Apr 26, 2012
Operator
Good day, and welcome to Asbury’s First Quarter 2012 Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh.
Please go ahead sir.
Ryan Marsh
Thank you, Sera, and good morning to everybody. Welcome to Asbury Automotive Group’s first quarter 2012 earnings call.
Today’s call is being recorded and will be available to replay later today. The press release detailing Asbury’s first quarter results was issued earlier this morning and it is posted at our website www.asburyauto.com.
Ryan Marsh
Participating with us today are Craig Monaghan, our President and CEO, Michael Kearney, our Executive Vice President and COO, and Scott Krenz, our Senior Vice President and CFO. At the conclusion of our remarks, we’ll open up the call for questions and I’ll be available later for any follow up questions you might have.
Ryan Marsh
Before we begin I must remind you that the discussions during the call today are likely to contain forward-looking statements. Forward-looking statements are statements other than those, which are historical in nature.
All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements.
Ryan Marsh
For information regarding certain of the risks that may cause actual results to differ, please see our filings of the SEC from time to time including our Form 10-K for the year ended December 2011, any subsequently filed quarterly reports on Form 10-Q and our earnings release that we issued earlier today. We expressly disclaim any responsibility to update forward-looking statements.
Ryan Marsh
It is now my pleasure to hand the call over to Craig Monaghan, our CEO.
Craig Monaghan
Good morning everyone, and thank you for joining us. We’re pleased to report the strongest first quarter in the company’s history.
Our EPS from continuing operations increased 68% for the quarter to $0.57 per share. We achieved these results to a strong gross profit growth in all lines of our business, combined with continued progress and SG&A expense control.
Scott will provide more detail on our financials and Michael will provide an overview of our operating results, but I would like to provide a couple of highlights from the quarter.
Craig Monaghan
Revenues and gross profit improved 6% and 11%. We continue to improve our cost structure, reducing SG&A as a percent of gross profit by 320 basis points.
And our operating leverage resulted in a fall-through of 54% of our incremental gross profit.
Craig Monaghan
Scott will now provide more detail.
Scott Krenz
Thank you, Craig. It was nice to have a quiet quarter from an accounting standpoint.
Our first quarter results of $0.57 include no adjustments for non-core items. We continue to focus on our cost structure through a number of cost and productivity initiatives.
Scott Krenz
SG&A to gross profit was 74.6% for the quarter, a 320 basis point improvement compared to the prior year first quarter.
Scott Krenz
The majority of the improvement came through better leveraging of our personal class. Although we also benefited from lower rent burden and we reduced utility costs.
You probably recall that on our year-end call, we committed to removing costs in increasing productivity over a two-year period. We said that would produce a 200 basis point reduction in SG&A as a percent of gross profit.
We believe we are on track in achieving that result.
Scott Krenz
SG&A as a percent of gross profit is obviously helped when gross profit increases in improving our environment. So to be clear, we are focused on decreasing costs and improving productivity.
Our goal is calculated using 2011 as a base line and assuming a flat [indiscernible] environment.
Scott Krenz
During the first quarter, we spend approximately $25 million pre-paying mortgages that mature in 2013. As a result of further debt reductions in growing EBITDA, we ended the quarter with a total debt to adjusted EBITDA ratio of 2.5x.
We are comfortable with our leverage in this range.
Scott Krenz
We are pleased that others have noticed our progress in strengthening our balance sheet. S&P recently upgraded as for one notch to BB minus.
Scott Krenz
With respect to capital expenditures, in the first quarter we spent $8 million of the $50 million we budgeted for 2012. We are increasing our 2012 capital expenditure budget by approximately $10 million to $60 million in order to accelerate several projects we believe will significantly benefit our business.
As an example of what we are talking about, we are building a new showroom and an expanded service area for our rapidly growing Hyundai store in the Tampa area.
Scott Krenz
We are also working with several of our manufacturing partners regarding potential ad points. Depending on the success of these discussions our 2012 CapEx could increase further to accommodate the construction required to support new franchises.
