Lithia Motors Inc (LAD) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Lithia Motors fourth quarter and year-end 2002 teleconference. At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. Before we begin, the company wants you to know this conference call includes forward-looking statements. These statements are not necessarily subject to risks and uncertainties and actual results could differ materially due to certain risk factors. These risk factors are included in today's press release and with the company's filings with the SEC. Now I'd like to turn the floor over to Sid DeBoer. Chairman and executive officer of Lithia Motors incorporated.

Good morning everyone. Thank you for joining us today. I'm joined today by Jeff DeBoer, CFO; Brad Gray, Executive Vice President; Bryan DeBoer Senior Vice President of Operations/Mergers and Acquisitions and Dan Retzlaff, Director of Investor Relations. We are very pleased with the results for the year. Earnings per share rose 15 percent to a $1.84 on 29 percent more diluted shares outstanding.

I'd like to point out that our original guidance for this year was for $1.72 to $1.80. That's for 2002. This was given last fall. Actually in 2001. This was before we announced our equity offering in January of 2002. We exceeded the high end of this guidance by four cents. Net income for the year grew by 49 percent. Our pretax margin for the year improved 30 basis points to 2.2 percent. In essence, our operations have more than made up for the dilution from the offering. We think this is an outstanding performance in a challenging economic environment.

When we started the year we expected to see total retail same store sales declines of between six and eight percent. Later updates to this guidance were more positive. Looking for a decline of three to five percent, as we had performed better than expected in the first three-quarters of the year but there were still extremely difficult comparisons coming up for the fourth quarter. In view of that, we are very pleased at this time to report a year-over-year increase in same store retail sales of 1.1 percent. Our new vehicle, same store sales were up 5.7 percent, versus an industry that was down approximately two percent.

We feel we have been very successful in guiding our operations to offset what has been a slow market in the areas where we operate.

We are also pleased with our fourth quarter performance, which, as I mentioned earlier, was facing difficult comparisons with the fourth quarter of 2001. Revenues in the quarter increased 12 percent and net earnings increased 18 percent to 7.3 million dollars. Earnings per share were 40 cents as compared to 45 cents last year. However, this was on 33 percent more shares outstanding.

Same store retail sales in the fourth quarter declined seven percent. By comparison, in the fourth quarter of 2001, total retail same store sales had increased a record breaking 11.4 percent. So we view our most recent fourth quarter as a relatively strong performance, considering the comparisons and the environment at that time.

For Lithia, new vehicle same store sales in the fourth quarter declined only 4.6 percent, as compared to an industry that we estimate was down nearly 11 percent. These achievements are not the result of improving markets or economic environments where we operate but are due to a concerted attempt on our part to aggressively gain market share in the areas where we operate. We have been able to achieve these results with both domestic and import brands, regardless of which brands we own in each specific market. In other words, these results are a function of our sales and marketing strategies kicking in and they work with either import or domestic brands. We posted record total revenues for the fourth quarter and the year. Excluding the used retail vehicle sales we were able to post double digit gains in both sales and gross profits across all business lines. Please refer to the press release for the specific numbers.

I'll continue with the same store figures for the quarter in the year. Same store used retail vehicle sales were down 14.5 percent. This compared to an increase of 8.3 percent in the same period last year, which again was a record level for Lithia, making, again, for a difficult comparison. For the year, used vehicle same store sales declined 7.1 percent as compared to an increase of 2.8 percent last year. As most of you know by now the pressure from highly incentivized new vehicles has affected the used vehicle business. When new vehicle sales are stronger or highly incentivized, used vehicle sales may suffer a bit. But in periods when new vehicle sales are more normal we expect used vehicle sales to perform much better.

In the parts and service business, same store sales were down 0.5 percent for the quarter and 1.5 percent for the year. While same store sales are down, we have experienced a significant increase in the margin in this business line, which more than offsets the sales declines for the year and the quarter. The major cause of the decline is a drop in domestic brand warranty work, as the improved quality of those brands has resulted in less warranty repair at those stores. The F and I business for the quarter faced the same difficult comparisons for the fourth quarter of last year, which was up 15.5 percent. This quarter's decline of eight percent reflected the weaker than normal new and used vehicle same store sales. For the most part, this was a fourth quarter phenomenon and for the full year we posted .8 percent same store sales growth in F and I.

