Lithia Motors Inc (LAD) 2003 Q1 法說會逐字稿

Good afternoon.

Before we begin, the company wants you to know that this conference call includes forward looking statements. These statements are necessarily subject to risks and uncertainties and actual results could differ materially due to certain risk factors. These risks factors are included in today's press-release and in the company filings with the SEC. Now I would like to turn the floor over to Sid DeBoer, Chairman and Chief Executive Officer of Lithia Motors, Inc..

Good afternoon, everybody. I would like to thank you for joining us for our first quarter 2003 conference call. With me today are Dick Heimann our COO, Jeffrey DeBoer our CFO and Dan Retzlaff our Director of Investor Relations.

As you know we released our first quarter 2003 earnings results early today which showed net income of 4.2 million and earnings per share of 23 cents. That was on 19 percent more diluted shares outstanding than the prior year. While earnings are lower than the prior year in a tough economic climate we feel there are some real positive aspects to the first quarter's results.

We posted record first quarter sales of 583 and a half million, an increase of 11 percent over the same period last year. New vehicle sales increased 21 percent, used vehicle sales declined 4 percent, part and service increased 15 percent an finance and insurance was up 19 percent.

In the face of a total market vehicle market decline, including new and used cars, we were able to gain market share in new vehicles. Our new vehicle same store sales were up 7 and a half, 7.7 percent in the quarter versus an industry that was down over 4 percent nationwide. We believe that most of the regions where we operate experienced even worse declines than the national numbers with a combined new and used vehicle market that was down at least ten percent as compared to the same period last year. Our combined new and used vehicle same store sales held steady then with the same period last year.

Total same store retail vehicle gross profit combined with finance and insurance income, which is probably the most accurate way of looking at the retail vehicle numbers was down only 3.1 percent. This demonstrates some of the positive impact of our volume based strategy and the benefits that accrue on the finance and insurance side of the business with the increased volume. Analysts in the sector often ranked the market based only on new vehicle sales, we all need to find a way to view the knew and used vehicle market on a combined basis. That is the total vehicle sold and used are a much larger piece actually than the new vehicles in that total.

At Lithia we believe that going after volume an taking market share is the best strategic decision during a slow economic period. This has been our strategy a long time certainly even before we became a public company. Gain market shares critical to long term health of the company to establish and maintain customer relationships. Customers not easily replaced and what we do now to gain customers will come back in the future and form of parts and service business and repeat sales and referral business down the road.

In addition we feel an aggressive stance towards new vehicle sales in a slow new vehicle sales environment is fundamental to our maintaining a healthy, long term relationship with our manufacture partners whose major concern is their market share.

What goes hand in hand with the volume strategy is the ability to sell our F and I products. For the quarter finance and insurance same store sales were up 7.3 percent. This was on top of the positive growth of 4.1 percent in the same year last year. We improved our finance and insurance penetration rate to 77 percent of all new and used vehicle retails units versus 75 percent we did in the same period last year. We also had 41 percent of our customers buy a service contract and 40 percent -- versus only 40 percent last year and we continue to improve our lifetime oil and filter product penetration and went up to 34 percent versus 29 percent in the prior year.

The strong new vehicle sales combined with greater penetration rates in F and I service contracts and our lifetime oil and filter product, insured continued parts an service business and increased customer contact in the years to come. Total same store retail sales in the first quarter declined .2 percent, the small decline in total retail same store sales is mostly due to the continued weakness in the used vehicle market. Used vehicle same store sales were down 14 and a half percent and they continued to be impacted by the heavily incentivissed (ph)new vehicles and the flat down economy.

We did experience an improvement in used vehicle margins over the same percent last year which help offset the decline in sales. With the used to new ratio of .8 to 1 and a company goal still of 1.5 to 1, a healthy used vehicle market is important to the success of our company.

The parts an service business, same store sales were down 2.6 percent for the quarter. Our margins in this business were roughly flat with last year. The major cause of the decline continues to be a drop in domestic brand warranty work as the improved quality has resulted in less warranty repairs at those stores. Same store sales in the parts an service customer pay side of the business were up 1.9 percent for the quarter.