As we always remind you, our CapEx numbers exclude the lease buyouts and real estate investments.
Scott Krenz
Finally, to support the relocation of one of our franchises, we purchased $6 million of real estate during the quarter. In addition, we continued to target opportunities to purchase properties we are currently leasing.
We expect to close on several of these transactions in the next 2 to 3 months.
Scott Krenz
We ended the quarter with total liquidity of $243 million; this includes $224 million available under our undrawn committed revolving credit lines, $4 million in cash and $16 million available and floor plan offset accounts. We continued to allocate capital in the balanced and disciplined manner, investing in our existing operations, seeking growth opportunities for the company and supporting the program with share repurchases.
Scott Krenz
I will now hand the call over to Michael to discuss our operational highlights.
Michael Kearney
Thanks Scott. I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance.
New vehicle gross profit increased 16% compared to the same period in the prior year. Our new vehicle margins for this quarter were 6.7%, up 70 basis points compared to the same period in the prior year.
We ended the quarter with 60-day supply on a trailing 30-day basis. With respect to our inventories we believe our stores had a necessary supply on the ground and in the pipeline to meet the majority of consumer demand.
Michael Kearney
Used vehicle sales continue to be a strength for us as our stores grossed all-time first quarter company records for used retail revenues and unit sales. We increased used unit sales 14% of the first quarter last year.
Used retail [indiscernible] we started in 2010 continues to grow and sustains this growth. Although margin slips 70 basis points to 9.9%, the increased volume more than offsets that effect.
Our used to new unit sales ratio was 82% for the first quarter and we ended the quarter with approximately $100 million of used vehicle inventory, or 32 days supply on a trailing 30 day basis. Our F&I business continue to remain strong for us as our stores, once again, broke all time company records for both F&I revenues and a per vehicle retailed.
Michael Kearney
First quarter F&I revenues grew 21% compared to the same period in the prior year. F&I per vehicle retailed for the quarter was $1,157, up 14% year-over-year.
In addition to excellent F&I process execution and our continuous improvement training program, we are the beneficiaries of the much-improved banking environment, higher advance rates, consistent application of lender requirements and the return of much more favorable lease terms.
Michael Kearney
Our parts and service operations also produced all-time first quarter records for the company in both revenues and gross profit. Revenues increased 2% and gross profit grew 7% compared to the first quarter of 2011.
Parts and service gross margin for the quarter was 57%, up 230 basis points compared to the same period in the prior year.
Michael Kearney
The year-over-year gross profit improvement was driven primarily by the 20% increase in reconditioning work as well as an 8% increase in customer pay. Offsetting some of these increases, our gross profit from warranty work was down 18% over the prior period.
This is due to a reduction in the higher recall volumes we saw this time last year, as well as lower units and operation resulted from the drop in new vehicle sales over the last 3 years.
Michael Kearney
Our National Tire initiative has been implemented in all of our markets. Program is off to a great start as we experienced record tire sales in the month of March with those sales up approximately 75% over March of 2011.
We are encouraged by the strength of vehicle sales so far this year. Please keep in mind the impact of fleet sales on the overall SAAR.
Michael Kearney
Fleet represented over 19% of SAAR in the first quarter versus 18% in the first quarter of last year. We continue to plan our business around 14 million SAAR, however we see no reason the current pace of car sales is not sustainable, considering the increasing number of consumers looking for more fuel efficient vehicles, the continued improvement in the availability of consumer credit and the cadence of new products coming from all of our manufacturing partners.
Michael Kearney
Finally, I want to extend my appreciation and thanks to all of our associates in the field. Your collective efforts are reflected in these results.
With that I’ll hand the call back to Craig to conclude our prepared marks. Craig?
Craig Monaghan
Thanks, Michael. The first quarter was exiting for Asbury.
We are seeing the benefits of all our hard work pay off as car sales recover. Over the last few years we have reduced our leverage to a level with which we are comfortable, while building out our technology infrastructure.
