Lithia Motors Inc (LAD) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Lithia Motors first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John North. Thank you, sir, you may begin.

Thanks and good morning. Welcome to Lithia Motors' first quarter 2012 earning conference call. Before we begin, the Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially due to certain risk factors which are outlined in the Company's filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements.

During this call, we may discuss certain non-GAAP items including adjusted selling general and administrative expense, adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operations, and adjusted cash flows from operation. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. These presentations are not intended to be provided in accordance with GAAP, but should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables at today's press release. We have also posted an updated investor presentation on our web site, Lithia.com, highlighting our first-quarter results.

Presenting the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and Chief Operating Officer; and Chris Holzshu, Chief Financial Officer. At the end of our prepared remarks, we'll open the call to questions. I am also available in my office after the call for any followup questions you may have. It's now my pleasure to turn the call over to Sid DeBoer.

Good morning, everyone. Thanks for joining us. As you can see from the press release, our Company continues to perform above expectations, for which we are very pleased. Also as we announced last quarter, effective May 1 of this year, Bryan DeBoer will take over as CEO. I will assume the role of Executive Chairman. Over the past few years, Bryan and I have worked closely together with the Board of Directors to transition his role to the CEO responsibilities. Bryan's team will continue to execute and expand Lithia's mission.

We delivered the best March results in company history as we continued the momentum that was in place at the end of 2011. As I discussed last quarter, a multi year expansion in the number of new cars sold in the United States remains ahead of us. As a result of the strength in new vehicle sales in the first quarter of 2012, we are increasing our estimate for full-year SAAR to a range of 14 million to 14.5 million units. Expanding credit markets, advanced safety features, improved fuel efficiency, new technologies, and attractive styling are driving consumer demand. That coupled with an aging fleet of vehicles on the road and a growing number of households in the US, we are confident that volumes will continue to recover, and the future is promising.

In closing, I'd like to thank our team for the strong performance that has allowed me to move to my new role as Executive Chairman. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Thank you, Sid. Good morning, everyone. I'd like to thank the Board, particularly our independent directors, for appointment to CEO. Looking forward, Lithia will continue to build on teamwork, the store entrepreneurial spirit and an awareness of customer need to drive our success. Today we reported a record first-quarter adjusted income from continuing operations of $15.8 million compared to $8.8 million a year ago. We earned $0.60 per share on an adjusted basis in the first quarter compared to $0.33 per share in the first quarter of 2011. We grew our revenues 30% and nearly doubled our earnings per share for the first quarter of 2012 over the prior period.

Total same-store sales were up 21% in the quarter, reflecting increases over the prior period in all business lines. All metrics from this point forward will be presented on a same-store basis unless otherwise noted. New vehicle sales increased 25%. This increase was on top of a 40% increase in new vehicle sales in 2011. On a unit basis, we sold approximately 11,600 new vehicles, an increase of 2200 units or 24%, well above the national average of 13%.

Our stores continue to drive new vehicle sales and increase our market share. While our overall new vehicle sales increased in the quarter, our domestic stores increased 32%, while imports and luxury stores were up 17%. Our team continues to outperform national results and increase our share in regional markets. We continue to target a 3% to 5% growth in market share during 2012, on top of the underlying market recovery. Used retail vehicle sales increased 18% in the quarter. We sold approximately 10,800 retail used vehicles, resulting in a used-to-new ratio of 0.9 to 1.

We sold a monthly average of 45 used vehicles per store in the first quarter of 2012, up from 39 used vehicles per store in 2011. As you'll recall, our goal is to sell an average of 60 used vehicles per store. In the quarter, value autos, or vehicles over 80,000 miles, performed well. This segment grew 46% year-over-year and had a gross margin of 20%. Although these vehicles have lower selling prices, overall the average selling price on our retail used vehicles increased 2% due to underlying market strength.

We anticipate continued headwinds in sourcing three to seven-year-old used vehicles due to the lower number of cars manufactured in 2008, '09, and '10. We have focused on retailing older used vehicles to offset the shortage. Throughout the quarter, late model used inventory remained scarce, a trend that will continue through 2013. The good news is that the supply constraint may spur additional new vehicle sales as customers convert to purchasing a new vehicle given the increasing market value of late model used vehicles. We are also concentrating on capturing as many trade-in opportunities as possible. The new vehicle dealer remained at the top of the food chain when it comes to procuring used vehicle inventory. We will continue to capitalize on this competitive advantage to maximize our used vehicle retail opportunity.

In the quarter, our F&I per vehicle was over $1000 per unit. On a GAAP basis, we arranged financing on 75% of the vehicles we sold. We sold 41% of our customers a service contract, and 37% of our customers a Lifetime oil product. Of the vehicles we financed in the quarter, 15% were to sub prime customers compared to 12% in 2011. In addition, our sub prime closing ratio, or the percentage of customers who successfully obtained financing after submitting credit information, increased 13% year over year. Over our entire customer base, the average credit score in the first quarter was 712. In short, credit trends continue to be positive.

