Lithia Motors Inc (LAD) 2002 Q3 法說會逐字稿

Hello, ladies and gentlemen, and welcome to the Lithia Motors conference call. At this time all parties have been placed on a listen-only mode and the floor will be open for your questions following the presentation. Before you begin the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty and actual results could differ materially. These risk factors are included in today's press release and in the company's filings with the SEC. Now I would like to turn the floor over to Sidney DeBoer, Chairman and Chief of Lithia Motors.

Hello, everyone, I'd like to thank you for joining us on the conference call. I'm joined by Dick Heimann our president and COO, by Brat Gray our Senior Vice President in charge of acquisitions, Jeff DeBoer, our CFO and Brian DeBoer, our Senior Vice President of Operations. We are very pleased today with the quarter. We released our third quarter earnings earlier this morning which showed record net income of 10.7 million or 59 cents a share on 18.3 million diluted shares outstanding, exceeding our guidance and an increase over the 7.7 million earned last year in the same period, on 33 percent more shares outstanding. I'd like to point out that our original guidance for this year given last fall was a dollar 72 to a dollar 80. This was before announcing our equity offering in January of this year.

Our current guidance for this year is $1.84 to $1.87 which now includes the 36 percent increase in shares resulting from the offering. In essence, our operations have more than made up for the dilution from the offering. Our net profit had to be up 60 percent to accomplish this. That's a 17 percent increase in earnings per share on 36 percent more shares outstanding in a challenging economic environment.

Net earnings then for the quarter increased 39 percent while net earnings for the first nine months of 2002 have increased 60 percent. Total same store sales for the quarter were a sector leading plus 11.1 percent. This was better than our guidance of a 2 to 5 percent decline. Total same store retail sales growth for the nine month period came in at a positive 4.3 percent. This marks four straight quarters of positive total and new vehicle same store sales growth for Lithia. and this is the third quarter in a row where we out performed the national numbers. We also posted record third quarter sales of 688 million, an increase of 46 percent over the same period last year. New vehicle sales increased 57 percent, used vehicle sales increased 30 percent parts and service increased 32 percent, and the finance and insurance sales increased 32 percent as well.

For the first nine months we posted record sales of 1.8 billion, an increase of 33 percent from last year. New vehicle sales increased 36 percent. Used retail vehicle sales increased 29 percent. Parts and service only 3 percent and finance insurance 29 percent. We've seen growth across all business lines this quarter. and year to date and have been able to deliver double digit growth in both sales and gross profits. New vehicle same store sales growth for the quarter was up 23 percent versus an industry increase of 9 percent. Year to date new store vehicle sales at Lithia increased 10 percent versus industry sales 1 percent for the same period.

New vehicle sales have been spurred by a strong incentive environment this quarter and since the beginning of the year we have taken on a much more aggressive approach to new vehicle sales internally. We are using a promo pricing and an advertising slogan of driving America. Combined with our internal program which means driving America means nobody walks. We have greatly enhanced the momentum provided by zero percent financing and other low interest rate programs in the marketplace. These Lithia exclusive programs are responsible for the surge in vehicle sales well beyond those of the industry star level. Basically we have focused on enhancing the ciflt customer experience making the sale and producing increased sales volume.

It is important to keep in mind that the markets where Lithia has stores are not the most vibrant areas in the country and truly experienced a severe slow down in the early part of 2001. and up until zero percent took hold in the fourth quarter of 2001, they continued on that trend. These economies have improved marginally if at all over the last year, but with our focus on improving operations and maximizing all departments in our stores, we have been able to grow same store sales every quarter in 2002. Gross margins for new vehicles were 7.9 percent as compared to 9.4 percent in the same period last year. Our margin decline is due to reverse -- excuse me, is due to reduced dealer incentives from the manufacturers, less floor plan assistance per vehicle sold and our aggressive volume driven new vehicle marketing programs.