We are now well positioned to grow shareholder value by investing in our business, pursuing acquisitions, and returning capital to our shareholders through share repurchases.
Craig Monaghan
These strong results could not have been achieved without the hard work, dedication, and commitment to innovation of the entire Asbury team. I would now like to turn the back to Sera and we’ll be happy to take your questions.
Sera?
Operator
[Operator Instructions] We will take our first question from the side of John Murphy with Bank of America.
John Murphy
Just first on the SG&A because that was really the big upside surprise in the quarter, at least relative to our expectations. The 325 basis points that you kind of beat by, or had this reduction with 320 basis points to be exact, year-over-year ahead of 200 basis points you are targeting and sales were up about 10%.
So if we were to think about the remaining 3quarters of this year, and think about your 200 basis point target, it sales were up 10%, new vehicle sales continued to be up 10%, do you think you would still be able to get this 300 basis points, or maybe slightly more, out of the SG&A for the remaining 3 quarters?
Scott Krenz
Well, this is Scott. It’s one of the reasons I said, we really are focusing on a cost number, we are not focusing on the percent, because the year will play out, as the year plays out we don’t present guidance on that and what we think the year is going to be and that’s kind of drive that percentage.
So I guess what I would say is that we are very much focused on becoming more productive as a company, having a more leveragable, personnel structure within the company and taking out actual higher costs. At year-end, we talked about that and we said we were targeting roughly $10 million to come out of this year, and that’s about half of what the total we are trying to target, bring it out, and that we’re on track.
You can plug that into your model as to what you think, your gross profit will be as we go through the year and the percentage will come out. But we are definitely focused on, not the percentage, but a hard number of costs we’re trying to bring out of the system.
John Murphy
Great, that’s very helpful. Then second question on inventory, you alluded to the fact that your inventory at this point is in fairly good shape.
I’m just curious, as we look back at the first quarter, where you really-- the shortages were. I’m assuming it would be mostly Honda, where you were short of inventory, and Toyota to a lesser extent.
And how much of an impact do you think that had on your new vehicle revenue in the first quarter?
Michael Kearney
John, this is Michael. We were on the call for the fourth quarter we talked about what a great December we had and we had an outstanding December along with the rest of the industry.
We started January with a number of our stores having single-digit days supply new vehicle inventory as well as some low-teens. And we really did start a little bit behind the curve for the month of January and actually into February.
So I think we were inventory-constrained in a number of our brands. I will tell you that the inventories have recovered.
And in the month of March, we had 7of our brands exceed the national sales growth rate. So we’re in the inventory constrained on into quarter, but I think our inventories are at that point time now we’re not restricted by the number of availability product.
John Murphy
Great, And then just lastly, you alluded in your CapEx comments to potential upside in the CapEx based on some new ad points that you are discussing with the automakers. I’m just curious-- it’s kind of a new phenomenon that we are hearing about a lot of ad points coming on from automakers to existing dealers.
Is there attitude change or a change in the relationship that you have with the automakers, where they’re coming around to the idea that they really need these well-capitalized, large dealerships to be partners for distribution, and you’re just seeing a lot more opportunities on these ad points than you would have previously?
Craig Monaghan
I think that’s a very fresh statement. It’s great.
I think the relationships are good. I think Asbury, as well as many of our other public peers, have demonstrated the benefits of the consolidation model in a-- both in a downturn and in upside economy.
We’ve clearly got the financial wherewithal to weather a storm. And then we will add to that the fact that we’re doing a good job on CSI, we’re doing a good job on sales effectiveness, and we work hard to have good relationships with our manufacturing partners, and I think one of the rewards that we see are these offers for ad points.
We’ve got a number of them in the mail, and I hope before we go a whole lot farther you’ll see some of those come to life.
John Murphy
And Craig, would you comment on-- is that the Japanese automakers, or the Germans, or maybe even the Italians, as we look at those ad points, is there any specific concentration or automaker that that’s a little bit more accommodative on these ad points?
Craig Monaghan
I would say it’s broadly across the board. Everybody is different, but you’re not seeing it concentrated with one brand or another.
