Asbury Automotive Group Inc (ABG) 2016 Q1 法說會逐字稿

Good day and welcome to the Asbury Automotive Group Q1 2016 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matt Pettoni.

Please go ahead, sir.

Thanks, Operator.

Good morning, everyone. Welcome to Asbury Automotive Group's first-quarter 2016 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 Monaghan, our President and Chief Executive Officer; David Hult, our Executive Vice President and Chief Operating Officer; and Keith Style, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions. And I will be available later for any follow-up questions you might have.

Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. 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 with 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-K for the year ended December 2015, any subsequently filed quarterly reports on Form 10-Q, and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements.

It is my pleasure to hand the call over to our CEO, Craig Monaghan.

Craig?

Good morning, everyone.

This morning we announced record adjusted earnings per share of $1.36 for the first quarter, a 5% increase over last year. From an industry perspective, the quarter started out relatively robust. However the SAAR for March fell off substantially to 16.6 million units. We believe that the industry performance in March was negatively impacted by Easter weekend, which typically falls in April but occurred in March this year.

Despite relatively flat retail sales and continued new vehicle margin pressure in the quarter, we are seeing some positive signs. Our used vehicle margins improved substantially versus the last few quarters, as a result of operational improvements we made in the fourth quarter of 2015. Our F&I business continues to deliver excellent results. Our front-end yield continued to improve sequentially and is up approximately $100 per vehicle from our low point in Q2 of last year. And finally, our operations teams delivered exceptional parts and service, customer pay gross profit growth of 11%, with overall parts and service gross profit up 8%.

As always we are focus on becoming a stronger and more efficient Company. We continue to work closely with our general managers to make sure that we are achieving our operational metrics and maximizing the potential of our stores. We have made great progress in the areas of used vehicles, F&I, and parts and service. And we expect to deliver continued growth in these areas.

From a capital allocation perspective, we repurchased $102 million of our common stock during the quarter. In April, we repurchased an additional $60 million of our stock, bringing our year-to-date repurchases to approximately 10% of our outstanding shares.

Finally, I want to take a few minutes to discuss our progress with Q auto.

As I'm sure you're aware, in February we closed one of our three Q auto stores. This was our largest format store, where we struggle to achieve profitability. We are pleased with the progress of our two remaining stores, which were both profitable for the quarter. Overall, our Q auto initiative broke even, even after giving consideration to the associated overhead.

Based on the progress we have made and our continued expectation that we can achieve excellent returns on investment, we have decided to expand our Q auto operations. We will focus on increasing our market presence in the greater Tampa area, and expect to launch two additional small to mid-sized format stores by the end of the summer. We look forward to sharing our progress with you in the future as we continue to expand the Q auto brand.

In summary, we continue to execute on our two-part strategy, driving operational excellence and deploying capital to its highest returns.

Now I will turn the call over to Keith to bring us through our financial highlights.

Keith?

Thanks, Craig.

Good morning, everyone.

This morning we reported record first-quarter adjusted EPS of $1.36. This represents a 5% increase from last year. Our results for the quarter were adjusted for a $3.4 million pretax real estate related charge or $0.09 per diluted share. There were no adjustments to income for the first quarter of 2015.

For the quarter, same-store revenue increased 1%, and same-store gross profit increased 2%. Turning to SG&A, our ratio as a percentage of gross profit came in at 69.5%. As a Company, we had difficulty adjusting our expense structure to the significant decline in March retail sales. And as a result, our SG&A ratio for the quarter increased 100 basis points from last year. There are a couple of expense items worth discussing as it relates to the quarter's performance.

First, insurance expense was up $1 million due to the impact of a significant hailstorm in Texas. And second, employee benefits costs rose $500,000 due to increased enrollment in our employee health insurance plans. While we consider the hail damage to be an isolated event for the quarter, we expect that the increase in employee benefits costs will continue to impact our future SG&A expense.

