Lithia Motors Inc (LAD) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Lithia Motors third quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS)

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 these certain risk factors. 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 Sid DeBoer, Chairman and Chief Executive Officer of Lithia Motors Inc.

Good morning, everyone. Thank you for joining us this morning for our third quarter 2003 earnings release and conference call. I'm joined today by Dick Heimann, our President and COO; Jeff DeBoer, our COO; by our two Executive Vice Presidents, Brad Grey and Brian DeBoer; and Dan Retzlaff, our Director of Investor Relations.

We're very pleased with our third quarter 2003 earnings results. For the third quarter net income increased 20 percent to a record 12.9 million and earnings per share increased 17 percent to a record 69 cents a share. This exceeded First Call estimates by 10 cents for the quarter.

For the third quarter of 2003 Lithia will continue the payment of a dividend of 7 cents per share. This is the second 7 dividend paid by Lithia. As we stated in the second quarter, payment of quarterly dividends should not affect our acquisition growth plans for the future. Lithia continues to have a very strong acquisition pipeline and we have experienced no shortage of opportunities in the regional markets where we have been so successful in the past. We are well capitalized to take advantage of acquisition opportunities over the coming years and still pay the dividend.

I would like to further explain the financials. We posted record third quarter sales of 728 million, an increase of 6 percent over the same period last year. We experienced growth in all business lines this quarter -- new vehicle sales up 10 percent; used vehicle sales up 1 percent; parts and service sales up 13 percent; and financing insurance sales up 17 percent.

We continued to be aggressive in all our markets in the third quarter of the year. Last year in the third quarter, new vehicle same-store sales were up 23 percent. On top of this difficult comparison, we were able to add an additional 1.5 percent of growth in new vehicle same-store sales this year. Year-to-date new vehicle same-store sales are up 6.9 percent for Lithia. This compares to national new vehicle sales that are down approximately 1.6 percent year-to-date. Our operational focus has allowed us to exceed industry sales levels throughout the year, even though we currently operate in some of the country's most challenging economic environments.

Lithia's exposure to the Chrysler brand has been a point of concern because of Chrysler's loss in market share so far this year. We have not seen a similar trend in the markets where we operate. Year-to-date through the month of September, Chrysler's national sales were down approximately 6 percent. Same-store Chrysler sales for Lithia in the same period were up 6.3 percent. In the month of September Chrysler's national sales were down 15 percent; at Lithia Chrysler same-store sales were up 0.3 percent in September. For all domestic brands same-store sales are positive year-to-date.

We feel that it is important that our analysts and shareholders understand these differences with regards to our performance so they can properly filter any news about specific brand performance and how it relates to Lithia. It is also important to remember that when we acquire stores we're generally acquiring average operators where there's room to increase market share. We have an operating model that has been proven to do just that. The way we increase market share in our stores allows Lithia's brand performance to run consistently contrary to national numbers. We see nothing to hinder us from continuing that trend. On top of that, both Chrysler and General Motors and Ford have strong new product plans over the next three years.

New vehicle margins have remained fairly consistent throughout the year; for the third quarter and year-to-date they came in at 7.6 percent. While this is lower than year ago levels, we continue to believe that going after volume and taking market share is the best strategic decision for Lithia and our manufacture partner at this time.

This volume strategy increases our ability to sell our F&I products. Through the quarter finance and insurance same-store sales were up 5 percent. This was on top of growth in 7.3 and 6.0 in the first and second quarters of the year. Our finance and insurance penetration rate remained steady at 76 percent, the same as last year in the third quarter.

Our service contract penetration rate increased to 42 percent, 2 percentage points higher than last year. We also saw good gains in the penetration rate of our lifetime oil filter service to 34 percent versus 32 percent in the same period last year.

Strong new vehicle sales, combined with greater penetration rates in F&I, service contracts and especially our lifetime oil and filter service, will ensure continued parts and service business and increase customer contact in the years to come. Jeff will comment on the positive results we have been seeing in the parts and service business later in the conference call.

Used vehicle same-store sales were down 7.9 percent in the third quarter. This is essentially the same as what we did in the second quarter of the year but substantially better than what we saw in the first part of the year.

Operationally, we feel that we have done well in this challenging used vehicle environment. Used vehicle days supply have remained at low levels throughout the year, and at the end of the quarter those days supply levels were at their lowest third quarter levels ever for the Company.

Additionally, we have been able to increase used vehicle margins consistently throughout the year to historically high levels in the third quarter. In the third quarter, as in the second quarter of the year, the dramatic increase in used vehicle margin more than offset the decline in same-store sales to produce positive same-store used vehicle gross profit growth for the quarter. Year-to-date used vehicle same-store sales are down 9.7 percent. However, used vehicle same-store gross profit is positive year-to-date.

