Lithia Motors Inc (LAD) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Before we begin, the Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty, and actual results could differ materially due to certain 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 Mr. Sid DeBoer, Chairman and Chief Executive Officer of Lithia Motors Inc..

Good morning, everyone. Again I would like to thank you for joining us for our third-quarter earnings release. I am joined today by Dick Heimann, our President and COO, and Bryan DeBoer, our Executive Vice President in charge of Acquisitions and Operations, and Jeff DeBoer, our CFO.

We are reporting, as you know, our third-quarter earnings results, and the net income from continuing operations increased 12 percent to 14.3 million and earnings per share increased 9 percent to 75 cents. Actually with discontinued operations, it was actually 76 cents. This exceeded the high end of our previous forecast by 5 cents for the quarter and is a record level for the Company.

For the third quarter of 2004, Lithia will continue the payment of a dividend of 8 cents per share. Last quarter we increased the dividend a penny from 7 cents. Lithia's third-quarter performance resulted from overall sales growth and margin improvements, particularly in the parts and service business. In a slower sales environment, we were able to maximize our profits through strategic initiatives. This was demonstrated by a gross profit margin that improved 40 basis points to 16.5 percent for the quarter and a drop in SG&A as a percentage of that gross profit of 190 basis points to 72.5 percent.

The sales environment of the third quarter showed mixed trends like those we saw in the second quarter of the year. Same-store sales were down 4.2 percent and margins yet were up. In the same period last year, the vehicle sales environment was healthier, so we chose to go after volume and give up some margin.

This year we are maximizing the profitability, taking advantage of what business there is in this slower sales environment. Our ability to increase margins in a volatile environment is a result of Lithia's store in network that runs on strong operating systems that are common to all the stores.

Our total gross margin improvement for the quarter was the result of increased new vehicle gross margin and increase service and parts gross margins. Gross margins for new vehicles in the third quarter increased 30 basis points to 7.9 percent as compared to 7.6 in the same period last year. This is the third straight quarter of year-over-year increases in this number.

Our new vehicle gross margins have increased 40 basis points from the first quarter of the year. Our historical average gross margin in the third quarter of this business line is 8.6 percent, so there is potential for margin improvements in new cars.

The used vehicle third-quarter gross margin was 14.1. Our historical average gross margin for this business line in the third quarter is 13.4. We are 70 basis points above that average and managing the business well in the face of what we consider a very tepid used vehicle market.

In addition, the wholesale used vehicle business continues the strength that began in the third quarter of the last year, the strength largely in our management of that limited disposal. In the third quarter, Lithia had a wholesale used margin of 3.2 percent and gross profit per unit of $166 versus a gain of $14 last year in this quarter. A significant portion of the gains here are due to the success we have had at holding our own local used vehicle auction, and in select markets we also dispose at larger auctions.

The parts and service gross margin for the third quarter was 48.5 percent compared to 47.2 in the same period last year, a 130 basis point improvement. We saw margin gains in all three compartments -- service, parts and the bodyshop business for the quarter. Our historical average gross margin in this business for this quarter is 46.6, so we remain well above our third-quarter average levels.

The primary drivers to margin expansion here have been a focus on service advisor training, which has led to gains in the sale of higher margin service items and cost savings initiatives across our entire service parts and bodyshop business lines. Total gross margin for the quarter was 16.5 percent, a 40 basis point improvement over last year as I said earlier. This is 40 basis points above the historical average for this (technical difficulty)--.

Our SG&A as a percent of sales was 12 percent. This is the same as last year? Our historical average third-quarter margin is 11.9. More importantly, SG&A as a percent of gross profit for the quarter was 72.5, which was a 190 basis point improvement from last year.

The combined effect with an operating margin of 4.1, a 30 basis point improvement from last year and an improvement over the last three years as we have now returned to the high end of those operating margin levels, this is the highest operating margin for the third quarter that we have seen since 2000. Historically we averaged 3.9 percent in the third quarter of the year. We have now experienced year-over-year operating margin improvement for five consecutive quarters.

I would like to turn things over to Dick Heimann, our President and CEO, who will comment on our sales, brand mix and the inventory positions currently. Dick, go ahead.

Thank you. Good morning to you all from Medford, Oregon. Currently we have operations in 12 states. Our annualized sales mix by state including all announced acquisitions is Oregon with 16 percent of sales, California with 15 percent, Washington 14 percent, Texas 14 percent, Colorado 9 percent, Alaska now is 8 percent, Idaho 7 percent, Nevada 6 percent, Montana 5 percent, South Dakota 3 percent, Nebraska 2 percent, and Oklahoma 1 percent. The most notable positive additions have been in Alaska and Montana over the last year. We now feel like we're truly getting good diversification across a wide range of markets.

For the quarter, I will list the states in order of same-store sales performance. Nebraska was the best, followed by California, Montana, Idaho, South Dakota, Texas, Oregon, Colorado, Alaska, Nevada, Washington, and finally Oklahoma. Montana was new to the same-store sales mix in the second quarter and has been a very successful market for us over the past year. Texas and Alaska are still very strong markets for us and performed well in the third quarter this year despite difficult comps from last year.

