Lithia Motors Inc (LAD) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Lithia Motors, Inc. first quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John North, Chief Accounting Officer for Lithia Motors Inc. Thank you. You may begin.

Thanks and good morning. Welcome to Lithia Motors first quarter 2016 Earnings Conference Call. Before we begin the Company wants you to know that this conference call includes forward-looking statements. Forward-looking statements are not guarantees of future performance, and our actual results of operations financial condition, liquidity and development of the auto industry and markets in which we operate, may differ materially from those made and/or suggested by the forward-looking statements in this call. Examples of forward-looking statements include statements regarding expected operating results, projections for our 2016 performance, expected increases in our annual revenues related to acquisitions, anticipated availability for owning and operating real estate, and anticipated levels of future capital expenditures and free cash flow.

We urge 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, adjusted SG&A as a percentage of gross profit, and adjusted pre-tax 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 our 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 an alternative to GAAP measures, a full reconciliation of these non-GAAP items is provided in the financial tables with today's press release.

We have also posted an updated Investor Presentation on our website with the Investor Relations.com, highlighting our first quarter results. Presenting the call today are Bryan DeBoer, President and CEO, and Chris Holzshu, Senior Vice President and CFO. Also in the room is Sid DeBoer, Chairman of the Board. At the end of our prepared remarks, we will open the call to questions. I am also available in my office after the call for any follow-up you may have. With that, I would like to turn the call over to Bryan.

Good morning, and thank you for joining us today. Earlier we reported first quarter adjusted net income of $40 million, compared to $37 million a year-ago, an increase of 9%. We earned $1.55 per share in the first quarter, compared to $1.39 per share last year, up 12%. Our revenue increased 11% in the quarter to $2 billion. All numbers from this point forward will be on a same-store basis. New vehicle revenue increased 6%, as average selling prices were up 1% and our unit sales increased 5%. This outpaced the national unit volume increase of 3%, which translated to quarterly SAAR of $17.1 million. Our domestic unit sales increased 2% compared to 5% nationally, import increased 7% compared to 2% nationally, and luxury units increased 2%, compared to 1% decrease nationally.

Gross profit per new vehicle retailed was $2,040 compared to $2,016 in the first quarter of 2015, an increase of $24 per unit. Within our segment both import and luxury gross profit per unit increased. Which was partially offset by lower domestic gross per unit. Some of our domestic stores faced difficult stair step incentive objectives, and elected not to pursue them, making a difficult comparison against the prior year. In the quarter retail used vehicles increased 12%, and used vehicle average selling prices increased $304, or 2%. We retailed 11% more used units over the prior year resulting in a used to new ratio of 0.83 to 1. In the quarter certified units increased 16%. Core units increased 12% and value auto units increased 3%. Gross profit per unit was $2,357 compared to $2,462 a year-ago, a decrease of $105, and declined in all three categories of used vehicles. On a 12-month rolling average we sold 64 used vehicles per store per month. Up from 57 units in the comparable period last year. We continue to make incremental progress towards our goal of selling 75 used units per store per month. The increased supply of used vehicles is impacting our gross per unit, while allowing our stores to generate additional sales and earnings, independent of new vehicle market conditions. Our F&I per vehicle was $1,292 compared to $1,181 last year, for an increase of $111. Of the vehicles we sold in the quarter we arranged financing on 73%, sold a service contract on 43%, and sold lifetime oil products on 26%. Our penetration rates and profitability improved in all three categories over last year, although the DCH stores have just recently started to offer the lifetime oil product, so the blended penetration in this category is below our historical average. In the first quarter the blended overall gross profit per unit was $3,507, compared to $3,435 last year, for an increase of $72 per unit. This was complemented by a 7% increase in unit volume.

As we had previously discussed, our store personnel monitor total gross profit generated, rather than a margin percentage, to evaluate and drive their performance. Our service body and parts revenue increased 10% over the first quarter of 2015. Customer pay work increased 8%, warranty 19%, wholesale parts increased 4% and body shop increased 22%. Our total gross profit margin was 15.5%, compared to 15.3% from the same period last year, an increase of 20 basis points. As of March 31st, consolidated new vehicle inventories were at a days supply of 78, an increase of 16 days from the year-ago. Used vehicle inventories were a day supply of 53, an increase of four days from a year-ago.