It goes without saying that competing against quarters with significantly higher new vehicle margins is difficult from an SG&A perspective. Taking a look at our sequential performance better demonstrates the progress we are making on our cost structure. With first-quarter gross profit relatively flat with the fourth quarter of 2015, we reduced our SG&A ratio 100 basis points. We expect to further improve our expense ratio as we head into the summer selling season.

In terms of capital deployment, CapEx totaled $10 million for the quarter. For 2016, we are planning for $80 million of CapEx, which includes: $45 million associated with our core annual CapEx plan; and $35 million of CapEx associated with acquisition renovations and construction, which will enable us to move out of facilities that are currently under lease. In addition to executing on our CapEx plans, we also purchased property during the quarter totaling $7 million. The majority of which was previously leased. Going forward we will continue to seek opportunities to purchase real estate currently under lease and acquire properties in connection with future dealership relocations.

Turning to share repurchases, during the quarter we returned $102 million to our shareholders through share repurchase. With the additional $60 million of shares we repurchased in April, we now have 22.2 million shares outstanding. And our current Board authorization stands at $138 million.

From a liquidity perspective, we ended the quarter with $4 million in cash; $93 million available in floor plan offset accounts; $100 million available on our used vehicle line; and $165 million available on our revolving credit line. We ended the quarter with $946 million in outstanding debt. And as a result of our $200 million bond add-on in the fourth quarter and additional mortgages in 2015, our interest expense was up $3.1 million in the quarter.

Our total leverage ratio stands at 3 times, which is at the higher end of our targeted range of 2.5 to 3 times. On a net basis our leverage ratio was 2.4 times. And adjusting on a pro forma basis for our April share repurchase activity, our net leverage is closer to 2.6 times. Going forward, we are committed to remaining in our targeted range while maintaining flexibility to deploy capital on an opportunistic basis.

Now I will hand the call over to David to discuss our operational performance.

David?

Thanks, Keith.

Despite a challenging market, we increased total revenue 1%; grew total gross profit 2%; increases our total gross profit margin 20 basis points to 16.8%; and delivered an adjusted operating margin of 4.7%. For the balance of my remarks, I would like to remind you that all comparisons to the first quarter will pertain to same-store retail performance compared to the first quarter of 2015, unless otherwise noted.

Our new vehicle unit sales were relatively flat with last year, due to a softer-than-expected March. We continue to operate in a very competitive market, with new vehicle margins down 70 basis points from last year. Specifically, a number of our domestic stores chased but failed to achieve very aggressive stair step programs, resulting in significant declines in our domestic grosses. However, both our luxury and import new vehicle margins have continued to increase on a sequential basis from the fourth quarter of 2015.

We ended the first quarter with $808 million of new vehicle inventory or an 81 day supply on a trailing 30-day basis. Our overall inventory levels were negatively impacted by a slower-than-expected March and having 16 million of stop sale vehicles in inventory. Looking forward, we believe we are well-positioned for the spring and summer selling months.

Turning to used vehicles.

Our unit sales were down 2% from last year. As the quarter presented a few challenges including a disrupted sales pace in March and many of our operators working through the stop sale issue, which tied up approximately 10% of our inventory. Despite these challenges, with better used vehicle management, we were able to improve our gross per unit by $19 to $1,761, our highest level in over one year. And taking into consideration our improved wholesale performance, total used gross sales profit was up 2%.

Our used vehicle day supply was 33 days, which is in the middle of our targeted range of 30 to 35 days. This includes $14 million of stop sale inventory.

Turning to F&I.

Our team continues to deliver strong results. Delivering F&I per vehicle retail of $1,425 up $43 from last year. The lending environment remains favorable. Before I turn to parts and service, I would like to summarize our front end performance.

During the quarter, we were able to offset a portion of our new vehicle margin decline with better execution on used vehicle grosses and improved performance in F&I. Despite new margins being down, our total front end yield -- which includes new, used, and F&I gross profit -- was down only $67. And, more importantly, on a sequential basis our total front end yield was the $20 from the fourth quarter of 2015. Our goal is to build on this momentum as we head into the summer selling season.

Turning to parts and service.