The weakest markets for Lithia continue to be Washington and Oklahoma. Our new vehicle sales mix by manufacturer for the quarter as a percentage of total new vehicle sales was 40 percent Chrysler Dodge Jeep, 24 percent GM Saturn, 8 percent Ford, 7 percent Toyota, 4 percent BMW, 3 percent each for Hyundai, Honda, Nissan and Subaru and 2 percent Volkswagen, leaving 3 percent other brands for a total of 25 different brands. 73.9 percent of our sales were truck SUV sales compared to last year's 71.5 percent. This increase in truck SUV sales is also partially responsible for the 5.2 percent increase in year-over-year new vehicle average prices for Lithia.

As is apparent from the numbers, we operate mostly in regions were trucks, SUVs and domestic brands dominate the sales environment and are a way of life. Our inventory position going into the fourth quarter is good. We had taken an aggressive stance going into the third quarter with a greater stock of 2004 vehicles in order to take advantage of the strong incentive environment.

You may recall that during the third quarter of last year we were able to take advantage of the heightened incentive levels as manufacturers tried to clearer inventories of older vehicles to make way for the new models. Dealers that were light on older inventory during this period suffered in the third quarter of last year as highly incentivized older models sold better than the new model introductions did.

This strategy worked well for us in the third quarter. We took advantage of the heightened incentive levels and sold down inventory to position ourselves well for the slower seasonal fourth quarter.

New vehicle inventories at the end of September were down approximately 7 days compared to the year-end 2003 inventory levels and down approximately 16 days as compared to the end of the second quarter. Our centralized inventory control process has been very effective at managing our inventory levels as we take into account changing market conditions in conjunction with seasonality.

Used vehicle inventories at the end of September were 6 days above the second-quarter levels because of the continued weakness in the used vehicle market. We feel we have the correct inventory that will work to improve used vehicle sales in the fourth quarter to lower the base supply.

Lithia continues to generate consistent improvements on the profitability of new stores in the finance and insurance area, F&I. Our F&I vehicle income this quarter was $1044. This was driven by strong improvements in the penetration rates of our key F&I components.

Thank you very much. Now I will turn you over to Jeff, our CFO. He will provide you with some more detail on the quarterly results.

Thank you, Dick, and hello, everyone. I would like to first look at the revenue numbers in a little more detail. New vehicle sales was 60 percent of sales. This compares to 59 percent in the same period last year. The used vehicle sales comprised 26 percent of sales this quarter versus 27 percent last year. Parts and service sales represented 10 percent, the same percentage as it was last year, and in finance and insurance it was 4 percent of sales, also in both years.

There was a shift towards new vehicle sales in the quarter away from used vehicle sales. The contribution to gross profit by business line this quarter was 29 percent new vehicles versus 28 percent last year, 20 percent from used vehicles versus 22 percent last year, 29 percent of gross profit came from service and parts this quarter versus 28 percent last year, and 22 percent from the finance and insurance area, the same as last year.

The increase in the new vehicle and parts and service margins is notable this quarter. 72 percent of our gross profit was from non new vehicle growth, the same as last year. So we have a very diversified profit model.

We posted record third-quarter sales of 756 million, an increase of 8 percent over the same period last year. New vehicle sales increased 10 percent, used vehicle sales were up 1 percent, parts and service sales increased 10 percent, and finance and insurance sales increased 12 percent. In the third quarter, new vehicle same-store sales were down 3.6 percent, and new vehicles same-store units declined 7.4 percent. So the average price went up substantially.

We were up against difficult comparisons in the third quarter over the last two years. Same-store sales increased 1.5 percent last year on top of a 22.7 percent increase in the third quarter of '02.

Year-to-date new vehicles same-store sales are down 2.2 percent, and new vehicles same-store units are down 6.3 percent. So again the average price is increasing substantially -- about 4 percent increase in average price.

As Dick mentioned, margins in the new vehicle business were up 30 basis points for the quarter and 20 basis points year-to-date. In the third quarter, the used vehicle markets demonstrated continued weakness as the competition from highly incentivized new vehicle sales continued to pressure used vehicle sales. Used retail vehicle same-store declined 7.5 percent and used retail same-store units declined 12.9 percent, so again we see the average price increasing on the used vehicle parts.

Year-to-date used retail vehicle same-store sales were down 7.2 percent and used same-store units were down 9.5 percent. Used vehicle margins were down 50 basis points to 14.1 percent for the quarter, but we consider this to be a very good level as last year's third quarter was at our highest point ever at 14.6 percent and we remain above our historical level.

On a combined basis, new and used vehicle same-store sales for the quarter declined 4.7 percent, and units declined 9.7 percent. So it is roughly a 5 percent increase in the average price. Year-to-date total retail vehicle same-store sales were down 3.7 with units down 7.7, a 4 percent increase in average price.