Both new and used vehicle inventory levels are elevated as a result of stop sale orders from our manufactured partners, due to outstanding recalls. We believe this trend will not result in significant changes in gross profit per unit going forward, and has likely created a backlog of sales that will be captured upon the stop sale order being lifted in the coming months. We remain optimistic on continued growth through acquisitions.

The market remains robust with a significant number of stores for sale. With Lithia targeting exclusive markets and DCH pursuing a metropolitan strategy, we have identified more than 2,600 stores nationwide as candidates. We remain confident that we will continue to find accretive purchases. DCH continues to build momentum and stores in both divisions have significant opportunities to improve both top and bottom line results through improving our customer experience and managing costs. Our team is capitalizing on the increased used vehicle supply and additional units in operation in our service drive, while aggressively pursuing new market share to respond to the local market conditions. With that, I would like to turn the call over to Chris.

Thank you, Bryan. At March 31st, 2016 we had approximately $171 million in cash and available credit as well as unfinanced real estate that could provide another $150 million in 60 to 90 days, for an estimated tote liquidity of $321 million. At the end of the first quarter we were in compliance with all of our debt covenants. Our free cash flow as outlined in our Investor Presentation was $58 million for the first quarter of 2016. Capital expenditures which reduce the free cash flow figure were $16 million for the quarter.

Our annualized net debt-to-EBITDA is approximately 1.9 times among the lowest in our sector, and providing ample liquidity to complete acquisitions or share repurchases. We again took advantage of the recent dislocation in our share price, and repurchased approximately 158,000 shares since April 1st of 2016. Year-to-date we have deployed over $60 million to repurchase approximately 759,000 shares, or 3% of outstanding float. We have approximately $236 million remaining under our current repurchase authorization. Our capital strategy is unchanged, as we balance acquisitions, internal investment, dividends and share repurchases. Our first choice for capital deployment remains to grow through acquisitions and internal investment.

Regardless of category all investment decisions continue to be measured against strict ROE metrics that generate solid long-term returns. Our first quarter adjusted SG&A as a percentage of gross profit on a same-store basis was an estimated 70.7%, an improvement of 70 basis points over the first quarter of last year. Throughput or a percentage of each additional gross profit dollar over the prior year retained after selling costs, and adjusted to reflect same-store comparisons was 37%. On a consolidated basis including the effect of recent acquisitions, our adjusted SG&A as a percentage of gross profit was 71.1%, an improvement of 20 basis points from the quarter of 2015. In the first quarter we grew our topline revenue and gross profit nicely, generating approximately $34 million in additional gross profit dollars. However, some of our stores pushed incremental top-line sales growth through increased spending in personnel and advertising, resulting in lower throughput than our target. Our sales will be focused on maintaining revenue growth, while balancing incremental spending, to ensure the additional gross profit generated is not eclipsed by incremental spending and SG&A. We continue to target incremental throughput in a range of 45% to 50%. This will allow us to achieve SG&A to gross profit for the full year in the mid to upper-60% range. As mentioned, our store personnel will be challenging their teams and examining their operations, to continue to drive top line improvement while engineering the results fall to the bottom line.

Given the current year trends and marketing conditions we are holding our full year guidance unchanged from our outlook provided 60 days ago. We expect second quarter 2016 earnings-per-share of $1.86 to $1.90, and full year 2016 earnings of $7.30 to $7.50 per share. For additional assumptions related to our earnings guidance, please refer to today's press release at LlithiaInvestorRelations.com. This concludes our prepared remarks. We would now like to open the call to questions. Operator.

Thank you. (Operator Instructions). Our first question comes from the line of Paresh Jain with Morgan Stanley, please proceed with your question.

Good morning everyone. First question on the guidance, it says clearly used margin outlook is a headwind here, but again most of that is being offset by an increase in used sales. A similar thing happening with the parts and services outlook. That seems to be a net positive as well. And of course F&I seems much stronger despite used outperforming after that favorable change in tax rate and share count, and yet guide is unchanged. So is it more related to SG&A, which was perhaps a small headwind versus expectation in 1Q as well?Sorry for the long question.

No problem, Paresh. This is Bryan. I think you touched exactly on a summation of the quarter in a real eloquent way. I think when we look at the quarter and we look at what we can accomplish going forward, it's primarily that we generated $26 million in additional same-store gross profit. If we would have been able to maintain our typical 50% throughput, that would have generated another $0.17 in earnings, which would have made a big difference obviously, and I think the primary reason for that is each of our local markets are responding a little bit differently, and I think when you reach a plateau in a market, and I would say a third of our markets, primarily the energy states, are feeling the pressures of either flat or slightly declining sales, there are they're continuing to keep volume, but they're not responding to their SG&A, so they're having to push a little harder to be able to maintain that volume.

