improve our operations and increase share ownership of our stores, grow our company and return capital to shareholders on an ongoing basis.

I'll now hand the call over to Michael to discuss our operational highlights.

Thank you Scott. I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance.

New vehicle revenues and gross profit increased 14% and 4% compared to the prior year. Our new vehicle unit sales were up over 10%, easily outpacing the industry growth rate of 8%. Although the new vehicle margins for the quarter were 6.1%, down 60 basis points, the increase in volume more than offset that margin decline. On a sequential basis, our new vehicle margins were essentially flat compared to the fourth quarter, and we do not anticipate significant new vehicle margin erosion from current levels this quarter.

Before moving on to our used vehicle sales performance, I want to highlight the fact that our total front-end gross profit yield, that is new and used vehicle gross profit per vehicle sold, plus our F&I profit per vehicle sold, of $3240 for the first quarter has been increasing since 2009 and is within $34 of our all-time quarterly high of $3274 we set in the second quarter of 2011. I think this speaks volumes as to the resiliency of the automotive retailer model. We continue to offset the effect of lower new margins by enhancing our F&I revenue.

We ended the first quarter with $557 million of new vehicle inventory or a 66 day supply on a trailing 30 day basis. We are comfortable with our new vehicle inventory levels, but we continue to watch them very closely.

We increased used vehicle revenues 14% over the first quarter of last year as we implemented Phase II of our Asbury 1-2-1 program. Although margins decreased 50 basis points to 9.5% compared to the prior-year period, gross profit per vehicle remained essentially the same while the average selling price increased about $900 a unit. Margins and gross profit per vehicle increased on a sequential basis from the fourth quarter as a result of a greater supply of trade-in vehicles. Our used-to-new sales ratio was 81% for the quarter as our markets continue to react favorably to the increased availability of preowned product. The impact of the Asbury 1-2-1 program on our used vehicle performance is evident when you compare our used-to-new sales ratio of 81% today versus the 60% range we produced back in 2007 and 2008 time frame.

We believe the supply of preowned vehicles will continue to improve throughout 2013 as we move further away from the collapse of new vehicle sales in the 2009 and 2010 time period and the increase in leasing in late 2010. We also are seeing more supply from the daily rental companies as they refresh their fleets. We ended the first quarter with $110 million of used vehicle inventory, or a 32 day supply on a trailing 30 day basis, essentially the same as Q1 of 2012.

Our F&I business remains a strong source of earnings growth for us. Our message and practice remains the same -- disciplined execution of F&I sales processes and training create solid, reliable growth and results.

First-quarter F&I revenues grew 23% compared to the prior period. F&I per vehicle retailed for the quarter was $1293, up 12% year-over-year, a substantial increase from the $997 PVR we reported in 2007.

In the first quarter, our Parts and Service revenues grew 3% and gross profit grew 8% compared to the first quarter of 2012. Parts and Service gross margin for the quarter was 59.4%, up 230 basis points compared to the prior year. The year-over-year gross profit improvement was driven by a 19% increase in reconditioning work, 4% increase in customer pay, and 10% increase in warranty work. We believe we continue to grow our Parts and Service business in a mid single-digit range while maintaining our current margins through our ongoing customer retention programs.

I do want to follow up on Craig's comment at the beginning of our call. January and February results fell in line with our expectations for the year, but we had a tremendous March. In all my years of experience, I have never seen a March like we just had. However, based on the strength of one month, we believe it is still too early to predict a trend.

Finally, I want to extend my appreciation to all of our associates in the field. You are doing an outstanding job adapting to the constantly changing retail environment. Your balanced energy and innovation are inspiring. I can't thank you enough.

With that, I will hand the call back to Craig to conclude our prepared remarks. Craig?

Thanks Michael. Continuing Michael's thoughts regarding 2013, we expect the recovery of automotive sales to continue throughout the year due to the current age of the vehicle fleet, extremely attractive financing rates, and the availability of exciting new products. Our planning assumption for 2013 SAR remains in the $15 million to $15.5 million range, which implies an overall industry growth of 3% to 7%.