Our service, body and parts sales increased almost 5% in the first quarter. Wholesale parts and body shops showed significant increases of 11% and 13%. Customer pay work increased 6%, which is the 11th consecutive quarter of same-store sales improvements. Warranty still faces headwind as it declined 12%. Warranty repair opportunities have declined as initial vehicle quality and reliability continue to improve. Also, we still face difficult comparisons from the declining number of units and operations under warranty. We expect these trends to continue in 2012 and potentially beyond. Despite this, our customer pay increases have been more than enough to offset the decline in warranty work we have experienced in recent quarters.

Regarding regional performance, all states performed well with all but one posting double-digit increases. Montana, Texas, Nevada, and North Dakota all delivered increases over 25%. Our gross profit per new vehicle retailed was $2439 compared to $2363 a year ago. Gross profit per used vehicle retailed increased to $2525 compared to $2386 last year. Our stores remain focused on deal average, or the gross profit dollars per vehicle sold rather than the margin percentage.

As sales price increases, a decline in vehicle margin is possible despite gross profit dollars per transaction being unchanged or higher than the prior year. We are comfortable with our performance here and continue to believe that margin erosion will not be a significant challenge in 2012. In the quarter, our overall gross margin was 16.8% compared to 17.4% in the same period last year. Increases in new and retail used vehicle sales outpaced our other business line and explains the decline in overall margin. Despite a lower margin percentage, overall gross profit dollars increased 26% over our first-quarter 2011 results.

Now to discuss corporate development. We continue to seek exclusive domestic and import franchises in mid-sized markets and luxury franchises in larger markets. Also, we want to reiterate that we remain disciplined on our acquisition strategy to ensure ROE targets that meet or exceed our internal hurdle rates. The acquisition market remained active, and we continue to look for opportunities to purchase stores that fit our strategy. As usual, we do not comment on acquisitions until they close, but anticipate completing transactions in 2012. With that, I will turn the call over to Chris, our CFO, to discuss our financial position, new credit facility, and increased guidance for 2012.

Thank you, Bryan. At the end of the quarter, we had $9 million in cash, $17 million available on a revolver, and $76 million in unfinanced new vehicle inventory. Therefore, liquidity totaled $102 million. As many of you know, we executed a new $650 million credit facility last week. This is a five-year syndicated facility that provides for $500 million in new vehicle floor plan, $100 million in used vehicle floor plan and $50 million in a working capital line of credit. As a result of this new facility, our liquidity will increase by $50 million to over $150 million in total, which should provide ample capacity for internal investment and acquisition activity. The facility can be upsized to $800 million to provide for future expansion as needed.

Strengthening our balance sheet with lower costs and longer duration debt financing remains a priority for 2012, and we believe we have additional opportunities to drive down our weighted average cost of capital over time. At March 31, excluding floor plan, we had $286 million in total debt, of which $201 million is mortgage financing. We have no mortgages maturing in 2012. As a result of our new credit facility, an acceleration clause was triggered, reclassifying $8 million in mortgage financing to current portion. Despite this, our mortgage debt maturities remain manageable, and we anticipate refinancing this debt over the next two quarters. We were in compliance with all debt covenants at the end of the quarter as well.

Our free cash flow as outlined in our investor presentation was $18 million for the first quarter of 2012. We continue to estimate the number to be approximately $43 million for the full year 2012 due to the increased revenue offset by planned CapEx as we continue to invest in projects that grow our business. Our capital expenditure estimate is $43 million for the full year 2012. This budget is based on new facilities, facility improvements and remodels, the consolidation of our headquarters facilities into a single location, and other business development opportunities that are currently in progress. We continue to focus on the prudent allocation of capital and believe a balanced strategy of acquisitions, internal investment, dividend, and share repurchase is appropriate. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid, long-term investments in the future.

Now to discuss cost control. In the quarter, adjusted SG&A was a record low of 72.2% of gross profit. For the quarter, incremental throughput, or the percentage of each additional gross profit dollar over the prior year we retain after selling costs, adjusted to reflect same-store comparison was estimated to be 56%. We continue to believe that incremental throughput is the way to measure our cost-control effort. The target of 50% incremental throughput remains attainable for the remainder of 2012 and beyond.

As of March 31, new vehicle inventories were at [417 million] or day supply of 61 days, an increase of one day from a year ago. Used vehicle inventories were at [115 million] or a day supply of 48 days. This is one day higher than our day supply level of a year ago. Import inventory levels are back to normalized levels at the current time, although late model used vehicles remain scarce. We're also continuing to monitor the situation with resin production for PA-12. Based on the current information from our manufacture partners, we've not heard of any disruptions to production but would also caution you that it remains a fluid situation that is still being assessed.