We believe that the volume model is the right model, though, because ultimately that's what builds our units and operations in service and parts, and secures our profitability long-term, in those fixed operations departments. So ultimately it's that we need to do a better job at finding those pockets, and helping our stores and they'll help themselves obviously, because we're an entrepreneurial model, to adjust to markets when it comes and it can take a quarter or two for that to adjust.

Yes. Paresh, there is Chris. Just to follow up on that. For the last five years we have had a real consistent guidance philosophy, which is to do a bottoms up forecast store by store, and then based our annual outlook on what our current trends look like, and so as Bryan alluded to, we had a tremendous top-line growth. We generated a lot of growth. We just immediate to figure out the right balance right now on the SG&A side. So we're going to continue to work on that, but our guidance reflects solid top-line growth, but doesn't have the incremental throughput in it that we've had historically.

Thanks for the color. I have one follow-up on F&I. Again, one of the surprises in the quarter and with the outlook as well. So the quarter itself saw a big jump and then your outlook was raised. What's really interesting is that this bump in F&I expectation comes despite an unfavorable growth mix, and by unfavorable I just mean used which comes with much lower F&I significantly outperforming new. What changed in the last quarter, and what gives you this confidence in taking up F&I?

Yes, Paresh. This is Chris. As you know we have lagged our peer group for the last several quarters in F&I performance, and what we really focused on was three primary things. It's people making sure we have the right people with the right pay plans, we have the right products, and we have the right process, and so we have been focusing on all three of those areas. We knew that we had the incremental opportunity there, and we feel like right now we're finally starting so see that execution happen, and we feel confident that we can continue to do that for the remainder of the year.

Got it. Thank you.

Thanks, Paresh.

Thank you. Our next question comes from the line of John Murphy with Bank of America Merrill Lynch. Please proceed with your question.

Good morning. This is Liz Suzuki on for John. Regarding inventory, your days supply in new and used was up pretty significantly, and you talked about the stopped sales for vehicles without sending recalls. Could you just go into a little more detail about what brands were affected, and how many vehicles are currently on the lot that have these recalls outstanding?

Sure, Liz. This is Bryan. Like we mentioned in our comments, new was up 16 days to a 78 day supply, our used was up four days. What we're really seeing is and we think it's going to continue for another couple of months, but we believe it will start to loosen these stop sale orders. So a little more color on that is, in new vehicles it's Civic, it's VW TDIs, as well as Toyota, GM, and now it appears that Nissan may be announcing something in regards to stopped sales. On the used side CR-Vs, fits on Acura, and then Acura TL, RDX, and RL are all on stop sales, which is a good portion of our used vehicle sales in those areas. BMW X5 and most 3 Series are on stop sale, as well again is more VWs, and if you have been following the press on that, this has been occurring for about 90 days now. Most of the manufacturers are supporting us with flooring assistance, but those cars have built up, because they have asked us not to wholesale those vehicles, as well to ensure that they as certified dealers get those sales eventually. So we really believe that there is a pretty good pent-up demand on those vehicles, and it will start to break loose in that May, June, July time frame as those parts become available.

Okay. Thanks. That's really helpful. And looking at the acquisition environment do you think it looks a little pricey at this point, and do share repurchases seem relatively more attractive, and should we therefore, expect maybe some lower contribution from acquisition this year? I mean even excluding DCH, but just fewer acquisitions of one and two franchise businesses?

Liz, Bryan again. The acquisition market is, I mean it continues to build momentum. There's no question about it. The prices are, however, pretty steep and we're pretty disciplined on what our hurdle rates are on acquisitions. So unless it's that opportunity that is truly underperforming or average performing, that we can believe we believe double or triple the profitability, we're going to sit and balance that with share buybacks at opportune times when there's price disconnections in relationship to what we can invest on new acquisitions. And I think that we'll see in the coming quarters and years opportunities still. I wouldn't say that it's going to slow, but I do think that we're pretty picky, I mean again, when we look at acquisitions, we look at approximately 10 to 15 acquisitions for every one that we're able to buy. Well, that's a pretty tight filter to be able to accomplish those, and right now there's a ton of acquisitions, and I think as the market begins to plateau, local markets begin to change, and people can see that maybe earnings for the next two or three years are reaching their potentials, then they're going to look to sell, and I think we'll be sitting there ready with open arms to join them into our organization. In terms of large groups, there's a lot of activity on those currently. I think many of you saw a large northwest group that announced a couple weeks ago, that was, obviously it appeared pretty pricey. It's a wonderful group, but it just doesn't fit our ROE thresholds when they're performing at a high level.