Currently our sales mix by state including all acquisitions is California now with 20 percent of sales, Oregon 17, Washington 15, Colorado thirteen, Texas 12, Idaho 8, Nevada 5, South Dakota 4, Nebraska 3 and Alaska 3.

I'd like to give some quantifiable data now as to the economic conditions in some of the states in which we operate. As of the end of February, Alaska, Oregon an Washington, which represent 43 percent of our total same store retail sales had the three worse unemployment rates in the country. Alaska and Oregon had unemployment rates of more than 7 percent while Washington, California, and Texas had unemployment rates above 6 percent. Combined all 5 states represent over 70 percent of our same store sale.

For the quarter, I'll list the states in order of performance. Alaska, Texas, California, South Dakota, Oregon, Nevada, Idaho, Washington, and finally Colorado. Excluding the markets of Colorado and Washington, total same store retail sales for the quarter would have increased by 6 percent from the combined .2 of the total company. That was actually a negative .2 of the total company. We would have been up 6 percent if we excluded Colorado and Washington.

On the other hand our combined business in Oregon and California has remained strong with same store sales up 4.6 percent for the quarter. This was on top of the 4.2 percent gain in the fourth quarter of last year and 14 percent growth in the first quarter of last year. This is despite the fact these are two of the worst market in the nation as far as economic stability is concerned.

I'll turn it over to Jeff, our CFO. He will provide you with some more details on our quarterly results.

Thank you. Good afternoon everyone.

I'd like to provide a little more detail on the quarterly revenue numbers.

First of all, new vehicle sales comprised 55 percent of the total sales. This compares to 51 percent in the same prior period of last year, you can see the shift towards the new vehicles this quarter. Used vehicle sales comprised 30 percent of total sales versus 35 percent in the first quarter of last year. Parts and service sales represented 10 percent of the same as the prior year, F and I or financial insurance was 4 percent of sales this quarter compared to 3 percent in the same period last year.

The shift from our higher margin used vehicle business to our lower margin new vehicle business did hurt profitability this quarter. The contribution to gross profits by business line this quarter was as follows: 25 percent new versus 27 percent last year, 21 percent used vehicles versus 23 percent last year, 31 percent from service and parts, so almost a third of our profits came from service and parts versus 30 percent last year and 23 percent finance and insurance and that was 21 percent last year.

Seventy-five percent of the our gross profit therefore comes from non-new vehicle gross profit in this quarter as compared to 74 percent last year. One can see the overall decline in the retail vehicle market and the relative increases in the parts and service and finance and insurance business line that contributed more to our profits.

I'll now go over the gross margins by business lines. Gross margin for New Vehicles in the first quarter were 7.1 percent as compared to 8.4 percent in the same period last year. As Sid described earlier, the decline was due to our aggressive volume driven new vehicle marketing programs.

In the Used Vehicle business first quarter gross margin was 13.0 percent, which was an increase of 40 basis points from the first quarter of last year and a sequential increase of 70 basis points for the fourth quarter of last year. This is the first quarter in a quite a long time when Used Vehicle margins actually started to improve again. We're experiencing the opposite forces at work in the used business as compared to the new vehicle business. We placed more focus on highly incentivized new vehicles as the total vehicle (ph) which includes new vehicles was down substantially in the quarter.

Parts and Service gross margin for the first quarter was 47.7 percent as compared to 47.8 percent in the same period last year. The gross margin in Service I improved while the gross margin in Parts declined slightly.

The gross margin for the body shop business remains fairly constant. As a result of the mix shift to lower margin new vehicle sales total gross margin for the quarter was 15.7 percent, 30 basis points decline from the prior year.

Our SG&A, our sales general administration expense was 13.2 percent of the sales, higher than normal largely due to increased advertising and seals compensation expenses related to our volume driven new vehicle sales approach in the quarter. The combined effect was an operating margin of 2.1 percent. It's important to keep in mind that historically the first quarter has the lowest operating margins of the year and we expect improvements throughout the years in operating margins. The range of improvements by the third quarter of the year over the past 6 years has historically been between 20 and 100 basis points with the average being around 70 basis points.