I'd like to provide a few comments on our increased guidance for 2012. Our EPS estimate for the second quarter is in the range of $0.60 to $0.62, with an increased full-year expectation of $2.45 to $2.53. We anticipate growing new vehicle same-store sales,16% and used retail same-store sales, 13%. These increases are 20% higher than our early 2012 estimates and are in line with our expectation of increased market improvement and additional share gains in our stores as Bryan outlined. Based on sales volumes through April, our performance is on track so far. For additional assumptions related to our earnings guidance, I would refer you to today's press release at Lithia.com. This concludes our prepared remarks. We'd now like to open the call for questions. Operator?

Thank you. (Operator Instructions) One moment, please, while we poll for questions. Rick Nelson, of Stephens.

Thank you and good morning. I was flipping through the slide deck and looking at same-store growth from Chrysler for the quarter, up 44%. That comes on top of 62% growth a year ago. It doesn't seem like you're having any trouble lapping the tough comparison. I'm curious what you see ahead for that brand from a sales standpoint, and are you seeing any resistance at all to gas prices?

Rick, this is Bryan, good morning. We're seeing in our regional markets, if you recall, that the demand for SUVs and trucks remained strong. And Chrysler's actually moved into the small car market. They also have the Dart coming in the next number of months, and we don't see a lot of resistance. It seems like our consumer base when it comes to fuel costs, they're more willing to trade in a car that gets poor gas mileage and upgrade to something that gets good gas mileage than we've seen in the past, and we're excited about the prospective on that.

As you look at the three segments of your business, domestic, mid-line import, and luxury, and your 16% same store new vehicle sales estimate, where do you see the best growth coming?

We still see the domestics being slightly better than the imports with the luxuries lagging a little bit.

Okay. Thank you for that. Also, I'd like to ask you about April sales both new and used. Are you seeing any pull forward into the first quarter because of the weather and the presales on the Japan product?

Rick, this is Bryan again. No, April looks right on forecast. We're not seeing any differentiation from what we've been seeing.

Got you. And the new vehicle gross profit, really solid as inventories now start to normalize. How do you see that shaking out? And the incentive programs, are those stepped up now that the J3 have normalized inventories?

I think it's pretty fair to say that the battle's on. Everyone's pushing market share. Incentives are pretty consistent. They're not quite like there was when there was a lot of flux from the tsunami last year. But now it's more of a head-on attack where all manufactures are trying to stabilize their market share or continue to grow market share. We think it's going to be a pretty stable incentive market throughout the summer months and into fall.

Got you. And finally, sub prime you noted was 15% of -- I guess that's transactions. How does that compare to the years when we were tracking 16 million, 17 million units? And is there opportunity to further grow that tough prime segment?

Rick, this is Chris. Great question. Our current sub prime segment as you pointed out is about 15% of our overall portfolio. Pre-recession, that level was closer to 25% of our overall sales. So still a lot of opportunity for us to continue to find financing for our sub prime customers.

Now with that said, that's something that we monitor very closely. And we're seeing on a year-over-year basis right now our availability to arrange financing for sub prime customers is up 13% to 15%. So we're I think optimistic about what we're seeing with the credit availability both in our ability to get sub prime customers financed, but also to continue to expand the advances that we get on our loans, which allows us also to provide additional back end product for our customers. So yes, things are getting better, but definitely not to pre-recession levels yet.

Rick, this is Bryan again, as well. If we talk about sub prime customers additionally, it's about the supply of vehicles that fit those customers, as well. That segment wasn't a segment we were heavily into pre-recession. Now we're heavily into it. I would say that there's still a lot of pent-up demand there despite the fact that it's 25% what we used to be. It may become a bigger portion of that because now we're definitely attacking it with our value auto vehicles, and our stores are very aware of how to get those cars on to the front lines and available to those sub prime customers.

I got you, yes, that seems to be a nice driver for the business. Thank you, and good luck.

This is Sid, I had one other thought on the gas prices. Did you see the appendix item on how our sales dropped historically during two of those cycles where we had a spike in gas prices? And as soon as they stopped going up, we saw response, and the market seemed to return on those vehicles that were impacted. We've already seen the gas prices begin to recede again now. So hopefully this worry that we've had about gas prices impacting SUV and truck sales is behind us.

The new product seems a lot more fuel efficient, too.

Absolutely.

And could be a stimulant to sales.

Okay, good. Thanks for being on the call.

Thank you. Simeon Gutman, Credit Suisse.

Congratulations, everyone, and good start for Bryan. Just a couple of variants on what was asked. Can you talk about gross profits for new? What's driving your confidence there? I think it stands out so far among the industry, and I guess the outlook looks pretty strong, too. Can you talk about what's driving the forecast?

Simeon, this is Bryan. Good morning. I think the main driver is -- typically why we stand out is our rural protected markets and our model of Lithia purchasing and operating stores in those more secluded markets. Now, I also believe that the way that we're building our teams in the stores, where they're definitely understanding and learning and listening to our customers in a way that is building value helps create gross margin, as well. And I think the better we get at meeting those needs, the easier it is to maintain margin.