This area of the business has shown consistent long-term growth for Lithia. As we are able to make substantial improvements to our newly acquired stores as well as continuing to improve our existing stores. Our five-year weighted average same store sales growth in the F and I business is up over seven percent per year. Finally, our compounded annual growth rate figures over the past six years in three key areas are annual revenues, up 60 percent; net profit, up 52 percent; and earnings per share or EPS up 23 percent per year. Average same store sales retail sales growth for the past five years is at 4.7 percent. I'll turn it over to Jeff, CFO he'll provide you with more details on the quarterly results.

Thank you, Sid and good morning to those on the West Coast and good afternoon to those on the East Coast. I'd like to begin by breaking down the revenues a little further. Total sales, as Sid mentioned were 580 million dollars, 12 percent increase over the fourth quarter of the prior year. I'd like to refer you to the press release break out of the sales by business line.

The overall sales mix for the quarter was, 56 percent new vehicles, 24 percent used vehicles, 10 percent service, body and parts, four percent finance and insurance, which we call F and I and six percent other. The comparable mix in the fourth quarter of 2001 was 56 percent new, 25 percent used, 10 percent service, and four percent F and I and five percent other.

We saw a little less retail used vehicle sales this quarter. The contribution to gross profit by business line this quarter was 29 percent from new vehicles, 18 percent from used vehicles, 31 percent from service, body and parts. You can see that's really the biggest contributor to our profits. And then finance and insurance at 22 percent. 71 percent of our gross profit, therefore, is from the non-new vehicle growth. That provides stability of the auto retail model. The contribution to gross profit by business line in the same period last year were 30 percent new vehicles, 21 percent used vehicles. 28 percent service and parts and 22 percent F and I. Once again, 71 percent of our gross profit came from non-new vehicle growth, a very stable business.

I'll now walk you through the gross margins by business line. Gross margins for new vehicles in the fourth quarter were 8.4 percent as compared to 8.5 percent in the same period last year. and a 20 basis point improvement over the 8.2 percent reported in the third quarter of this year. The year-over-year margin decline is due to reduced incentives from the manufacturers, a reduction in floor plan assistance per vehicle sold with interest rates being low and our aggressive volume driven new vehicle marketing program, known as "Driving America".

In the used vehicle business, fourth quarter gross margin was 12.3 percent, a decrease of 60 basis points from the fourth quarter of last year and a decline of 20 basis points from the third quarter. We continue to experience some margin compression due to the value proposition of highly incentavized new vehicles competing with like-new used vehicles. We did more volume in the new or used cars this quarter because they were more of a bargain or became more affordable due to the pressure from new cars. This is evidenced by a year-over-year increase in the average retail used vehicle price for 495.00. Lithia tends to sell deeper in the used vehicle markets. To summarize, the average price increases due to a mix shift in the age of used vehicles sold but the margin has declined due to the pressure from highly incentivized new vehicles.

Next, parts and service. We continue to experience favorable trends here. Parts and service gross margin for the quarter was 48.3 percent, an increase of 70 basis points over the fourth quarter of last year. And an 80 basis point increase over the third quarter. The gross margin in parts remains fairly constant while the gross margin in service and body shop businesses improved. We continue our success of driving consistent year-over-year margin improvements in this very important and highly stable part of our business.

Total gross margin for the quarter was 16.1 percent. A 20 basis point improvement over 15.9 percent in the fourth quarter of the prior year and a 90 basis point improvement over the third quarter of this year. The margin improvement in the parts and service business more than made up for the minor decline in new vehicle gross margin and declining used retail gross margins for the quarter, resulting in an increase in the total gross margins. This demonstrates the strength and importance that the parts and service business provides to the auto retail model. The 16.1 percent gross margin for the quarter was at the top end of our past guidance ranges for the quarter.

Our SG&A as a percentage of sales for the quarter was 12.9 percent, which was at the high end of our forecast range. The combined effect was an operating margin of 2.9 percent, which was in the middle of our forecasted range and a ten basis point improvement over the fourth quarter of last year. For the fourth quarter, Lithia used to new ratio was 0.8:1. So, 80 used cars for every 100 new cars that we sold. We sold 6 percent more new and used vehicles than in the same period last year. For the year, our used to new ratio was also 0.8:1. Lithia retailed 91,000 vehicles approximately, a 19 percent increase versus last year. Almost to the 100,000 vehicles per year level.