Our new vehicle sales mix by manufacture for the quarter is also follows: Chrysler/Dodge/Jeep 35 percent; General Motors and Saturn 22 percent; Ford 13 percent; Toyota 8; BMW 4; Hyundai 4; Volkswagen/Audi 3 percent, Subaru and Honda both at 3 percent and Nissan at 2 percent. The remaining 3 percent are all our other brands for a total of 24 brands.

Our gross profit mix by new vehicle brand as a percentage of total gross profit for the year was 9 percent Chrysler/Dodge/Jeep, 5 percent General Motors Saturn, 3 percent Ford, 2 percent Toyota and 1 percent BMW, leaving approximately 1 percent from the other brands. No one brand I will point out here represents more than 9 percent of our gross profit, demonstrating that the variety of businesses that auto retailers enjoy and the sources of our profits.

Of the 3 domestic brands on a new vehicle same stores basis Chrysler performed the best with a 13 percent increase in same store sales, followed by Ford and then General Motors. All 3 of these domestic brands demonstrates a positive same sale store growth. Of the major import brands Hyundai and Honda performed the best followed by Toyota, Nissan and Subaru.

At Lithia new vehicle same store sales for both domestics and imports were positive year to date with similar growth rates.

Our new vehicle inventory day supply has improved by 10 days if the beginning of the year an is in good shape going into the busier second quarter.

Our used vehicle inventory day supply is about at our average for this time of year and in good position going into the second quarter as well.

Lithia continues to generate consistent improvements on the profitability of the new stores and the finance and insurance area. Our F an I revenue per vehicle this quarter was $938 per vehicle, the highest level have achieved in the first quarter of a year. As Sid mentioned earlier this was driven by strong improvements in the penetration rates of all of our key F and I components.

For the quarter, the total of flooring and other interest expense as a percent of revenue was .8 percent as compared to .7 percent last year. We recently took advantage of the low interest rate environment to lock in 6 straight on more of our flooring debt by entering into two 5 year interest rate swap agreements for a total of 50 million dollars. This resulted in an increase to our flooring interest expense for the quarter, however we believe it is prudent to protect more of our flooring debt against rising interest rates at this time.

We currently have hedged approximately 25 percent of our new vehicle flooring debt including all fixed rate debt applications, including the mortgages, approximately 24 percent of our total debt at the current time has fixed rates.

At year end our variable rate debt comprised approximately 86 percent of our total debt, now 76 percent, so we have made progress on hedging against rising interest rates in the future.

Of further note recently the EITF from the Financial Accounting Standards Board issued pronouncement O2-16 relate to the timing and classification of vender credits. For Lithia this relates mostly to flouring and advertising credit received from manufactures. Consistent with the pronouncement Lithia -- we do not recognize these credits as income until the vehicle is sold therefore we do not have any adjustments to earnings from this pronouncement.

I'll now turn to the balance sheet. We had nearly 30 million dollars in cash at the end of the quarter as compared to 6 penal million at the end of the year.

Our long term debt excluding used vehicle flooring is largely composed of real estate and equipment financing and was 115 million dollars versus 105 million at the end of the year. The 10 million increase this quarter is due to the addition of mortgage debt from acquisitions from last year that we financed this quarter.

Our long term debt to total cap ratio increased slightly to 26 percent versus 25 percent at the end of the year but is still among the lowest in the sector.

Our goodwill is a percent of total assets is the lowest in the sector and improved to 19 percent of assets compared to 20 percent in 2002.

We continue to have a very healthy balance sheet with plenty of capital for future acquisition growth and share repurchases as Sid will elaborate on later in the call. Shareholders equity for the quarter rose by 1.5 percent to 325 million from 320 million at the end of the year, through 3.5 percent growth in retained earnings. Retained earnings now total 122 million dollars.