We have taken an aggressive stance towards gaining share in the markets where we operate. This is the critical element for driving long term future growth in both used cars, parts and service, and not to mention the support necessary for our manufacturer partners. In the used vehicle business, same store sales for the quarter were down 6.5 percent, and year to date are down 4.8 percent. We have experienced some minor margin compression due to the value proposition of highly incentivised (ph) new vehicles competing with like new used vehicles. We did more volume in the younger use cars this quarter because they were more of a bargain due to the pressure from other used car sales. Lithia tends to sell deeper in the used vehicle market and in the third quarter we did see a minor pull back in subprime lending that made the low end market more difficult. Retail used vehicle margins were 12 percent for the quarter, which is consistent with the last two quarters. Our used vehicle margins are still comfortably the highest of the publicly traded groups and with the healthy new vehicle environment our used to new ratio in the third quarter only dipped 10 basis points to point eight to one.

In the parts service and body shop business same store sales were down 1.35 percent for the quarter and 1.8 year to date. Afore however in the month of cement same store sales for the parts and service business was up 1.1 percent. the decline this quarter is related to the lack of Ford parts and service business which was strong in the same period last year as a result of the problems with the Ford explorer. Excluding Ford, parts and service same store sales for the quarter would have been flat. Gross margin improved 80 basis points over the same period last year to 47.5 percent. We also believe the minor decline in same store sales is due to more people trading up to new cars as opposed to getting used cars to getting used cars serviced and therefore largely due to the impact as well from Ford.

The gross margin in parts remained fairly constant with the gross margin in service and body shop business while it improved. The F & I business continues to out perform again, growing 12.4 percent for the quarter and the 9.4 percent for the year to date. This is on a same store sale basis. This area of the business has shown consistent growth for Lithia as we are able to make substantial improvements to our newly acquired stores. Even a difficult period like the first quarter a of 2001 when our market slowed significantly, we were able to post same store sales growth in F & I of 3.8 percent.

We have highlighted the margins for the individual business lines combined they generated total gross margin of 15.2 percent which was lower than our forecast range for the quarter. the largest component to the gross margin compression for the quarter was new vehicle sales as the mix shifted more towards the lower margin, new vehicles then forecasted. We experienced a concurrent improvement in the SG&A margin to 11.7 percent, that was better than forecast, and helped offset the decline in gross margin. the combined effect with an operating margin of 3.3 percent which was within our forecast range and the sequential improvement over the first and second quarters of the year.

Currently our sales mix by state including all acquisitions is Oregon with 19 percent of sales, California 18, Washington 16, Colorado 13, Texas 12, Idaho eight, Nevada five, South Dakota four, Nebraska three, and Alaska two. We have added the states of Texas and Nebraska since the same period last year and expect to see these states comprise more of the mix going forward. For the quarter, California and/or or performed the best, followed by Idaho, South Dakota, Alaska and Washington. Colorado continued to be the weakest market in the third quarter of the year. It continues to suffer as the fall out from the tech and telecom sector in that market continues. Excluding the weak Denver market, total same store retail sales would have increased 14 percent. Our combined business in Oregon and California which currently represents approximately 51 percent of our same store sales has remained very strong with same store sales up 24 percent in those markets. This quarter on a top of a 12 percent and 14 percent increase in the second and first quarters of the year. Jeff, would you like to take over? He will provide you with some details on the quarterly results.

Thank you, side. Good morning, everyone, or afternoon for a lot of you. I'd like to further breakdown the quarterly revenue numbers as discussed. Total sales in the third quarter were 687 million, 46 percent higher than the third quarter of last year. The overall sales mix for the quarter was 56 percent new vehicles, 29 percent used, nine percent service body parts, and four percent F & I. The comparable mix in the third quarter of 2002 was 52 percent new, 32 percent used, 10 percent service and four percent F & I. The mix shift to new vehicles is very apparent in these numbers. The contribution to gross profits by business line this quarter was 29 percent from new vehicles, 19 percent from used vehicles, 29 percent from service and parts, 23 percent from F & I. So 71 percent of our gross profit is from non new vehicle business lines. SID (ph) has already touched upon the gross margin by product line. For the quarter, Lithia's used to new ratio was point 0.8 to 1. We sold 35 percent more new and used vices than in the same period last year. For the first nine months our used to use ratio was 0.9 to one, Lithia retails 88,911 vehicles, a 27 percent increase versus the nine month period last year.