I think it is important to look at the total vehicle market that includes new and late model used retail units. There is not good national data on the used vehicle market, so it is difficult to do this on the national level, but important to consider. We can provide a glimpse of what has occurred in Lithia's market. With new vehicle sales looking back to 1998, with the exception of 2001 and the first nine months of this year, our new vehicle same-store units have been positive.

It is important to keep in mind that where we have operations we tend to do better than the market because of our promo pricing strategies and our focus on increasing market share. However, we know that due to low interest rates and high incentive levels that the new vehicle market has been stealing sales from the late model used vehicle market. We need to look at the combined total vehicle market to see what the overall health of the market has been. The star by itself does not tell us that.

We have been able to perform well in a combined new and used vehicle sales environment that has been declining for at least three years. This makes the case that we are not borrowing sales from the future with high incentives and that a big year for total vehicle sales is still ahead of us with an improving economy.

For the quarter, finance and insurance same-store sales were up .3 percent. This was on top of a large increase of 5 percent in the same period last year. Year-to-date F&I same-store sales were up .5 percent. The reason for the increase was our success in improving the penetration rates of our finance and insurance products. For the quarter, we arranged the financing on 79 percent of all new and used retail units, which is a record level for Lithia. This is well above our historical average level of 75 percent. We also had 43 percent service contract penetration as compared to our historical average of 39 percent. Lifetime oil and filter products penetration was 34 percent compared to 31 percent historically.

Parts and service same-store sales for the quarter were down 1.4 percent. However, our continued focus on service advisor training and our lifetime oil program have led to increases in the parts and service business, and year-to-date parts and service same-store sales are up 3 percent. We continue to experience gains in the customer pay side of the parts and service business. Same-store sales here were up 6.1 percent so far this year. The improvements in the quality of Chrysler, General Motors, Ford and Toyota vehicles continues to be apparent as they all have declining warranty work. This is the largest reason for the decline in same-store sales in our parts and service area. Other brands continue to demonstrate increases in same-store warranty sales.

Total same-store gross profit for the quarter was down 1.3 percent. However, year-to-date total same-store gross profit is up 1.6 percent. So far this year in spite of declines in same-store sales, we are seeing gains in same-store gross profit.

I will now discuss the debt and capital side of the business. For the quarter, the total of flooring and other interest expense as a percentage of revenue was .9 percent as compared to .7 percent last year. In the first quarter of the year, 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 a minor increase to our flooring expense in both the second and third quarters. We currently have outstanding 175 million in interest rate swaps with fixed rates on our flooring debt.

Including all fixed-rate debt obligations, including the mortgages and hedges, approximately 51 percent of our total debt now has fixed-rate as compared to 28 percent at year-end. The higher floating-rate ratio was advantageous for Lithia in the past as rates were going down, but now that they look to be going up, we are in a very good position in the interest rate cycle at 51 percent fixed debt currently.

For those of you that are new to looking at Lithia, I would like to reiterate briefly our thinking behind the convertible debt offering we announced in May. First, with our steady 15 to 20 percent growth plans into the future, Lithia has an ongoing need for growth capital. With interest rates at historic lows, we felt it was a good time to pay down our higher priced debt and further lock in fixed-rate financing as below 3 percent in terms of our capital structure.

On the balance sheet, we had 39 percent -- I'm sorry $39 million in cash on the balance sheet. Our long-term debt, excluding used vehicle flooring, is largely composed of debt from the convertible offering, real estate and equipment financing and totaled 261 million versus 178 million at the end of last year. Our long-term debt to total cap ratio is now 40 percent versus 33 percent at the end of 2003. The same ratio excluding real estate and mortgages, which is the way most of the banks and lenders look at the ratio, is only 26 percent currently versus 22 percent at the end of 2003. Our goodwill as a percentage of total assets is 20 percent as compared to 19 percent at the end of 2003.

I would also point out that our acquisition line is totally untapped, and we have $150 million line available for acquisitions. We have zero debt on our acquisition line currently and very little on our equipment line as well.

Shareholders equity for the first nine months rose by 10 percent to 395 million. Our book value per basic share is now $21 basically -- $20.98. That is our book value.

Free cash flow measured as net income plus depreciation and amortization, less non-financeable CapEx and dividends was approximately $13 million for the quarter. On average for the year depreciation from the income statement tends to be about the same as non-financeable CapEx, so net income less dividends is a good indicator of cash flow for the company. So far this year we have generated approximately $30 million in free cash flow and basically paid for most of our acquisitions this year from free cash flow.

As a final note, our annual guidance for 2004 has been increased to a range of $2.15 to $2.18 per fully diluted share prior to giving effects of the recently approved changes to FASB statement number 128, which is detailed in the press release. For the full year 2005, we are providing guidance of $2.31 to $2.41, which is assumes the steady pace of acquisitions. It is anticipated that the final adoption of the new accounting change will reduce fully diluted EPS by approximately 10 cents in '04 and 18 cents for the full year 2005. I would like to remind everyone that the adoption of the accounting statement change does not affect the net income, cash flow or basic earnings per share of the company. It is only on the diluted share calculation.