In the parts and service business we've begun to realize consistent improvements. Same-store sales were up 3.9 percent for the quarter. Year-to-date parts and service same-store sales are now positive, up 0.6 percent.

Same-store service and parts sales have been positive since June of this year. There are a couple of reasons for the improved results. The largest impact has come from the fact that we've been able to continue to improve the customer pay side of the business. The customer pay side of the parts and services business is up 4.5 percent for the quarter to date and 3.8 percent year-to-date. Secondly, in the third quarter we saw a moderation in the decline in domestic warranty repairs to just 4.4 percent. We are pleased to see these positive trends in the parts and service business.

Finally, total same-store retail sales in the third quarter were down a very slight 0.6 percent, which as we have seen was the result of the weak used vehicle market. Year-to-date same-store retail sales are up 1.6 percent.

Currently our sales mix by state including all acquisitions is -- California with 19 percent, Oregon 17, Washington 15, Texas 13, Colorado 11, Idaho 8, Nevada 4, South Dakota 4, Nebraska 3, Alaska 3, Montana 2 and Oklahoma 1. We continue to focus on diversifying our revenue base in different economic regions.

For the quarter I will list the states in order of performance from best to worse. Our best states, beginning with Alaska, Texas, Idaho, Nevada, Oregon, Colorado, Washington, California, South Dakota and finally Nebraska.

California came in near the bottom of the list only because it is up against some very difficult comparisons from the third quarter of 2002 when things improved immensely there. California is still a very healthy market for Lithia.

Same-store sales in the Idaho market improved substantially in the third quarter compared to what we saw in the second and third quarters of the year.

Colorado also performed significantly better compared to the first and second quarters of the year and in the month of September demonstrated positive comps. Part of the improvement here is due to easier comparisons from the same period last year, at least in Colorado, but we also are making good progress at building stronger teams in that market, and the improvements become more apparent each quarter.

Texas has remained a strong market for Lithia, demonstrating positive same-store comps every month of the year through the end of the third quarter. The integration of those acquisitions we made there last year have progressed very well and those economies are much stronger than many of our other markets.

I would like to turn the meeting now over to Jeff, our CFO, and he will provide you with some more detail on our quarterly results.

Good morning, everyone. I'd like to first look at our revenues and break those down a little further for you.

New vehicle sales breaks down into 59 percent new vehicles. This is compared to 57 percent last year in the same quarter. Retail used vehicle was 23 percent versus 24 percent. Parts and service was 10 percent of sales this quarter versus 9 percent last year. Finance and insurance went up to 4 percent of sales from 3 percent last year. You can see the shift from our higher margin used vehicle business to our lower margin new vehicle business, but also we saw a shift toward our more profitable parts and service revenue and finance and insurance. Therefore, despite the mix shift to the lower margin new vehicles we were able to substantially increase gross and operating margins this quarter versus last year by gaining improvements in used margins and increasing the leverage on our SG&A expenses.

The contribution to gross profit by business is as follows -- new vehicles 28 percent this quarter versus 31 percent last year; used 21 percent this year versus 20 percent last year; service and parts 29 versus 29, the same contribution; finance and insurance 22 percent this year, 21 percent last year. Seventy-two percent of our gross profit was from non-vehicle growth in the third quarter, as compared to 70 percent last year, mostly reflecting the increases in service and parts and finance and insurance sales.

I'll now go over the gross margins by business line. Gross margin for new vehicles in the third quarter were 7.6 percent, as compared to 8.2 percent in the same period last year. The year-over-year decline continues to be a result of our aggressive, volume driven new vehicle marketing programs as we go after market share and volume in many of the depressed markets in which we operate. Our historical average gross margin in the third quarter for this business is 8.7 percent. As we have noted earlier, new vehicle same-store sales have been strong and margins have been lower.

Next, the used vehicle business where the opposite is occurring. Same-store sales have been weak, but margins have been strong. The third quarter gross margin was 14.6 percent, a dramatic 210 basis point increase from the third quarter of last year and a sequential increase of 80 basis points from the second quarter of the year. Our historical average gross margin for the used business in the third quarter is 13.4 percent, so we are 120 basis points above our historical average in this business. In addition, wholesale losses in the third quarter dropped dramatically as compared to the same period last year and compared to the first and second quarters of this year as well. Inventories, as Sid mentioned, are at all-time lows and this reflects our improved strategy in the used vehicle business.

The parts and service gross margin for the third quarter was 47.3 percent compared to 47.5 percent last year. Our historical average gross margin in this business is 46.4 percent, so we are still above our average level.

Total gross margin for the quarter was 16.1 percent for Lithia as a whole, which is a 90 basis point improvement over last year and only 10 basis points lower than our historical average for the third quarter of the year, which is 16.2 percent.