Now I'd like to give you our new vehicle sales mix by manufacture. Chrysler Dodge Jeep continues or our largest brand at 35 percent. General Motors sat yarn 23 percent, Ford 15 percent, Toyota eight percent, BMW percent, Volkswagen odea (ph) three percent, Subaru three percent, Honda three percent and Hondai (ph) three percent and then the remaining four percent are other brands for a total of 24 different brands. Our gross profit mix by brand is a percentage of total gross profit for the quarter was 10 percent Chrysler Dodge Jeep, six percent General Motors Saturn, 4 percent Ford and 3 percent Toyota and on down the line. Of the three -- so the important point here is only 10 percent our gross profit comes from any one brand. Of the three domestic brands on new vehicle same store sales basis General Motors performed the best followed by Chrysler and then Ford. Of the import brand Nissan performed the best followed by Hondai (ph) Toyota, Honda, Volkswagen and then Subaru .

New vehicle same store sales for both domestics and imports were up 22 percent. Lithia continues to generate consistent improvements on the profitability of the new stores in the finance and insurance area. Our S and I revenue per vehicle this quarter was 9 $27 per car. Well above our target range of $800. the F & I penetration for the quarter was 76 percent versus 74 percent last year. the average store is below 50 percent in F & I penetration and the an and averages around $400 per unit. It's worth noting that our 28 percent -- 28 percent of our stores have F & I penetration rates and the 80 percent plus range so this continues to be an area where Lithia adds a lot of value to our acquisitions. the penetration of Lithia's lifetime oil and filter product which is unique in the sector was at 32 percent and year to date stands at 30 percent. So we are happy to see improvements in this product which is important to the long term success of our service and parts business as it is designed to improve customer retension in the service side of the business.

Our goal is to have our service parts and used car businesses absorb 100 percent of our fixed costs. For the quarter, the total of flooring and other interest expense as a percentage of revenue was .7 percent as compared to 1.1 percent last year. Floor plan interest expense decreased 13 percent year over year and other interest expense declined 2 percent year over year. This is despite our growth in sales and inventories. the decrease is mostly due to lower borrowing costs on our variable rate debt which comprises approximately 85 percent of our total debt. Finally as side mentioned earlier, total retail sales for the quarter were an industry leading 11 percent. I'll now turn to the balance sheet. We have $64 million in cash and cash equivalents on the balance sheet at the end of the quarter, long term debt largely composed of real estate and equipment financing and excluding the used vehicle flooring facility was $97 million, nearly equal to our year-end 2000 numbers despite a number of acquisitions over the period.

We've generated good cash flow through the year. This gives us an improved 24 percent long term debt to total cap ratio. This ratio stood at 32 percent at the end of the year. We continue to have one of the strongest balance sheets in the sector with plenty of growth potential going forward. Shareholders equity at the end of the third quarter rose by 53 percent to 31 $1 million from 203 million at the end of 2001. This was through 29 percent growth and retained earnings over the same period and proceeds from the offering we completed in the earlier part of the year. Retained earnings now total 110 million.

We have updated our guidance for the fourth quarter of 2002 and full year 2002 and we are now providing initial guidance for 2003. You can refer to our press release for the details of these numbers. We continue to maintain our conservative outlook for sales throughout the rest of the year. We are leaving our previous guidance for the fourth quarter unchanged despite the weakness in the current economy as we have already factored in very tough comparisons year over year in comps for new vehicle sales, we factored in a 12 to 14 percent decline in new vehicle sales in the fourth quarter.We are raising our full year 2002 guidance by the amount that we exceeded this quarter to a dollar 84 to a dollar 87.

Our 2003 estimates factor in total same store sales declines of three to 5 percent so again we're remaining conservative for next year's assumptions and for same store sales on new vehicles we have a 5 to 7 percent decline factored in. This also includes new acquisitions next year of 3 to 400 million in sales which will contribute approximately 150 to 200 million to next year's revenue and that's assuming we do them evenly through the year. That concludes the financial summary and I will now turn things over to Bryan who will comment on operations and acquisitions.