And what about the mix of J3 coming back? Because you do have some exposure there. That I guess assumes that range that you're giving captures that mix shift, as well?

It does. It does. And I think we were up 17% or so within our import brands. Which is still considerably better than what the market was. [Domestics] are carrying a lot of that weight, as well. We're also gaining market share within our individual markets which I think is really the true test of whether or not your model is operating, whether your people are getting it done, and it just seems like we're improving in both.

And so far Chrysler has been the standout among the domestics this year in holding its own because I think you've seen the others --not return -- just the J3 starting to take some share back. Are you seeing anything, any signs in those brands, anything that you think may evolve or the J3 will take some share back from the Chrysler brand? Or do you think that stays strong?

I mean, I personally believe -- and I haven't seen any signs yet of any declines within Chrysler or the other domestics. I think what we saw was from happenings last year where the domestics were able to get back what they lost from the previous two or three years during their financial woes. I think now it's just stabilizing out, and it's a normalized market again, where I don't see big gains from any one manufacturer.

Okay. And how would you characterize the incentives at least from the back end, things that the consumers don't see? I guess generally that tends to be a better environment for the dealer group as opposed to when the dealers have to put some incentives top of deals.

Simeon, this is Sid. When you look at the incentive plans out there, I mean, it's one of the reasons I think Chrysler's getting lift both nationally and with us. They're all focused on having every dealer sell a lot more cars. All the incentives reward you to do that and it's retro back to the first one sold. I mean, I got to hand it to them. They know how to get a dealer motivated to sell more cars, and it's working. That's still where the strength of the retail model is, is at the dealership. It's not with some national marketing strategy. It's at store by store, salesman by sales, meeting with customers, finding a way to get a guy in a car. And they're just doing it and really well. Reid Bigland who took over a year ago now has had that whole forecasted formula, and others are copying that to an extent. We're getting the most lift in Chrysler, and I think a lot of it comes from dealer incentives.

Okay. Thanks a lot. Congratulations again.

Thank you. Scott Stember, Sidoti and Company.

Good morning. Could you guys maybe talk about the magnitude of the increase in Chrysler car sales? I think you guys said it was up 88% in the quarter. I know that it's a big increase, you know, percentage-wise, but it's still a small piece of your overall business. Could you talk about what you're seeing with the new 300 in particular, and the potential upside that we can see as the year progresses if this rate of sale continues.

That 88% is just the Chrysler brand. And I think a lot of that was fleet. In reality, the 300 is doing very well. We're actually, we can't get the eight speed 31-mile-per-gallon one in any volumes. And there's a lot of market there, and they're advertising it very well. Yes, it's a great, strong product. That eight speed transmission is coming in the Dodge truck -- I mean the Ram truck, as well. They stepped up on that. They're the only domestic with a real transmission like that. They are using the same one BMW is using, I think. I mean, it really helps both performance, gas mileage, you drive one of those, you want it. I mean, the car just responds to every little touch of the throttle and puts you in the right gear. And I think it's very effective.

The new Dodge Ram -- I mean -- I've got to quit saying Dodge. The new Ram is going to be out this fall. They've completely revised so many things, the fuel economy's going to be better. All the interior features are continue -- it's probably going to be the finest truck out in America. So yes, I think that, you know, I always go to the truck because it's more of our business than the car part. But reality is they're going to pick share with the car.

I don't know if you guys have seen this Dart, but that's going to be a home run. The way they're doing that, it's got many choices. You can get that car in a multitude of colors and interiors. They're going to accessorize it. And the interior now, it's got a bigger interior than any compact that I've ever sat in. So it's really not a compact, but it is, and it's going to be priced right. It gets great mileage. I think they've done a great job with that too. So we're going to get started getting more and more lift I think out of the car brands. Chrysler itself, a lot of that was fleet. The 200, they do a lot with fleet. But it is selling, too. Compared to the Sebring it's up at least 100% at retail, that one model. They didn't sell many at retail before.

Okay. And moving on with parts and service, the collision or the body shop side of it was up nicely in the quarter. Could you talk about how you did that despite the fact that there was the impact of warmer weather and fewer collisions?

Scott, this is Bryan. You know, I would say this -- that two years ago and even last year we had -- we had a few leadership issues in a couple of our stores in Texas. Really what we did is just focus in those markets that are -- our general manager helped us find some talent there and some promotions. And it was a lot of people moves in Texas that really made the biggest difference in body shop revenues.

Okay. And lastly, did you give the SUV/pickup mix in the quarter versus a year ago?

We didn't. I can get that for you afterwards, Scott. I'll call you offline.

That would be great. Thank you very much, guys.

James Albertine, Stifel Nicolaus.