All right. Thanks very much.

Thanks, you bet Liz.

Thank you. Our next question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed with your question.

Hi. Thank you. Good morning. The question I wanted to touch on with the sort of stop sale, if you will. What is the implication on the service side of the business as we move forward into the next quarter or two, and what is does that imply for sort of the mix between customer pay and warranty, and your availability to continue to perform all of these necessary repairs?

Good question. Always the glass is half full, right, Tony? I think as these parts begin to hit the ground, I think initially we'll be fixing consumers' cars, because there are many people out there that are either in loaner cars, or are sitting waiting for those parts, so we'll be fixing those first, and then we'll be fixing our stop sale vehicles. Now to keep that in perspective last quarter, we had a 19% increase in warranty parts and service sales, which is big. I mean that's five quarters in a row of positive comps. We believe that when the air bags and the igniters start to come in, that should be as robust or possibly even more. If you recall we have talked in the past about workloads, and it's really availability of productive times. So there are limitations to that, but I think the idea that there's more warranty work out there for the next quarter or two, and the implications that are pretty large, I think we're staffed up to be able to handle both that and customer pay, which was up 8% for the quarter, as well as the fact that units and operations continue to grow quarter by quarter. So there is a our lot of upside in that arena, especially as those parts begin to trickle in.

Okay. And then if I can just follow up then on the inventory, how do you gauge the real demand of what you're seeing today? I understand that you don't have certain units, and so inventory is building, but from the customer standpoint, are you getting the sense that there would have been demand to absorb the volumes that you have today, or is it a little bit softer? Has weather impacted anything? Just kind of a little bit more color on what you're seeing from the end-user?

Sure. Tony. This is Bryan again. The demand is strong. I mean we have backlogs of consumers waiting for those stop sale vehicles, especially the CR-Vs and Civics, and some of those nice older BMWs that are sitting there, that would have sold if they weren't there, and I think the implications of frozen capital on your lots creates actions by managers in the stores that impact SG&A, and I think those stop sales have mental effects of too much inventory, whether or not the rest of their inventory is turning or not, that can affect SG&A in ways that are negative, and I think once those cars start to be relieved, and that pipeline in the lots become empty again, I think everything begins to more rationally control costs, and more rationally look at margins to be able to continue to grow where we left off in the previous quarters.

Okay. Very helpful. Thank you for your time.

You bet, Tony.

Thank you. Our next question comes from the line of Brett Hoselton with KeyBanc. Please proceed with your question.

Good morning, Bryan, Chris, John and Sid.

Hi Brett.

Bryan, do you want to take a stab at trying to guess at the impact of stop sales on your new vehicle same-store sales? I mean you're up nearly 5% on a same-store basis. I mean any guess as to what that might have been if you didn't have the stop sales? I know it's a tough question, but any thought there?

Yes. I'm probably as good at slagging things as the next, but I would probably say a couple of percentage point on new, maybe a little higher on used.

Okay. And then given the entrepreneurial nature of your business model, which I'm a proponent of, how do you control that SG&A spend that you're talking about?

Yes, Brett. This is Chris. I think what we continue to do is leverage the same tools that we've had for the last several years. I mean we have two primary expenses that drive our SG&A it's smell cost and advertising. We evaluate that on a store by store basis, and we work with our regional teams, and the individual store general manager, to help at least highlight the opportunity, and discuss the ramifications of continuing to run at the expense levels they have if they don't have the gross, but our first approach is always identify if there's ways to generate additional gross with the costs that they have, and then if there's not then we'll talk about cutting the costs, but again we have 140 stores that we're looking at. We went through the quarter. We evaluate them. We find our top opportunities, and then we work with our regional teams and the individual store leaders to work on addressing that.