Thank you, Jeff. I'll comment briefly about our acquisitions so far this year, as well as some operational issues that are currently ongoing in our company. We have completed acquisitions of 11 stores with nearly 4 $15 million in revenues which is over 20 percent more than the acquisitions that we did in the prior year. Our latest acquisition of sky line Volkswagen in Thornton, Colorado which by the way is a suburb of Denver, was completed on the sixth of August and had annualized revenues of approximately $20 million. with $64 million in cash on the balance sheet, our largely unused acquisition credit line of $130 million and positive free cash flow, we have enough capital to acquire approximately $2 billion in revenues which would nearly double our current size, and still keep our long term debt to total capitalization ratio below 50 percent.

Looking ahead, plans are solidly in place. On the long term sustained basis, we are targeting a goal of a 15 to 20 percent growth for earnings per share. We feel that we can accomplish 10 percent acquisition growth through internally generated free cash flow and 5 percent growth organically for a total of 15 percent without having to access the capital markets or our credit line. Any additional growth from more aggressive acquisitions would be funded from our credit line.

I'd now like to also comment on the uniformity of Lithia's systems processes and people that are unique to Lithia and necessary for sustained cu success in automotive retailing. for a company wide dedication all Lithia personnel operate from the exact same play book. We believe this unity is the foundation for a stable future. We hold national training meetings with all department heads at one location on a quarterly basis. This common play book allows for visibility across all stores on an equal basis so that we can detect and fix deficiencies more effectively. We are proud to say that our system is flexible and can quickly change to accommodate positive changes while at the same time gaining immediately company wide acceptance, which is very difficult to do in our industry. We have a consistent sales process across all stores which includes customer contact procedures, full pricing disclosures, and a fixed product pricing structure in the finance and insurance department.

Our marketing practices are centered around promo pricing and event advertising as side said, which are also supported by the driving America national campaign, that you will find in every single one of Lithia's stores. You may recall that we utilize a common ADP payroll or common ADP computer system, common CRM systems, and a uniform payroll system throughout all of our stores that is linked through a wide area network directly to our management company. This wide area network is comprised of a vast list of things, primarily an intra-net, management information system which incorporates a standardized chart of account, includes training handbooks, procedures manuals, Lithia standard eyed forms, employee handbooks and many other crucial reporting and measurements score cards.

For the use of these tools we are able to maintain commonality at every single store. with these uniform reporting and measurement score cards we are able to generate a ranking system to make equal comparisons between different brands and different store sizes that provide many additional advantages by utilizing the benefits of these uniform systems, we are able to develop action plans that will ensure quantifiable and substantial savings and gains that quickly go directly to the bottom line.

Remember, we typically purchase under performing stores and maintain very solid margins, even with the poor performance of the new stores. However, these improvements in the new stores are not fully recognized and will be realized over time through the full implementation of our model. We consider this company wide commonality our uniform operating model and cohesive personnel all working from the same play book to be a real competitive advantage for Lithia and necessary in automotive retailing for long term success. It is no different than the system set up by most other hard good retailers such as Wal-Mart, Lowes or Cosco (ph), and we plan on being at least equal to these companies in the future. Now Sid would like to comment on valuation and then we'll take some questions. Go ahead, Sid.

Thanks, Bryan. to comment on valuation, a most of you know, the sector has been increasing steadily in pricing and in the market since mid April of 2001 through May of this year at which point a major correction occurred basically erasing all of our year to date gains and those of the other companies in the sector as well. We felt that the increase in valuation sent in April was in large part due to the resiliency of the auto retailers and the demonstration that of in the face of a slow and economic environment. Parts and service and used vehicle business lines demonstrating their common cyclical nature and our ability to generate profits with good healthy cash flows throughout this sector.

The separation of auto retailers and manufacturers in the markets have finally started to take hold. It seems that over the last couple of months that separation was forgotten. As concerns were raised about the consumer and how demand might be affected. Historically we all need to remember auto retailers as a group have never lost money, even in the very worst recession with earnings down around 40, 50 percent, but still remain very profitable. We have a very good business model that still works in recession.

You may recall that Lithia already experienced the slow down in the first quarter of 2001. That remained throughout the rest of that year and throughout this year as well. with our markets being some of the worst economies in the country. We demonstrated that we could turn the corner on earnings within two quarters once we were able to adjust inventories and expenses, and have generated positive same store sales growth in the past four quarters. Our variable expense structure was demonstrated throughout that period. Inventories remained at historically low levels currently and costs currently are under control.