Our new vehicle sales mix by manufacturer for the year as a percentage of total new vehicle sales by brand was: 35 percent Chrysler/Dodge/Jeep, 21 percent General Motors and Saturn, 13 percent Ford, eight percent Toyota, four percent BMW, four percent Volkswagen Audi, three percent Subaru, three percent Honda, three percent Hyundai, two percent Nissan. Leaving four percent from the other brands, for a total of 24 different brands.

Our gross profit mix by new vehicle brand as a percent of the total growth profit for the year was: 10 percent Chrysler/Dodge/Jeep, six percent General Motors, Saturn, four percent Ford, two percent Toyota and on down the list. No one brand, the important point here is that no one brand represents more than 10 percent of our gross profits, which demonstrates the stability of the auto retail business model. Of the three domestic brands on a new vehicle same store basis, General Motors performed the best for the quarter for Lithia, followed by Chrysler and then Ford.

Of the major import brands, Nissan performed the best. Followed by Toyota, Hyundai, Honda, BMW, Volkswagen and then Subaru, in that order. New vehicle same store sales for both domestics and imports were positive year-to-date. I'd like to comment that from this quarter we are reclassifying -- now I'll turn to the finance and insurance area is the next area. From this quarter we are reclassifying documentation fees from F and I income to new and used vehicle revenues. We are bringing our reporting standards in line with the rest of our sector by making this change. The resulting effect for last year was approximately $100 per vehicle, less F and I income and an increase in new and used vehicle margins of between approximately 20 to 50 basis points, depending upon the period. This of course has no effect on overall profits. That it is a reclassification from one revenue category to another. To receive the numbers that have been affected by this change for the analysts or whoever else might like to see them, please contact Candy Rider (ph) at 541-776-6591 and she will fax you the information.

Lithia continues to generate consistent improvements on the profitability of the new stores in the finance and insurance area. Our F and I revenue per vehicle this quarter was $960 per car. Well above our internal target of $800. Keep in mind that this number has been adjusted downward with the reclassification of documentation fees but is still, we believe, the highest in the sector. This quarter's level of F and I penetration was 76 percent versus 78 percent recorded in the same period last year. For the year, our F and I revenue per vehicle was $886 versus $857 last year. This year's level of F and I penetration was 75 percent versus 76 percent recorded last year. The average store that we acquire is below 50 percent on this measure. And it averages around $400 per F and I per retail unit. It's worth noting that 23 percent of our stores have F and I penetration rates in the 80 percent plus range. Service contact penetration in the fourth quarter of 2002 was 42 percent versus 38 percent last year, so we improved here. For the year, service contract penetration was 40 percent of vehicle sales versus 39 percent in the prior year. Penetration of Lithia's lifetime oil and filter products in the fourth quarter was 32 percent versus 29 percent in the same period last year. Year-to-date penetration for lifetime oil and filter stands at 31 percent, a one percent improvement over the prior year. So we're happy to see gains in this product which is critical to the long-term success of our service business, as it is designed to improve customer retention in the service side of the business.

For the quarter, the total of flooring and other interest expense, as a percent of revenues was 0.8 percent of sales as compared to 0.9 percent last year. For the year, the total of flooring and other interest expense -- for the year this number is 0.8 percent as well, versus 1.2 percent last year. The decrease is mostly due to lower borrowing costs on our variable rate debt, which comprises approximately 86 percent of our total debt. For the fourth quarter our flooring interest credit to flooring expense coverage ratio was 112 percent. So we received credits from the manufacturers for 112 percent of our flooring interest cost. For the year the ratio was 118 percent. As a side note, flooring interest credits and other factory credits are accounted for at Lithia as a credit of cost of goods when the vehicle is sold, not when the vehicle is taken into inventory, which has been the industry practice.

Our weighted average interest rate for the full year 2002 was 4.1 percent as compared to 6.4 percent for 2001. In January of this year we entered into two interest rate swaps for 50 million dollars on our floor plan debt, bringing the fixed portion of our debt up from 14 percent to 23 percent. We plan to continue to raise this ratio as a hedge against rising interest rates as we convert variable rate mortgages to fixed rate mortgages as well, in the coming months. Our swaps that we entered in January were completed at an interest rate of around 3.26 percent for a five-year period.

