Lithia Motors Inc (LAD) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Lithia Motors first quarter 2004 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. 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 uncertainty and actual results could differ materially due to certain risk factors. These risk factors are included in today's press release and in the Company's filings with the SEC. I would now like to turn the floor over to your past, Sid DeBoer, Chairman and Chief Executive Officer of Lithia Motors Inc.. Sir, you may begin.

Good morning, everyone. I would like to thank you for joining us this morning for our first quarter 2004 earnings release and conference call. With me today are Dick Heimann, our President and CEO; Jeff DeBoer, our CFO and Dan Retzlaff, our Director of Investor Relation. As you know, we released for first quarter 2004 earnings results early this morning and they showed an increase in net income from continuing operations of 75 percent to 7.6 million and growth in earnings-per-share of 67 percent to 40 cents a share on 5 percent more diluted shares outstanding. For the first quarter of 2004, Lithia will continue the payment of a dividend of 7 cents per share. This is the fourth 7-cent share dividend we have paid starting in the second quarter of last year. Investors can refer to our press release for information on the record and payment dates for that quarterly dividend.

We posted record first quarter sales of 637.8 million, an increase of 14 percent over the same period last year. We experienced growth in all business lines this quarter. New vehicle sales increased 15 percent, used vehicles 10 percent, parts and service were up a remarkable 23 percent and finance and insurance sales increased 15 percent.

For the quarter, new vehicle same-store sales increased 1.4 percent. This was on top of a large increase of 7.7 percent in the first quarter of last year. Both domestic and import brands exhibited positive growth for the quarter.

The used vehicle market continued to show signs of stabilization. Used vehicles same-store sales declined 0.4 percent for the quarter. Used vehicle same-store sales in the first quarter of the year have now declined for three straight quarters with a used-to-new ratio of 0.8-to-1 and a company goal of 1.5-to-1. A healthy used vehicle market is important to the growth of our company. It is also important to remember that although same-store used vehicle sales have been down slightly, we've been able to navigate the weaker used vehicle sales environment by increasing margins and generating positive same-store gross profit growth. On a combined basis, new and used vehicles same-store sales for the quarter increased 0.8 percent. However, because we've been able to increase margins in the used vehicle business, total same-store retail vehicle gross profit was up nearly 5 percent for the quarter.

For the quarter then, finance and insurance same-store sales was up 2.7 percent. This was on top of a large increase of 7.3 percent, again, last year in the same period. We arranged the financing and with a creditor on 75 percent of all new and used retail units that we sold in this quarter. This is right at our historical average level. We also had a 44 percent service contract penetration and that was compared to our historical averages of around 39 percent. And the lifetime oil and filter product penetration was 36 percent as compared to our historical averages of 31 percent. Lithia's strategy of producing the strong new vehicle sales, combined with high penetration rates in our finance insurance department and by selling our service contracts and our lifetime oil and filter products is starting to demonstrate results in the parts and service department.

The financing side of the business has come under some scrutiny lately in the press. It is important to know that they vehicle owned is written between the customer and Lithia as the creditor. We are the creditor and carry the risk until we sell the loan to a permanent finance source, which is our normal practice. However, we do not take long-term risk by keeping the loans; we're (ph) all sold nonrecourse. When we sell the paper, we're able to retain a portion of the interest in exchange for generating the business for our finance sources.

Parts and service same-store sales for the quarter were up 8 percent. Parts and service same-store sales have now grown for three consecutive quarters. We continue to experience gains in the customer pay side of the parts and service business. In fact, same-store sales here were up 9.9 percent. The improvements in quality of domestic vehicles continues to be apparent. However, we are seeing a moderation in that decline we have seen of that domestic warranty work as we anniversary some more dramatic declines from previous years. The import brands continue to demonstrate some increases in same-store warranty sales. Total same-store retail sales in the first quarter increased 1.7 percent.