Operator
And next we’ll move to the side of Rick Nelson with Stephens Inc.
Rick Nelson
To follow-up on the SG&A. How much of the improvement that we saw year-over-year was due to the DMS expenses that went away, and of the $10 million you’re talking about in hard dollars coming out, how much of that is related to the DMS?
Scott Krenz
There was certainly some benefit of the DMS in the first quarter. But the majority of that’s going to rollout a little later here in the year.
We still - if you’ll recall again from our year-end call, we were still putting in the last few installations, implementations still in the first quarter. So most of that’s going to come out later in the year.
The majority of the costs were, as I said, work we had done and work very hard on around our rent structure, utilities, we’ve done a lot of work with the telecom and moving that into an IT environment and Internet environment. Those costs were down substantially.
Scott Krenz
As well as, we spent a lot of time making sure that we were market competitive in terms of all of our pay plans, but that they were aligned with our goals and objectives for the company and gave us an ability to leverage that as the SAAR improved, and that’s where the bulk of it is coming. We’re still working on, and I think it is a longer-term benefit, and as I said, we’ve said upfront that this is a 2-year approach to this because a lot of the benefits, the hard costs, which would come out associated with the DMS now and the things were building on top of that, will happen, they are all underway we’re working very hard on it, but that will happen later in the year and the next year, as we bring those to fruition.
And it’s not going to be a straight-line improvement. There is going to be some investment along the way, but we are committed, as we said, with 2011 being our benchmark, on bringing that 2011 full year estimated gross profit down 200 basis points by the time we get to the end of the 2-year period, and running from there on that basis.
Scott Krenz
So we’re on track. It’s a lot of little things, and I’m going to tell you that as a company it’s not one big thing that this company, and I give full marks to Michael and his people and the people on the field that are really focusing on cost, at the store level, at the corporate level and across the company and you’re seeing the results of that.
Rick Nelson
And Scott, do you see that as more back-end loaded acting on the DMS issue, which you discussed?
Scott Krenz
Yeah. I mean those costs related to systems probably will be things we see later in this year and on into next year.
And that’s just because of the work that needs to be done underpinning them and make sure everything works together here. Ed, I didn’t mention it before, but when we set the goal, we also - we set the goal clearly at year-end and again, as I said in the prepared remarks, that was predicated on a flat SAAR environment.
We’re seeing a little benefit here the fact that we’re continuing to take hard costs out, the SAAR has been improving a bit and that drives that percentage down again. That’s one of the reasons we’re not chasing the percentage as much as we’re chasing the commitment we made, the hard costs, $20 million of hard costs out, and then as we mentioned, we’re planning around a 14 million SAAR and that’s sort of where our planning purposes is.
If we see some of the momentum we-- the momentum continue here in the year, and who knows what will happen. We try not—we try to be very disciplined in this company and not predict SAAR, there’s so many variables to that.
But if that were to happen that could in fact benefit the percentage of SG&A to gross profit as we go through the year.
Rick Nelson
Okay. And then Michael or Craig, per unit growth in new cars seemed to lag the industry, was that purely inventory constraints and if you could talk about the market share, your key brands, what’s happening there?
Michael Kearney
Yeah, Rick this is Michael. I think I mentioned with John, our caller, but we had a tremendous December.
And we went into January with a number of our stores very inventory constrained, got a very large volume [indiscernible] of the store that went into January with 9 days supply of products. So we did outnumber of those, we took us really the month of January and part of February to get the-- not only the number of units, but the mix, the model mix, to where we felt comfortable again.
I think we got there with March, if I look at what we did in the month of March, 7 of our largest brands outpaced the national number in sales growth for the month of March.
Michael Kearney
So I’m comfortable that it was inventory constraint and that our inventories are really kind of where we want model to be. There is always going to be a shortage of something, I’d like to have a few more BMW 3s.
We’d like to have a few more Mercedes this, or Honda this, but we’re never going to get the perfect world, but I think as an overall situation, our inventories are—I’m quite comfortable with them, I feel they are well-placed right now.