Our SG&A as a percentage of sales was 12.0 percent. While this is 30 basis points higher than the same period last year, it is right at our historical average level for the third quarter of the year. More importantly, it is 120 basis points better than the first quarter of the year and 70 basis points better than the second quarter of the year, so you can see that we have made consistently positive strides in gaining leverage on our SG&A expenses throughout the year.

Finally, the combined effect was an operating margin of 3.7 percent. Historically we average 3.8 percent in the third quarter of the year. Again, as with our SG&A, we have experienced sequential improvements throughout the year in operating margin. Our third quarter operating margin of 3.7 percent was 160 basis points higher than our first quarter and 70 basis points higher than our second quarter.

Our new vehicle sales mix by manufacturer for the quarter is as follows -- Chrysler, Dodge, Jeep 36 percent; General Motors and Saturn 23 percent; Ford 12 percent; Toyota 8 percent; BMW 4; Hyundai 4; Volkswagen, Audi 3; Subaru 3; Honda 3; and Nissan 3; with 2 percent of other brands, for a total of 24 different brands. 71.5 percent of our sales are truck, SUV, minivan versus 70.1 percent last year, so it's a small increase in the mix here. It's important to remember that we operate mostly in regional markets where domestic trucks and SUVs dominates the sales environment.

Our gross profit mix by new vehicle brands as a percent of total gross profit for the quarter was -- 10 percent Chrysler, Dodge, Jeep; 6 percent General Motors; 3 percent Ford; 2 percent Toyota; and on down the line. No one brand represents more than 10 percent of total gross profit.

For Lithia, of the three domestic brands on a new vehicle same-store sales basis General Motors performed the best, followed by Chrysler and then Ford. Of the import brands, Hyundai, Nissan and Mazda performed the best, followed by Honda, Subaru, Toyota and then BMW.

Our inventory position going into the fourth quarter is very good. New vehicle days supply at the end of September were down 19 days compared to the year end levels and 15 days compared to the second quarter levels. Our new centralized inventory control process that was rolled out in the first quarter has been very effective in helping us to manage our inventory levels, taking into account changing market conditions in conjunction with seasonality. Used vehicle days supply at the end of September were 20 days below the beginning of the year, 8 days below the beginning of the second quarter at the lowest level of any third quarter since Lithia became a public company at the end of 1996. Once again, you can see that inventories are in great shape going into the winter selling season.

Lithia continues to generate consistent improvements on the profitability of the new stores in the finance and insurance area. Our F&I revenue per vehicle this quarter was $932, our highest level achieved in any third quarter over the last five years. As Sid mentioned earlier, this was driven by strong improvements in the penetration rates of our key F&I products.

For the quarter, the total of flooring and other interest expense as a percent of revenue was 0.7 percent as compared to 0.6 percent last year. In the first quarter we took advantage of the low interest rate environment to lock in fixed rates on more of our flooring debt by entering into two five-year interest rate swaps for a total of $50 million. This resulted in an increase to our flooring expense for the quarter. However, we believe it is a prudent strategy to progressively protect more of our flooring debt against possible rising interest rates. Even with the added expense from the swaps, our flooring credits to expense ratio for the quarter was 133 percent, so our flooring credits from the manufacturers fully covered our flooring interest costs and then some. Year-to-date they were 108 percent.

Including all fixed rate debt obligations and hedges, approximately 26 percent of our total debt now has fixed rates. The higher floating debt ratio has been advantageous for Lithia, allowing us to take advantage of the lower rate environment over the last couple of years. We will gradually hedge more of our debt against rising rates as warranted by the economic environment.

Now I would like to turn to the balance sheet. We had $50 million in cash on the balance sheet at the end of the quarter, as compared to 16 million at year-end. Our long-term debt, excluding used vehicle flooring, is largely composed of real estate and equipment financing and was 139 million versus 105 million at the end of last year. Our long-term debt to total cap ratio was unchanged from the second quarter of the year and increased slightly from the end of the year to 29 percent from 25 percent at the end of last year. Our goodwill as a percentage of total assets is still 20 percent, the lowest in the sector. We continue to have a very healthy balance sheet with plenty of capital for future acquisition growth. Shareholders' equity at the end of the quarter end of the quarter rose by 8.8 percent to 348 million from the end of the year. This was through growth in retained earnings of 21 percent. Retained earnings now total 142 million. Lithia's book value per share is now $19.10. Book value per share, $19.10.

At this point, I would also like to go over some information on Lithia's cost of capital. Analysts have started to look at whether companies in our sector have been earning above their cost of capital. We believe that this is a prudent approach and an important metric to be considered when looking at companies within the sector, and it is something that we monitor internally every quarter.