Let me add my congratulations on a great quarter. Wanted to just focus on two topics. The first on the new car side and then the second on the used car side. I want to understand in a little bit more detail. Obviously the headline numbers for Chrysler are significantly higher than many other manufacturers, but what's the sense that you get on the ground level of the conquesting that's going on? Are there really customers shifting away from other brands that are coming to Chrysler, or are these really, you know, people weighing the necessity of buying a car versus cars that are breaking down? And determining to stay with Chrysler and just happening, given the average age of vehicles ramping, you know, to impact results as of late?

James, this is Bryan. There's a couple of different things that are occurring. I think there's definitely conquesting going on within the Jeep brand. The Wrangler and the Grand Cherokee are wonderful products that haven't been available in quantities that they are now. So we're starting to see some impacts there. I believe additionally many of our stores are built around teams that are more capable than the competition within those markets. And they believe, and as Sid said, they respond to incentives more readily than a typical Chrysler dealer, because our numbers are up considerably more than what Chrysler's numbers are. And I think a lot of that comes from an awareness in stores and the ability to sell that brand better than they can sell the peer group. Yes, we are conquesting throughout and as well as within Jeep.

Okay. That's very helpful. I appreciate that color. And then secondly, on the used car side, very strong performance, obviously on the comp unit sales. But also I noticed the growth on the average price per comp units. In light of what you said with the mix shift to the older vintage of cars, I'm wondering -- is it this dislocation because of the lack of late model that's allowing prices for the older vehicles to stay higher? And what are your thoughts on pricing for the used segment and how it impacts ultimately gross profit going forward?

This is Bryan again, James. I think the average price, there's no question that the shortage in vehicles across the board not only within really those three, four, and five-year-old vehicles that we talked about, it's -- it affects everything that occurs in the used car market. So everything's come up in price. What we've found that's nice is when we have high new car sales, we obviously take in a car in about every two out of three trade-ins, right? We take in a trade-in. And of those, we keep about half of them.

When we sell more new cars and sell more later model used cars, those seem to ramp up the entire line of things. And we're fortunately there now to be able to filter through and get those vehicles within the pipeline so that value auto really isn't a conscious effort to go externally find those. It's more of a reaction to that top line higher level new and used vehicle. Does that make sense?

It does. To be fair then, you're getting essentially better at purchasing, and that's what's helping the gross profit per comp unit more than it is just the elevated pricing?

Yes. If we're working in the one to five-year-old vehicles, we're definitely getting better at purchasing those. We're able to buy them off the street, find them at auction, so on and so on, and take them in on trade, which is single best source typically for used cars. I think that's why being at the top of the food chain with new car sales, you automatically have an even flow of trade-ins which is your main pipeline to your used vehicle sales. And it's why we've been able to continue to grow upon our past same store sales increases.

Very good. Congratulations again.

Thank you. John Murphy, Bank of America Merrill Lynch.

Good morning, guys. A first question and followup on the Chrysler stair-step program that you're seeing out there. Has there been a change in that program in the beginning of this year versus what they were doing last year, or are they running the same programs? And in absolute terms, are the incentives to you increasing versus where they were last year from Chrysler?

John, this is Sid. No, they haven't really changed them. In fact, they've hedged back a hair. They're being very effective in seeing that every dealer has a fair objective. And there's a lot of discussions about that. I'm on the National Dealer Council, and we work our tails off to try to make it effective. But everybody has to sell more cars to hit those numbers. I don't really call them stair step because it's really -- it's a doable thing, particularly for dealers that haven't performed very well. They really get in the money quickly. It's created that whole level.

One of Chrysler's strengths is that they still have 2300 dealers where Toyota has 1200 or 1300. That's all in those small markets. They're getting lift out of that small [dealerships] they're in. As you know, lots of our dealerships are small dealerships. So I think that whole mix is really working. Reid laid this plan out, I think, in the fourth quarter or third quarter of 2011 -- I mean 2010. And he stuck right with it. I mean, I think it has a big part of why they're so successful right now.

And don't take anything away from the product. They did as much with their product plan as you could have done with a limited amount of planning that had gone in prior to bankruptcy and the limited amount of dollars they could commit. I mean, they reworked every model and made it so much more acceptable. A lot of it was in the interiors. And now these moves with transmissions and engines and gas mileage and -- I mean, they're going to be a front-runner in all those areas. I mean, it's a remarkable case study of how an individual like [Margioni] can change an organization and how he can respond. You can never underestimate, no one knows 10 years from now who's going to be leading the pack.

Yes. It is impressive in short order. Sid, you also mentioned that you thought that there could be some mimicking of parallel of programs that would be put out by other auto makers. I mean, what would be the hurdle or what's unique that Chrysler's doing that those other auto makers might not be able to do with these kind -- with the same kind of program?