The upside performance we delivered in the first quarter relative to the underlying SAR growth proves that we have positioned our Company to outperform the industry. We believe our strong brand portfolio, attractive geographic locations, and proven ability to execute will allow us to grow across all business lines.

I'm excited about Asbury's future and remain encouraged by the recent positive momentum from four trailing quarters of record profits during an uncertain economy.

In closing, I want to thank each of our employees. Our record results and momentum are a direct result of your dedication and hard work.

I would now like to turn the call back to the operator and we would be happy to take your questions. Operator?

(Operator Instructions). Rick Nelson, Stephens.

Thanks. Good morning. Congrats on a terrific quarter. (multiple speakers) segment outperformed both mid-line import and domestic in this quarter 19%. Same-store you were up 11% in both mid-line import and domestic. Can you talk about the drivers there, and if you could also address the margins indices that we have seen (inaudible) there within those three segments, or is one less than another?

This is Michael. I'll take a shot at that. Our increase in the luxury segment was driven primarily by BMW. It was up about 35%. I think if you'll remember on our Q1 call of last year, we noted, as did another group, that BMW inventory was a little bit constrained in the first quarter of last year. As '12 developed and we went into '13, the supply of that product increased substantially, so we took advantage of that. We also saw a nice uptick in the Acura business, so those two kind of push those numbers up.

As to the margins, it is -- we are seeing a little bit of compression in margin across all lines. It's -- there's no one particular brand that's not been affected by it. However, the luxury business is holding up a little bit better. We are still seeing some decent margins there, and with the new product and the expanding of the actual brands themselves, we would call into the mid-line price range, we are seeing a little bit of margin compression from there also. So, those are the drivers on where the luxury business went to. And as far as the margin, the rest of the mid-line import and the domestics, domestics actually held their own, and reasonably stable on the mid-line side.

Thanks for that color. Are you hearing from BMW that the supplies are going to remain more plentiful? That was a challenge, as I recall, through the summer months a year ago.

As it stands right now, we don't anticipate any shortages from them. We've not heard anything, so we are just continuing to move along as if our inventory supplies that we have at the end of the first quarter will remain consistent throughout the year.

Got you. And then the SG&A, that was noteworthy this quarter once again actually. We are calculating SG&A flow-through ex-rent of incremental gross profit of 50%. Do you think those sorts of levels can be maintained as we move forward?

Yes, your number is right around where we calculate it. This is Scott, by the way. We've consistently said that we feel we target and can get into the range of a 40% and 50% flow-through, and we are hanging right there at the top end of that range and that continues to be our long-term target.

Overall, SG&A -- I'll say we've reached the point where I describe it now as cost control as a cultural issue as much as it's anything, and we continue to focus on constantly getting better in every aspect of our business, and that will keep us in that 40% to 50% range and will continue to be the way we run the Company. So no big things, but it is a matter of just having a cost control culture.

Got you, thanks. And a final question -- if you could address the acquisition pipeline and the pricing. Some of the dealers are saying that there is a lot out there, but the pricing is still high.

It's Craig. I'll give you a shot on that there. There's definitely a lot of activity. We are talking to a number of different individuals about potential transactions. I would say that we are optimistic that we are going to be able to get some things done, but we won't want to talk about those until they are actually in the bag.

With respect to pricing, I think every seller is different. I would call your attention to the transaction that we did end of last year, in December. With the release of these financials now where you get total reported numbers as well as same-store numbers, you can back into the profitability of that Volkswagen/BMW store. And you can look at cash flow statement from last year and essentially figure out what we paid for it. And you will see that store in just one quarter is generating a very attractive double-digit return.

So, we believe there are deals out there that make economic sense. You've got to work hard to find them but they are there. And we, like I said, we feel pretty good that we are going to be able to bring some more to the table here in the -- certainly as we move forward through the remainder of this year.

Got you, thank you. And good luck.

John Murphy, Bank of America Merrill Lynch.

Good morning guys. Just a follow-up on the SG&A question. Obviously, your performance there is pretty stellar. Are you at a point where you think you're kind of reaching through this asymptotic limit to the downside and there's not a whole lot more costs to cut, or do you think you can go a lot further? Because your percentages here are pretty damn low relative to anything we've seen from any dealer.