It is important to keep in mind that Lithia has no high-priced fixed sub-debt in its capital structure, and therefore our weighted average cost of capital is substantially lower than those companies that carry sub-debt. We want it to be understood that Lithia does earn above its cost of capital. Historically our after-tax returns are between 100 and 400 basis points higher than our actual weighted average cost of capital consistently, even in the weaker times.

As a final note, for the full year 2003 we're now forecasting from $1.82 to $1.85 per fully diluted share. For the full year 2004 -- next year -- we're forecasting earnings per share of $1.90 to $2.00 a share. This forecast assumes a steady pace of acquisitions throughout the year.

That concludes the financial summary. I will now turn things back over to Sid who will comment on acquisitions, operations and makes some final closing comments, and then we will take your questions.

I'd like to correct one statement, just in case someone misheard it. Seventy-two percent of our gross profit was from non-new vehicle gross (ph), not just vehicle gross (ph).

I'd like to comment on acquisitions and operations in 2003. In the first quarter of the year we acquired three stores with approximately 75 million in revenue. The second quarter we acquired another three stores with about 100 million in revenue. Third quarter of the year we acquired two stores with approximately 50 million in revenue -- Mercedes Benz of Spokane, Washington with approximately 20 million in revenues and Lithia Dodge Suzuki of Santa Rosa in California with around 30 million in revenues. So far in the fourth quarter we have made two acquisitions -- Chevrolet Cadillac of Fairbanks, Alaska, a small store with 15 million in annualized revenues; and finally we just closed yesterday on a Lithia Dodge of Grapevine, Texas store. This story has annualized revenues of approximately 70 million. Year-to-date we have closed on approximately 310 million in annualized acquisition revenues.

The potential for growth in our company has not changed. The Company has the ability to grow revenues at least at 15 percent through a combination of internally generated cash flow and organic growth, without having to access capital markets or our credit lines. Currently our five-year average same-store sales growth rate stands at about 4.7 percent, and we have a significant number of stores of that we have yet to fully integrate with substantial sales improvements that will be realized over time. Any additional growth from more aggressive acquisitions would be funded from our credit line.

To finish, I would like to summarize what we've seen so far this year. In the first quarter of the year we demonstrated what the impact of an economic slowdown for Lithia looks like again. We were long on inventories and margins were negatively impacted as a result. At that point we adjusted our operations to maximize the benefits of our operating model in the quarter and for the year ahead. As a retailer with low fixed costs, we're very nimble and it takes us only one or two quarters to adjust to a change in the economic environment and return to our normal numbers. This is one of the benefits of the auto retail model.

The second quarter we were able to get our inventories back in line. We were also able to adjust our operations to the new lower sales environment. The result was improvement and better trends in all of our business lines and sequential improvements in our new and used vehicle margin.

Most recently in the third quarter with the vehicles we were able to walk the fine line of keeping inventory days supply conservative while generating positive same-store sales growth. In the used vehicle business we combated a weak market by increasing margins. For the month of October our business has been stronger then what the national trends for business have been reported to be so far. We are in a good position for the rest of the year and will continue to execute the Lithia business model and add stores to our operational base in a consistent and disciplined manner.

This concludes our presentation and we would now open the floor to you for questions.

(OPERATOR INSTRUCTIONS) Rick Nelson, Stephens.

Good morning and congratulations, guys. Can you, Sid, talk about sales and profit trends as the quarter progressed and what you're seeing in October?

Both July and August were very strong and September was flatter, but October so far, as we just commented in the press conference, is probably stronger than September. It's running about the same.

And how about on the used vehicle front? There's some mixed news out there. You obviously had a very good quarter in used, particularly in gross. But just some general comments there would be helpful.

The used market is the same as it was in the third quarter. We don't see any acceleration of a down trend in used. We focus now even more on the lower-priced used cars. That improves our gross margin.

And as you know, the impact on used vehicle sales is largely hit in those later model ones. We haven't seen a large fall off in prices yet at the auction on the 2003s, and there normally has been already. So maybe there's a sign of strength there.

We have a weekly report that comes out on that, and I follow it and trend it and all of our used car managers and general managers do as well. We have an active auction force that rates and markets based on how the market is shifting and when the best time to buy is. We're still waiting really to buy most of our 2003 models for the spring selling season and our early winter selling season.

And you had some good same-store sales numbers in service and parts, actually the first positive same-store we've seen in that business in a little while. How are you able to overcome that decline in domestic warranty work?

First of all, the decline is not accelerating on that. We're down to a level where we are probably going to be able to maintain those warranty levels. There was a large drop over the last two years. But that trend has not accelerated any longer, and its actually flattening out. So our comparables are becoming more realistic in terms of warranty sales. We have seen a slight increase in warranty sales in the import brands, which is surprising.