That concludes the financial summary, and I will now turn things over to Bryan who will comment on acquisitions and operations.

Very good, Jeff. Thank you. Hello, everyone. I would like to comment on acquisitions and operations as Jeff said there so far in 2004.

In the first quarter of the year, we acquired two stores -- a Chrysler Jeep store located in Reno, Nevada, and a Chevrolet store in Helena, Montana. In the second quarter, we acquired two more stores, both in Alaska. Those were Chevrolet of Anchorage and Chevrolet of Wasilla. In the third quarter, we acquired three more stores and five more franchises. In July we acquired Lithia Toyota of Odessa, which will be our six store -- which is our six store in the Odessa midland market in West Texas. And near the end of September, we acquired Lithia Chrysler Dodge Jeep and Lithia Honda of Great Falls in Montana. Those are our four and fifth stores in the great state of Montana.

More recently in October we completed the acquisition of a Chrysler and Jeep franchise in Santa Rosa, California. We have combined those franchises with our existing Dodge store in that market, and that will add approximately $10 million to the annualized revenue of that store.

Finally, earlier this week we completed the acquisition of a BMW store in Anchorage, Alaska, with approximately $15 million in annualized revenue. With these last two acquisitions, Lithia has acquired approximately 305 million in annualized revenues so far in 2004.

More importantly, each of these acquisitions are perfect examples of our core growth strategy, which as you all recall is small to medium-size markets. For the trailing four quarters, we have added a total of $385 million in annualized revenues, all from acquisitions. Trailing four quarter revenues for the same period have been approximately 2.61 billion, so we have added approximately 15 percent revenue growth through acquisitions for that period.

Over the same period, we have added revenues of $140 million in Alaska, $90 million in Texas, 55 million in Nevada, $80 million in Montana and $20 million in California.

As was mentioned earlier, the used vehicle market in 2004 has been weak. For the rest of 2004 and into 2005, we will continue to emphasize two initiatives in the used vehicle business that have been very effective in maximizing margins in the face of slow sales.

First, we will continue with our strategy of conducting our own local used vehicle auctions in select markets, and better managing the disposal of units at third-party auctions. This process is now fully centralized and controlled at the management company level. We no longer allow stores to dispose of their excess inventories on their own. This new focus has proven to be effective, and it saves time and expense and we maximize the value from our wholesale vehicles operations. The benefits of our focus on this area are evident as we have now recorded wholesale profits per unit for five straight quarters.

Secondly, we will continue to roll out our used vehicle promo pricing strategy to all of our stores. Approximately 70 percent of our stores are currently utilizing this strategy, and most of the rest of our stores should have it in place by the end of this year. This strategy again takes a new approach by marketing vehicles with a $99 downpayment, and then grouping vehicles on the lot by payment level as well as in advertising. Vehicles are marketed with clear and understandable pricing for the benefit of the customer and the employee. Promo pricing reduces haggling, it speeds up the sales process, and most importantly it enhances the customer's buying experience. Keep in mind that this is not a nonnegotiable pricing strategy, but what it does do is resolve the price issue, downpayment and monthly payments for the customer and our salespeople in a very simple way.

Additionally we are gaining traction on several other operational initiatives that are new for the company. We have something that is called Lithia Store Management System, which is an automated front-end system that focuses on the customer and the employee follow-up systems. There are three real focus areas in the new LSMS system, as we call it, that focuses around on daily work plans for salespeople, better advertising, tracking and sourcing and sales traffic control and tracking.

Secondly of these initiatives are human development focused, and again it has three key focus areas that we are attacking. The first is certified employees in all positions. Secondly, online training for all positions. And thirdly is an AMP program, which is an acronym for Accelerated Management Program that really focuses on growing our high potential people and moving them through the organization quickly.

I would like to now turn over the discussion to Sid for closing comments.

Well thanks, Bryan, Dick and Jeff and all of you for listening. In closing I would like to add that on a long-term basis we are still targeting the goal of that 15 to 20 percent growth. We have done well by increasing margins in what has been a slow sales environment. This is the benefit of a strong operating company with systems and a group of people that are dedicated to raising the performance of each store.

Keep in mind that we have a significant number of stores where the improvement will still be realized in the future. We have continued to execute our plan with our eye towards what is best for the long-term health of our company, its investors, employees and customers.

That includes the presentation portion for today on our conference call. We will open the floor to questions, and I think our gal is going to organize that.

(OPERATOR INSTRUCTIONS). Rick Nelson. Stephens Inc.

Thank you and congratulations.

Thanks, Rick. Nice to hear you. How are things in the east there, Southeast? You are in Chicago, aren't you?

Yeah, I am in Chicago. Lithia is the only company in the sector that is expected to beat their original guidance and (technical difficulty)-- sorry about that. I guess we've got a fire drill. Can you hear me?

We came hear you fine, Rick.

Lithia is the only company in the sector that is likely to post year-over-year EPS growth for the quarter that beat the original guidance. Is there anything different about the local economies that you operate in? Is it brand mix, or is it all about execution?