Total same-store retail gross profit for the quarter was up 5.3 percent. Our sales mix by state currently through this quarter including all acquisitions is California 16 percent of sales, Oregon at 16, Washington at 16, so the three West Coast states now have equal amounts. Texas at 14, Colorado 10, Idaho 8, Nevada 6, Montana 4, South Dakota 4, Alaska 3, Nebraska 2 and Oklahoma 1. For the quarter, I would like to list the states in order of their performance. Idaho, Texas, Oregon, South Dakota, Nebraska, Colorado, California, Alaska, Washington and finally Nevada; and that was in descending order, Idaho being the strongest for the quarter in terms of improvement. Texas has remained a very strong market. The most notable improvements from the same period last year have been in Idaho, again, as I said, and Colorado as well.

Same-store sales in the Idaho market have now improved for the last three quarters. Colorado has also demonstrated improvements for the last three quarters. Part of the improvement in Colorado is due to easier comparisons from the same period last year. We are also making good progress in building stronger teams in the Colorado market and the improvements continue to be become more apparent each quarter. The markets in California and Alaska remain healthy, even though they were up against very strong comparisons and increases from last year. The weakest markets for Lithia were Washington and Nevada.

In our fourth quarter 2003 conference call, we took a look at our Texas stores to demonstrate the power of Lithia's operating model and how we can improve operations and hence, margins, as the integration process takes hold. And as I stated earlier, the Texas stores continue to do that and execute well.

I would like to take a look at improvements at one of our unique stores in Omaha, Nebraska, a Ford store. This store represented a turnaround situation for Lithia. When we acquired the store, it was selling 40 percent of market share. It was facing stiff competition from another much larger Ford store that consistently undersold the market. Our initial approach was to go after market share to satisfy Ford Motor Company. We did this by using an aggressive pricing strategy, combined with greater advertising and enhanced inventory levels. We soon discovered that this strategy was not working to our displeasure, so that with this particular store in that market, was dominated by a much larger competitor that was intent on always underselling the market and undercutting ourselves and the other competition. So we changed our focus at this store entirely. Our focus changed from market share to profitability.

First, we placed a new general manager in the store that had recently completed our training program. We immediately set out to reduce new vehicle inventories and we placed a heightened focus on used vehicle sales. We also cut our advertising budgets by more than half and reduced expenses in the store across the board. We advertised promo pricing as the reason to buy from us and we did it without disclosing our prices in either print or on television. We sold the convenience and the fairness of promo pricing. We added used promo pricing to our message as well.

The results of this strategy have been dramatic. Gross profit margins increased 360 basis points to 18.8 percent. SG&A decline 450 basis points to 14.5 percent, and the result was a pretax margin of 3.9 percent versus a loss in the first quarter of last year. Overall, we were able to increase total sales by 3.9 percent. Our gross profit per unit increased $351 on 17 fewer units for the quarter. Gross profit on used vehicles increased $463 on 97 more units for the quarter. Our F&I per retail unit increased $133 to $908.

I like to relate this story because it highlights the flexibility and strength of our operating model. Jeff, I'd like to turn it over to you now, and you can provide more details on our quarterly results.

Thank you, Sid, and good morning everyone. I would like to look at the sales numbers first and give you a little more breakdown there. The new vehicle sales came in at 55 percent of total sales, the same as the first quarter last year. Used vehicle sales made up 30 percent of our total sales. This was compared to 31 percent in the first quarter of last year. Parts and service sales represented 11 percent, unchanged from last year and finance and insurance sales were also unchanged at 4 percent of total sales.

Contribution to gross profit by business line are as follows -- 25 percent from new vehicles compared to 26 percent last year; 22 percent from used vehicle versus 20 percent last year -- you can see the improvement here due to the margin improvement in the used car business -- 31 percent service and parts versus 30 percent last year. That strong same-store sales increase is there -- and 22 percent F&I as compared to 23 percent in the same period last year. This quarter, one can see the effect of the increased margins in the used vehicle business, as well as the relative increases in the parts and services.