Now I'd like to turn to the balance sheet. As you can see, by looking at the balance sheet in our press release, we have moved contracts and transit which clearly, which generally is clear in four to five days into trade receivables. We had 16 million dollars in cash on the balance sheet at the end of the year. Long-term debt is largely composed of real estate and equipment financing and excluding the used vehicle flooring facility was 105 million versus 96 million at the end of 2001. The increase is due to increasing mortgages on acquisition properties and new stores made over the year. Our long-term debt to total cap ratio improved to 25 percent from 32 percent last year, partly due to last year's equity offering. Our goodwill as a percentage of total assets also improved to 22 percent as compared to 24 percent in 2001. We continue to have a very healthy balance sheet with plenty of growth potential going forward.

Shareholders equity for the year rose by 57 percent to 320 million from 204 million at the end of 2001 through 38 percent growth in retained earnings and proceeds from the offering we completed in the material part of last year. Retained earnings now total 118 million. We have raised our revenue assumptions for this year to between 2.6 billion and 2.8 billion and have lowered our margin assumptions slightly resulting in EPS of $1.82 to 1.92 the same forecast range as previously provided. We have shifted four to five cents of EPS from the first and second quarters to the third and fourth quarters to reflect recent trends in our business. Our full year estimates factor in a total retail same store sales decline of two to four percent which is slightly better than our past guidance of a decline of three to five percent, due to signs of continued strength in new vehicle sales. You can refer to our press release for the ranges for all the key line items in our assumptions, for the quarter and for the year.

Also today, we would like to announce the completion of a new three year 200 million dollar acquisition and working capital credit facility with Daimler Chrysler services, a long time partner of Lithia Motors. The facility has an interest rate similar to that on our 130 million dollar acquisition facility with Ford Credit, which has been replaced. We are very excited about the partnership with Chrysler going forward. This facility enables us to execute our acquisition and internal growth plan of 15 to 20 percent EPS growth per year over the coming three-year period. Also as we've begin to leverage our balance sheet, it's our goal to return ROE to the historic 15 to 17 percent range that we realized before the dramatic slow down that began in late 2000 and is still going on in the western economy where we operate, as well as the issuance of new shares last spring. That concludes the financial summary and I would now like to turn the floor to Bryan who will comment on operations and acquisitions

Thank you, Jeff. And again welcome to everyone out there. I'd like to comment on the regional sales mix, regional performance, and acquisitions in 2002 and a little bit on what we expect to accomplish in 2003.

Currently our sales mix by state, including all acquisitions, is Oregon with 19 percent of sales, California 18 percent of sales, Washington, 16 percent, Colorado, 12 percent, Texas 12 percent, Idaho, eight percent, Nevada, five percent, South Dakota, four percent, Nebraska with three percent and finally Alaska with three percent. As you can tell, we've really balanced out our state mix and there's no one state with more than 19 percent of our total sales volume. For the quarter, California and Alaska performed the best followed by Oregon, Nevada, South Dakota, Washington, Idaho and Colorado. Colorado was the weakest market in the fourth quarter of the year. Colorado continues to suffer as the fall out from the tech and telecom sectors in that market unfortunately continue. Excluding the weak Colorado market, total same store retail sales for the quarter would have been experienced a decline of only 2.9 percent. So without Colorado we were still fairly strong especially from the comp in 2002.

The combined business in Oregon and California, which currently represents approximately 45 percent of our staple store sales has remained strong with same store sales up 4.2 percent this quarter. On top of 14 percent in the first quarter, 12 percent in the second quarter and 24 percent in the third quarter, so we're seeing great acceleration in Oregon and California as you can see. I'll comment briefly about our acquisitions for 2002 and what we expect to see in 2003.

In the first quarter of 2002, we acquired five stories with approximately 168 million dollars in revenues. In the second quarter we acquired four stores with approximately 205 million in revenues. In the third and fourth quarters, we slowed down just a tad bit and acquired four smaller stores with approximately 82 million in revenues. We completed acquisitions of 13 stores and 28 franchises representing 455 million dollars in annualized revenues in 2002. This is an increase of 24 percent from our 2001 revenue base and represents over 32 percent more than what we acquired in 2001.