I think it's all about execution. Our mix is appropriate for the markets we are in. So we did not have the Florida exposure with the storms, but by the same token the economies we have been in have been worse than other economies. When we look at our same-store sales, there is some real falloff in some markets. We've got some markets that are up slightly, but overall we don't see -- and we are not losing market share. So it's the market itself that is down.

This company is focused on maintaining market share for both ourselves and our manufacturing partners because we know that same-store sales growth ultimately is our responsibility and we will get it when those markets improve. So we are very positive about our operating strategies being able to hang onto what margins we can produce in any kind of sales environment, and the mix of businesses that we have are so critical to us as we expand parts and service and those opportunities and (multiple speakers)

How big of an advantage do you think Chrysler is these days?

Well, you know we did not see marked increases because we've always been really strong with Chrysler. It's great to see the Chrysler cars themselves selling, but there is actually a shortage of those products right now at all our stores. So we should see some gross margin improvement in those lines because we are able to get pretty much MSRP for any of the Hemi-equipped Chrysler 300s.

You know that a Chrysler 300 basic model loaded with equipment is $23,800 delivered in any one of our stores at full MSRP, and that's highly competitive. I was in one yesterday with a couple of guys from Daimler/Chrysler and we went around it and I am impressed. I mean this is a real automobile. It's really an e-class Mercedes in disguise for 24,000. I think we're just beginning to tap the realities of that car and the potential that it has. I'm hoping they can wrap up production because we think we can sell a lot more of them.

A question on your forward guidance. It appears that the implied guidance for the fourth quarter is lower than where you were, and the '05 guidance is below the long-term target of 15 to 20 percent EPS growth? Is this just you are just hard to be conservative, or is there something you see in the business?

Well, we are not going to predict an upturn until we actually see it, and it will take an upturn for us to hit 15, 20 percent. Remember we are going to average that, and there are years when it won't happen and we cannot forecast aggressively when we see what we see. There is still a flat market.

The fourth quarter has traditionally been a quarter that we have always done okay in, but when you look back historically, and particularly now when we are moving into Alaska and Montana, those are not hot quarters. That's one of our weaker quarters, and I think we need to be conservative for that quarter yet, and that's why the guidance is where it is. We are trying to be realistic about what we know we can achieve.

Rick, also we are up 22 percent so far this year on earnings per share, so if you factor in the fourth quarter, it's still above our target per year.

Rick, this is Bryan. How are you doing? Thirdly, the partial reason for that is we strongly believe that because of incentives at the end of the third quarter that we have some pull forward out of the fourth quarter because of those initiatives which really took a lot of our '04s that are very good margin vehicles that we would typically sell in the fourth quarter. So we had some pullout there as well that we think will hurt us a tad bit in the fourth quarter.

You have seen now five quarters of EBITDA margin expansion. How sustainable do you think that is?

We are pretty confident about it, Rick. Now if the new car stores took off, sales jumped 20 percent like they did in the one year, then margins would be lower because that's our lowest margin item. So we still have that mix issue can affect that margin, and I think we always have to deal with that and be educated about it so we don't react to a margin shift when in reality the business is fine.

Additionally at the start of the year we have a pretty strong focus this year regarding training of our general managers and our stores to look at seasonality and focus on that when they try to control their expenses. And we believe that is starting to take hold and we should see good improvements on that in coming years as well.

And then secondly is we have a program that is more of an office focus program called "Keeping the Net," which really takes a certain expense each month that is in the dealership and you break down that expense and compare it to the other stores to really try to attack some of those SG&A costs.

Very good. Thanks. Congratulations.

Gerry Marks. Raymond James.

Good afternoon. I am in the Southeast.

I remember that. You got those storms.

Right. A couple of questions. First of all, I just wanted a little clarification on (inaudible). All you're basically doing is adding a couple million shares to dilute accounts. How come it is so different in terms of the EPS impact in 2004 versus 2005?

We only had a partial year with it in 2004. We did not do that until April.

Okay. So that is where it's going to make a difference. Your 10 cent impact, which is not in the number that we see in the press release, you're saying would count for quarters two, three and four so we would have to readjust that?

Right. Those will have to be readjusted based on that accounting for the fully diluted count. We hope to be able display it three ways -- the basic share, diluted as it was in the past and diluted as it would be under the new standard. I don't know what we are going to be able to do in the Q. We will have to see. They are still all talking about it.

You know rationally this does not make a lot a sense, and I was certainly one of the people that spoke against them doing this because it would have to be converted at $37 and something to actually have that dilution take place. And it just does not seem logical. It seems like some Black Shoales method working forward into it would have been more sensible than putting the whole unit count in immediately.

But I think we all have to be rational enough to understand it does not affect net income or basic earnings per share, and the reality is it is an accounting entry. If those shares are never exercised, I will be very disappointed because I'm sure our future price on our stock should accelerate in time is we continue to execute. So hopefully that will all wash it itself out in time, but it is reality right now.