Rick Nelson
Any commentary on April new and used kind of sales, that would be helpful, too.
Michael Kearney
Again, it's Michael. Rick.
April is seasonally less than March, always. April's traffic is good, attitudes are very good, consumers’ attitude is very good in addition to the employee’s attitude.
There is a substantial amount of product that’s on its way on the new side, with our initiative that we put into place about 2 years ago, we continue to harvest a much larger percentage of our used car inventory from our trade-ins. So as the new car sales go, we will take more trades, and I think we’ve gotten - our teams have gotten much better at holding on to more of them, so I think it's a good time to be in the retail automotive sector and looking forward to the rest of this year.
Operator
And next we’ll move to the side of Scott Stember with Sidoti.
Scott Stember
Could you guys maybe talk about - maybe how you were constrained on some other brands outside of, say, Honda, Toyota or on some of the premier brands like BMW and Audi
Michael Kearney
Scott this is, Michael. We only have the 2 Audi stores, and we were little bit constrained, not too much there.
We have a number of BMW stores. As the model year- the series, 3 series, as it switched over, I think the entire BMW world in the United States saw a shortage of availability, and then as you see any new product come into the marketplace, it takes a while to build up.
As you know, BMW brings in different variants at different times, so we'll see not only the fact that we just have to – the new 3 introduced very recently, we'll see different variants of that throughout the remaining quarters of this year. So, we were a little constrained on the BMW side, new product introduction, and I think we are through that and I don't believe that’s going to be a constraining issue for the balance of the year
Scott Stember
So the demand was there? You just didn’t have the product to sell.
Michael Kearney
Yes
Scott Stember
Okay. And could you talk about on the new side, the gross profit being up as much as it was.
Is that because of the fact that you were able to charge a higher price given the supply and demand?
Michael Kearney
Scott, I think last year as we went through the results of the tragedy in Japan there was a little bit of learning for the whole industry about how to price and value cars, as well as how to turn the inventory in a tighter inventory environment, so I think as an industry, we’ve all learned how to maintain little more margin on that. It is, however, in the macro side, it really a function of inventory and incentives to a large extent.
We are in a relatively flat incentive environment with still relatively normalized inventory. So, I think the margins—that is reflected in margin.
I think lending has had a little bit of an impact on margin, you get a little bit better advanced rates, and when you put all those together I think we’re lacking some pretty low margin this time last year. So I think those all together is what brought about the increase in the margin on the new car side.
Scott Stember
Okay and last question, what is the percentage of real estate that you own currently?
Craig Monaghan
Roughly, Scott it’s…
Michael Kearney
It's roughly 60%.
Operator
And next we’ll move to the side of Steve Dyer with Craig-Hallum.
Steven Dyer
Same store sales growth, did I miss that, for new and used?
Scott Krenz
Same store units were up 1.3% and the used units were up 14.3%
Steven Dyer
What are you seeing on the acquisition front out there? How are you thinking about that as the balance sheet gets in better position, just any color there would be helpful?
Craig Monaghan
Sure Steve, this is Craig. I think you really hit the nail on the head.
For us, capital allocation really has been - is first a function of getting the balance sheet in order. So you’ve seen much of the capital that we’ve been allocating over the last 2 years has been focused on strengthening the balance sheet in the last quarter.
We spent about $25 million paying down debt, but when you combine the debt pay-down efforts that we’ve been undertaking with the incremental EBITDA that we’ve been able to generate, our leverage is now down to about 2.5 times, and we think that positions us very well to start looking at other alternatives. We are looking at acquisitions, we’re looking at add-ons like we mentioned earlier.
Our share repurchases is also something that we always keep in mind. Specifically on the acquisition front, we don’t see a lot of activity in the market, but there are some potential transactions that we find-- are finding interesting.
I don’t think it would be unreasonable for you to expect that you might see a tuck-on type acquisition here at Asbury before we get to the end of the year.
Steven Dyer
Okay, great. And then, one housekeeping item.