Once again, we are in the position of demonstrating the resiliency of our auto retail model. We must continue to show how we can acquire stores at good prices, improve them, and deliver profits even in a slow down. I have no doubt that we will continue to accomplish these goals in the future and ultimately the market will reward us for our efforts as retailers with the multiples that retailers enjoy. That concludes the presentation portion of this confrefn call we would now like to open the floor for questions. Patrick?

Thank you. the floor is now open for questions. If you do have a question, please dial the number one followed by four on your touch tone telephones at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. Once again that's one followed by four to bring you into queue. Thank you. Our first question is coming from Rick Nelson of Stephens Inc. Your line is live.

Thank you. Good afternoon or morning I guess out your way.

Right.

Side, can you talk about your new vehicle sales growth? It exceeded everybody else by a huge margin, and wondering what these internal initiatives were. and is that type of growth relative to the industry sustainable? It doesn't appear that that's in your fourth quarter guidance.

Well, we certainly think that some of the that growth is sustainable, Rick. I mentioned in my presentation, I don't know if you picked up those points, but that driving America campaign and the focus on nobody walking, and the focus on being sure that our customers were really handled with the high quality and the standardization of our sales process has been fully integrated really in the last three quarters. and we're seeing the results of that in these remarkable same store sales increases and new cars. Long term it speaks well for us. We think there is still a lot of room for us to improve that but as you know we try to guide very conservatively. Since we had such a large dilution, 36 percent more shares outstanding and not having to lower our initial estimates because of that offering, that 60 percent increase we needed to do some of these things, even though we were forecasting lower same store sales growth. and we'll continue to do that and we're certainly going to try to continue to do that. That's the goal inside this company, to get share.

Are the gross margin pressures that you sought 200 basis points decline in new vehicles, I guess at the offset to pushing hard here?

Rick, I don't think it was 200, but it was 1 point something. We gave some reasons for that. Part of that was a lot of some old rebates we got on some Ford stores in the prior quarter, and then the rest of that had to do with interest. and there is some margin compression when you go for volume. So we're willing to sacrifice some of that to get the volume.

You think we'll start to see this show up in parts and service? I realize September was better, but what sort of delay is there typically?

There's certainly no margin compression there. We have no real price issues there. Our margin continues to hold stable there or even improve. and parts and service are initiatives really in full place. We had a really high comparison because of the Ford (inaudible). We finally identified without those Ford comps on parts and service, which we should see go away as we're getting into a more comparable year, we should have the same 5 percent same store sales growth in parts and service that we've been targeting all along. Most of the initiatives in terms of maximizing training, improving our pricing model and working with our people in those stores to improve the sale of these people coming in for the lifetime oil changes, and dealing with the capacity constraints through improving our facility, which we have accomplished in many areas and improving our hours of operation, we should be able to continue it that growth rate.

Thank you.

Thank you. Our next question is coming from Gerald Marks of Raymond James.

Hi, Jerry.

Hi, Sid. Your inventory levels, they seem to go up quite a bit to 399. Is that partly because your used inventories have shorter day supply versus new and so when you ship from like a one to one to a point 8 to 1, is that what happened there?

Possibly. I haven't looked at that number. We really have the lowest day supply we've had in sometime. We're really wired to manage that. We did stop systems in that. They're uniform across the company now, too, which wasn't true a couple years ago. So, a lot of the regional markets, we have to carry a higher day supply because they're island markets and we have to cover the whole range of product. We don't have a lot of volume in some of those stores, so I don't think we have any inventory issues that aren't being handled.

Our inventories are both new and used were at the lowest levels they've been in the last four years so we didn't see any issues there on used vehicles in particular. They continue to be -

We'll get back to you, Jerry.

Because the dollar amounts, I think that's what might be happening there.

It's possible.

The main thing is the acquisitions, Jerry. We added so many stores that goes up naturally, the larger size of our company.

We added, you know, we were up 35 percent or something just in volume from stores and things. So there's a lot of growth last year. We were up over 20 percent on volume. (inaudible) at the new stores.

Okay.

I don't see anything to be alarmed with there.