I will now go over the gross margins by business line, starting with new vehicles. Gross margins from the first quarter were 7.5 percent on new vehicles, as compared to 7.4 percent in the same period last year. Our historical average gross margin in the first quarter for this business line is 8.3 percent. As has been the case, all of last year and now into the first quarter, new vehicles same-store sales have been strong and margins have been lower.

In the used retail vehicle business, the opposite has occurred. Same-store sales have been weak, but margins have been very strong. The first quarter gross margin for used business was 14.2 percent, an increase of 120 basis points from the first quarter of last year. Our historical average gross margin for this business line in the first quarter is 13.2 percent, so we are 100 basis points above our historical average.

In addition, the wholesale used vehicle business realized profits in the first quarter as compared to losses in the first quarter of last year. We have now seen profits in the wholesale used vehicle business for three consecutive quarters. A significant portion of the gains here are due to the success we have had at holding our local used vehicle auctions in select markets and managing the disposal of units at larger auctions. Additionally, inventories continue to be at all-time low levels. This reflects our improved strategy in the used vehicle business.

The parts and service gross margin for the first quarter was 47.3 percent, as compared to 47.6 percent in the prior year. Our historical average gross margin in this business line is 46.1 percent, so we remain above our first-quarter average levels for this time of year. Total gross margin for the quarter was 16.7 percent, a 90 basis point improvement over last year. Our SG&A as a percent of sales was 13.4 percent. This is 10 basis points above the same period last year. The combined effect was an operating margin of 2.8 percent. This is a 60 basis point improvement from last year and an improvement over the last two years as we work our way back to normalized levels following a recession in the West. It is important to remember that, historically, the first quarter has the highest SG&A levels of the year, which leads to the lowest operating margins. We normally see improvements throughout the year.

Our new vehicle sales mix by manufacturer for the quarter as a percentage of total new vehicle sales was 40 percent Chrysler-Dodge-Jeep, 23 percent General Motors and Saturn, 9 percent Ford, 7 percent Toyotas, 4 percent BMW, 3 percent Subaru, 3 percent Honda, 3 percent Hyundai and Nissan as well, and 2 percent Volkswagen with Three percent represented from the other brands for a total of 25 different brands. 73.7 percent of our sales were truck/SUV, compared to 69 percent last year, so a full 400 basis points improvement here. This increase in truck/SUV sales is also partially responsible for the 7.2 percent increase in year-over-year new vehicle average prices for Lithia that some of you may have noticed. As is apparent from the numbers, we operate mostly in regions where trucks, SUVs and domestic brands dominate the sales environment.

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, Nissan, Subaru and Honda were our star performers, followed by BMW, Toyota, Volkswagen and Hyundai, in that order. At Lithia, new vehicle same-store sales for both domestics and imports were positive for the quarter, as Sid mentioned earlier.

Our inventory position going into the second quarter was good. New vehicle days of supply at the end of March were down 5 days compared to the end of the year and in-line with average levels for this time of the year, so we have plenty of inventory going into the high selling season here in the second quarter. Used vehicle inventories at the end of March were the same as year-end 2003 levels. These are historically low levels for the Company.

Lithia continues to generate consistent improvements on the profitability of the new stores and the finance and insurance area. Our S&I revenues per vehicle this quarter were $990 per car, our highest level ever achieved in the first quarter of a year. For the quarter, the total of flooring and other interest expense as a percent of revenue was 0.8 percent, the same as last year. We recently 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 a minor increase to our flooring 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 outstanding 175 million in interest rate swaps and fixed rates, mainly mortgages. Our flooring credits to expense ratio for the quarter was 103 percent. Including all fixed rate debt obligations and hedges, approximately 37 percent of our total debt now fixed, compared to 28 percent at year end. The higher floating debt rate has been advantageous for Lithia in the past, allowing us to take advantage of the lower rate environment. However, as we move ahead, we intend to raise our fixed percentage to further hedge against rising interest rates.