As a final note, for the full year 2003 we are still forecasting from 1.50 to 1.60 per fully diluted share. In this guidance we're assuming no improvement from the current economic conditions beyond the normal seasonal variations.

That concludes the financial summary and I will now turn things back over to Sid who will comment on acquisitions, operations and make some final closing comments.

Thank you, Jeff. I'd like to comment on our acquisitions and operations in 2003.

The first quarter of the year we acquired 3 stores with approximately 75 million in revenues. Richardson Chevrolet in Salinas, California, Pacific Hyundai in Anchorage Alaska, and Randy Hanson Chevrolet in Twin Falls Idaho.

Most recently and as part of this announcement today we announced the acquisition of Grisly Chrysler/Dodge in Montana with about another 25 million in revenue, so for the full year we are at 100 million at this point in acquisition revenue.

For the full year 2003 we expect to continue to complete new acquisition throughout the rest of the year as we have been doing. We have ample capital to continue our growth plans. With 30 million in cash on the balance sheet, our largely unused acquisition credit line and still strong operating cash flows, we have enough capital to acquire approximately 2 billion dollars in additional revenues over the next few years which would nearly double our current size and still keep our long term debt to total cap ratio below 50 percent.

On a long term sustained basis, we are still targeting a growth of 15 to 20 percent in earnings per share. Approximately ten percent of this growth can be accomplished through internally generated cash flow and 5 percent of the growth should come from our internally organic growth on same store sales totaling 15 percent without having to access the capital markets or our credit lines.

Our 5 year average same store sales growth rate still stands at 4.7 percent in spite of the last couple years. Any additional growth for more aggressive acquisitions could be funded from our credit lines.

In operations, Lithia continues to be dedicated to its plans of building our uniformity an continuity throughout our network of stores using the industries best an latest practices. From the very beginning we have implemented a process to integrate each acquisition and improve it's operations. We operate on a fully integrated network of information systems. Our sales process implemented in all stores includes customer contact procedures, industry leading pricing disclosures, consistent marketing practices and a fixed product pricing structure in finance and insurance.

Working from the same play book is a huge competitive advantage and we believe a necessity to sustain long term growth and consistent earnings. We have a model that works effectively and consistently and that has proven to add value.

To finish I'd like to comment on valuation.

It's important to keep in mind at this time when most of the companies in the sector have experienced dramatic declines, that historically auto retailers as a group have never lost money on an annual basis even in the worst recessions.

In the first quarter of this year we demonstrated what the impact of a severe slowdown for Lithia looks like, and this was similar to what occurred in the first quarter of 2001. We adjusted our operations to maximize the benefits of our model in the quarter and for the year ahead we are set. We are in a good position for the rest of the year. We will continue to add stores to our operational basis in a consistent disciplined manner as we have in the past.

It is nice to point out that our book value per share has grown from 4.22 at the end of '96 when we became a public company, to 17.72 today at the end of 2002.

And finally, in the first quarter of the year Lithia resumed its share buy-back program. Lithia's board of directors has approved the repurchase of up to 1 million shares, of which over 940 thousand we still have access to purchase.

I guess that concludes the presentation portion of the conference call. We would like to open the floor to your question.

Thank you. The floor is now open for questions. If you have a question you may press the number 1 followed by 4 on your touch tone phone. If at any point your question has been answered you may remove yourself from the cue by pressing the pound key. We do ask you pick up your hand set to provide optimum sound quality. Please hold while we pole for questions.

Thank you, your first question is coming from Rick Nelson of Stephens. Please state your question.

Thank you. Hi, guys.

Question about inventories. Jeff had mentioned that they were 10 days better than year end on the new vehicle side. What was the absolute day supply number and how does that compare to the prior year first quarter end?

We don't give that number, Rick and those numbers are not consistent in the industry. There is in-transit issues and other issues. We are trying to standardize that within our sector an get everyone to give a day supply number that's accurate and when that happens we will give our day supply numbers, but until that takes place I'm not going to.