Brett, to expand on that we're approaching each individual department and each individual store to be able to find those opportunities, and I think it's important to realize that this is not a global issue. This is a local market-by-market department by department issue. I could give you a little bit of color of where we're feeling some of the pressures, and where we're responding to these changes. Alaska was up 4% in revenues, and down 18% in profitability year-over-year. California in contrast very strong market was up nearly 15% in both the North and the South regions, and pre-tax was up almost 10%. Oregon was up 11%, pre-tax was up 10%. Texas was flat in sales, in fact down 1%, and profitability was down 20%.

I mean I think if I went into the individual stores within those states, you would see that it is a people equation, it is an entrepreneurial equation that those that are looking at this as an opportunity to take market share, to leverage the fact that there's a greater supply of used cars out there than there's been any time in the last five years, that your units and operations is growing every single day, and then manage your expenses when you attack those three components, the opportunities are strong, and those stores are getting the 50%-plus throughput, and achieving what their forecasts are.

The DCH stores in both Southern California and the Northeast are realizing the throughput. They're aggressively pursuing their opportunities, and showing nice gains still around the same track they were on. Many of the Lithia stores are doing the same thing, but there are pockets in both divisions that are feeling the pressures, and haven't responded as rapidly as they probably could.

Thank you, gentlemen. And then finally, could you kind of consider the M&A market obviously the deal flow is pretty good, you mentioned the prices are somewhat steep. As you kind of net all of it out, and you think about your past experience in the M&A market just in terms ever dollars and so forth that you have been able to acquire, what's your general sense going forward? I mean DCH is a bit of an anomaly, it is a very large acquisition so taking that out of the picture what's your sense going forward? Do you think that you're going we should expect a deceleration in terms of your net M&A activity, or do you think it's still going to be on par with where you have been over the past few years, or might it actually accelerate kind of net/net, what are your thoughts there?

I really believe that it's market dependent. I mean we don't plan on changing our ROE thresholds. So we have done approximately eight deals in the last 12 months, so that's a pace that I'm pretty confident that we can maintain. I think if we go back 24 months and we include the $2.5 billion from DCH, that maybe is a little less realistic, but I also believe that the DCH combination provided an opportunity to attract people, and to expand our presence to now nearly twice as many opportunities as we had before, and I think we've always spoke to the idea that there may not be another DCH type combination out there, but to be fair, I think that there could be. Now it may not be the magnitudes of $2 billion in revenues, but I believe that the opportunity for a group that's performing at an average or a slightly above average performance can combine with us, and together we can find the synergies, give the authority back to the stores, and create detective measurements that manage trends, and find the opportunities in earnings, that allows both sellers and us as buyers to be able to add value to each other.

Okay Bryan and Chris. Thank you very much. Appreciate it.

Thanks, Brett.

Thank you. Our next question comes from the line of James Albertine with Stifel. Please proceed with your question.

Great. Thanks for taking the question. Good morning, everyone.

Good morning, Jamie.

I wanted to just ask if you could help jog our memory with respect to compares. I recall and John has helped us with this a little bit John North, historically thinking about incentive trends among the domestics. The one thing that jumped out was your operating income performance for the domestic segment in the first quarter was down a little bit more than we thought it might be. Can you help understand what you were lapping in the first quarter, and then how the compares will trend, and what considerations we should keep in mind for the second quarter? Thanks.

Sure, Jamie this is Bryan. I mean really our pressures have been felt in the domestic. We averaged $2,055 per unit, which was down $216 from the prior year. That was about 5.4% gross margin, minus 70 basis points year-over-year. Units though were up 2%. The implications is stair steps. You do reach plateaus where they become difficult, and I think some of the stores have chose not to play that game. We still believe that it is the right game to play, and manufacturers are taking the right approach, but sometimes they can get the carrot out a little further than our stores can see, and I think that will be adjusted in the coming quarters, because I don't believe many of our domestic manufacturers achieved the targets that they expected retail-wise either, and I think we'll get the benefits of that in the coming quarters.

Okay. Great. So there wasn't any one stair step program, or anything that sort of jumps out in your mind from the first quarter or that you recall when you think about the second quarter compare?

No. I mean we cherish our relationship with our manufacturers, so we tend to globe likewise when it comes to stair steps, or the implications of stair steps.

Understood. And then if I may just a follow-up related to sort of the broader supply chain. Just in light of what we're hearing out of Japan with the earthquake verification thereof, you talked about stop sales already, which by the way thank you for all of that detail, it's stunning how many vehicles that crosses, how many brands. And now with flooding at least in the eastern side of Texas, which may not be as much of an exposure to yourselves, but help us understand what you're seeing perhaps more from the import side here, and how we should think about modeling kind of import contribution in the second quarter?