I would like to now turn to the balance sheet, where we see $40 million in cash. Our long-term debt, excluding used vehicle flooring, is largely composed of real estate and equipment and stands at 155 million at quarter end, versus 178 million at the end of 2003. Our long-term debt to total cap ratio is 30 percent versus 33 percent at the end of 2003. Our goodwill as a percent of total assets is still 19 percent, the same as at year-end, a consistent discipline on our acquisition pricing.

Shareholders equity for the quarter rose by 2.1 percent to 367 million. Lithia's book value per share is now almost $20 -- $19.69 -- for book value per share. Free cash flow measured as net income plus depreciation and amortization less non-financeable CapEx for the quarter was $8.2 million.

As a final note, for the full year 2004, we are raising earnings guidance from continuing operations to $2.06 to $2.14 per diluted share. We expect second quarter earnings per share in the range of 51-53 cents. This forecast assumes a continued pace of acquisition throughout the year.

Finally, I would like to comment briefly on the thinking behind the convertible debt offering we announced earlier this morning. First of all, with our steady 15-20 percent growth plans into the future, Lithia has an ongoing need for growth capital. With interest rates at all-time lows, now is a good time to pay down our higher priced debt and to further lock in fixed-rate financing at very low levels for our capital structure. This offering makes our fixed rate ratio of debt rise to 53 percent from the current 37 percent and puts us in a more protected position relative to interest rates rising in the future.

The new notes will be offered as a 144 A private offering and will be fully subordinated to our existing credit lines with DaimlerChrysler Financial, Toyota Financial Services and other lenders. Other details of the note are included in this morning's press release.

That concludes the financial summary. I'd like to turn it back to Sid, who will comment on acquisitions, operations and make some final closing comments, and then we will take your questions.

Thank you, Jeff. I would like to comment then on our acquisitions and operations in 2004. The first quarter of the year, we acquired two stores with approximately 95 million in revenues. At the end of January, we acquired a Chrysler Jeep store located in Reno, Nevada with approximately 55 million in annualized revenues. Then in mid-March, we completed the acquisitions of a Chevrolet store in Helena, Montana with about 40 million in revenue.

Lastly today on a separate announcement, we announced that we acquired Tony Chevrolet of Anchorage and Tony Chevrolet of Wasilla, both located in our attractive Alaska market. These stores have annualized revenues of about 125 million. With these acquisitions, Lithia will have acquired approximately 220 million in annualized revenues for far in 2004. Closing of this transaction is anticipated within the next 10 days.

For the trailing 12 months, including the latest acquisition, we have added a total of 455 million in annualized revenues from acquisitions. We have added revenues of 140 million in Alaska, 100 million in Montana, 70 in Texas, 55 in Nevada, 50 million in California and 40 million in Oklahoma. Both Montana and Oklahoma were new markets over the last year.

In operations, Lithia continues to be dedicated to its plans of building our uniformity and continuity throughout our entire network of stores. From the very beginning, we have implemented a progress to integrate each acquisition and improve its operations. We operate on a fully-integrated network of information systems. Working from the same playbook is a competitive advantage and we believe, a necessity, to sustain long-term growth and consistency in operations. We have a model that works effectively and that has been proven to add value to the stores that we've purchased.

For the rest of 2004, we will continue to emphasize two new initiatives in our used vehicle business. First, we will continue to implement a strategy of conducting our own local used vehicle auctions in selected markets and then managing the disposal of our units on a centralized basis at larger auctions. This process is now centralizing control at the management company level. We no longer allow stores to disclose their excess inventories on their own. This new focus has proven to be effective as is saves time and expense and we tend to get better value from our wholesale used vehicle when we price them at market.

Secondly, we will continue to roll out our used vehicle promo pricing strategy through all of our stores. This strategy takes a new approach by marketing vehicles with a $99 down payment and then grouping vehicles by payment levels. Vehicles are marketed with clear and understandable pricing. This pricing reduces the haggling and speeds up the sales process, both for our customers and for our salespeople. It resolves the issue of price, down payment and monthly payment for the customer and this helps our salespeople as well. We are excited to see what we can do with this strategy in the coming year and we're beginning to see the results of these initiatives as was demonstrated by our first quarter results.