In the first quarter, we delivered parts and service revenue growth of 9% and gross profit growth of 8%. Our overall gross profit performance was driven by an 11% increase in customer pay, a 4% increase in reconditioning costs, and a 7% increase in warranty. For the full year 2016, we believe we can continue to grow our parts and service gross profit in the mid-single-digit range.

Finally, we would like to express our appreciation to all of our teammates in the field and in our support center, who continue to produce best-in-class performance in many areas. Again, thank you.

We will now turn the call over for the operator and take your questions.

Operator?

(Operator instructions)

Our first question comes from Rick Nelson, Stephens.

Thanks, good morning.

Good morning, Rick.

A follow-up on inventory as it stands today. Where you're light, where you're heavy and how long you think it's going to take for the industry and Asbury to re-position the inventory?

Rick, this is David. I think were in an overall good position even with the stop sale vehicles. Since last quarter our ratios have improved as far as our car-truck mix and our total inventory. We feel like we're pretty well positioned over all for the upcoming quarters.

You made reference to a weak March. Any commentary on April would be helpful. I know we have five weekends here in April. Is that tracking stronger than March?

Hey Rick, it is Craig. Let me take a shot at that. David might want to follow up and maybe a little more about our inventory levels. We ended the quarter inventory 81 days but I think we've got to remember that March was disrupted. I think that makes 81 days look a little higher than it might really be. To add to that, we got all the stop sale inventory that's probably another three or four days. I think if you were to make the adjustments for that our inventory levels effectively would be in the 70s and that is why we say that heading into the summer selling season we do not feel like we are in that bad of shape. Of course there are some brands and some models where we have far too much inventory. But broadly speaking we think we are okay.

April it started off I would say it started off pretty well. We all see the analyst forecasts in the industry, talking about numbers in the mid-17. It feels a whole lot better than what we saw with March in the mid-16s. And I would add to that not only do the sales feel a little better, the margins continue to be stable. So I think we feel like were a pretty good shape Don't know that continues for the quarter, but right now we feel good about what we're seeing.

Thanks for that color, Craig. Finally if I could ask you about Q auto, how that performed in the quarter? I see you're going to add two more units there, if you could provide some of the economics around that business. That would be helpful.

Sure, Rick. Q auto, which just feel strategically with all of our knowledge about used cars, the capital that we can bring to play, the marketing expertise we have in house, IT what we can do with websites, it just seems to be an initiative that makes a lot of sense. It is very much worth our time and effort to try to figure out that model.

Just to give you a sense, the large format store just did not work. We couldn't generate enough volume through that store to get it to breakeven on a stand-alone basis. But the smaller volume stores seem to be working. In fact the store that we've had open the longest, our store in Brandon has been profitable now for four quarters. Our store in Fort Myers has been profitable for two quarters. And this quarter, those two stores made enough money to essentially completely offset the overhead that they carried. So that's what lead us to breakeven.

We are learning that brand is far more important than we thought it was. We can make up for some of that lack of brand with effective Internet marketing. We think SEO is very important in that world and we're spending a lot of our efforts on that. We think that putting a couple more stores in the Tampa market where we can start to get some mass could prove to be very beneficial. We can bring those two additional stores online in that market without really spending a lot of additional money on advertising. One of the stores is essentially a satellite store that will come online and we are very interested to see how that plays out. We think that will bring us some efficiencies.

So we continue to be excited about it. Like Keith said, we think it is a model that we can generate an attractive ROI. We are still learning. We've still got a long ways to go. We think as shareholders it is a good use of capital and we're going to continue to see if we can't make this successful.

Thanks a lot, Craig. Good luck moving forward.

Thank you, Rick.

Irina Hodakovsky, KeyBanc Capital Markets. Please go ahead your line is open.

This is Brett Hoselton standing in for Irina. Good morning.

Brett.

Let me start off with a Q auto question and just longer term I'm thinking about Carmax and some of these skills that they have built up over time. Their ability to call a car. Their ability to manage inventory, et cetera. Obviously a lot of data there and a lot of databases, et cetera. Do you think that you can develop a system and maybe a brand that is as robust a Carmax is?