If anything now we're short of inventory because zero percent, we sold out so much and if anything we're on the short side for inventory.

This is the time of year to be short on used cars. We will bulk up late year this fall in anticipation of price fall off even further.

I think Ford and GM would be pretty up is set it they saw you guys down 12 to 14 percent forecast based on their production schedules. Do you guys -- it seems like you're doing a pretty good job managing your inventories by indicating you have the lowest day supply. Do you have some controls in place to make sure your general managers aren't ordering too many cars?

Yes, we have sophisticated controls that really monitor that on a daily and weekly basis with reports circulated everywhere. and then people trained to help each manager handle that part of his job. I think we've got a better handle on that than we've ever had. As we said, those systems that Lithia has the ability or unique in the sector in that every one of our stores is fully integrated and operated on a common basis and these inventory requirements are being monitored, not just by an area manager or platform leader or anything or on that order. It's being monitored by corporate personnel with systems that identify any problems immediately. We produce -- I see a list weekly that shows the number of day supply in any store out of line and I find the reason why. Maybe there's a plan in place to increase sales. We allow that. There's other reasons a guy might have but it's really monitor. I'm very comfortable with it.

Okay. Thanks.

Thank you. Our next question is coming from Richard Keem of Kensington Management.

Richard Keem (ph): Hi. Numbers look nice. Congratulations.

Thanks, Dick. Nice to hear from you.

Richard Keem (ph): Thank you. a couple questions. First one would be for Bryan. He mentioned, he mentioned that you expected at least equal Wal-Mart, Lowes (ph) and Cost Co. (ph) and I wondered how soon he expects you guys will be larger or equal to Wal-Mart, Lowes (ph) and Cost Co. (ph)?

Richard, we'd like that to happen sooner than later obviously. But I don't know when that is going to havment I think we're getting pretty darn close and we've been consistent over the past six years and that will help build that credibility.

Richard Keem (ph): I think you guys will be there soon.

Dick, just so you know, our industry is four times the size of the home improvement industry, so our industry (inaudible) on I am home improvement industry. Clearly from a sales perspective that's very possible.

Richard Keem (ph): Okay. I'm looking forward to it. Second question is we talked about acquisitions and you mentioned that your last acquisition was the 21st of August, which is therefore for the last few months your acquisition rate is nil and not equal to your earlier acquisitions. Does this mean -- the first question, are we done with acquisitions for the year?

Dick, we're probably going to have maybe one more, but there's not a lot out there that we're going to close this year. --- quite a few developing for next year.

Richard Keem (ph): I would think because of the situation and the state of the economy, prices of acquisitions might be coming down and there must be a lot of attractive acquisitions. I was wondering why you all slowed down a bit on your acquisition schedule.

Dick, there were two reasons given earlier and I'll repeat those I think on a prior could conference call. We talked about the reality that the retail business itself isn't really down. Most dealers are doing well, profits are up. and in places they can put their money, like the stock market have kind of disappeared on them so the incentive to sell was lessened so far in this recessionary (ph) environment. So we hope that will accelerate. As more acquisitions this year than we actually accomplished (inaudible) percent growth in terms of acquisition growth so we're comfortable with it, but we're holding our cash aside and we're ready to act. But we're not going to load up on prices to get stores to sell to us. Finding that balance and we think we've achieved that this year and hopefully next year will be a banner year in acquisitions. We have forecasted just 300 to 400 million because we don't know what might change there. We'll have to play it out.

Richard Keem (ph): So just following up on that, if you made more than three to $400 million in acquisitions and you would expect them to be added earnings is that fair and you would have to raise your earnings estimate?

That's right, Dick, we certainly would. and hopefully that will take place.

Richard Keem (ph): Your quarterly estimates, Jeff, that you made were -- it looks like the worst comparison is in the fourth quarter of next year versus 2002. Is that correct?

The third and the fourth quarter will be our tougher comparisons for next year.

It's a long ways out there and hopefully we'll have a better view of that as we go and be able to raise those. We'll have to see how the world develops. There's a lot of macro issues we can't control and we're still seeing, you know, not much of an improvement out there for the next year or two.