In February of this year, we completed the acquisition of Richardson Chevrolet in Salinas, California, which was approximately 35 million dollars in annual revenues. We're pretty excite about that acquisition. It's a wonderful market in the central coast of California and it is going to be a phenomenal store for us. For the full year 2003 we expect to complete new acquisitions with 350 to 450 million dollars in sales which will contribute approximately 150 to 200 million dollars to this year's revenues. With 16 million dollars in cash on the balance sheet, our largely unused acquisition credit line and strong operating cash flows, we have enough capital to acquire approximately two billion dollars in revenues, which would still nearly double our current size and keep our long-term debt to total capitalization ratio below 50 percent.

Looking ahead our growth plans are solidly in place. On a long-term sustained basis we're targeting a goal of 15 to 20 percent growth for earnings per share, which we previously discussed in the past. Again, we believe we can accomplish 10 percent acquisition gross through internally generated cash flow and an additional five percent growth organically for a total of 15 percent, without having to access the capital markets or our credit lines. Any additional growth for more aggressive acquisitions would obviously be funded from our credit lines. Finally, operationally, Lithia continues to be dedicated to its plan of building out uniformity and continuity throughout our whole network of stores. Our system is flexible and can quickly change to accommodate positive changes while at the same time gaining immediate companywide acceptance.

These systems are what allow us to quickly react to the -- they allowed us to quickly react to the slow new vehicle sales environment in our markets and pose strong new vehicle same store sales performance throughout the entire year of 2002. We have a consistent sales process across all stores which includes customer contact procedures, industry leading pricing disclosures, consistent marketing practices and fixed product pricing structure in finance and insurance. We consider this company wide commonality our uniformity in operating models and cohesive personnel all working from the exact same play book to be the real competitive advantage of Lithia. And we really feel it's necessary in automotive retailing to sustained long-term growth. Now Sid would like to make in closing comments then we'll take your questions. Sid

Thanks Bryan and Jeff. As you know the sector has been plagued by fear of war, higher oil prices and stagnant economy. We have proven in the past two years we can operate well and deliver strong performance even in a weak economic environment like the one we're in. Relative to the war, there's been much speculation and concern that once the war broke out the new vehicle sales environment would become very anemic. There really is no way to predict exactly what the effect of that war would be on our business and so we're making no attempt to do that. We're going forward as if we will have a sound business in spite of the war. And the war in fact may not even take place.

It's important to keep in mind that historically auto retailers as a group have never lost money on an annual basis even in the very worst recessions. We have a very good business model. It still works in recession. Lithia already experienced a significant slow down in 2001 and it has continued throughout 2002. Our markets have continued to be some of the worst in the country and we've demonstrated we can turn the corner on earnings within a short period of time and continue to grow those. Our book value per share has grown from 4.22 at the end of 96, just after we went public and it currently stands at 17.72 at the end of 2002.

Going forward, we'll continue to demonstrate the resiliency of the auto retail model we'll show how we can acquire stores at good prices improve them and deliver profits even in slow down. I'd like to comment think this is my 25th conference call since having become a public company. It's been over six years now. I'd also like to comment that the core management team at Lithia is still soundly in place, the same company that began it as a public entity six years ago. We're proud of their performance, very proud of the company and continue to stress that we're going forward with a positive outlook. That concludes the presentation portion now and we'll open the floor for comments.

Emma, would you like to that?

Thank you. The floor is now open for questions. If you do have a question, please press the numbers one, followed by four on your touch-tone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received and we do ask while posing your question, that you please pick up your handset to provide optimum sound quality.

Once again, that is one, followed by four to register any questions at this time. Our first question is coming from Joseph Low of NS Free. Please go ahead with your question.

Joseph?

Mr. Low, your line is live. Do you have a question?

We may have answered it. OK, next one.

I'm sorry, there was no response. Our next question is coming from Rick Nelson of Stevens. Please go ahead with your question.

Thank you. Hi guys.

Hi Rick.

Inventories were up 62 percent year-over-year. Sales up 27 percent for the year and up 12 percent for the quarter. Can you provide more color on inventories, maybe days sales?

Rick, that really was a function of slow sales in October and November. That takes a while to correct that overinventoried (ph) situation. We were definitely overinventoried (ph) at year end. We've cut back dramatically on all ordering, for the first of this year. And it will pull itself back in line our sales rates will improve hopefully going especially into March and those short-term sales rates dictate that days supply. Really, very poor business climate in October and November and we ordered for a better business climate.

Where are you heavy, Sid? Is it new vehicles, used or both?