How about day supply at Lithia relative to a year ago at this time in

We think we're in about the same shape we were last year now. We weren't at the start of the first quarter, obviously.

Last year the sales rate really accelerated in the fourth quarter. What we're trying to actually develop is a new method of forecasting which we have always use odd a store basis that we use in our own financial analysis which is based on a forward thinking day supply predicting what sales will be and knowing what we have in stock to serve that sales rate which makes a lot more sense be these trailing sales rate.

Some people use a 90 day sales rate average on a historical basis. Some use 30, some use 60, some have in-transit times, some don't.

The numbers are all over the board and you can see it's important to try to get an consistent method. We have our own internal structure based on a forward looking day supply. When we look at that we're in real good shape for this quarter.

The floor plan interest expense was up 58 percent year-over-year. Is that heavy inventories, are they hedging, a combination of the two?

Combination of the 2.

And the hedge added quite a lot to that. We added stores and those are the main factors that drove the interest expense higher.

Sid, do you think Lithia is more susceptible to channel stuffing given your brand mix, very good domestic, heavy, a lot of Chryslers and also your acquisition appetite where you need manufacturer support probably to a greater extent than those that are not making acquisitions?

There's really -- inventories are in our control, there's always pressure from manufactories, but I don't think we're exposed to more pressures. Obviously manufacturers that build domestically don't do as good a job as needed for sales as the imports have done.

And historically, for instance, right now where they are asking us to build out orders for the next five months on many vehicle lines and obviously that becomes and tussle and domestics are worse at that than imports. So it may impact. Ah... some of the smaller markets were in force us to carry a little larger day supply but obviously the manufacturers are a huge partner for us and we want to consider share as a big factor and at times we will bulge-up an inventory to take more share in a market -- particularly when a store is under-performing.

And on service an parts front -- I'm wondering if there is a domestic or a difference in the same store performance between your domestic dealers and your import dealers?

We gave you that one number this time, Rick, which was customer labor sales were up 1.9 percent on the same store basis and that's what we monitor, the other one we don't have a lot of control over and I think Ford and Chrysler are down dramatically on warranty cost and that's a function of really of the quality of the vehicle has much improved and that's really cars they built three years ago that we're currently not having to fix transmissions on, you know, that they used to have trouble on.

I think that's itself biggest part of any decline we're seeing in parts and service on the analysis we can do. We continue to see growth in our labor sales in service and parts.

We also have a factor that we didn't discuss in the meeting, it's relating to people trading in used cars that normally they might have kept because of the highly incentivized new cars and they are not repairing them so we are getting a little of that to make sure that is taking place.

We're quite pleased in the progress of service an parts. I think all the things we planned will ultimately give us a good consistent 4, 5, 6 percent growth rate in service an parts.

When does that resurface, soon?

I think warranty in the domestic shop represents about 20, 25 percent of the sales so that will slide down a little bit more probably but hopefully we can offset that so we should get pretty flat growth in the same store certify investigate an parts maybe at the outside a couple of years but beyond that I'm sure we will continue to see that customer labor component really pick up.

Thank you.

Thank you. Your next question is coming from Scott Stember of Sidoti & Company. Please state your question.

Good afternoon. Can we touch on obviously you aren't giving quarterly guidance out for the rest of the year but maybe just how April is shaping up and just in general terms on the new and the used side and maybe also if you could touch on the used a little bit and maybe just talk about some of the older cars versus the newer cars if there's any specific area other than the fact that you are seeing the newer stuff. Are some of the older cars also being under pressure as well?

Let me answer the first thing on the guidance for April as far as the business. We had a really bad January and February, March we were hoping would end-up being a barn-burner and it ended up being a good month. It looks like April is trending about like March.

And then on the used car issue, we're not selling as many late model used cars as we did, and the older used cars there are issues with getting people financed that we didn't have a year ago, so Mayer Credit (ph), some of the other once have cut way back on buying and some of the other manufacture finance sources as well , have a higher cost of capital that they did, and they are taking a little less risk. So we're finding that has impact our ability to sell some of the older used cars. Those things are pressuring used car sales.