Brett, Carmax has been at it well over 20 years. They're the 800 pound gorilla. We're not try to duplicate Carmax. That is beyond us. I think we look at it a little differently. We send almost 40,000 cars a year to auction. A large percent of those cars are retail cars that quite frankly end up on a Carmax lot or another competitors lot.

Fundamentally the question we ask is with all the skills that we've got in-house isn't there some way that we can build a distribution channel and retain those profits for the Asbury shareholders. We do not have to duplicate Carmax to do it. We just need to be smart.

I would tell you that fundamentally what we are learning is brand is important, but we think we can augment the lack of a brand with intelligent, a web-based approach to the market and we're seeing some real success there. We have also learned that it is very important to restrict the amount of capital that we invest. We think the key to this model is a have a relatively small format where we do not tie up a lot of capital but we move a lot of inventory through that store.

And then the third critical leg of this thing is sourcing inventory. We source some of that inventory essentially from our core stores that we believe would have gone to auction otherwise. But we are also sourcing inventory in the local market in the way of trades and we do get some cars from auction. We like what we see and we feel like we are making very good progress and we want to see how this Tampa market experiment that we are moving forward with, plays out. If it works, we think it's a market we can take to other markets. It is still in its infancy, but it is making progress.

And then along the lines of the airbag recall again, first can you quickly remind how much of your new car inventory was tied up? But then secondly more broadly speaking, do you think it had a negative impact on your new and used vehicle sales? And is there any sense of how you might be able to quantify if it actually did?

And then also, I know I'm asking a multi-part question but timing of parts. We are hearing mixed thoughts. Some dealers are telling us that it may be a year before they get parts or airbags for their Audis for example. And then finally, has the OEM stepped up and said we will actually compensate you in some way, shape or form for that fact that we're trying up inventory here?

This is David. I will hopefully remember all the points in there and take my best shot and others can jump in. If I miss something please let me know, Brett. On the new car side it is essentially a couple days supply for us that we have tied up so is not a significant amount. It is impacting certain brands more than others. Acura being one of them.

We feel like it certainly hurt us a little bit in sales. Tough to quantify how much. We really think March has more to do about the four weekends and Easter than anything else and really April feels like March. It almost feels like the months have flipped. On the used car side, we do think it was more of an impact because that affected all of our stores as far as cars coming in and what they had on the ground. It did have an impact to our sales. It was 10% of our inventory. I'm not sure how to quantify what we would have sold had we not had but it is fair to say we did miss opportunities because of them.

To touch on the inflators that are coming in, we have started to receive them. In small quantities from Honda and Acura so far, and not for any of the European brands. We are told later in this quarter we will start to see more significant volume from both Honda and Acura with those inflators. So we think that will pick up fairly quickly in the second quarter and it will be a little bit slower overall for the Europeans. Mid-to late summer is our best guess and they're going to service the states with the hot and humid weather first. So potentially it could go into fourth quarter, first quarter next year depending upon where the stores locations are.

And then finally from an OEM standpoint obviously this is a big issue. Have the OEMs stepped up in some way, shape or form and offered you floor plan assistance or slush funds, et cetera?

Correct. We're really on all the stop sale vehicles we are being compensated. They all very a little bit depending upon value, depending upon model, depending upon age. But there is compensation across the board on all stop sale vehicles.

Okay. Thank you very much, gentlemen.

Our next question comes from Bret Jordan with Jefferies. Your line is open.

Good morning. I was a little slow on the sign in. Did you say anything about the M&A environment, maybe what you're seeing out there as far as opportunities or is anything changing as sales have been slowed for the independents?

This is Craig. We're not seeing a lot of activity on the M&A side. There's always a conversation happening somewhere. But it feels to us that with the prices of the publics where they are today and we'll speak specifically to ours and you see it by our action, we think we are far better off buying our own stores via share repurchase than we are going out paying a significant premium for somebody else.

We are buying our stock at a 7 times EV to EBITDA multiple. And we hear about car stores coming to market with blue sky numbers that are bigger than that. So we're happy to buy our own stock when that situation happens.