We are still chasing, right? And as long as we are chasing, we can get better. This is Scott. I'm not willing to give up. I think there's always things we can improve. When you're in an improving -- an improving sales market, which we are right now, it makes those percentages a lot easier to keep improving. But in any market, I think there's still always a place you can get better; there's always a place you can become more efficient. And as I said before, that's a cultural thing, and we are trying to instill across this entire Company, from every place down as far as all the way up to the very top, that culture as we constantly look for ways to improve and get better, and we are not giving up on it.

Okay. I wasn't suggesting you were giving up. I'm just saying the numbers are pretty good already. So just curious there.

Then on Parts and Service as well, this 59.4% gross margin, was there anything going on in mix in wholesale parts or something going on in the business that drove that huge margin? Is it internal incredibly high margin? I'm just trying to understand what that was in the quarter.

This is Michael. No, we don't do a particularly large amount of wholesale parts business, but I will tell you the margin on our customer pay business actually was up a few basis points. Margin up on warranty was up a little bit. We are we just have been doing a substantial amount of internal prep work because of our big increases in used car sales, and that pushes that also. So, it's nothing that we haven't been doing for the last eight quarters. It's just when they combine them all this quarter, we had a little bit of an increase and effect on the margin.

Okay. And then just to follow up on that on Parts and Service, it seems like your second half this year, we are hitting this nadir where the UIOs really start to grow pretty significantly. Is there opportunity to improve this business even further from where you are right now, which is already a great level? And is the second half of the year where you kind of see that nadir in that return or increase in the units in operation around your dealerships?

This is Michael again. So yes, I think I would agree with you that we are seeing a point now where we've got a lot more cars that we've been selling. They are hitting this 18 to 24 to 36 month maintenance period, which is usually the peak maintenance period before we get into the heavy repairs. So, we are going to all benefit from that. We've put a number of programs in place. We have some follow-up programs we started at the end of last year. So we think that that will very much help us take advantage of these units that are in operation.

So, I think there's always this potential to grow it more in that business. I said it a number of times on the calls that our industry, the retail automotive franchise dealers, gave away a large piece of this business decades ago. And I think all of us are trying to get that back, and we are putting in retention programs, wiper blade programs, tire programs to bring these customers back to us. So, I think we'll all see the benefit of that and I think we can continue to benefit from just having a lot more vehicles out there.

That's helpful. Then just lastly, as we look at the sort of the leveraging of your real estate and the $12 million in mortgages you put in place in the first quarter, I'm just curious what kind of capacity you think you have out there beyond that. Is there another $50 million of real estate that might be available to get mortgages off of in the next 12 months? Just trying to understand the possibility of really a realization of some of that value.

We have said that we had $200-plus million of unencumbered real estate and we thought a very attractive way of accessing this market with the low interest rates was by writing mortgages on those.

In terms of capacity to get that done, we don't see any constraint right now. There's a lot of appetite for assets. I think the financing people, whether it's our captive partners or the broader financial community, have seen how well car stores have performed throughout the cycle, and find these a very attractive investment for them. So, I don't see any constraints in terms of capacity. It's just a matter of striking the right deal and working through all the detailed negotiations.

I apologize. I probably should know this. But of the $200 million you said was unencumbered, how far are you through that? $12 million in the first quarter. What was done sort of late last year, or is there still the bulk of this to go?

We are still chasing a number, and we said we would be writing mortgages throughout the year and we will continue to do that. I don't -- I hesitate to put an exact number on it because, for one thing, I don't want my phone ringing off the hook with all these finance companies (multiple speakers) selling me stuff. But it's a matter of just working through the paperwork. But it's a very attractive way for us to access this market.

Great, that's very helpful. Thanks a lot guys.

Scott Stember, Sidoti.

Good morning. Just talk about -- the last couple of quarters, it seems that you faced tough comparisons in the used car business. And now that Phase II of 1-2-1 has come on, you've seen things accelerate again. Could you maybe just talk about basically the difference between Phase II and Phase I and maybe just give us a timetable for when Phase II will be completed?

Yes. This is Michael again. So Phase I we started a number of years ago which was essentially a process at the store level on teaching individuals how to value cars and value that we put on them as well as educating sales staff and management. It took a while to get that implemented, but we got it done and it's been out there for well over 18 months.