Richard Keem (ph): Is it fair to say, though, that -- I mean like we'd be talking about your 62 to 66 -- versus 59 is what you're looking for and then the fourth quarter is a little bit higher, and I'm just sort of wondering if maybe you're being very, very conservative on these estimates. Does that have any light on that?

We hope they're conservative. We hope we exceed.

Richard Keem (ph): Well, final question would be at the beginning of this year, as you said, you had estimated dollar 72 to dollar 80 and now looks like a dollar $1.84 to $1.87.

That's with all those new shares.

Richard Keem (ph): Right, which is even better performance than anybody expected. I would assume (inaudible) looking for -- that you would expect to be achieving higher estimates than you're tossing out there at the beginning of the year which is a good thing?

Well, Dick, that's been the trend for us and we hope to be able to continue it that but we're not going to make forecasts that we don't think we can definitely achieve.

Richard Keem (ph): Okay. Thank you.

Thanks, Dick.

Thank you. Our next question is coming from Vinay Shah of Morgan Stanley.

Hi. Can you talk about the used car business what you saw in the quarter sort of units versus pricing? And then can you talk about sort of tone of business in October compared to September both for new and used? Thanks.

Vinay, this is Bryan. Our used vehicle in the business in the quarter as you noted same store sales were down a little bit part of the reason for our decline in service and parts, same store sales as well. And I think what really happened there is the new car market was so strong and we focused on gaining market share in the new car market so well that we maybe lost a little bit of focus in terms of the used cars. But also remember when incentives -- when incentives get more aggressive on new cars to gap between a new car and used car becomes smaller, a used car doesn't look quite as attractive so that occurred as well and it's continuing to occur. So -

Does that get you there?

I have a couple things to add to your question there. One thing is in September our -- we were down 6 percent for the quarter --- on used vehicle same store. But for September we were only down two and a half percent. So -- with new cars not being as strong, you can see both the service and parts and the used cars -- service and parts is actually poz if I have in ept and used is only down two and a half percent.

Is that coming from pricing or units getting a little better?

The pricing and the units for the quarter were down six percent on same store used and the units were down basically 11 percent and the pricing was up six percent. units were down actually 12 percent and the pricing was up six percent so it's' mainly unit decline. Pricing was actually positive.

Okay. and then overall tone of business in October versus September?

Business in October is down from the prior year as expected due to the difficult comparison of course zero percent started in October last year and we had 21 million unit (inaudible) last year. Anything compared to that is going to be down. and it's down as much as we expected, but it's also been consistent and better than September at this point from what we've seen.

Okay, great.

We've got three days left.

Yep. Thanks.

Thank you. Our next question is coming from Tony Roberts of Gill Bear (ph).

Side, you've done such a brilliant job I'm almost reluctant to ask the question, but you made me think of it with your own comments. You said that with regard to the used, in your words, you sell deeper into the used market than maybe others and that you saw a subprime pull back, meaning I guess money available to subprime borrowers and making the used sales more difficult. I'm sure you know that subprime is one of the areas that at least people in the financial community are apoplectic about these days and I just wonder what your take is on that in terms of your own exposure to additional pull back in subprime?

We think we've seen the worst of it. Ford credit was the biggest disappointment for us there. They had to pull back. Their ratings got lost and they no longer could loan to the higher risk, you know, buyer and we were using them pretty heavily. But the rest of our lenders tend to be about the same as they were. So we're able to ramp some of those up and we found a couple new ones. There always seems to be somebody pop up that's got a new idea that thinks they can do this different. We sell that all nonrecourse. You know there's no risk to us and I don't think there's a definable trend there. There's a certain amount of cyclicality of that based on the recessionary environment. Hopefully we're at the bottom of that.

So you don't think kind of on a generalized basis that the sub -- the whole subprime area has gotten grotesque expended and therefore there's an overall risk in that whole area.

No, we didn't get the shut down I've seen in the past.

You've seen it worse in the past?

Much worse.

Okay, okay. Thank you.

As a reminder ladies and gentlemen that's 1 followed by 4 to enter you into the queue. Our next question can coming from Scott Stember of Sidoti & Company, LLC. Your line is live.

Good morning, guys.

Good morning, Scott.