We're very pleased with that result of far, Rick. And I think our same-store sales and service and parts reflects the strong penetration on the lifetime oil change and the strong emphasis we've made in all those stores in terms of expanding capacity within the existing square footage.

We've also done an effort to get our service writers to be a little more aggressive on their sales efforts in getting more business and roll that out across our network. And that's really targeted at customer pay business. And we've found that that's starting to pay off and we think it will in the future as well.

You know how good we are at F&I. We plan on doing that with the service salespeople. We're building a team of people that can help them on an ongoing basis and set objectives on an individual basis, just as we do for our F&I people, and expect performance there.

The strong new vehicle sales, do you think you're able to convert those customers into service, that that's beginning to show up?

Yes, we're building market share in almost all of our markets, and long-term that builds us longer units (ph) in operations. Much taller. And hopefully those people will be able to get back to our shops, particularly when almost a third of them -- or a little over a third of them -- are buying their lifetime oil changes from us, which requires them to return, really.

So we should see positive comps continuing in service and parts?

We're sure looking for it. We're doing everything we can. We certainly think there is a lot of opportunity there.

Thank you.

Gerry Marks, Raymond James.

Good morning. Just a question or clarification. You're indicating days supply of inventory, but it was the delta, I believe. Could you kind of go through those numbers again? (indiscernible) it was down 20 days from the prior quarter, is that what it was?

We don't give the actual days, but we can give trends to you. It helps.

From a more philosophical standpoint, it seems that in the third quarter of last year days supply of inventory seemed really low from an industry prospective and then exploded last year in the fourth quarter. Could you touch a little bit more on some of those initiatives that you think could helps steer you clear on that potentially happening like we saw last year?

We know it's not going to be like last year because we're way ahead of where we were last year, both in that inventory management. But it's largely a factor of forecasting the seasonality and putting it in our days supply formula. We're looking forward, not back, for a days supply figure. And that's really helped; it has helped train all of our people on a day-to-day basis. We project based on historical results what we should have for a days supply, based on the selling rate that will take place in the future, not the one that took place in the last 90 days. That's a real flaw in the current formulas that are out there in rating days supply.

I guess that's why the industry has gotten in trouble. From the other standpoint, though, Sid, you have been around this business forever. How do the automakers react when you guys are being a little bit perhaps more disciplined in your ordering schedule than your private competitors that don't necessarily have those models in place?

There's always a concern there, and our partners have to be convinced that this is the best thing to sell more cars and sell them more efficiently. And they're pretty much in line with us. They've never been one to force units on dealers. That's up to a dealer to order his cars, and it's a one-on-one decision made by each general manager. But with guidance from corporate now and definite rules for those who don't comply on an ongoing basis, we bring back home the decision-making on those inventory levels.

So we're taking some -- arguments obviously take place on the one-to-one basis. They always want you to buy more. And we have to have the right balance. There's a danger of not having enough, too. That's always there. You don't want to miss the market so you have to find the balance.

I have those numbers for you. The new vehicle days supply at the end of September was 19 days lower than at the end of the year and 15 days lower than the last quarter. And we're right at our historical averages. we are about a day below our historical average for the third quarter of the year, so we're right in line with where we need to be at this time of year. Used vehicles, did you want that again as well?

No, that's okay. I just really wanted (multiple speakers).

Then my final question is when we head into next year, there's a fair amount of new makes coming out from the domestic automakers. Sid, do you have any thoughts about how that might impact in terms of Chrysler or Ford or any of those guys?

I'm really strong on what Chrysler has coming. The new to Durango is right on the market and should capture share from, if not foreign makers, certainly other domestics. It's a home run design and reflects a lot of the new Mercedes design technology and their manufacturing processes have been improved. They actually lowered the price on it, and it's a much better vehicle than it was; state-of-the-art, really. Then you look at the new 300 Series, the new car lines. The car market in some of our markets, particularly in the Bay Area and whatnot, is almost 50 percent of the market. So it's an important ingredient for us to get some car business again out of those domestic lines. The new rear wheel drive Mercedes technology, the Crossfire is selling fairly well (indiscernible) the new model last year. The Pacifica is finally making some progress. They overpriced it to start with probably. But overall, I see a lot going with Chrysler.

Of course General Motors has so many new products coming. The new Malibu is right core at Camry and Accord, and under-prices them substantially. And I think it is every bit as fine an automobile. It's come a long way. So this fight is not over.

Jonathan Steinmetz, Morgan Stanley.

On the used margin, can you discuss a few of the factors that you attribute the rise to? And is this a sustainable level of margin if you can get some volume increase volume increases? Or does there need to be a trade-off here?