Phase II is essentially inventory movement. It is a process whereby all of our inventory is consolidated daily. We evaluate inventory. We have a team of individuals that work with individual store management and evaluate based on the age of a vehicle, where that vehicle should be moved, whether it should go to another store, at what price it should go to that store, and then eventually should that vehicle be sent to auction. We started that program late last year. It obviously will move much faster. We will be finished the entire country on that program some time before end of the second quarter.

Okay. Did that require the importation of bolt-on system, or was that all part of the DMS?

It's actually part of a used car system we have been utilizing for about the last five or six years. It's just management, some individuals that we've put on the team that are very, very good and skilled at using that.

Okay. And obviously you did a great job of putting more profit down to the bottom line with regards to G&A. And now with the DMSs complete, can you maybe just talk about some of the things that really are driving this 200 basis point move and maybe just talk about last quarter you talked about shared services and a few other items you could hit that would further those gains.

It's -- again, it's no single big thing. Yes, we've got the DMS in. We are leveraging that technology. It's largely giving us a much better visibility into the operations of our stores, allowing us to be, I think, better managers across the board now that we have access to common numbers across the entire platform. Michael and his team have done a great job of making sure pay plans are competitive and amongst the best in the business, but at the same time produce leverage as we grow the business, and that's been a part of it.

We've constrained headcount. We are very cautious to add people to the organization unless it is absolutely necessary, and that has become part of our culture. We have a whole team working on shared services, and that is making progress. And that is beginning to have some real traction in terms of creating more -- more leverage in a more leverageable environment. So, it's across the board. Outside services, you name it, we scrutinize it, we look at it and our systems and infrastructure now really allow us to stay on top of that stuff. And it is a, like all cost control initiatives, it's a detailed job and everybody needs to be part of it. It's a full-contact sport here at Asbury.

Got you. And last question, obviously March was a record month for everybody across the board, but what are you guys seeing in April so far?

This is Michael again. So, us old guys that have been in this business a long, long time always look at month-to-month-to-month, how they track seasonally. So April is always less than March. April is turning out to be a very good April. We anticipate that we will take advantage of what's happening in the marketplace, particularly with the brands that we have. And just referencing what we just spoke about on the pre-owned side, we anticipate that we will not be disappointed with April.

Got you. That's all I have. Thank you so much.

Bill Armstrong, CL King and Associates.

Good morning guys. Most of mine were answered, but can you talk about the supply, the availability of used cars, both on the trade-in side and on the wholesale side and what you're seeing in terms of pricing?

This is Michael again. So as -- we've ramped up and with the SAR on the new car side, we take about 65% of our new retail sales result in a trade-in. When you couple that with the Asbury 1-2-1 program, we are keeping more of those, being able to move them around. So I think the availability of used from the trade-in side as we become increasingly more aggressive in that pricing arena, I think we'll have ample supply with the SAR the way that it is.

We do purchase of course cars at auction. Cars are available. There's I wouldn't say a shortage, but the prices for luxury certifiable cars is pretty tight. You're going to pay a little bit for those. It's not -- hasn't recovered quite yet from the '09, '10 time period, but we are beginning to see more of those. We're beginning to see a few more mid-line priced vehicles at the auction from the data rental fleets. So there's price -- there is product out there. It is a little pricey at the auctions.

The other side of that is that we also see, except for the real high mileage vehicles, we still see a very strong wholesale market, would anticipate that market to stay that way at least through June and July time frame.

Okay, great. Thanks.

James Albertine, Stifel.

Thanks for taking my question. Good morning and congratulations. Just to follow on to that last question just for a moment, have you seen any discernible trends in terms of your used sales performance if you looked at it by brand, so luxury used lots versus sort of the mid-line imports and so forth?

This is Michael. We track it obviously by the brands that we have and what we sell. So it's not -- it would not be unexpected that our inventory and our sales reflect what we sell in new. So our largest, by model, our largest sale of used cars is Toyota, Honda, Nissan; it falls right in with our new car side. And then our inventory of course reflects that same. So we are not seeing any trends other than what I mentioned earlier. Availability for certifiable high-end BMW, Mercedes, Lexus is still fairly tight. There's still a shortage of those, so there's a lot of price out there on them. But again, we source 65% of our product on the trade-in side, so as the new business increases, we will continue to supply ourselves, particularly with the brands that I just mentioned.