As far as the buyback, did you buy back any stock in the quarter?

Yes, we did.

How much ?

We didn't give the number but not a (inaudible)amount. We began to buy.

And if stock was to stay at these levels would you get more aggressive during this quarter and going up?

Yes. We think the stocks are grade buys at price and we should be using our capital there as well as acquisitions and we have settled all our issues with equity financing, debt financing, we have lots of capital we're in a position to support and put our dollars to where they make the most sense.

That's all I have. Thanks

Thank you. Your next question is coming from Jerry Marks of Raymond James. Please state your question.

Good afternoon.

Jeff, is there any possibility -- you indicated terms of the floor plan interest expense being impacted by the hedging cost as well as the higher inventory. Can you give an idea in terms of the magnitude of the hedging cost?

When you enter a hedge the 5 year hedge rate is a higher rate than the currently rate. So it's an incremental expense. Our swaps that we did were around 3.2, 5 percent or so and so that additional interest expense is what we are talking about on about 50 million dollars. So you should be able to calculate that yourself, I guess.

Sid, the other question I had was the used vehicle sales seem to be impacted, you're indicating you are having a little bit more problems getting financing from like AmeriCredit, but it seems to me the incentives weren't as big as January, February, March really because the auto makers didn't know what was going on with the war. I'm just kind of wondering why you know the same store comp really came out the way it did. Was it a lot of the lenders not helping you get those customers into the car?

I think the total vehicle rate and that's a number we don't have but we're trying to gather it as well as we can within our regions are down at least 10 percent, maybe even 15, and because of that, we were selling new cars and they -- everybody says the SAR was relatively good with only losing 4 percent. And incentives in domestic brands, General Motors was the only one that backed off but Chrysler really went forward in March. We saw benefit from that. I think all the stores hit the highest margin on their incentive payback programs. I don't see much difference in that March month than what we're seeing now in terms of incentive. I realize General Motors has a better package right now but that shifts it seems like one guy's plan and one isn't every month and you have to realize the mix of manufacturers they have will give us that balance. Did that get you there, Jerry?

Yes

On the lenders as well, I'm looking at the list of lenders and there's a number that have increased their business with Lithia and there are some that are declining. But there's that shifting that occurs and we see a lot more credit unions taking sub-prime paper so we have been able to sell the paper on the sub-prime and over.

It's not like it's dried up but there is an impact. Again if you can buy a new car and the payment is about the same you're going to buy a new car and that's really taking place but I think the total environment is in a recessionry (ph)environment. It showed up on the used car side because the new car was a more economical choice.

I would be real curious on your efforts in terms of finding a total US, SAR.

I've been talking to a friend of mine is on the Federal Reserve Group here locally, we have these area representatives and I've asked him to try to find out any information about total vehicle sales. One of the problems is that about 50 percent of used cars are sold privately and there's no measurements on that, but there should be something on DMVs on transfers. If anybody has any information on that. --

If anybody could figure it out, you could.

It's probably like 40 million annual rate. I mean it's a huge number so the used is a bigger component and if we don't know whether that number is, whether it's up or down, if we're talking about new car SAR, we're missing something.

I think you're right, it's tough data to get. Thanks allot.

Thank you. Next question is Richard Kine (ph) of Kensington Management Group.

Just a couple of questions. It seems this call is dwelling on used cars and I guess I will follow up. You mentioned the used to new ratio was 8 to 1 and I think you mentioned your goal was .85 to 1.

1.5 to 1. That's a long term goal we think we can achieve over time. Every time we add a store that's doing .4 it hurts the average. And it takes time to build that part of the business.

What was the comparative -- the .8 to 1, what was the comparative figure last year in the 1231?

I think we got the 1 to 1 or was it .9? We did as high as 1.1, I think. Our original dealer group we went public with was almost 3 to 1.

If everybody worked 1.5 to 1 wouldn't even be a max?

It's certainly not a max, no. But it's an achievable goal. And we have stores doing it.