Jamie, Bryan again. The earthquake is very minor in terms of the implications it will have on supply. If you recall we do have stop sales that are sitting there, which has increased our day supply in import luxury and domestic. So those will start to free flow within the next couple of months, so I think the balance of the two probably is a net positive in terms of supply, so I don't think there's going to be the implications. I do believe that the demand will be there. It sure appears in most of our markets that there's a robust environment that's the best that we have seen in our lifetimes, and I think that will continue, and a good portion of our markets and like we have stated in the past, markets that are maybe energy based are starting to feel the pressures of it, and it's how this Management Team and our store leaders that have the autonomy to respond to their individual local conditions, that will drive our performance in the future.

Okay. Great, I'll get back in queue, but thank you so much for the taking the questions.

Thanks, Jamie.

Thank you. Our next question comes from the line of Bill Armstrong with CL King and Associates. Please proceed with your question.

Good morning, gentlemen. On your segment breakouts, corporate had a pretty big increase, I was wondering if you could flush to that out for us a little bit?

Yes, Bill. This is John. I can give you a little bit of color offline, but I mean the billings change is really related to some insurance proceeds that we saw related to a fire that we had at one of our locations that was closed, and that was several million dollars, that wasn't allocated to any particular division, because it was a body shop. So that was the biggest change. Other than that it's just normal increases for internal rent adjustments.

Okay. Got it. And then on the stop sale on the recalls, is that primarily air bags, or are we looking at some other parts as well, and what's the outlook in terms of those parts flowing into your dealerships?

Bill, it's igniters and air bags. I mean they're starting to flow now, which is a good sign. They expected it was going to be mid to late summer, but we're already are starting to see them now late spring, which is wonderful. With Toyota, it is some computers, but it's a small amount as well.

And what sort of compensation or other breaks are the OEMs providing you and other dealers as a result of this?

So depending on the magnitude they could be providing flooring assistance. They could be providing depreciation assistance on used vehicles that are frozen. And then there are also slush funds with manufacturers such as Volkswagen or others, that allow you to really maintain your customers attitudes, or allow you to put them into loaner vehicles if there are extreme cases, especially in those high humidity states, which is really for us, it's just really Texas and Hawaii, but those are the three main things that they are able to provide us.

Okay. Got it. And then finally on sub-prime could you update us on the percentage of sales to sub-prime customers in the quarter, and what you're seeing out there? We're hearing that some sub-prime portfolios are starting to see increases in delinquencies and default rates, just wondering what you guys are seeing in terms of sub-prime financing?

Yes. Hey Bill. It's Chris. So about 13% of our overall finance deals are to sub-prime consumers, which is flat on a year-over-year basis. So we feel like things are relatively stable right now, and no real trends to talk about.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning guys.

Hey Steve.

Hi Steve.

If I could drill into used a little bit, obviously, Manheim has softened a little bit, and your expectations for margins there tick lower as well for the remainder of the year. Just talk a little bit about the dynamics there, what you're seeing obviously a lot more off lease coming this year, how you're kind of managing that and making decisions around that?

Sure, Steve. This is Bryan I think the softening of Manheim Index is a positive thing that usually indicates that supply is loosening. I believe our stores are feeling that as well. Our terms on used vehicles are actually pretty stable, despite the stop sale vehicles, and when you remove those. What we are seeing, though, is that the value auto vehicles are still tight, they're still difficult to get. I believe, let me get you some specific numbers here. So our revenue mix is about 14% value auto, 52% core, and 34% certified, units are 23.50 and 26. So about a quarter a quarter and half. Our value auto vehicle gross profit was down 1% where as both core and certified were up 10%. Which gives indications that the supply of those vehicles, we're finally able to gets the cars that we need, and more importantly able to be more discerning in our choices of those cars, to find the demand cars, which is where we build our gross profit. I think that can continue, but it's still tight in our core and value auto, and over the coming quarters and years, I believe that will continue to happen. You did notice that we stepped about eight units further towards our 75 unit goal as well, from 56 to 64. So we think that 75 is now maybe let's call it near-to-mid term, rather than mid-term like we've always been saying, and I think we have seen some nice increases in a dozen stores or so, and we more than ever see that it's people inventory, and the ability to attract the customers that are looking for those vehicles, and I think that will continue.