I hope they all do it. I mean, it doesn't hurt us if others do it. We'll only get more lift in the new car business, and that just gives us more trade-in and grows and gets us to 16 million units quicker because the customers are out there. They want to buy automobiles. It's just being able to afford them and get them financed, those are still the issues.

I mean, we still -- that's not where it ever was before. And even when that bad paper which you could call bad paper was at 25%, 35% of our business, that stuff worked its way out. They didn't take flocks or repos. We will see a trend toward buying more and more loosely because they can do it and still have it work out. It wasn't a collapse like the housing industry. That's a really big point. If you look at any single thing that will determine how well we all do, it's how much credit can we get for our customers.

And that takes me to my second question here. As you look at the used vehicle market and the pricing that is really still at all-time highs, you kind of alluded to some of these used car buyers tripping into buying a new car because the value equation actually may make a lot more sense to buy a new car versus a late model used car at this point. Are you actually getting consumers that are coming in to your showrooms to buy a late model used car, that just see the price, have sticker shock and say -- okay, let's talk about a new car, because that may be on a monthly basis even cheaper than buying a one or two-year-old used car?

Yes, definitely. And that's a wonderful format for our business model because we can sell them a new or a used. We're going to go wherever they want. The market makes the most sense. Right now, a one or two-year-old car doesn't make anywhere near as much as sense as a new car does.

So you're actually converting used car buyers into new car buyers directly.

Simply because we don't have many of the one or two or three-year-old cars. So it's really important that we convince them it's a good investment to buy a new car. Look how much you can really save over a lifetime relative to the depreciation, and everything's brand new when you buy a new car.

John, this is Bryan again. Our Lithia model and our stores are pretty indoctrinated into the fact that you always have had to be very careful about one to three-year-old used vehicles because of that price differential being so tight as it is. Our main push has always been the three to seven-year-old vehicles, and then obviously over the last couple of years, those value autos that are the seven-plus-year-old vehicles. So our guys are not playing that game. However, there's definitely conversions that are occurring because of that tighter, narrower difference now.

That's helpful. Bryan, you had mentioned as we think about gross profit for the new vehicle business, we shouldn't be so focused on percentages. We should be much more focused on the dollar per unit. That makes a lot of sense to us. As we look at the gross profit per unit, it's kind of been traveling in the $2500 to $2600 range for the last few quarters -- actually, almost the last eight quarters or so. That's up from where it has been historically. As we look forward and get this -- we're seeing this recovery in demand, do you think that absolute dollar number could potentially continue to fade higher, forget about the percentages?

We're actually not forecasting it to go up much more. We're up about $100, I believe -- is that right, Chris? Over last year, a little bit more on new than on used. But I think that's a pretty normalized level. Especially as the used car market recovers and supplies recover, there's going to be enough used vehicles again. And remember, a lot of our sales come from that three to seven-year-old vehicle which is a $10,000 to $20,000 vehicle that we make $2500 on, which has pretty good margins obviously at 15%, 16%.

I'm sorry, Bryan. I meant on the new vehicle side. Is there room for those absolute dollars on your gross profit per new vehicle? I'm sorry, I didn't mean new -- didn't mean used, I meant new vehicle grosses.

There's probably some upside. I mean, I really believe that deal average isn't just built from incentives or product. It's built from your relationship with the customer. And it's how well you sell the values and how well -- how well your competitors do to some extent to be able to combat that. I think that's where our improvements come from. As we grow better people within our stores, I think that's where we're seeing a lot of the improvement is purely from great staffing and great customer service.

Thanks. And lastly, on the parts and service business, customer pay was particularly strong this quarter. It's been the case for a while now. I'm curious, as you look at the customers that are coming back, are they doing more heavy maintenance? Are you writing larger tickets as opposed to there being higher volume, or are you actually getting more volume in your service base? And secondarily, are you seeing customers coming back with a four, five, six-year-old car that they bought new from you and just coming back to you for a longer period of time for a longer -- you know, for more service over the ownership cycle of the vehicle?

John, Bryan again. You nailed it. There's no question we're getting a longer period of retention of the customer than we had in the past. There's -- we're also able to provide them many more services than we did in the past. So it's not that heavy maintenance like we typically had. We typically have a little bit smaller tickets that maybe aren't quite as much margin. But we're getting them in more often, and they're retaining their vehicles for a longer period of time.

John, this is Chris. Just to add to that, when you look at an 11% decline in our warranty business, that's about $1.5 million in revenue in the quarter. The 6% increase in customer pay was about $2.5 million in the increase in revenue. While we are seeing a big percentage decline in warranty, the fact that we're keeping those customers in a higher gross profit segment of the business for us in fixed is definitely -- is definitely positive for us.

Great. Thank you very much. That's very helpful.

Steve Dyer, Craig Hallum.

Congratulations on another good quarter, guys. Just a couple things that haven't been asked. Great revenue quarter, brought up the EPS guidance quite a bit, left the revenue guidance relatively flat. What's sort of the thought process there? Is it a mix shift, or what am I missing? Or is it just conservatism I guess going forward?