Okay. Just one last clarification on that. You guys would add back the interest expense on that 18 cent number?

That is all factored in there.

You factored that in. Okay.

The other thing I wanted to check on is your average selling price wholesale was up like 20 percent. It sounds like you guys are doing some great initiatives. But I was also curious that you guys from the ASP side of things suggested that more of the products you're selling into auction are trucks?

No, it is really that midline car line. That is what has really been sucked up into the new car field. That used Tarus, used Honda Accord even. I mean a lot of their cars they are buying the new ones. And that is the market that is soft.

And then we try to find an explanation why our price keeps growing on the used car side even though we're losing business in that one and two-year old car. What is happening is we are selling more and more of the used SUV because there is still quite a strong market for that. There is enough spread, but those markets that are high commodity, they are highly incentivized, they are not selling used at all and people are buying the new one instead of that. So that SAR number that Jeff was trying to explain is real. I just wish we could put dynamics to it so the world understood it, but I feel like a guy standing in the surf yellowing at the ocean.

I think what you said about average wholesale place price applies too, Gerry.

Okay, with the higher SUV mix?

Yes.

Okay. That is fair.

They are not -- I mean our stores have to be able to sell whatever it is, and we make that decision when it comes in largely. These wholesale units are not units usually that have been on the lot 60 days. They are units we determine we don't want from day one.

The last question I had is, I noticed inventories have gone up about 55 million since December, but your floor plan tables have only gone up about 32 million. Is that in a timing issue, or it is that related to your guys paydown of the used vehicle flooring?

Well, we do you some cash to pay off new vehicle flooring when we have excess cash and after the convert offering we did have and we are generating a lot of cash ongoing, too. So you will see that sometimes, Gerry. That is the second place we park cash. We pay off any of our acquisition and capital debt. We need to maintain the lease capital debt out there because -- I mean the equipment capital debt because it is used for the sweep on all of our checking accounts across the country, so we have to have a line of credit there.

So you will see that used vehicle line hover where it is, but technically we could show zero cash if we wanted to and have less debt. But reality is that you should have a balance there when you put your numbers out, so that is how we go about it.

Jon Steinmetz. Morgan Stanley.

A few questions there. You talked about the increase in your average new vehicle transaction price. Could you talk a little bit about that in terms of dispersion by brand? Were there some brands were that was a lot better than others?

We are seeing improvement in the Chrysler car lines obviously and that is smart. But overall I think the trend is just to continue -- I mean manufacturers have raised prices. There is no if about that. Incentives are a big play, but they continue to grind up prices, and our actual transaction prices are going up even after the rebates. So I think that's pretty much across the board. Do you have data that would tell us that?

We can maybe get back to you on that, Jonathan.

I don't think that's anything private we could not share. We will get that to you.

Okay, I appreciate it. You talked a little bit about new margins being up but below a long-term rate. Is there anything short of economic acceleration that you could see bringing those back up towards that rate? Is there anything sort of Lithia specific?

Well, maybe this mix of the Chrysler brand should begin to pay off. We should be able to see margin improvements in some of those lines that are in short supply. That is really driven by supply, and we need more demand and they are vehicles to improve margin in the new car side. And until that happens and we honestly believe it will, we think that story on the SAR and the used car total is real and I don't they were borrowing ahead. I think there's going to be a banner year here one of these days. We are not putting that in any forecast for the next 12 months, but we are prepared to take advantage of it when it happens.

Okay. Can you talk at all about how October is going?

We're not really saying anything about it. It is nothing unusual. It's got a five weekend (multiple speakers)

Our guidance that we gave includes the trend, so there's nothing unusual there.

There is a five weekend month in October, so October is a critical month for us for the quarter.

Thank you very much.

Scott Stember. Sidoti & Co.

Good afternoon, guys. Could you talk about the new vehicles again? Obviously the margins were helped by some higher SUV sales, but did I hear you correct when you said this was less of a promotional environment versus last year?

Yes, it is.

Okay. Also, I missed what the parts and service same-store sale was -- the decline?

I believe 1.6 percent -- 1.4 percent. And year-to-date it is up 3 percent, 3.0 percent.

We're getting a feedback, but I think it is okay. We are near the end of this.

Okay.

And the customer paid same-store sales were up 6 percent.

But the main reason here that you would attribute to this obviously is just the fact that domestic brand warranty work is down?

Right.

We even saw a fall-off in the Toyota warranty work, which is a good sign because they were creeping up.

Okay. As far as you were talking about the fourth quarter and obviously this year you're going to have more seasonally effected areas, could you quantify how much business for instance you had in Alaska and Montana last year or in some of those markets versus this year?

As you can see, I don't know if we have got that right in front of us, but almost all the acquisitions this year have been in those sensitive areas, particularly those two big stores in Alaska. Those were -- how much were they in revenue?

They were 135 million.

135 million. We added in Alaska alone. Plus we just added a BMW store in Anchorage. And the swings are more severe there than Montana, although Montana has some of that. It is quite severe in Alaska.

Jeff, if you want to get back to him on those?