Got it. Very helpful. Thank you. On the parts and service side anecdotally we have heard more and more about a shortage of techs. Are you finding in that in any of your markets is than impediment at all, or are you having success there?

Steve, Bryan again. What is your occupation the last six to 12 months are our big problem has always been in Texan and Alaska, and that is loosening, we are starting to be able to get techs, I will really believe that's where we will continue to grow, and most of the other markets have been stable throughout.

Got it. Okay. Thanks, guys.

Thanks, Steve.

Thanks, Steve.

Thank you. Our next question comes from the line of Rick Nelson with Stephens Inc. Please proceed with your question.

Thanks. I would like to follow-up on your commentary about Texas. I believe you said sales were down 1%, and pre-tax down 20%. Does that market seem to be getting sequentially more difficult, and if you could talk about your flow-throughs there also, I think 37% was the corporate versus your target 45% to 50%. I believe you said these flow-throughs in the other two market were significantly below that?

Good question, Rick. I mean Texas has been flattening. There's no question. Your recap of those numbers is correct. A little more color on it would be the gross profits in that state. So despite dollars, revenues being up or down 1%, our gross profit was down about 6%, and nets were down the 20% that I talked to, which means that throughput is not looking good, but I will say this. We have a handful of stores, and I think we have 16 stores in Texas. There are approximately five or six stores and they're actually fairly seasoned stores, that are really the ones that are struggling with adjusting to a tougher new car market, and replacing those sales with used vehicles, and I think the misnomer that we all find ourself and get trapped into is, well, if the new car market is tough then the used car market is tough, and I think the Texas markets have been so strong in new vehicle sales, that used cars have become secondary over the last five to ten years. And I think now they're having to retrain themselves on how to go find the used vehicles, and teach their sales people how to sell those used vehicles, and more importantly how to attract the customers back into a store that wasn't known for used vehicles, and that takes some time to adjust, but fortunately, those stores are responding. They understand that the supply chain is more robust than ever, and they can look outside the Texas market to obviously find those vehicles, and I believe that they can adjust to it in the coming months and quarters.

Thanks for that color, Bryan. Also I would like to ask about the 2Q (inaudible) that might relate to what you saw in the first quarter. A lot of the dealers that we speak to had a tougher March, and wondering if that's something you guys saw, and what's incorporated into the guidance, and maybe what you're seeing in April? Is that reflected in the guidance, or April has five weekends. Would you expect that to be a better period?

Good question, Rick. This is Bryan. I'm sure Chris will have a quick follow-up as well on guidance. March was a little bit softer than we expected, especially coming off a fairly solid January and especially February. March seemed to not have quite the volume that maybe we were driving for when you looked at a year-over-year basis, and some of that could come from a difference in days, and that maybe caused many of our stores to overestimate what their SG&A was going to be. The good news is that it appears that April is on track, and I think that balance between the March and April, every store has one of those months that seems pretty good and it seems like that's what's happening again this year, and we expect things to look solid in the future. Chris, you want to talk a little bit go guidance?

Yes. Hey Rick. As Bryan alluded to earlier every market is unique, and we definitely saw some real positive trends in the number of the markets that we have in March. And as we look forward towards our guidance, and lay that out in our presentation, we do use as much information as we can prior to setting those numbers. So we're midway through April, and are leveraging everything that we're seeing rights now in the numbers that we laid out in both new, used, and service and parts. So I would say that that's the opportunity topline, and we're confident we can achieve the numbers that we gave you. And as I alluded to earlier, what we didn't do is forecast a big improvement in our leverage, and our SG&A throughput over what we saw in the first quarter. I mean we're confident that we can execute on that, we have got people in the field going store by store identifying those opportunities, and working specifically with those stores that have opportunity to improve their cost and leverage where it sits today, but that is not baked into the guidance that we have for the remainder of the year.

Rick, Bryan. Just one quick follow-up. I think as a Company we're always a glass is half full, so we're always looking at the opportunities, and despite us not achieving the throughput that we typically have been accustomed to, I think we also looked at that $0.17 opportunity if we would have had 15% throughput gives us the excitement to be able to wake up each morning and go find it, and I think those are the challenges that this management team faced over the last eight years, and I think that challenge is what excites everyone, and I do know this, that our personnel that are managing our departments and our stores, have the ability to change very quickly, and are well prepared for this challenge, and I think whether their market is still up, or whether it's started to plateau, so they are ready because they're empowered to take action, and in those areas where they haven't, then as Chris said, our field teams will help challenge them, and point out the opportunities to be able to capture it as the market begins to the adjust.