A little bit of both, really. It's pretty well spread. It's worse on the domestic side. I mean you've got Ford, particularly with considerably higher days supply than we need And you've got some in Daimler, although we're improving that quick. General Motors is the best of the three. Honda and Toyota lines are have fairly consistent day supply. There methods of allocating are much better really.

Do you have a total day supply number for new and used?

Rick, we don't give that.

And any comments on first quarter trends as it relates to sales and inventories? I know your guidance is calling for fairly substantial decline in first quarter EPS and yet growth for the full year, I'm wondering what your thoughts are there?

I think, Rick, it's traditional to have particularly February be a little slower. And January was quite slow. So we're looking at a big March. We've got five weekends and we've got normally that's one of the better months of the year. We see momentum building out of the latter part of February now. We've had a couple good weekends in a row. I think everything is on track. It's easy to panic in the winter but we've not done that and we're continuing to plan to have a very good year, considering the markets that are out there.

Inventories, would you expect they would be back in line by the end of the first quarter?

I think depends on the sales rate that we get out of March, coming out of this quarter. But there will certainly be much improved from what they were at the end of the. We're really aggressively pursuing a lower days supply than we ever have in the running of the company and we're continuing to improve our methods of forecasting internally, so we don't have those hiccups when markets slow dramatically. We'll have to keep a really lean base.

SG&A. I notice that wiped denied a little bit as percent of revenue and as percent of gross profit in the quarter.

The biggest increases there, we did a lot of analysis on that, obviously, was in the health care cost areas and employee benefits. That's really been the biggest increasing area in our SG&A across our company. And I think everybody is experiencing that. But we've had to weather through that.

We also have a higher mix of service and parts business, which carries a higher SG&A, too, Rick. We're still within our guidance there. We're not alarmed by it. We think it's fine. We're continuing to invest there the growth of the company. One of the few public entities really aggressively pursuing acquisitions, and we're equipped to do that by having adequate personnel and people in the training mode to become general managers and whatnot. So we carry a little heavier load there and always have.

I understand the manufacturers were forcing inventory on the dealers and wondering what you can do to really stop that

We have to say no, Rick. It's a tough deal. But it's done store by store, by manager by manager and those relationships are important. And we've got to get a little stronger enhanced program to prevent them from taking vehicles when they're over, where they should be, because the pressure is immense. And they do continue to pressure you to take cars.

I mean General Motors will go over a list say you passed so many cars in an allocation, if you would have had them, yack yack yack. It goes on and on it's a difficult proposition. The good partners in the business and Daimler Chrysler is becoming one of those in a stronger sense. I know Toyota and Honda understand it, recognize that selling a car doesn't take place when it's sold to a dealer it's when it's sold to a retail customer and they need to do that and we need to do that with the leanest days supply possible.

Thanks a lot.

Our next question comes from Scott Stember of Sidoti & Company. Please go ahead with your question.

Good afternoon, guys. Can you just talk about the parts and service business. You mention on a same store basis it was down this past quarter due to some of the improved proved qualities in the domestic OEM products. I know that's always been one of the selling points since you guys have always been weighted heavily towards the domestic models being that traditionally there's been some issues with quality and warranty work and stuff like that. Now that you've seen this trend going the other way, is there anything in place that you guys have to maybe try to reinvigorate that side of the business to offset that trend?

Our drop on Chrysler, for instance, Daimler Chrysler, in warranty costs year-over-year, I think those figures were through the third quarter. I don't think I have them year to year. They were down about 20 percent in terms of warranty. And that indicates the strength of their long-term processes and building better automobiles and our goal internally is to increase customer labor sales to offset that revenue loss on the warranty side and we're mounting a lot of interesting campaigns to succeed at that very competitively pricing those products. Chrysler has several new marketing techniques. Our lifetime oil change thing ensures that a lot of our customers are returning to us, if we can sell them the other services they need. As that capacity restraint is lifted some not having so much warranty work it helps us really be able to expand the customer labor side. We feel very confident we can at least hold that flat and grow it by five percent in the next years and in even in spite of declining warranty costs.

We're also seeing increases in the warranty costs for import brands which helps to offset that. Just if you look at the numbers, the domestics as a whole were down 18 percent on warranty costs, imports were up 20 percent on warranty costs so there's a dramatic shift there. I would point out that warranty sales for Lithia only represent about 20 percent of our parts and service business. It's not the key component of the parts and service business, it's 20 of the business.