That concludes the presentation portion of this conference call. We would like to open now the floor to your questions. Holly, would you take it from here?

(Operator Instructions). Rick Nelson, Stephens Inc.

Good morning and congratulations, guys. Is it still the older model used cars that are driving that segment? And are you seeing any improvement in the newer model arena?

The newer model arena has fallen enough in price that we are seeing -- you know, no more drop-off in the sale of those vehicles. But our real emphasis, and this is why it's hard to grow same-store sales, we're selling at a little less expensive unit as an aggregate, although that average selling price is still quite high.

These initiatives on the whole side that you just mentioned, have those been rolled out to the stores? Or is it something that is coming down -- you did really well on the wholesale.

It is pretty much in place, Rich. I think there's a couple of stores where we've got seasoned used car managers that we're going to convert over last. But you understand with our operating model, what it is, it is much easier for us to integrate a unified policy or program across our network at once because we have the ability to effectively get every store to participate. We don't have independent operators running out there on their own program. Everybody is on the same page and trying to run their businesses the same way. And once an agreement is had, pretty much execution can take place.

Lastly, what are you seeing on the incentive front? The manufacturers I know are trying to back off the incentive pedal. Is that, in fact, showing up?

Actually, we are seeing the opposite. If this is backing off, they have missed the brake pedal and hit the accelerator again.

And April's sales?

April sales are fine. We're right on track.

Thank you.

Scott's Stember, Sidoti.

Good morning. Can you talk about the convertible offering just a little bit more? Maybe just quantify the interest rate or the savings that you foresee, if rates were to go up?

We're not at liberty to talk a lot about that offering. You're going to have to get that information directly from the people that are selling it.

Can you tell me about what is going on in Idaho? It seems like you've had some pretty good traction in the last couple of months, last couple of quarters, actually?

We had great movement there. And a lot of it is generated by the Ford business there. We had a Ford and an old rundown facility, and late last year, we were able to move it to a new facility. And I would have to admit, during the middle of the year last year, and it's making a tremendous difference there. The emphasis on growth has really been forecasted. I don't think the market has improved there, but it is no longer continuing to decline either. That is a base of -- what's the name of the firm there -- Micron Technology -- is one of the largest employers there, and they are stable at least. So.

And lumber prices have been pretty high. So Boise Cascade must be doing well too.

Okay. And lastly, could you just talk about some of the new Chrysler products that have come out? They've had a whole new slew products, like the 300 C. Can you talk about how you anticipate that helping you guys since you have a pretty big slant towards Dodge and Chrysler?

Well, we're beginning to see the fruits of that partnership with Daimler-Chrysler. I don't know if any of you had the time, but it is well worth the effort, if you want understand Chrysler, to go drive the new Chrysler 300 C and try to drive it in a Hemi version. I drove on the other night and put a couple of hundred miles on the car. You have to spend upwards of $60,000 to find anything like it in the market. A rear-wheel drive car that is as quiet as a mouse, has tremendous performance, good room inside, drivability and fit and finish that's European top-of-the-line class. And this is the things that we've been preaching that are going to take place with that company.

Now, if car sales can improve generally for Chrysler, it should make quite a difference for us as well, particularly in some of the markets, the larger city markets where cars are a bigger part of our business, like in the Bay Area. So -- and then the new stow-and-go minivan -- we're sold out on it, we're sold out on the 300 pretty much. There's plenty of demand right now for those products, so it looks very good at this point. That stow-and-go feature is unique now in that whole segment. Within a couple of minutes, even a woman can lay down all of the seats in that vehicle for a flat floor, from front to back. And even though they did not redesign the outside, they did a major thing. I have one of the demos, just because I thought it was great to have one parked in my garage because I have a pickup, like a van, and I have seven-passenger seating, all within one unit.

Okay, that's all I had. Thank you.

Gerry Marks, Raymond James.

A leisurely 200-mile drive, Sid?

Well, yes. It's quite a car, Gerry, you'll have to go try one.