I think our historical levels are probably what we're always shooting for internally and this is not an aberration; it's a hard focus on being sure that we retail the cars that we should keep and wholesale right away if we're not going to be able to market an automobile. And we've put a lot of initiatives in place in the stores to bring discipline to that. And it improves gross margin dramatically when you focus on cars you can make the money on and get rid of the once the can't. You notice our wholesale losses were lower too, which is a good indication these guys are making the decisions right up front when they first take the car in.

Most of our cars we trade for, so it's a little different than a Carmax model where they're having to purchase them. And I think that's a real key ingredient to the new car retailing model. But you do need to make those decisions on what you can retail and make money on.

We also make a much higher margin if we sell an older vehicle, and that is something we can continue to focus on. We're just recently working on we have a promo pricing marketing strategy through our organization on new cars, and we kicked that off in three of our markets on used cars. And the results are very strong, indicating that that promo pricing method -- it is based around a payment, a selected payment at 199, 299, 149, 169, and we stock cars that fit that payment. And that just seems to work very well for our salespeople and for our customers to be easy to choose a car, and we still make it gross margin on those when we sell them that way. It takes some of the price negotiation out.

Secondly, you said October was running strong. We hear a lot about the increase in the vehicle license fee in California. Are you see any weakness from that? And if not, what are you doing to buck what seems to be a state-wide trend there?

There's nothing to buck. I mean 200 to $300, maybe a little indecision on a couple of people. But remember, everybody's buying automobiles. How much a month can I have it? How much down payment? Do I qualify? Those are the questions. It's not how much is the DMV fee and I think I will wait a month because they might drop it. I don't think that discussion happens ever.

So it's a factor, obviously. It raises the cost a little bit for customers. But you spread that over 60 months, what is it, $1.00? It's not material. And I think it actually will be repealed. And it's a negative tone certainly to have the higher tax on cars. It get people angry. That's why Gray Davis got kicked out. Whatever. We see no effect it from it basically.

We also have no luxury in California. And it's based on the price of the vehicle, so if there is any impact we would be less impacted than anybody.

Thank you so much.

Scott Stember, Sidoti.

Could you maybe just touch on some of the model year changeovers? Carmax mentioned some of the pressure that placed on with the discounting going on the new side, how that affected the used piece of the business. Could you talk about some of the discounting environment throughout the quarter maybe sequentially, and maybe talk about where it is right now, at least what you're seeing?

The discounting on the new side has not accelerated; it fluctuates slightly and varies with manufacturers. They get hot and cold on it. They get cold feet and back off. Chrysler backed off in September and it hurt them badly. They didn't incentivize the '04s soon enough. And guys that didn't have many '03s weren't able to give those better deals to the customers, so they lost some share. But I think in October they re-accelerated -- and I'm not sure of the numbers, but the latest figures I've heard from Chrysler is their share is way up in October from what it was in September.

So that was the first two weeks I was back in Detroit. And there's an indication that their new strategy in terms of incentives is to stay with it period, announce it 90 days in advance and don't blink. But they can't be on and off it. I think that's pretty much a given going forward for all the product lines that are mature. And it's built into their pricing mechanisms; they can still make profits with incentives, but they do need to sell a certain amount of volume to do that. So I think the war will go on. I do not think there is any discounting that's been accelerating. And it does vary, like I just said, between manufacturers at times.

General Motors just came out that they were going to pay salesman 300 to $400 a car through November 17th direct from manufacturer to the salesperson. So we're not really happy about that, but it goes on all the time, these attempts to find some way to accelerate sales and take from the competition.

As a retailer, it's fun to watch because it all benefits us generally. The more they get heated up over incentives, the more reasons there are for people to buy cars and it just helps us keep going. And we are a new car dealer primarily. It really hurts those late-model used cars. Most of that impact has been felt, and we should be sophisticated enough to sense when those discounts can affect the price of a used car and to buy accordingly. We're very cautious when we purchase and how much we purchase in that late-model used because the price can vary 2 to $3000 over a three-month period and you can get hurt if you don't do that right. Again, you need to look forward, not back.

And as far as you mentioned you had a new system in place, inventory system, which was helping you, or aiding you, in better forecasting demand and stocking your levels. Could you talk about where you stand maybe to the end of this year going into next year; if you think you can get any additional improvements sequentially by lowering the days supply that you have, assuming that demand remains relatively stable where you're seeing it right now?

I think we're at a level where you need to maintain your inventories and these days supply rates going forward because you don't want to be out of cars, as I commented. It's critical that you have the right cars and enough volume so that you can continue to meet customer demand without waiting for deliveries. People want the car when they drive in and they will keep shopping until they find it, particularly in markets where there's more than one dealer with the brand.