That's helpful. What I was getting at was trying to I guess dig a little deeper in demographics and whether the luxury consumer, if you will, was more or less likely to purchase a used vehicle in this environment versus maybe a mid-line import consumer or so on and so forth. But I appreciate that color.

And then, look, over the course of the last several years, this has really been a record-breaking, record-setting turnaround effort, continues to be so, certainly on SG&A side. I guess is there any color you can provide as to the opportunities going forward? I know you've touched on a lot of different opportunities, but maybe frame it with respect to the top third of your stores versus the bottom third and whether there is a bigger gap in F&I or a bigger gap in used gross profits or sort of what you're seeing there and how long you think it will take to sort of close that gap over time.

This is Craig. That's the all-encompassing question. A what's senior management here for question.

I'd start off, I think there are still areas where we can perform significantly better. I think it all starts with people. I think we've got a great team in place. We've got a great structure with the way we are organized out in the field. Our general managers get very good support within the different segments of the business from the folks that we have out there to help them. You could always take the bottom quartile of any set of stores and look at any area, whether it's new, used, F&I, and say there's an opportunity because the bottom quartile is not at our midpoint. It's the way we think about things.

The other thing that we constantly do is we rank the stores. The stores sit actually by brand amongst themselves and look at one another ranked in different areas and look for opportunities to do better.

I would say that our systems are starting to mature to the point where, because we do have common systems, we do have common charts of accounts, we make information available to our general managers on a real-time basis so they can see how they are performing in any aspect of the business relative to their peers and relative to other stores in their marketplace. Obviously, when we see -- when they see someone who's doing well, there is an opportunity to pick up the phone and call them and find out what's working and what's not.

I would back up and say we think the big areas of focus Michael has already touched on, is we do have an opportunity to do better in used. We still have too many vehicles that are going to the auctions. We want to keep those vehicles in-house. We think there's an opportunity to generate more gross profit dollars on the used side and actually sell more units there. So, that's one of the areas that we've got some focus.

We think there is still an opportunity to grow Parts and Service. We've done a good job growing gross. I think we've still got to do a better job growing customer pay. And we've got a number of things we're working on there.

There was a question earlier about what can we do about continuing to drive productivity. The shared service stuff we talked about last quarter is not done. That's going to run on for another year, maybe more. We still have a very decentralized accounting structure within this business. Many of our peers have been successful in centralizing those activities. We will catch up very quickly, but there is still probably at least 18 months worth of work to do on that side.

But I think, if you put it all together, we are very happy with the team that we've got here. We are very happy with what our IT people have been able to do to get good systems in place, but we still have a lot of work to do and think there's still a lot of upside to come.

That's very helpful. I appreciate the detailed answer. And then just one last housekeeping item. Apologies if I've missed it in the prepared remarks. I thought you had mentioned it maybe earlier in the quarter either at a conference or in the last call. But the dealer that you sold, was that a function of an opportunity that you just couldn't pass up as a seller, or was it a function more of the underperformance of that particular dealership? And did you say what brand or location that was at one point? I just don't recall. Thanks.

We have and called out the brand specifically but I would say that we run this business very much from a shareholder's perspective. And there are times that buying stores makes sense, and there are times that selling stores make sense. In the last quarter, we did sell a store. We feel that we got a very attractive price. We got a multiple well in excess of what we created for that sale. And if you go back I think about a year, you would find that we sold another store. And in that case, again, we got a very attractive price and we felt it was in our shareholders' best interest, if you would, for us essentially to rebalance the portfolio, take those proceeds and redeploy them where we can earn a greater return. And so you should not be surprised to see us buying stores in the future or even potentially selling stores if that's what we believe we can do to get the greatest return for our shareholders.

Great, thanks again. You're doing a great job and certainly good luck in the year ahead.

Brett Hoselton, KeyBanc.