It's higher in domestic than import stores. It has a lot to do with the operational length of warranties not included in those numbers is the service contract business which we continue to expand that builds long-term service for us in the shops as well. I think we're at 42 percent sales rate on service contracts this year. I mean that fourth quarter, I believe it was. That's a lot much higher penetration rate on service contracts than we've been achieving in the past. We continue to escalate that because it builds long-term service work as well. That's pretty much (inaudible) for us in repair and it's done at full retail. That does count, not as warranty repair. That counts as customer labor sales.

As far as on the acquisition front, given some of the softening sales environment that we had towards the end of the year, have you seen any softening in pricing for acquisitions?

Scott, this is Bryan. We have did he definitely over the past three to four months seen some softening and it appears that the performance of a lot of dealers out there have kind of hit them to where they've made the decision now to sell. And what we've kind of found is that some of the people haven't been willing to sell it at the multiples we're willing to pay are now willing to do that. We're starting to see that to accelerate and we're getting a lot more attractive acquisition candidates that are in the price range we're willing to look at.

Jeff, just a couple of little balance sheet items here. Do you guys have both the cap ex number and what the operating cash flow number was for the year?

Yes, cap ex, that was right around six million dollars for the company last year and that is the nonfinancible piece, the piece that's actually cap ex. The rest of our cap ex was all financed during that period and the money came right back in. We've made the purchase. So six million dollars for cap ex and then for next year we're at, for this 2003, we're estimating eight to $10 million of nonfinancible cap ex for the company.

He asked also, Jeff, about -- .

The cash flow.

The cash flow from operations.

Take the 32 million add the depreciation and amortization and add the cap, take the cap ex out, that's what you've got. But it's basically on our 10K it's around 45 million dollars.

All right. That's all I have.

For operating cash flow.

Thank you our next question is come from Tony Roberts of Gilder Gagnon. Go ahead with your question.

This is for Sid. Sid, you made a comment about inventory. And I don't want to read too much into it but I'm just curious. You said we're shooting to run the company with lower inventory levels than we ever have in our history. And I wonder, I know in 2002 you were making -- I believe I think you said in the calls you were making a push for new vehicle sales to increase your penetration in those markets. Does your comment about inventory imply that that kind of extraordinary pushes over?

No, not at all. We think we can accomplish both objectives it will take a constant focus internally. Since the stores are run individually by store managers and they make the inventory decisions on a day-to-day basis with the manufacturers, and we want to keep a decentralized framework like that, but because of that we can't always control it on a day-to-day basis. It's a more macro issue.

And the forecast out there for the fourth quarter that were put out by our company were fairly strong for October and November. And in fact that didn't take place. So we're overinventoried because of it. It happens you have to forecast out about 90 or 120 days. You have no choice. We're doing a good job about it, but we don't pretend to know where the markets are going to be every time. No one is good enough to guess that.

I don't want to fall short of inventory in a hot sales period and last year we had a very hot sales period in October and November and it was driven by those incentives, so we lost share last year during that incentive time because we had forecasted a lower day supply so we ended up the year with a very low days supply last year. By comparison we're higher this year. We were too low last year. It's a balancing act. It's one of the key things we continue to struggle with and work hard on and I think we're executing as well as anyone can, finding balance between volume and low inventory cost.

You noticed we still covered about 112 percent of our flooring cost. We covered more than the actual cost of the flooring through the credits that are given to us by the manufacturers. And so that's kind of our guideline. If we can keep that around 100 percent we're fine.

Do you let then the individual store operators make their own forecast of the demand that they see or do you kind of do a we'll tell you what the forecast is?

They do it by store they do it with their manufacturing partner. Your day-to-day forecasting each model, make, color and try to guess what you need in inventory, based on your historic performance and what we know turns. There's a lot of information available there and to try to do it on a macro level would require a tremendous amount of staff and I don't know that we'd be any better than it than having it done store by store right on the hands level where the guy is making a decision based on what he sees in his own market.

Tony, this is Bryan. On a corporate level, we do give a forecast on a monthly basis to the stores that's looking out 90 days to try to give them an indication of what we think is going to occur. But really it's in the stores and working with the manufacturers to try to get that accomplished so we keep our inventories under control.