What was the stock comp number in the quarter?
Craig Monaghan
Maybe one of the guys might to get back to you on that.
Michael Kearney
Yeah. We’ll get back to you on that.
Steven Dyer
Okay. That sounds good.
Michael Kearney
So we’re not ruffling papers madly here by trying to find it.
Operator
And next we’ll move to the side of Rod Lache with Deutsche Bank.
Dan Galves
It’s Dan in for Rod today. Just wanted to ask a couple of questions on used and parts and service.
Used growth was really good, particularly in the context of a lower pool of younger used vehicles. Can you talk about maybe what the used-to-new ratio was a year ago, and how much the initiatives you put in place over the last couple of years are contributing to the growth?
Has the age of the vehicles that you’re selling changed at all? Any color on that will be great.
Michael Kearney
Yeah, so Dan this is, Michael. So, it was in the mid-70s I think the first quarter last year.
Scott Krenz
It was 76 to be exact.
Michael Kearney
76, and I think the initiative that we put in place roughly two years ago, what it did is, it broadens the price band of car that you’re willing to stock and sell. So, you’ll get in that, you would obviously expect some older cars, you’ll also expect some not as old cars, but with higher mileage.
So it’s really a price band that you look at. So when you expand the price band that you traditionally didn’t want to keep, you’ll take more of your trades in, you’ll recondition them and put more money in the reconditioning, but it gives you an opportunity to reach so many more buyers than you would’ve had on that.
So I think that, that initiative in itself allows you to have more potential sales with less purchase inventory, and you don’t have to spend as much time or sit in the auction lanes being the last one to raise your hand. So I think that part of the initiative have a lot to do with our build to sell more used cars.
And I’m sorry; I missed the second part of that one.
Dan Galves
I think that that gets to it just to follow-up on that. I mean, why do you think dealers, new car dealers, didn’t do this in the past?
Were there - are there any downsides that you see potentially in perception, having older cars in the lot, perception of your dealership. I guess, it seems like it’s been successful for a lot of dealers over the last couple of years.
Why wasn’t it done in the past?
Michael Kearney
So, Dan this is, Michael again. Just quite frankly, it’s a lot of work.
It was always easier just to take a trade that’s real clean, take it to the auction and make your money. You could also take that same trade to the auction and cover up some of your mistakes as you’ve made on some other cars.
So, fundamentally it’s more work and it brightens the spotlight on it. So I think that’s why it wasn’t done in the past.
But it is-- and to your point about the perception, we either certify through the manufacturers or certify through it through Asbury all of our used cars that we sell.
Michael Kearney
So these vehicles are well-inspected, 121-point inspection, they’re reconditioned extremely well. We put new tires on a large portion of those vehicles.
So I don’t think there is any perception that consumer comes in and has assessed their bigger variety of a car to see, so it’s been received very well in the market place. I don’t think there’s any issue with perception of price or value from our consumers.
Dan Galves
That’s great to hear. On-- just on the margins, used margins have been moving around a lot, got down below 9, and now it’s back up to close to 10.
What are the key drivers going forward, how should we be forecasting used gross margin over the next few quarters do you think?
Michael Kearney
Dan, this is, Michael again. I think, I’ll answer the question kind of in reverse, and then you’ll have to apply it, as you see fit.
Our margins stayed right around that 10 mark for a long time. Towards the end of last year, we saw a little margin deterioration as a direct result of carrying more inventory on the used car side in a number of our stores, because we didn’t have any new product to sell.
As new products started to become available, we had to shift a little bit. And when that happens, we would prefer to retail the over-pieces, then take them to the auction and take a potential wholesale loss on them.
So what we would see is a little bit more discounting at the end of the third quarter and throughout the fourth quarter of last year on our used cars. We are not in that position today.
We have 30, 31 days supply of used cars. We have ample new car inventory, inventory is turning very quickly and because of that, our margins have begin to increase a little bit from there.
Dan Galves
Okay, it sounds good. And then on the parts and service, 57% that’s the highest we’ve seen.