That sounds good. A couple questions, most of mine have been answered. In terms of the wholesale, it looks like you have a fair amount -- as a kind back of the numbers -- a fair amount of profit on the wholesale side. Have you thought about reducing that profit number and trying to sell a little bit more on boosting your used units comps going forward?

I'm not sure they're directly linked, Gerry. Some of that is a function of -- we don't pass any deals, so I don't think how much we make or don't make on used vehicle wholesale, it really has to do with how we just book the unit in. As long as we turn it quickly, it really doesn't make much difference. So I don't see any -- I just want to maximize the sale of the used vehicle when we're not selling it at retail on the wholesale level, and we were not doing as well as we could by allowing our used vehicle management to manage that on an individual store basis. By centralizing it, we have improved our market pricing on that tremendously. And ultimately, yes, it will help drive our ability to trade on a car and it might help us make a few more deals. But we have not been passing deals anyway.

Okay. The last question I had -- on the balance sheet side, it looked like your floor plan went up kind of commensurate with inventories. We don't have the full balance sheet, so I was just wondering if there was some other working capital issues or if it was because of your debt paydown? What happened there that made your cash balance go down in half cents?

That is really just a function of quarter end borrowing. It's really not anything you have to track specifically. You combine the total debt and cash and you have a pretty good picture where we are at. You notice the debt dropped as well. That is -- and the debt actually increased in it. It went down actually, because we borrowed less.

You need to look at them in combination, Gerry.

The swaps increased interest rate some, you know, those two new swaps. We're paying a couple of hundred basis points extra for those swaps.

Okay, thanks.

(Operator Instructions). Jonathan Steinmetz, Morgan Stanley.

Good morning, everybody. A couple of quick questions. On the comp, I believe you said new was do was up 1.4, used down 0.4. Can you give a breakdown between units and price, just how we got to those numbers on a comp basis?

Absolutely, John. The new breakdown, the 1.4 on the new average -- volume is negative 4.4 percent and the average price was up 6 percent. So that shift to the truck/SUV was the main driver there. Used vehicles volume was down 0.9 percent, and the average price was up 0.5 percent for the 0.4 percent comp that you mentioned.

Great, thanks. Just on the parts and service on the customer pace side, I think it was up almost 10 percent. Can you talk a little bit about what might have been driving that, whether there was any brands that were really strong or geographic regions or anything just going on there?

It's an initiative we have internally to maximize the sale of service products and the service drive. We hired over the last year and then trained 10 service trainer people that are full-time now in the company, working with each of our service departments. And we're beginning to see the fruit of that. What we had was an explosion because of the customer pay labor side with the oil changes. We had more customers coming and we were not taking the time to sell them the additional work they needed at the same time because we were so overloaded with -- and we've increased capacity there and reorganized our shops so that we can get the oil changes done and have more time to actually sell the additional work. And I think that is the largest reason for the increases. So it's really structured internally with ourselves, which is good.

So would you say at that point then that this type of an increase could be sustainable throughout the rest of the year?

We hope so.

Thank you.

Thank you.

David Mills, JDM Capital.

I know there is a trade-off with your extending maturities and near-term earnings projections. Could you sort of give us a sense of what would incline you to extend your majorities, your average majorities more between now and the end of the year than you have indicated, and even if it does happen to have a little near-term impact on earnings?

Are you referring to our -- extending maturities on our customer financing with the vehicles we sell?

On your floor planning.

I would say by buying the swaps and fixing the debt -- that's what you're referring to then?

Right.

Right. I don't think we will accelerate that any at this point. The rates have jumped back up again on that short term swap and we've been pretty much a bargain hunter there. I am looking out the next 60, 90 days for inventory reasons and we should be able to manage the cost of our flooring right in these ranges.

Okay, thank you.

There are no further questions. I would like to turn the floor back over to Mr. DeBoer for any closing comments.

Thank you all again for listening and we will continue to execute as our strategy calls and keep you well informed. Thank you so much for being a partner with us.

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