You gave some guidance for next year, obviously next year's '03 numbers you're look at what, 5 to 7 percent down in new same store comps. Can you just give us a flavor if what if we're looking at 10 percent new store sales being down? And maybe just equate that a little bit to the last time that we saw something like this happened back in late 2000, 2001?

If you look back, Scott, the first quarter of 2001 our comps for new cars were down over 10 percent and the second and third quarter 2001 we were also down ten to 12 percent on new vehicle comps. So we've come through that very type of period already in our western markets. and if you look at our earnings, we were down -- it was a rather sudden unexpected slow down at that time. We were down 43 percent on earnings per share in the first quarter and then down 18 percent as we adjusted to the slower sales environment in the second quarter, and then by the third quarter we're still down 12 percent on new cars you, but we actually exceeded the prior year. So we adjusted everything in our company inventories, costs across the cm through that lower sales environment and we're already exceeding the prior year by the second quarter out. So that clearly demonstrates how auto retailers adjust to negative, 10 to 12 percent come pses which historically have been the worst years. In the early '90s when the slow down came new cars were down 12 percent. So we actually have already had that happen. So if you look at our financial results you can see how quickly we adjusted to the lower sales environment. and that's at our point about being the retailer having a variable cost structure and currently, you know, our inventories are very low. So even better.

Right now we're positioned for that slow down that we forecasted. and if you said it increased to another four, five points, I don't think that's significant to us. We can respond in the present environment and still probably achieve the goals we've set. So I'd take about 20 percent drop in new car sales or something before we would have to probably look at revising our estimates.

So all things being equal, given the fact interest rates are low and your inventories are lien right now, if you went through the same type of drop you would not see nearly the same bottom line effect even in the first quarter that you did in the first quarter of 2001?

It depends on the severity of that drop. I don't know.

We're seeing down five to seven percent and we -- we have acquisitions that we did in the first quarter this year, quite a lot actually. and we've also acquired through the rest of the year. If you look back at the first quarter of 2001, we didn't have hardly any acquisitions coming in so we do have that benefit as well this year. We think we've been very conservative on our guidance for next year, down to five percent sales on new -- five to seven percent on new cars, total down three to five percent for same store sales.

I guess my point was just trying to point out that I guess you guys are better positioned now?

I think we're better positioned than we were at the time this happened last time. But we're talking about an acceleration of the current recession because we are still in that recessionary environment. The only thing held up real well is new vehicle sales. But, you know, that's not the rest of the businesses. We've seen that in used cars and that's probably some from the recession.

Okay. and from what you're seeing on your front, I mean, we've seen some statements come out of the big 3 with GM how they will continue to use some form of discounting. Have you heard whether they will step up the pace even more so than they are doing now if that's possible?

I guess you all here about the same time wee do. As soon as the news picks it up sooner than the dealers find out. I'm sure they have something up their sleeve. They're a strong company and they're not going to give up share. They want to gain share now. Not a little bit. They'd love to bite off five percent. They can do it with truck.

All profitable at the current level incentives.

I think something will happen November, December, I really do. I can't imagine them sitting there with their plans, like you said. They haven't really cutback production and with our forecast down that much and the other sector forecasting the same thing, hopefully there will be a surge in there in November or December.

Okay. and just this will be the last question. Jeff, it goes back to the estimates for '03. You're talking about 100150 to 2 million of those 3,004 million announced acquisitions hitting in '03. Are you also --- factoring in that number or separately acquisitions that come from this year that are going to blow into next year?

Yes. Those naturally flow in, the contribution this year was not complete. We did do a lot of acquisitions in the first half of the year, so there is an element that still comes in next year.

Just for clarification, the three to 400,000 of new acquisitions in 2003.

That's only the new acquisitions.

The forecast for sales growth include the roll in of prior acquisitions throughout 2003.

That's not included in the 3 to 400 million. Or the 150 to 200. ---

150 to 200.

150 to 200 is bigger than we buy half in the first part and half in the second part.

Okay. Thanks a lot, guys. Great job.

Thank you, Scott. Nice to hear from you.

Once again, that's one followed by four to bring yourself into queue. I'm showing no further questions, gentlemen.

All right. With that, then, we'll conclude our question and answer series and thank you all for listening and participating in the Lithia family. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank for participating. Have a good day.

END