Is there anything that was particular in the mix of the business this quarter that was driving that higher?
Michael Kearney
Dan, no, it’s just as we continue to grow our internal work and pre-conditioned work, it’s a high margin part of the business. As we continue, again, it’s part of our used car initiative.
That’s one of the very positive offshoots of that initiative, is that we do a lot of reconditioning work, and we benefit from that.
Scott Krenz
Okay. Warranty work continues to decline quarter-over-quarter.
I mean, quarter-over-quarter, warranty work was down almost 18%. So all that’s in the mix.
Just quickly, I was able to, without causing too much of a kerp-plop [ph] here so everybody has the benefit of this, but stock comp in the quarter was $2.4 million compared to the $2.6 million prior year first quarter?
Dan Galves
And just one last on the mix of car versus truck, did you guys see much impact from fuel prices in the quarter, and then has there been any change in customer perception since fuel prices started to moderate few weeks ago?
Michael Kearney
Dan, this is, Michael. We did not see a significant switch from that.
I think it’s been running about what it has run at least in the brands that have the trucks, it’s been running about the same percentage. I will tell you that just as an off-point to that, there are so many more variants of automobiles and trucks today that get in excess of 28 to 30 miles per gallon than there has been in the history of the industry.
So there is a lot more choice for the consumer. So I think the fluctuations in gas prices are not as dramatic, do not have as a dramatic effect on the consumer as they did 2 or 3 years ago.
Operator
And we’ll move next to the side of James Albertine with Stifel Nicolaus.
James Albertine
So I just wanted to, a lot of great color by the way in the prepared remarks and throughout the Q&A here. But I wanted to foot first quarter ‘12 results back to something you said earlier this year, at the beginning of this year, namely that you’ve transitioned from a company on the defensive to a company going back on the offensive.
And I wanted to understand in a little bit more maybe granularity where being offensive in the first quarter helps you, relative to maybe your direct competition in the market on the new, used or parts and service side, or helps you produce results that were above and beyond what the industry would have projected?
Craig Monaghan
James, it’s Craig. I think we’re working through a continual, and I would argue that there is a transition from defense to offense, and I wouldn’t say that the first quarter was really evidence of that.
I think it’s still to come. But if you think about it, in the first quarter, we finished our DMS conversions, so it’s finally behind us.
We’re not getting on a call and being the only the public consolidators, it’s still talking about getting everybody on a common system. So that’s done.
Craig Monaghan
In the first quarter, we got our leverage down to 2.5 times. I’d argue our balance sheet is in great shape.
We’ve got everybody on a common CRM, and we’re really, I think for the first time, beginning to learn how to really use these tools. And I think as we said earlier, it’s positioning us very well that it feels good to get to here - get on this call with you and talk about the fact that we are looking at a tuck-in acquisition.
We’re looking at ad points, and we know we’ve got the ability to go out and buyback stock. I consider those things offensive moves, as to trying to fix things like we’ve been doing for the last 2 years or so.
James Albertine
Understood, and that’s very helpful. And I guess there is one quick follow-up to that.
Is there anything that you’ve found, and I’ve likened it in the past to sort of a home renovation where you think there’s going to be a certain cost, you tear down the wall and you find out that there is 7 other things that you to fix that you didn’t count on it as part of budget, and I guess my question is, now that you’ve gone through these processes and now that you have your personal training on these systems and learning how to better optimize these systems in a real-time fashion, is there anything that gives you pause about your ability to produce consistency quarter-to-quarter, in terms of the results that you have now, which really, frankly, were great results in the first quarter of this year?
Craig Monaghan
I don’t know - I looked at it other way around and I leave this-- Mike or Scott, jump in as well. I am very proud of what our people in the field have been able to produce.
I think the results in the quarter despite -- we still had some challenges, as Michael pointed out. I mean, we had some serious inventory constraints and despite those constraints, I think the teams just did a phenomenal job.
Craig Monaghan
But all that said, we’ve made a lot of investments in technologies and tools and we are still not all power users. We’ve got some power users out there, but nowhere near as many as we’d like to have.