Great. Thanks a lot guys, and good luck.

Thanks, Rick.

Thanks, Rick.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey. Good morning.

Good morning.

To follow-up a little bit on Rick's question, and I appreciate that Texas was flat year-over-year, but sequentially have you seen any improvement as the trajectory of energy has improved somewhat from the trough levels earlier in the year?

This is Bryan again. I think it's static from where it's been the last few quarters. I think the small increases into the mid $40 a barrel range will help over time, because I think they have indicated that $30 to $40 is kind of where they can breakeven, and they can kind of hold firm on the number of pump jacks that are out there. Anything beyond that, they start to drill again which we think is an exciting thing that could happen, and we'll watch for that. More importantly, it's so easy to forget that the used car opportunity in Texas, I mean we're, and I don't have the exact number, but I think we're like 0.5, 0.6 to 1 in Texas in our used car sales, so that's our big opportunity in Texas, and obviously their units in operations are growing at exorbitant amounts, because they have had the biggest boom, and I think their ability to meet the customers' needs in a timely and cost-effective way in the service departments, will create a turnaround there, despite what happens with oil prices.

Great. I might have missed this, did you quantify the 16 days new inventory growth how many were related to stop sales?

So the increase I could probably quantify that it is probably half from stop sales, and the other half would be luxury focused on year end build out and some model endings that we had to take some additional product that we are still working through.

Okay. One last question, 22% collision growth, what happened there?

To be fair, we had three body shop mangers that two of which we promoted, one from the outside, that have really taken hold. Again a lot of that is in Texas, on a positive note, so--

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Michael Montani of Evercore ISI. Please proceed with your question.

Good morning. First I wanted to ask if I could about the reduction in guidance for service gross profit rate, even though the dollar growth is up in terms of sales dollars, a little surprising to me just because I would think that you would get better absorption and labor hours scheduling, but then there was actually a 30 bip reduction in the guidance there. So could you just help flush out a little bit what would have changed there in the thinking?

Yes, Michael, this is Chris. One is looking at current trends, it is kind of equal to where our overall fixed margins are coming in, a weighted portion of that is going to go towards the body shop, which has a gross profit margin of about 20 or 15 basis points lower than our CPN warranty work, so as we improve that business and get that back on track, it is going to weigh down our overall GP margin, but what we guided for the year is really consistent with what we saw in the quarter, and no real changes that we are anticipating on that.

Okay. Got it, and if I could on used, the reduction there in gross profit, and also the step up in inventory, is there any way to quantify Bryan or Chris how much of that was from stop sales?

This is Bryan. I am pretty confident that we would have had a reduction in days supply if it wasn't for the stop sales, so it is definitely at least 100% of the four days, because we know that in many of our Honda stores, we have 20% to 30% of our inventories that are frozen because of CRVs and Civics and Fits.

And then on the gross profit outlook that has been lowered on gross for used, is that primarily related to the inventory builds for stop sales, or is there anything else going on there?

I think that is a combination of both, I think that certified is the area that we are feeling it the most, we were down $240 per unit, and I think that is a function of a greater supply, but I think ultimately that is the top of our waterfall effect, and that is where we have to be able to capture those core products that eventually lead to the highly profitable value auto, so we are willing to sacrifice that in the short term.

If I could lastly, could you just split out what the comp trends look like I think 8% total co. same store, but could you give us a granularity into DCH versus core Lithia?

Yes, Michael, Chris. We are not breaking out that comp at this point in time, I think that again, it is store by store, and trying to break it out by division.

Chris, is it fair to say that they were comparable in the two divisions, the difference was is that the throughput at Lithia was a little softer than the throughput at DCH that was robust, but they are also coming off now their second year of being able to find those cost advantages, and I believe that DCH will continue on that, and I think that Lithia will again capture that $0.17 or so opportunity that was really out there. That hasn't quite been responded to, but will in coming quarters.

Thank you guys for taking the questions.

Thanks Michael.

Mr. DeBoer, there are no further questions at this time, I would like to turn the floor back to you for any final remarks.

Thank you for joining us everyone, and we look forward to updating you again in July.

Thank you. This concludes today's teleconference, you may disconnect your lines at this time, thank you for your participation.