The other question I had was I think that you were more aggressive with regard to acquisitions than the other public companies right now. I think you said that. Correct me if I'm wrong. Why is that, do you think? What's your view? Is it just that you're the type of store you're going after they don't go after or is it the stuff they go after is pretty much done? How do you see that?

It's a combination really. You can't uniformly apply it because they're all different. Each one has a different strategy. Some have quite high debt to equity and have limited money available for acquisitions. Some have a plan you buy where they only buy platforms and you're seeing some of that dry up.. Both manufacturers resisting that, based on approval and performance issues and how they're going to be able to handle that. And no one else has the strategy that's buying underperforming stores and turns them into winners except us. It's a consistent plan we develop from the beginning and we continue to execute that.

We did 13 stores last year. And we'd like to add 15 to 20 percent more stores on the base we have. We see no reason to slow that down based on any of the issues that the others might face. It does require a lot of personnel in the support services division of our company in order to buy underperforming stores and integrate them. Normally when we purchase a store, the owner operator leaves and we have a general manager, either that exists in that store or we have someone on the bench that we bring in to run that store and that takes a complete cultural change and very few others are willing to tackle stores that require that and that's really, I think, our key to long-term success in this sector. Manufacturers ultimately will really respect what we're doing and welcome our acquisitions. Where if you're buying their best stores in platform groups and you end up with just average performance out of those stores and you don't improve them, you're welcome with the manufacturer is going to be very limited and this already proving out. I've been saying this for six years the hype has gone out of it. You need to buy underperforming stores or average stores and turn them into winners if you're going to be a player in this business.

That's 80 percent of the stores throughout, by the way. It's the largest pool of stores available. That's why we've been consistently able to locate and acquire those type of stores and will be able to do that in the coming five to ten years.

Is it your thought that you can continue to achieve your targets with regard to acquisitions and stay in the markets that you identified that you're in right now? Do you have to go outside the states you're in now?

We don't have to but we will. Where we find the best opportunities we will go. We're right now kind of drawing a line at the Mississippi river. But art's plan is to become nationwide it works nationwide we've developed regional vice presidents. We have a strong presence in Denver. You slowly grow your way across the country. There's no need to leap across unless we found a very attractive acquisition and then we would.

What happens, not to take too much time, but what happens when you make a mistake you buy an underperforming store and you find out as a practical matter for some reason you can't figure out. You just can't get it to where you want to sell it. Do you keep it shut it down, move it? What do you tend to do?

All of the above. We've sold four or five stores, Tony. We've sold off some franchises that were underperforming within stores. We honestly think the lower five percent of our stores we acquire will fall into that category. And we're not perfect. There are elements of change and things change after you acquire a store that maybe we're not beyond your control in doing your diligence.

We think we can do it without losing more than five percent of them. And we'll have to sell those or find a way. We did shut one down in one market where the there didn't need to be a dealer, came in a package, very small store. We've sold in a couple of markets all the stores we had there because of the dynamics and the requirements that manufacturers have in terms of performance. If we can't achieve market share with a store, with a manufacturer, we needle to get rid of it. Because it will hold us back in terms of being able to buy other stores that are of that brand.

We've only sold off four stores out of the 65 or so that we've purchased over the year. So it's a very small percentage.

Three of the store sales were very small storage in Bakersfield California and we did not see the vision that we were going to be able to obtain 25, 30 percent market share in that market.

Thanks very much.

We'd go right back to Bakersfield if we could get the Ford, Chevy or Dodge store there. It's a domestic market. Imports don't do real well there.

Thank you.

Thank you, as a reminder the floor is still open for questions. If you do have a question, press the numbers one followed by four on your touch-tone telephone. Our next question is coming from Eric Miller of Heartland Advisors.

Right now GM seems to be putting out a push on this XM radio that you'll be seeing in cars. Are you seeing any traction from that?

No.

No.

Those guys work hard on that stuff they make extra bucks. I guess it's like us in F and I. But we don't see the customers demanding it. If it's something we can install after the sale quite easily, you have to balance that in your inventory mix and there is a little demand for it but it will take time.

OK. Thanks a lot.

Thank you. Gentlemen, at this time I would like to turn the floor back over for any additional or closing comments.

All right. If there's no other questions I'd like to thank you all again for participating. We're still disappointed obviously with the stock price and hopefully time will reward us for the job we're doing, because as you can see this thing still works. Thanks again for being part of the team.

Thank you, everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.