We will have to get back on that. We will get you that information as well, okay?

That's fine. When you get a chance. If you could just maybe talk about the F&I environment? How trends are -- what you guys are seeing at the store level with some of the publicity that has been out there over the last year or so?

We have seen no material changes. You can see we have arranged financing again and at a very high-level. We continue to execute the sale of those products that we think add value for the customer and certainly improve our gross. But we will find products if some of those profit centers are wounded by regulation. Then we will find something that we can sell as a value for the customer. There is still a large market.

We just discovered one the other day that is out there, that it attracts the actual location of the card, the GPS tracking device. So you can tell where it is at. If you are teenage son has got it or if somebody stole it, you will know right where it is. And I think that will sell, and that would be something we would sell in F&I.

We can only sell so many things, so you have to choose and we are limited by choice now to what we are doing well with, and we want a sell the service contract. We want to sell the lifetime oil change because those build future business for us. And then those auxiliary items, if we lose some of our gross margin on the financing of the vehicle if gets regulated down.

Incidentally Arnold helped us in California. He vetoed that bill. So that died there for now. We did agree as a dealer group, not us, but the California Dealers Association, to try to work with the legislature to come with something that they would be satisfied with that we could work with. So I don't sense that that environment is changing any from what we saw six to eight months ago when it all came to the front. I don't think it is getting any worse.

Yes, I have that data for you. Alaska was 3 percent of our sales last year, and it is now 8 percent. And then Montana we did not have any last year, and it is now 5 percent. So those two states, and those are not the only ones that have the more extreme winters, but those are 13 percent of sales and last year they were only 3 percent of sales. So there is at least 10 percent addition to the mix that is in those extreme fourth-quarter regions.

I appreciate it, Jeff. That was very helpful. Thank you.

John Tomlinson. Prudential Equity.

Can you here me?

Sure can. We have gotten a little feedback on our side, but I guess you guys are okay.

Just a little clarification for next year. Can you briefly just go over what kind of revenue you're thinking in terms of acquisitions versus same-store for your guidance in '05?

The 10 to 15 percent range usually at the lower end is what we assume 10 percent roughly would be our assumption and our guidance for next year. Same-store we don't really provide guidance on that, but we are not being aggressive in any regard basically.

Pretty flat.

Pretty flat. And then that 10 percent would come in over the year. You know it is not all upfront.

Including the stuff that is coming on this year, so net net about 10 percent then acquisitions?

Yes.

Okay. So are you assuming that next year on a same-store basis that things kind of level out and don't get any worse, or are you rationally think that could be more downside on the same-store?

Our markets really took a hit in '01 and '02 and '03, and then this year they have been more level to slightly declining. But at this point -- we're not economists -- we're not saying there is going to be another downturn in our market. The trends are stable to slightly improving, so we are basically saying flat same-store sales.

Our job is to look 90 days out. Because we've got to manage inventories based on our own forecast for that 90 days. You know we made mistakes before and we probably will again, but we are going to be damn better at it than we have ever been.

Sure. What do you see in your guidance? I know you have some offset from your swaps, but what kind of sensitivity do you have to interest rates going up next year?

We at this point want interest rates to go up. That means that the economy is getting better, and interest rates are at an abnormally low level. So 200 to 300 basis point increase in interest rate will be a net positive for Lithia's business.

On an actual P&L basis, obviously there's some impact. But the improvement in same-store sales and the margins and so forth are much more important factors than the pure increase in the interest rate. So we want interest rates to go up at this point.

Okay. But you don't have any kind of quick and dirty number just on that estimation?

In our forecast, we have basically 25 basis points a quarter forecasted, so a full percentage point is what we factored into our guidance.

Okay, great. Well, congratulations on the quarter, guys. Thank you.

Peter Sirus (ph), Gorilla Capital (ph).

I have two sets of questions. Let me get to the complicated -- I guess the simple one first. As I listened to all of your competitors, they are all talking about lower margins and everything. Now, leaving aside the fact that you guys did not get hit by too many hurricanes and one of the guys threw you a softball question, is it just that you guys are so smart, which you obviously answered yes to, is there something else going on? Is there a difference between the small markets and the large markets?

Your competitors are mostly in large markets. You are mostly in small markets. You have got some large market stores. Do you see a difference in the gross margin numbers between the small markets and the large markets?

Peter, that is a good question, and we have statistics to verify that the small markets, medium-sized, are primary targets. It is our number one acquisition strategy, and it is specifically because we do get better margins there and they are less volatile in economic changes that take place. They are more stable.

Is it also that without any major competitor, is it that the private guys are not as aggressive in pricing as when, say, if you got Sonic in group one and Asbury Auto against each other in Orlando or someplace like that, they tend to be more aggressive, the bigger guys than the smaller guys? Is that a factor?

Well, 75 percent of our stores roughly, Peter, are inclusive franchises. Meaning they are the only other dealer for that brand. So the competition is extreme, is severe, but it is brand to brand not intrabrand.