I think more than anything, Steve, it's that our comps still get a little bit more difficult toward the end of the year as inventories came back in new vehicles. And you know what, it's -- we always like to keep our wits about us, so we're able to maintain our cost structure and achieve that 50% plus throughput. So I mean, that's kind of the Lithia way, and we don't plan on changing that much.

No, and I think we all appreciate that. So as it relates to financing, how are you finding the leasing market you know, now relative to maybe a year ago and maybe relative to pre-downturn in 2008?

Leasing is definitely becoming a bigger segment of the business that we have. I still think pretty immaterial to the overall finance deals that we do. I mean, the manufactures in their programs are pushing additional leasing, but we found that in our markets it still isn't something our customers are looking for or are used to. All in all, leasing is big for the manufacturers, especially luxury manufacturers. In our markets, we continue to get the majority of our deals financed through traditional sales.

Okay. One final question I may have missed. How many shares were repurchased in the quarter?

Pretty light amount. Less than 25,000.

Okay. Thank you.

Thank you. Brett Hoselton, Keybanc.

Credit availability. I'm looking at slide 18, and it looks like we continue to see a slow, steady improvement in the sub prime area. My question is, as you're talking to various sources of credit and so forth, do you see anything on the horizon that suggests that you're going to see a more material improvement in the sub prime availability, or do you see it as just kind of at this point being a slow, steady improvement from where we're currently at?

Good question. I think when you go back to what our sub prime segment is as far as our overall retail sales at 15% and you go back to pre-recession levels north of 25%, I mean, there's definitely room for upside there. And we're optimistic that that's going to get better. Now, I think normalized levels in the future will probably be closer to the 20%, 25%, but that's that still leaves a lot of opportunity for us to continue to penetrate that sub prime segment.

Do you see any sources coming into the marketplace, knocking on your doors or anything along those lines saying -- look, you know, we used to be in the sub prime and we dropped out, now we're coming back and we're going to be back in a big way, sign these papers, that sort of thing? Or is it again traditional sources slowly seeing improvement there?

No, we're seeing new banks enter the market all the time that were very present back in 2007, 2008. They basically disappeared, you know, 2009, 2010. Started coming back in 2011. And we're definitely seeing a lot more interest from those banks to do business with us in 2012 now.

Okay. Switching gears, just --

Sorry. Go ahead.

Go ahead, Brett.

I was going to ask you, acquisitions. On the acquisitions front, can you talk a little about what are your expectations for 2012 on the acquisition front? You obviously have been a nice, steady acquirer of dealerships and so forth. Do you see kind of a steady pipeline of acquisitions potentially through 2012? Do you think there's potential for more aggressive acquisition going forward? Or do you think it's going to go through a period of maybe a lull or something along those lines? What are your thoughts as far as the outlook for 2012 going forward?

Hi Brett, this is Bryan. You know, it's shocking that we always look back at what occurred in acquisitions and look forward, and it always seems to be pretty static. The availability of stores is typical, and it's based off the age of really the dealer, okay. As they age, you really then have opportunities that arise. I think most importantly from Lithia, we don't set quotas.

What we do is basically approach things in a disciplined fashion and have very high ROE targets that we have to achieve. If those things are out there, then we'll continue to grow. And if they're not, we'll sit and hold our cash and grow when that age of the dealer body comes into play. I think if I look forward on the horizon, it seems like it's the typical flow of acquisitions that we've had in the past. Obviously we have some relationships with manufacturers where we're able to grow without goodwill by getting open points or working through reinstatements of dealers and those type of opportunities, as well, which obviously are a lot more cost effective.

Thank you very much, Bryan. Thank you, gentlemen.

Thank you. David Whiston, Morningstar.

Good morning, guys. First of all, on the results for the quarter, you were at $0.60, and in late February, you were guiding into the low $0.40s. Were you at the time being very ultra conservative, or was March way ahead of expectations?

David, that's a great question. This is Chris. When you think about how optimistic we are about our recovery in sales, both new and used, going forward, you know, that definitely prevails in the space. But it's definitely not a linear trajection. What I'm saying by that is when you think about Q1 for us, our January results were just a little light of what our expectations were. Then we started pacing a little ahead of expectations in February. When we guided in February, we felt pretty good that we were on track.

Then coming into March, we had a record March. I think it was the best month that we've had since 2005 as a company. We broke records on all kinds of levels other than in volume. I mean, our cost-control measures, you know, our discipline that we've had in deploying our capital. All of those things are really taking hold. You know, it's hard really to forecast out on a month by month basis. You can look at the overall year and give guidance. I think when we increased our guidance from $2.16 top end to the $2.53, that's a 20% improvement over where we were 60 days ago. I feel like that's something that is fairly aggressive, but at the same time, it's our goal to give you guidance that we're confident we can achieve.