So I don't think we can improve sequentially to speak of on days supply than from where we are right now. I think we're about right. 133 percent of our flooring cost in that third quarter was covered by the flooring rebates back from the manufacturers. Our goal is to hold that above 100 and 108 at the year, so we're trending really pretty well. The first quarter hurt us last year because we were over inventory and expected actually a better first quarter than happened. So you have got to work your way out of that. And there's no prevention from that completely. If markets shift dramatically in a short-term basis, we're going to be out of inventory. But it can also be working the reverse; we can be short of inventory if the markets really accelerate. We have to find that balance.

(OPERATOR INSTRUCTIONS) Michael Heifler, Deutsche Banc.

I just have a fast question. In the press recently there's been some talk that Chrysler sales management has been looking to reduce dealer margins. Are you guys seeing any of that?

No. In fact, I just was in discussions in Detroit and that's all a rumor and it's not happening.

So no further pressure on the margins?

In fact, they had a very open discussion with their large dealer group, and I was party to it. They thanked me for being there because I spoke my mind freely about that issue. They are experimenting, trying to find ways to move the market. Certainly those things are always discussed, but there is no movement to do that. They understand the need for margin on the dealer side and how critical it is to our trading advantage that we have an adequate MSRP margin.

The selling price is dictated by our costs largely, but the transaction with the customer needs as a high a retail price as possible. The whole industry has the wrong focus there. The lower MSRP is not the way a manufacturer should go if he wants more share.

Jeff, you had mentioned that your weighted average cost of capital is less than some of your peers. Do you have a number that you can throw out?

Yes. We have a sheet to calculate that on an ongoing basis. Dan do you have that handy?

What was in the most recent period at our calculation?

110 at this point.

I don't mean the margin; I meant the cost of capital.

Our weighted average interest rate is 4 percent, which is substantially lower than if you have 8 to 9, 10 percent debt in your capital structure. So that is the biggest difference right there. Effectively, with the tax yield that's a 2.4 percent interest rate on our debt, which is 61 percent of our capital. Our equity right now comes to an 8 percent in cost on equity, and we have the assumptions in here that are pretty standard and that's 39 percent of our capital structure. So you get a weighted average cost of capital of 4.6 percent at the current time. And we're earning between 100 and 200 basis points above that at the current time.

Thanks.

Peter Siris, Guerrilla Capital.

Incidentally, Sid, I just want you to know that Jeff has announced that he will only return phone calls if we buy this lifetime oil change.

He's got it right then, has the?

No, no he does. I now have six life time oil changes and I am not within 2000 miles of one of your stores. But I am planning to drive there.

I have two sets of questions. You guys have been more aggressive in topline sales than some of the other people. And you're a lot of your stores are sitting in small markets where your competition is more mom-and-pops than other people and where if you capture the sale in Boise or that kind of market, Medford, the people are not going to drive 100 miles to the next place to get service. I'm wondering how the sort of small market focus that you have -- are the economics of small markets different from the economics of the big markets? That's the question I'm trying to ask.

I think you can overdo that. There's some advantages certainly, but our competition in the service and parts business is the private, independent repair shop; it's not another new car dealer in most places. If they're going to come to a new car dealer and you do a good job, they will come. But you've got to convince them that our prices are competitive and that we can offer the kind of one-on-one service that they expect from a private, independent operator.

So I think in answering that, I wouldn't labor that too much. We've found, like Boise really, you can say it's a regional small market, but it isn't. There are five or six dealer selling everything. You get to Medford, Oregon. Yes, maybe there's only one of each brand, but we've got real strong large independent auto repair shops here that we have to compete against. And those exist throughout the organization. It may be even easier in the big city to keep the market because people have less patience.

So if I looked at your sales, your sales wouldn't be stronger in the small markets than in the big markets?

I don't think our service penetration is any better in the small market than it is in the big markets.

Interesting. Second question I had is what percentages of your real estate do you guys own?

I wish we owned all of it. We're trying to wherever we can. I don't know the percentage right off. Jeff, can you take a guess?

We are right around 50 to 60 percent currently.

But if I look at a lot of the other guys, a lot of the other guys have sold off large segments of their real estate. Is that a reasonable statement?

I believe so.

So that means you have depreciation on your balance sheet that the other guys don't have, right?

Yes, but they have got higher rent, so it probably balances.

The market value of your real estate, how does that compare to where it is carried for in the books?

The market value is much higher and that's going to be the trend. Obviously we will leverage that in the future. It's a very low cost to capital, to borrow against that fixed cost, that real estate. That's how I built the business before we were public -- we borrowed against our real estate; it appreciated seven, eight, nine, ten percent a year; we borrow again every three or four years against the property; you end up owing more than you paid for it certainly, but you've raised capital and you fixed your rent cost. All you've really added is interest costs at the very low rate, which is the same as just raising capital to grow your business. (multiple speakers)

If I'm looking, Sid, at a company that has no real estate, that's sold it all to Capital Automotive or somebody like that and leased it back, versus looking at your company, if I'm looking at debt to capital or something, am I looking at apples and oranges?