Okay thanks. One question, this is obviously probably not a big issue for you guys given your exposure but how do you think about the Tesla Model 3 as it comes to market and obviously 400,000 plus people have committed or hope to commit to that. Its impact longer term a maybe the 3 Series BMW and the Mercedes, are you seeing on a shorter term maybe less interest in those cars because people have committed to some car at an 18 or 24 month future?

I will start with the whole electric hybrid market is 3% of the total market. It's still to this day a very small portion of the market. Obviously we do not sell Tesla. We do not feel at this point that it is really having any significant impact on our stores.

But the 400,000 people who might have been 3 Series buyers in that entry luxury, now going to that product is not changing any customer interest or traffic on your side?

From a bigger perspective, at any given point in time there is going to be a hot model that is going to displace other models. That is just the nature of the industry. So that i8 is a not as hot as -- the i8 is a great example. It came out red-hot and in a six month period it cooled down.

Right now it is the Tesla that seems to be red-hot, but who knows where that will be in six months and who knows what the next vehicle, one of the other major manufacturers might bring out that will go head to head with the Tesla. I just think there are so many unknowns out there that it is hard to say what is going to happen.

Great. Thank you.

Mike Levin, Deutsche Bank. These go ahead.

Good morning, guys. I wanted to dig into the customer pay growth a little bit. The 11% number was bigger than I can remember going back a couple of years. Was there anything in there particular in the comp or any one offs around getting customers in who were on recall or anything like that we should think about for Q1?

This is David. I would just tell you, Mike, since the first quarter of last year as a team we have been very focused on fixed operations and customer pay. I think we are just starting to see the benefits of the plan that has been put in place.

Got it.

Hey, Mike, I've got to hop in here and say the work that David has done, the team have done, just done a phenomenal job. What you don't see is the work they've also done on the collision side where the growth is even better than the 11%.

Got it. You mentioned the domestics stair steps in Q1 and saw gross profit decline similar to Q4. How should we think about what brings stabilization to the new margins going forward and how does that progress over the next couple of quarters?

This is David. I will take a shot at that. It changes month by month so it is kind of tough to predict that. I'll tell you where we are in April. We feel really good and we see April as positive and up from a margin perspective on domestic at this point. That could change in any given month depending upon what the targets are that are put out there in front of us.

Understood. And then lastly, looking at the current demand and competitive environment, are you guys comfortable being at the high end of your leverage range or are you thinking that something closer to the 2.5 is a little better going forward?

This is Keith. We have always said 2.5 to 3 times is where we want to be and we've worked over the last year and a half to get there. Like I said with the share repurchase in April we are about 2.6. We're comfortable at that level and we're just going to remain flexible and opportunistic going forward.

Appreciate that. Thanks.

Thank you.

Tony Cristello, BB&T Capital Markets. Your line is open.

Good morning. First question I have is a bigger picture and it has to do with hearing more and more about the leasing of CPO and used vehicles. I just wanted to get your understanding. I imagine it would be good from your standpoint.

How does that over the long-term potentially influence new vehicle sales? And then how does that influence the general thought of how you approach the business longer term as well, if it's adopted by most of the manufacturers down the road?

This is David. We have seen this before with Toyota and Lexus. Anytime you can have an alternative in financing something and give someone the opportunity for lower payments, that's obviously a positive thing. It is tough to quantify down the road what the impact is on new.

But traditionally speaking, these cars coming off lease for the folks at do end up leasing these vehicles, we view them no differently than any other preowned customer. We see them as a good parts and service customer, good finance customer and clearly good potential future customer. Whether that translates back into a new vehicle or used I'm not sure at this point.

When you look then at the opportunity for service and I heard commentary here on the customer pay side and I'm assuming you are going to see more business as these recalls continue to be repaired. How do you view the service opportunity with Q auto and isolating that as a used only, knowing that a lot of those customers may not identify going back to the dealer for service, but how do you approach that and try to capture that market share as well?