Okay. That's helpful. Thanks. On the new credit line, with that in place, should we be expecting financial leverage to materially increase this year or early next year?

Good question again, David. I think it all depends on what happens with acquisitions. We have liquidity available of $150 million, which is very ample for us to do a number of acquisitions. But as Bryan stated, we're going to stay disciplined in that, and unless we need to use that leverage, we plan to maintain this discipline, look for acquisitions, look for opportunities to deploy capital internally. Continue, you know, our dividend, which we just raised to $0.10 and we'll look for opportunities to buy back shares. I think it's a balanced approach, and we don't really have quotas for any of those.

Okay. And on used vehicle retail generally, what percent of your unit volume is in the value channel?

David, this is John. It's about a quarter of the volume.

About a quarter. Okay. And finally on Chrysler, two questions there. One, you talked in the past about getting your overall Chrysler mix down -- I want to say it was 25% or at least below 30%. But given the renaissance that the firm is having now, are you rethinking that reduction?

David, this is Bryan. You know, we're actually pretty comfortable at that 30% level we're at now. We're not actively out pursuing because we do have a fair amount of stores that are Chrysler. But you know what, in terms of what is out there today and what we foresee for the future, in our sized market, Chrysler fits. So when we look at a Chrysler store or diversification, it really boils back down to our mitigation of the real estate costs, okay? Or the lease exposures that are out there. As long as we don't add a lot there, we can add Chrysler to our mix without adding a lot of risk. I think we'll be looking at some of those in the future as opportunities arise. But I don't think our percentage as a whole should be increasing other than what hopefully they continue to exceed the marketplace in terms of same-store sales. I think that's where we're getting a lot of our increase in percent acknowledges in Chrysler.

Finally on the Dart, I agree it's a great looking car. But most Lithia consumers, will they probably more still opt for the truck than a compact, right?

Well, a truck customer's not typically the Dart customer. So we have an opportunity to conquest other manufacturers including imports and the other domestics. I think having a vehicle in that space and having the talent that we have in our stores provides value. I don't think it really -- I don't think it affects the truck or the SUV market. It's really the ability to compete now in a space that we hadn't in the past.

David, this is Sid. A lot of history here. Remember when the PT Cruiser came out? Chrysler absolutely killed the market with that, and they didn't have any customers normally coming in for a small car like that. And that thing just rocketed. We were sold out. Getting over retail for those for like almost a year. I don't know that the Dart's in that category, but when they come out with innovative new products, people aren't loyal to the brand anywhere near like they were. They want the latest raging thing. We could pick some lift.

Okay. Great. Thanks.

Thank you. (Operator Instructions) Adam France, 1492 Capital.

Yes, good morning, guys. Thanks for taking my question. Sid and Bryan, based on your comments you made about the acquisition pipeline, I guess maybe the best question for Sid knowing the mindset of these local dealership owners. But do you think any of these folks get more motivated in the back half of '12 to talk to you based on an increased tax bill if they hang on until 2013, or do you not put much stock in that?

One of my major roles continues to be to find guys that I think need to sell. And I pitch them around those three basic premises. Taxes are never going to be cheaper. That, you know, you don't have an exit strategy and there's never a better time to sell than when things are improving because you can probably get more than when they're going down. And there's plenty of money available. We actually can write checks for your store, and, you know, we just keep preaching that. I don't waste my time any longer with some guy that's got a strong family that's in the business. I'm looking for the guy that doesn't have anybody because they're out there. There's lots of them.

You know what, 17,000 dealerships in the United States. 5% of them will turn this next year. And who's going to buy those? We're certainly the prime guy to buy them in the markets we're in. Also, all those markets we've targeted, so it's a role I get keep playing. All I do is hand them off to Bryan and his team. I mean, if I can get them interested. That's going to be a big part of my play and what I've got, that I get to do yet in this business. I mean, obviously those are the things that I'm pretty good at, I understand the psychology. I understand I'm kind of in that bucket. I'm an older guy that kind of knows how those guys feel.

Sure.

From the ground level, we definitely heard that comment. We're hearing it from their tax planners, as well as their attorneys. It's a big driver. And we hope it accelerates things, and hopefully it's at final, you know, the final straw that breaks the camel's back if they finally decide to sell.

The biggest handicap is these guys remember some price that real estate used to be worth.

Sure.

And it's like everything, all of this, our houses, everything is worth less. You know, you say -- gee whiz, it will come back. We don't think it will. These are the realities of the world. You need to take advantage of it while you can. It doesn't do any good to think about what it used to be.

Got you. Very good. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Thank you all again for participating with our company. And as before, we never want to disappoint. We're going to charge ahead in this group. I'm so proud of Bryan and the team, and I'm so pleased that I'm able to let go of being actually the CEO. But I still get to play a major role, and I'm going enjoy the next few years. This is going to be a great time to be a car dealer. Thanks again for listening.

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