In other words, if I am in Helena, Montana, I'm not going to go to Denver to buy a car?

You might if we are not competitive in some way, but there's a little bit more of a hedge. You know $300 or $400 a car is enough to keep a guy from going probably. You know if we can be within range, we are usually okay.

Peter, the small market, big market thing in terms of competition, we face off with AutoNation in Denver, and yes, about a month-to-month basis, there are times when they sell cars below cost just to get volume and just to meet some target that some manufacturer has. Those issues are really predominate in metro (multiple speakers)

So the small markets -- the small markets clearly are helping you differentiate?

Absolutely.

And the second question I had is this, now this is a tough one and it is actually the kind of question that Jeff is going to have to put on his green eyeshade for.

If I look at your competitors -- you versus your competitors -- and I try to understand something on an apples-to-apples basis, there is one significant difference between you and most of your competitors, which is you own a substantial portion of your real estate and they do sale and leasebacks. Is that a reasonable statement?

I think generically you could say that. Our goal is to own it all.

But help me out here. They are doing sale and leasebacks for a reason. I guess because it makes their short-term earnings look better. If you took all your real estate tomorrow and leased it and did a sale and leaseback to Capital Automotive RE or something like that, how would that impact your earnings? In other words, how can I look you and look at somebody else on an apples-to-apples basis?

You know, Peter, I don't know if we could answer that offhand in terms of how it would affect our earnings. I know this much we've got a built-in asset value that is considerably more valuable than what we carry it for, what we paid for it, and it continues to appreciate particularly in the environment we have been in and most of locations we are in. Some of the properties we own are probably worth twice what we paid for them five or six years ago.

But like you said your book is like $20 a share, and you have real estate that is undervalued. And the question is, I'm just trying to understand how much undervalued or what the difference between doing a sale and a leaseback versus owning the real estate is? (multiple speakers) I understand there is an asset there.

One way to look at it Peter is (multiple speakers)

How much?

Today I'm getting mortgages, long-term mortgages at 5 percent or so, and if I do a sale leaseback, my fixed cap rate is going to be at least 8 or 9 percent. So my P&L effect is at least 300-400 basis point savings today on the holding cost for that real estate. And then you have the CPI increases, which are automatically locked in with the REIT. If you own your real estate, obviously it is different, and we have the appreciation on the land as Sid already mentioned. Unless your balance sheet is so highly leveraged that you have no choice but to sell the real estate, it really does not make sense for us as a company.

That is why we display all of that real estate debt separately so that people can understand when the real debt-to-equity ratio on us is not as is reported because others have long-term leases that may be just short of having to put them on the books. That's probably the next thing FASB will do will make you put your leases all on the books.

There is another hidden asset as well, Peter, that you are on the topic. Our goodwill as you know we test that for impairment, and because we bought average performing to underperforming stores and dramatically improved the performance in most cases, our goodwill is understated by a large percentage on our balance sheet as well. So there's another asset that is hidden on our balance sheet.

You don't want to quantify that for me?

I don't need to, but it is substantial.

I know one thing, if I owned this and it was not public, I would be real pleased and I do own a lot of shares.

Jordan Heimowitz (ph). Philadelphia Financial.

A couple of quick things. First of all, unless I am wrong and I respect Peter Sirus who I know is on this call directly, but by keeping the properties, you actually reduce earnings per share but increase -- I'm sorry by selling the properties to Capital Automotive, whatever, those other companies reduce earnings per share but increase on equity. And you guys actually increase your earnings and reduce your return on equity by keeping it. Is that correct?

Probably you are close.

Okay. Second. On your guidance next year, how much in dollars has not been acquired already is assumed in the guidance? In acquisitions?

I think 10 to 15 percent.

What would it be, though, in the whole year? 150 million?

Yes, the 10 percent is newly acquired revenue basically. And the rollover from things we acquired this year you know are already going to happen.

But that is what I am saying. What is the dollar amount, because you're including stuff that is maybe in proportion to this year or next, what is the dollar amount of newly acquired (inaudible) in for next year?

It is a steady pace, Jordan, and that 10 percent is the minimum target. We're not quantifying exactly.

What have we got? 2.7 million, 270 million divided by 2, there is about that much is going to come in during the year.

Okay. And second, are you assuming about a 4 percent operating margin as well for next year?

No, we would not make that assumption.

Nowhere near there.

That is a quarter. It was just this quarter, and that is our strongest quarter.

Can you say what the operating margin assumed in your guidance is?

We don't give that.

Those are details beyond what we have already given. It is very conservative our assumption. (multiple speakers). We can tell you this, Jordan. The operating margin and the SG&A are a direct reflection of each other.

Big help.

I mean they tend to move together so.

Okay. Thank you very much and congratulations on really a very strong quarter. (multiple speakers)

(OPERATOR INSTRUCTIONS). Thank you. I would like to turn the floor back over to the speakers for any closing comments.

I have none. I thank you all again for listening, and we will look forward to communicating with you as necessary and hope that we've got a great quarter ahead of us. Thank you.

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

Thank you.