What really -- I'm still not -- I know this is a bunch of questions but what really turns around this -- to get the -- get a used car ratio up? What is it going to take? I mean, is it going to take better financing, America credit more willing to do it, or is it the lack of incentive on new cars bring the ratios of prices down or what turns it for you?

It's mostly infrastructure on our side, Dick, that would largely allow us to continue to grow that. Having the retail space available, the manpower that understand how to sell used cars, how to buy them at each store. We have got on a corporate level, we have got it on a lot of stores.

We are develop regional used car directors that can help teach and educate our people how to do it. It's a high risk business. It's not something you turn people who don't understand it lose because you can lose a lot of money getting back out of the it, so you have to educate and become. Our Toyota store in Medford here has a wonder if you will used car manager we tried to sell the knowledge he has, but it's really more a personnel issue than anything.

And this new car to used car will definitely impact it if manufacturers are pushing for share and until somebody finally says uncle and gives up it's going to be cheaper to buy a new car than a one or two old one, that's going to have an impact. I think that's at least .2 of that ratio right now and the rest is infrastructure or our side and the long term plan to build it and still be able to make money as we are building it, you still got to make your -- you know, your quarterly targets and monthly targets and things. So it's a balancing act to develop the structure.

So near turn it's not gonna turn? Continue to deteriorate?

No, I don't think so. I think we can hold this. This is a pretty low level for us. We have invested a lot in that side and we continue to see benefits. It's a store at a time process. Depends on what kind of stores we add, too. Some of these stores we have at in the region markets. They tend to do better on the used cars than the metro markets. The regional market stores are definitely our strength. With all the acquisitions this year --

Let's go into that for a second. The regions that you are in are really the same regions, you're not really going out to new regions; is that correct?

That's right. And Salinas was relatively new and the one in Alaska we're there. The one in Idaho. Twin false is a new city.

You're in (inaudible) (inaudible)

That's a new outlet for us in that city and that's a unique market

What I'm getting at for the next question is really your regions are not doing well, you know, and -- wouldn't it be better to diversify into other areas? I'm not saying you have to make another platform acquisition but wouldn't it be better to do a little more diversification an therefore the next time we have a downturn you're not going to get hit as hard because, as you said, did you give those figures that you had just gave there is a -- concentration on the areas of the country that respect not doing well

We have began to expand in the Mid West and we will do more acquisitions there. I'm not going to forecast, you go back 5 years ago, these were the hottest markets in the country we are in right now so who is to tell us that that won't swing. I mean, today we all feel like it won't but when you go back threw history, these go back and forth, these are great livable areas where vehicles are a critical part of people's life styles and it's better to buy now in those markets while they are down than to try to chase those markets once they get hot again because they are going to get hot again, there's no question Idaho is a great place to live, so is Washington, Oregon, lots of parts of California. I think that we are in some of the best markets in the United States and we should be accelerating our acquisitions while it's down because it won't stay down.

Are you accelerating your Acquisitions?

As much as we can within the amount we are willing to pay for stores. We can only buy 24 stores in a year. That's all the infrastructure support we have. It would be wonderful if we would find that money and have, you know, the requirements that we have internally for market share and our issues manufactures that make it all work.

But I think we can certainly work on accelerating. You'll find that we'll hit the targets we're at for this year in terms of acquisition. That's pretty aggressive. We are doing more than anybody else because we have a company built to grow through acquisition, one of the reasons our SG&A is a little higher than others because we have got the people in personnel to do it.

When we take a store over it's a major project and we close the store a couple of days change the computers an retain the people put all our systems in, it's something I don't think anybody else is doing it to the extent we are.

I don't think anybody is going to argue with you that these areas won't come back, it's just -- because you definitely have taken a down hit here and I'm just wondering if you -- do you have anything in mind that would say cushion you for the next down turn? Do you have anything in mind that will cushion you for future downturns?