At this point these service business within Q auto is immaterial. We are starting -- we've got to step back. Q was in its infancy. We're still in the process of developing the brand. We are starting to see repeat customers and referrals. But that is primarily on the sales side.

We are starting to see some repeat business in the service drive there but quite honestly most of the work we do in the service drive at Q was essentially reconditioning. We think that can come over time. The stores and we put in place have the capacity to do service but we are way too early in the game for that to be a material part of that business model.

So if you offer, do you offer any warranty product and is that warranty then serviced at that location? Or are you sending those customers to your other dealerships to have that type of warranty work performed?

No we do offer a warranty product and it can be performed at those locations.

Great. One last question. When you look at your ability to adjust and you talked about April doing better, should we think about the SG&A as a percent of gross to then come back from the levels we saw in the prior quarter? Or are there still some inefficiencies related to sales and inventory that will prolong until you can get a sell through all of those stop sales that are sort of pent up?

Tony this is Keith I'll start and then maybe David would like to jump in. We have always been a very cost-conscious Company. You can see that in our ratios compared to our peers. We're not going to stop that process and it is a constant process of measuring and monitoring productivity and setting our expectations. That goes from a store base level and also goes from a shared service perspective as well.

I think everybody knows we've had our shared services in place now for about a year. We are seeing and incremental efficiencies as we go forward with those teams. There is still more technology we can deploy to improve our processes, support of our stores and also improve our efficiencies in that area as well.

The only thing I would add to that is Craig has created a great culture with the operators and the stores and they are fantastic at what they do. They are constantly looking for ways to improve. Both on the production side and on the expense side. They are always ahead of it and the culture is out there to constantly get better at what we do so they are focused on it.

Very helpful. Thank you for your time.

Thank you.

Michael Montani, Evercore ISI. Please go ahead your line is open.

I just wanted to ask if I could on the improvement that we've seen in the GPUs particularly on the used side. I think that was a comment earlier that there was some changes that may have been made operationally in the fourth quarter of 2015. I just want to try and understand a little bit better how sustainable is this level of improvement and is it wholesale, it is reconditioning? Just if you could give some added color on what has changed there it would be helpful.

This is David. We haven't changed anything as far as our internal perspective on how we handle that or how we come to market with our vehicles. It's just been more of a focus internally at growing our margin and we may have suffered a few sales or lack of sales from that, trying to find the right balance.

Again, it speaks to the talent that we have in the marketplace and the stores. They are the ones that are producing fantastic results and clearly they should get all of the credit. Our key now is to keep that momentum on the GPU that we have and find a way to increase volume at the same time. With that we will get the finance, we will get the internal parts and service business and we think we are well positioned to move forward.

Got it. And then if I can follow up, David you mentioned some perhaps encouraging signs. It is still early but in April from the domestic GPU front on new, is there anything you can add in terms of luxury as well as imports? Just because I was a little surprised to not see further improvement on the import side given some of the feedback has been pretty positive on RAV4 and some of the crossover product there.

Some of our import lines did increase quarter over quarter. I understand overall you are seeing a different situation than that. Again, I think the domestic has improved and will improve year-over-year in April for sure. We are seeing positive signs when we compare April to last year to April of this year from margins across the board. Both in luxury and in import as well.

We think it is a timing issue a little bit with luxury. There has been a lot of lower entry models that have come out with less margins involved. And later this year coming into the second and third quarters there will be newer models coming out with a little bit more margin so we see some opportunity.

Thank you.

Our next question comes from James Albertine, Stifel. Please go ahead.

Thanks and good morning and apologies in advance because of the background noise, hopefully you can hear me okay. I wanted to ask on the Q auto side if I may very quickly, what can you share, if anything, at this point on the return of invested capital metrics of that business given that you have made some comments that the smaller stores been profitable for the last few quarters? Just maybe in context of your ROIC on the traditional auto retail business.

We believe or our target is to get to returns that are greater than what we can get if we buy a franchise in the marketplace. We are not there yet. We know from watching what some of the other competitors do in the space it can take up to four years for a store to reach maturity. We are trying to hold ourselves to a higher standard.