And I think we look at this as, just give us some more time. Like Scott said, there’s more projects that we’re working on, these are not quarter-to-quarter projects, but projects are going to take a year or 2.
I think there’s still lot more good things to come
Scott Krenz
I’ll just add that, we’ve put in a lot of the foundational stuff here. I mean as Craig says, we’re still learning.
But we’re using it to a large extent. It’s many of the things that we are now able to access and look at because of the common DMS are being used.
We put in operational structures, management structures or review our performance, all of which are designed to drive continue solid sustainable operational performance within the company, and that’s been a big part of what I think is going on the offensive is not fixing constantly distracted in using your man time to fix problems, but to look at programs like the tire program. What can we do in this service drive, and then there is all of these are-- they’re not terribly sexy, or they are not as sexy as a big acquisition.
But I’ll tell you, for relatively low risk and solid return on your investment they drive performance, and I think that’s what you see more than anything else in this quarter
James Albertine
And it’s all the more impressive considering how quickly this has happened.
Operator
And next, we’ll move to the side of Brett Hoselton with KeyBanc.
Brett Hoselton
Couple of thoughts here. First of all, on the new vehicle side, gross profit per unit with the built in inventory through the first quarter and into the next couple quarters.
Do you think you’re going to be able to maintain your gross profit per unit on the new vehicle side, or do you think you might see some incremental pressure as inventories sell?
Michael Kearney
Brett, this is, Michael. As I mentioned earlier, it is many pieces to that equation, but some of it is, in fact, inventory and incentives.
We are in a relatively flat incentive environment and that could change depending on production and availability of production. So we believe we can hold to those margins, but the caveat to that is really inventory, and the level of incentive that sits in the marketplace.
Brett Hoselton
Okay. And then switching over to used vehicles, obviously you had a nice bump up into used as a percentage of new, nearly up in that low 80% range.
Is your new vehicle supply recovers or has recovered and you should get some better sales on the new vehicle side? Do you think that you will be able to maintain that 0.82 used as a percentage of new, given some of your initiatives on the used vehicle side, or do you think that’s why you kind of just drift down a little bit?
Michael Kearney
Well, I don’t plan on letting it drift down much. We started the initiative a number of years ago and I preached this to all of our people in the field.
They’ve heard it so much that they can recite it backwards to me. In this country, we sell almost 3 times as many used cars as we do new cars in any given year.
And of that, the franchise dealers get approximately 1/3 of that volume. All that I want to do is maintain a growth into the other 2/3.
So, I don’t view it as a competition at the store level for the consumer on new versus the used. One caveat being that, again, level of incentives.
But I think we can continue to grow the used car business, we have some internal stated goals. I think there is enough of the consumer base out there, and as long as we grow our new car business, continue our Asbury initiative we will have a farm to pick the used cars in of way of our trade-ins
Operator
It looks like our final question will come from the side of Efraim Levy with S&P Capital IQ.
Efraim Levy
That leaves me with only one question after all the other good answers, and that’s even going back to the acquisition topic. In terms of the brand preferences, do you have certain brand preferences who that you’re looking at?
What about, like, the Korean and VW, what’s your thoughts about more acquisitions there?
Scott Krenz
We are wide opened to relatively broad range of brands, I don’t think there are that many brands that we would exclude. I think maybe what I start with is by saying that we’re quite happy with our portfolio brands.
We are very happy with our geographies. The ideal acquisitions would be ones that would allow us to continue to maintain a diversified brand portfolio.
We like the markets that we play in today, we would be willing to move out on to the periphery of some of those markets, but we think that sticking close to our knitting [ph] and close to home is good business.
Operator
And it does appear that we have no further questions in the queue at this time.
Craig Monaghan
Great. Well, thank you everyone for joining us today, and we look forward speaking with you again next quarter.
Scott Krenz
Thank you.
Operator
This does conclude today’s teleconference, thank you for your participation you may disconnect at this time, and have a wonderful day.