No. Those are not capitalized leases unless they were. Technically I think we could take real estate debt out and come up with a long-term debt too cap ratios that would have a more meaningful number because our debt service payment is very close to what our lease payments would be.

When you look at what happens to leases over a 20 year period, they will probably accelerate and double just due to the cost of living indexes that are built into all those leases. So we have locked the cost of our real estate.

And it also gives you so much more flexibility when you own a place -- you can move; you can sell it; you can do something with it; you remodel it; you can refinance it. You have much more flexibility. I'm just a real proponent of it and I think it fits our sector. And we find plenty of capital available to finance it. So it is a key part of our ingredient.

Thanks.

Jim Larkins (ph), Wasach (ph).

I just wanted to get some color on your integration efforts. How would you characterize utilization of your integration teams right now?

Just about right, Jim. We've got the capacity to add a lot more acquisitions on an accelerated basis, but we've taken our focus off that. We're only going to buy if we get the value we want in the markets we want. They're working on under-performing stores when they're not busy working on our acquisitions. So acquisitions may be at a little slower pace than some people would like to see, but we're very comfortable with it. We think we can grow, as we said, at that 15 percent, 10 percent from earnings, 5 percent same-store at an easy basis and accelerate when the prices on acquisitions make sense in the markets we want to be in. And they come and go some. Obviously we've been buying more domestics than the other because the prices are right and love to buy more imports and domestic -- imports as we go forward, but I'm not going to pay a guy a multiple double what any reasonable return would be expected from it.

Is it fair to say that you're seeing some operating leverage from those people yet? Or do you need to have a higher level of acquisitions to get that?

We're starting to see so that leverage. There still more to be realized, but we did reposition some of the peoples on the teams out into the regions that are directly working now in the regions and in the stores. So we've actually adjusted some of the numbers that were on the teams here in Medford. So that's helped us. Plus we've gotten leverage on what we have left there. I think we're making good progress and can still make more progress there.

That strong team gives us the ability to replace the general manager or change a store when it's not functioning the way we want it so much better than not having people that are capable of going into a store.

That Santa Rosa store, pretty much everyone quit when we bought the store. We ended up with a very few number of employees. We just manned it with an acquisition crew and actually had a successful first month of operation. And now we have built a partial team there. They continue to help and support the store a little more than we normally would have to when that many employees quit at once.

But having that ability is critical for our growth and our ability to build under-performing stores and turn them into winners. And those are the stores that are going to be out there for sale. And those are the stores manufacturers want people to buy. They don't want public operators to buy their best stores; they want us to buy their under-performing stores because we bring value then and we are focused there.

In that type of a situation, is it common that you would move somebody from Oregon out to one of those stores? Or eventually will you find a local guy that will be the manager?

A combination. We will move someone temporarily. We have an interim general manager bench, as it were, where we've always got someone available for any store that's under-performing or a store that we just acquire. But our goal is always to find a local person, bring them into our company, train them. It takes a few months for them to learn all of our systems and be effective in their own local market. But generally we look for someone in that local market. And we're getting quite a few applicants. We have more applicants than we really have time to sort through them. It's quite a process to get a job here at this point because we're getting fussy.

Great quarter, you guys. Good luck. Thanks.

James Quinton (ph), Parrot & Co (ph).

My question has to with your guidance going forward at $1.90 to $2.00, which includes a steady pace of acquisitions. What percentage of your planned acquisitions do you have to really hit to make that guidance?

Since acquisitions don't bring a lot in a year you buy them, I'm not sure we would have to make any. But we don't want people to think that we're not going to do acquisitions, because we will. We don't want estimates raised immediately when we do an acquisition unless it's a real large one that's going to have a real accretive affect right away. Because of the way we are buying stores it takes a while to get that extra profit out of them (multiple speakers)

When I read the press release it says, "We're providing guidance of $1.90 to $2.00, which includes a steady pace of acquisitions." So I'm just wondering what the hit or miss ratio would be to make that $1.90 to $2.00.

Very little dependence on acquisitions and very conservative assumptions on our underlying business behind the guidance.

Okay.

It would make a real shift in the economic environment for us not to be able to make that.

Thanks very much.

(OPERATOR INSTRUCTIONS) I'd like to turn the call back over to Mr. DeBoer for any closing comments.

Thank you all again for listening, and we look forward to communicating with you as necessary, and we will keep doing our job here. Thanks again. The meeting is over.

This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.