Good morning gentlemen. I figured I'd start on the new car side. Michael, you obviously had a good quarter. You talked a little bit about BMW helping you out here. I'm wondering. As you think about your inventory constraints and your comparisons moving into through 2013, do we just get more difficult and more difficult comps sequentially as we move into the second, third and fourth quarter, or is there actually a particular step-up maybe in the third or fourth quarter time frame when inventory really became plentiful?

This is Michael. I think, as we look back on the comps from last year, the first quarter of last year, with the exception of BMW, was the only quarter we really had any kind of constraint, and it was not much. We still had a little bit of tightness to supply some Lexus product, a little bit of Honda but not so much. So I think second, third, and fourth quarters of this year, the only comps that we would be looking at would have been BMW, and that product really began to loosen up in the third quarter of last year. So as we go forward into '13, I don't -- unless something overseen happens, I don't see a shortage issue or a constraint on any of the new product that's out there in our portfolio right now.

And as you think about your F&I gross profit per unit up I think it was around $135 per unit year-over-year, very very nice improvement. Can you talk about the drivers of that improvement?

And then secondly, more importantly, can you talk about where do you think you might be able to go? And to put that into context, is there any sense of where maybe your top quartile is performing?

I'll take a shot at a couple of pieces of the question. As far as what are the drivers to that, the vast majority of our income comes from product sales, so our focus is educating both our managers and consumers. Everything is menu-driven at our stores, so it is just presentation, presentation, presentation. That's what drives product sales, so that's what drives value to the consumer. So, I think just the continuation of our training and process and our presentation is what continues to move that number up.

I've said this probably every quarter, how high is high? And we alluded to it in some other areas. There's always a bottom third. So when we look at the bottom third and we do have some very specific programs, we call them our boot camp that we place our bottom third performers in on a very regular basis and help them and retrain and learn the processes a little better. So we are seeing the results of that.

As far as we don't really want to disclose the top numbers versus the bottom numbers, that is an average. So you can just imagine that there's some highs and some lows in that number. And we think, again, constant improvement is what we are looking for, so I would anticipate that we can just continue to move that number up.

And then as we think about Parts and Service margins, some very nice improvement on a year-over-year basis. I would expect to see that continue as your used car sales build and warranty rebounds. Is that a fair expectation?

I think that's a fair expectation. I'm not too sure that there is a substantial magnitude to that number, but I would say that, if you just do the pure arithmetic, yes, that should -- we should be able to at least hold the margins that we've already got out there.

Excellent. Thank you very much, gentlemen.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning everyone. Can you give us a little more color on exactly why March was so awesome for you? And also, you said earlier that you're pretty confident that new margins won't deteriorate from current levels. What gives you that confidence, especially when we're seeing some other dealers talk about openly wanting to gain share at the cost of some margins in the near term?

This is Craig. Let me take a shot at the question about why March was so great. And we will at Michael do the second part of the question. My short answer would be we wish we knew why. It was January and February. We are tracking along very much in line with expectation. And March was just phenomenal, like we said. And I wish we could tell you why. We don't have a staff of economists here, but it just -- we just hit on all cylinders. I mean everything --

(multiple speakers)

I'm sorry?

I'm sorry, please go ahead.

I was going to say it wasn't just a new or used. It was every element of the business, including Parts and Service just took off in March. So it's -- I would like to believe that this is the beginning of a strong recovery of the economy, but like Michael said, one month doesn't make a trend. I'd also point out that this is a business where you can have a phenomenal weekend and then you get to the next weekend and the business is absolutely dead. So we are enjoying this, but we hope it continues, but we don't have the crystal ball that's clear enough that we can be confident about which way it's going from here.

I would just add that this is the payoff. We've worked very hard as a company here to put in the processes, the systems, the cost controls so that, when something like this happens, you benefit and you see it right here. And this is the payoff of all that hard work.

This is Michael. On the margin piece, what makes me think that we shouldn't see a substantial deterioration, a couple of pieces to that. Fundamentally, we do want to hold market share ourselves, and we are watching manufacturers as to what they are doing to grow market share. We are seeing a little bit of readjustment of some of the programs that the manufacturers are putting out there, which should help us a little bit, maybe not quite as many of some of the programs that cause margin deterioration.