Yes, we will continue to grow and eventually we will have a complete regional mix, that should buffer and area being up or down and we should be able to maximize that. But you remember I'm a 10 year player. That's my vision, I always look 10 years out. I can't do something today that will hurt us 5 years from now so we have to continue to grow on the basis we can. I'm not going to leap across the country and buy something in the southeast now just because it's a little hotter market when I don't have the infrastructure to support it there.

Okay. Thank you.

Good points, I don't mean to sound defensive. I think you're right on target. Those are all issues.

Thank you.

Thank you. Your next question is coming from David Herman (ph)Shumway (ph) Capital.

Good morning. I have two questions regarding the timing and classification of this vendor credits that you refer to in your press relief. I guess first in looking at your earnings on comparative basis to your public peers, I'm not sure how everybody else in the industry is accounting for these floor plan assistance and ad credits but assuming they are doing it a different way than you are, how much of an impact would it have on your earnings if you were to recognize these credit for time served as income at the time you took the vehicle and inventory rather than the time the car was sold so I can look at your earnings on a comparable basis?

There's no difference in earnings on a comparable basis. The only difference would be you're making the money when you're buying the car instead of when you're selling it, so if you are increasing your inventories you will have a higher gross margin and it will look better than it is probably is. If we went back, that's the normal auto manufacturing way of looking at it and that's why some of the other ones in the sector are doing it the way they have always done it and we recognize that it wasn't proper a long time ago to record income when you buy something, so we said we need to do it when we sell the car and we converted over a period of time so we were on that system instead of the way we are. As far as the actual impact on real earnings it's a one time adjustment for somebody to come to our method. They will have to take a write off of that money that they have reported as income until the car is sold. So whatever they have in inventory times the dollar amount will be the amount of that adjustment. Other than that, there's no impact on earnings going forward

And the second question is related to that. Given the significant acquisition activity in this industry, help me understand how these floor plan assistance and advertising credits are typically treated in acquisition are the credits recognized as profit at the time somebody obtains a dealership in the inventory or are they recognized -- so they are running a lot of profit through their P and L by trying to make an acquisition or are they recognize when the car is sold to the consumer.

If they are using the first method I described , it would flow through P and L as they acquire the store.

Not when they sell the

Not when they sell the car

How do you do it?

We are on the method that we don't record it until we sell the vehicle so we do not get any profit out of having an acquisition take place.

And I have one last question. How do I think about you guys done a great job on your F and I business and it's very helpful you give these penetration rates. Where do you think F and I can go on a per vehicle basis? You are at 938. It sounds like there's probably some further penetration on sort of the extended service warn advertise.

You know, our target internally is a thousand, and we have seen stores at 12 hundred, but I mean I really think that that's -- we're in the range. You might see some percentage increases 4 or 5 percent a year, but it's not going to leap.

That because you're bringing sort of your third and fourth level stores up to the average as you acquire them or how are you driving that?

Yeah. Well, I mean we get that pretty soon on an acquisition.

Uh-huh

Because our systems all go in immediately so it's no more than three or 4 months and they are getting close to our numbers.

There's not a lot of growth coming out of acquisitions that would make the numbers go higher. I think it's generally pricing rising. We will charge a little more for service contracts. We keep looking for products we can sell that add value for the customer and there are some out there and some are more sensitive to certain products than others, the alarms and we might do some of the at light radio things, we sell a subscription and you get a couple bucks a month. And the cell phone things we did that for a while and we used to sell cell offense in the F and I office.

It's largely the service contract , that margin on the finance reserve the credit life health and accident, and then our protective coatings is largely and then lifetime oil change we get a profit out of that. So this is again auto dealers challenge all along because it also puts pressure on the competitive base on the gross profit margin on the vehicle that you need to find ways to make additional profit ,if you can arrange the financing while the customer is there you have an opportunity to sell the products. If you don't arrange the financing you won't sell them because they need to put them into their payments in order to afford them. So we need to be really good at F and I, I think we can continue to enhance that but we're not going to go to 1500 a car. It was at 5 hundred 15 years ago who would have thought we would be at a thousand

Thank you for your time. I

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