We would like to get to double-digit returns sometime in the second to third year. And that is what we're targeting. We are not there yet, but like I said earlier, we are making progress and think it's worth seriously persuing.

Jamie, this is Keith. Just a give you a context of these two stores. If you look at these two new stores we're going to invest a total of $10 million including working capital investment in those two stores. So really once again as Craig mentioned earlier, minimizing the amount of investment in these stores and pushing the volume. And we think we can get to the ROIs we expect, like Craig said, within a couple of years.

Okay, great. I wanted to clarify you made some comments, Craig, I believe in your prepared remarks as it relates to the importance of brand, some [SCO] I believe investments, I just want to know should we be modeling in incremental either SG&A in the coming quarters as it relates to that and not only the existing Q autos, but also the new stores you've got planned?

I do not think you need to do that. The stores, like we said, the stores and the associated overhead was a push, it was a breakeven in the first quarter. There will be some incremental cost as these two stores come on but we think the two existing stores will continue to make progress. I think for modeling purposes you can almost ignore it and just give us some time to continue to see how this plays out.

Okay. Thank you for that. And again for your patience for one more question if I may sneak one in. We have received a lot more questions in the last few months on resession proofing our models or at least sensitizing to a potential recession.

Not necessarily believing that one exists or is looming but one of the things that we've had a trickier time understanding is, you have been making a lot of improvements on the F&I side from san execution perspective. If we did see a reduction in demand for new vehicle sales hypothetically, how do you think F&I would trend over the course of that downturn? Because it is hard to look at history and use it as a judge given that you're a much improved Company since the last time we went through this.

Sure, Jamie, this is Keith. I think keeping in mind F&I one-third is financing and two-thirds is related to product sales. I think what it comes down to in a recessionary environment is the customer's ability to pay.

And so that is going to come down to employment levels, the overall economy, how much money people have in their pockets, and what they are willing to afford as far as monthly payment. It's that monthly payment aspect that potentially could impact our abiilty to push warranty sales volumes.

The only thing I would add to that in looking back through the last recession that was very steep and clearly we don't see anything like that coming anytime soon. The consumers' ability was still there to pay, it really comes down to the financial institutions and their availability to lend. It certainly appears they are in much better shape than they were back then. So I do not think the impact from an F&I per vehicle standpoint would be significant.

That's all extremely helpful color. Maybe, Keith, you and I can follow-up on some more details off-line. Thank you again gentleman for taking the questions.

Thank you.

We will go to John Murphy, Bank of America. Your line is open.

First question. The discussion around the lost Easter weekend or the placement of the Easter weekend in the first quarter as opposed to second quarter has been largely isolated to the new vehicle business. But I was curious if you could just maybe talk about what impact you thought it might've had on the used vehicle business as well as losing a weekend on service bays in parts and service?

John, I haven't honestly calculated down to that point in time. I can tell you traditionally what we would normally do on an average weekend compared to that particular weekend, our sales were down almost 40%. For that particular weekend. On the fixed operation side, there was not much of an impact at all because of Easter.

Got you. And then second question, Craig, the capital allocation here seems to have of gotten obvioulsy a lot more aggressive on buybacks and there was a great opportunity and probably still is in your stock.

Obviously you are bumping up against your range on leverage. Would you consider given where the stock is right now getting even more aggressive and potentially going to the high end of the range on your leverage targets and could you even go above that?

John, I think Keith said it well. We have committed to this 2.5 to 3 times leverage number. We look at it on a net basis so including any excess cash we might have on the balance sheet or floor plan or our unutilized used vehicle line. And like Keith mentioned, we are at 2.6.

I think in the market that we are in today where there is still a lot of uncertainty, I would just go back to the first quarter and I would tell you that January started weak. And then we saw very strong February. It's almost felt like we were off to the races in February and the March got sloppy again. I think in this environment we've got to maintain our flexibility and net leverage at a 2.6 number, I think is a good place to be.