We are also enjoying new product that seems to come out in a very nice, steady flow from all of the manufacturers, especially with our portfolio. So it's not like we got a whole bunch from one and none from another. We are seeing a nice steady flow of it across the board. New product always helps us maintain the margin.

The other piece of it is just the training part of it. There is a certain margin that we work for. We don't want everyone to give up market share but we work for that, constantly talking about it. So I just view it as the deterioration of it, we've watched it over the last seven or eight years. We've also watched the rate of that deterioration slow down. We are getting very, very narrow bands of transaction prices now. We are not seeing these huge variations within a particular model. We are seeing a much narrowing of that transaction pricing band. So if you put all those together, that's what kind of gives me the confidence that I don't think we will see a substantial decrease in it.

Got it. Is April looking similar to March or Jan and Feb?

April is -- let's see. April is not as good as March. It's never, in my history, it's never been as good as March, but I think April is favorable for us. It is -- I am saying this because Easter was in March, April will be better than a normal April.

Understood. And apologies, I missed this earlier. But can you give us your thoughts on the F&I business and what the [CSVB] rules might mean for F&I per vehicle over time?

Sure. This is Craig. I would say that is an issue that we're watching closely. We don't really have any more information than what you do, any more concrete information. Some of the things that we understand is obviously there are a lot of questions about a cap on the F&I reserves, as we call them, the rates, a lot of questions about whether, if that cap were to happen, would that be a hard dollar cap? Would that be a percentage cap? We just don't know.

I would say that we feel if something did come, we feel like we could manage it well. We have self-imposed caps that we've already got in place today to make sure that our stores remain within compliance, so if there's a new cap, I'm not sure that will have a major impact on us. If the cap were -- even if the cap were somewhat less than the caps that we've got in place, as Michael said, the majority of our profit comes from product, so we will continue just even put more emphasis on product. So, I think it's something we've got to watch, but at this point, we feel like we're in good shape and we'll manage through that challenge as well, the same we we've managed many other challenges in the past.

Got it. How long do you think it will take to get that clarity? Is it going to be a matter of weeks, quarters, or maybe a year or so?

I wish I knew. You probably know as much as we do.

I think our sense is it's not weeks or months. It's probably more likely quarters before we get any more clarity in that regard.

Great, thanks very much.

Do we have time left for one more question?

We have one more question in the queue. Would you like to take that? Bret Jordan, BB&T Capital Markets.

Good morning. This is actually David Kelley in for Bret. I appreciate you guys fitting me in here last second. Just a couple of quick follow-ups. We are really looking at the second quarter here where warranty has rebounded. I think gross profit was up, what, 10% year-over-year. Do you think we've finally bounced off the bottom and are the expectations that warranties should show some positive improvements from here on out?

This is Michael. I think the rate of decline of warranty that we've all seen in the industry over the years is that rate is definitely slowing down. I don't know whether we've bounced off the bottom or not. As we all know, the cars are made so much better, the quality of them is substantial, so the improvements in technology and so on have made it -- so that the warranty business is a much smaller piece of what it used to be.

We will always see recalls in our business. We can't predict them. They just -- when they occur, we will work with them as with our manufacturing partners. So sometimes we will see a little lumpiness in the way the warranty business works, but I think it is a much more stable part of our business than it had been in the past.

Great, thank you. And just one quick final follow-up on Parts and Service. I know you guys mentioned tire volumes expanded considerably, 70% in 2012, and you had aggressive goals set for '13. Just wondering, as of April 2013, where you are relative to those aggressive goals you had set and what you're seeing in the tire market.

So the tire business continues to be very strong for us. We are not quite at our goal; we are very close. We are addressing what we need to do to get there, but it is still a very good business for us. And again, as I've said on a number of calls, it is a retention business for us. It is the way to keep not only the customers that we have sold to and serviced in the past, but to attract customers to whom we did not service or sell. So that is how we view it, and I would say we are on track, David.

Great, thank you for taking my questions today.

At this time, we have no further questions.

Thank you very much, operator, and thank you, everyone, for joining us today. We appreciate your time and look forward to talking to you again next quarter.

That does conclude today's conference. We thank you for your participation.