We're comfortable there. We've got a lot of dry powder. If we see great opportunities whether that be to buy our own stock or we see an opportunity to buy an attractive, pursue an attractive acquisition, we've got the flexibility to go after it. So I would come back to what Keith was saying earlier, I think we are in a good spot and let's just see how things plays out from here.

Great. Thank you very much.

Paresh Jain, Morgan Stanley. Please go ahead.

Good morning everyone. Some of my questions have been answered. But a broader industry level question, are you seeing OEMs, pretty clearly luxury OEMs starting to adjust production schedules in any way or even adjust their production mix?

We have definitely seen and felt production mix. From the last quarter we have improved 4% on the truck side and decreased our car side 4%. So that was a nice shift for us. We will certainly feel the benefit of that. From a production standpoint, it does not feel like the foot has been taken off at all. We're not seeing that with any of the OEMs.

That's good color. Then a follow-up on Q auto, there's clearly a preference for smaller format stores. However, in-store inventory selection is perhaps what makes the larger store format work for one of your bigger peers in this space. Could a smaller format cap your share gains in the long run?

That's a fair argument. But when we concentrate stores in a market and we can quickly move inventory between stores, I think that becomes less of a concern. It gets back to why we want to concentrate these stores in a given market and see what we can do there. And then when we're online we can offer all the inventory across all the stores within that marketplace to the consumer. Even though the store's format might be small we can show them a broader breadth of inventory.

Got it. Thank you so much.

David Whiston, Morningstar. Please go ahead.

Thanks, good morning. Continuing with Q auto. Craig you had mentioned earlier that there is still some things to learn. I was just curious if you can point out some key strategic areas?

And somewhat related is on the large store versus small store format. If down the road Q auto had a much bigger brand equity in a market or even within a whole region of the country, is a larger store something you're willing to revisit at that time?

I will go back to my days at AutoNation where we had 20-acre used vehicle megastores. Those are not going to work. They didn't work for AutoNation, I don't think they are going to work for anybody in this marketplace. So you will never see us build anything like that.

When we say small or medium-sized format, one of the things that we will be experimenting with in this Tampa market is one of these stores will really be a satellite store. It will not have any on-site ability to do parts and service work. There is a moderate or medium-size store within 15 miles or 18 miles were we will do that work. Even though that's a moderate sized store it has a big enough, it has got enough bays sitting behind it that it can do the work to take care of Brandon and it can do the work to take care of the satellite store. And we think that could be a very attractive model for us.

We've got to minimize the capital that we tie up and we've got to utilize those service bays ideally be utilizing them 7 by 24. If we can drive that kind of productivity I think these things can work and that is what we're trying to do.

Okay. Thanks. Over to domestic gross profit per unit. I think it was -- David in your prepared remarks you were talking about some sort of stairstep issue and I didn't quite catch that. Could you repeat that real fast for me?

Sure. Will all of our domestics we have targets that we have to hit and there's substantial money tied on a per car basis, up to $1000 per car. When those targets are set at a store level, we chase those sales from the beginning of the month with hope that we catch it by the end of the month to have that money wash back through.

Will be do not hit the targets and do not receive that money, there is a substantial impact. We had a lot of stores that just did not get there in the first quarter. But again, April it is the opposite scenario at this point.

So David I could add some color if I could. You are running a large domestic store, you've got $1000 a car that is retro back to the first car that you sold. So you take off on the month and you are trying to drive volume. You are taking lower front end grosses because it is all about volume and you think you will get an extra $1000 at the end of the month, it will all work out.

When you do not hit the stairstep, you are punished twice. One you did not get that $1000 stair step and two you spent the entire month giving, not giving away, but selling cars at price points below what you might done otherwise. So it is brutal. And that is what you saw in our domestic [PBRs].

Okay. Can you elaborate at all on why you were not able to hit the volume?

There were tough targets and we just did not get there.

Okay. Thank you.

That wraps up our conversation for today. We appreciate all the questions and the conversation. And we look forward to getting together again with you at the end of next quarter. Have a great day.

This does conclude today's program. You may disconnect at this time. Thank you and have a great day.