Lithia Motors Inc (LAD) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome the Lithia Motors fourth-quarter and full-year 2004 conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation.

Before we begin, the Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risks and uncertainties, and actual results could differ materially due to certain risk factors. These 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, Incorporated.

Good morning, everyone. I would like to thank you again for joining us for our fourth-quarter earnings release and our conference call and also our year-end earnings release. I am joined today by Dick Heimann, our President; and Bryan DeBoer, Executive Vice President; and Dan Retzlaff, our Director of Investor Relations; and Jeff DeBoer, our CFO.

We are reporting our fourth-quarter and the full-year earnings results this morning. For the full year, net income from continuing operations increased 20 percent to 42.6 million, and our pretax margin improved 10 basis points to 2.5 percent. Earnings per share from continuing operations increased 16 percent to $2.22.

I would like to point out that our original guidance for 2004 was for $1.95 to $2.05 per share, so we exceeded the high end of that guidance by 17 cents. This is a record level, obviously, for the Company.

In order to have an equal comparison with the same periods last year, I'm going to report our numbers for the year and the quarter excluding those additional convertible share counts that are now required to be counted in our official numbers, as a result of that FASB ruling EITF number 04-8. Lithia's performance for the year resulted from overall sales growth and margin improvement across all business lines, particularly in the used vehicle and parts and service businesses.

The sales environment for 2004 showed very mixed trends throughout the year; however, we were able to maximize our profits through strategic initiatives. This was demonstrated a gross profit margin that improved 80 basis points to 16.8 percent, and a drop in SG&A as a percentage of that gross profit of 160 basis points to 76.1 percent.

Total same store sales were down 2.7 percent, and total gross margin though was up 80 basis points. This led to a 1.9 percent increase in same store gross profit for the year. Lithia again had demonstrated the ability to increase vehicle margins. As a result of our strong operating systems, an integrated store network, improving strength of our work force, and regional market focuses, we are able to continue to deliver this type of result.

In the fourth quarter, revenues across all business lines increased, resulting in total revenue increase of 9 percent and operating increases of 8 percent. Net earnings and earnings per share were essentially flat with last year, because of higher interest expense and more stores that have been affected by seasonality than in the fourth quarter of last year. Most of the stores we added this year and last year are in some regions more impacted by seasonal swings in weather conditions.

I will now go over the gross profit margins by business line for the year and the quarter. Gross margins for new vehicles were 7.8 percent in the fourth quarter, the same as in the fourth quarter of last year. For the year, however, new vehicle gross margins did improve by 10 basis points to 7.8.

The used vehicle fourth-quarter gross margin was 14.1, a 50 basis point improvement over the fourth quarter of last year; so we continue to improve in that important number. For the year, the retail used gross margin also improved 50 basis points to 14.3 percent.

Our historical average gross margin for this business line in the fourth quarter and for the full year are 13.3 percent and 13.4 percent, respectively. At this point, we are substantially higher than our historical averages and manage this business well in the face of a very weak used vehicle market.

In addition, the wholesale used vehicle business continues the strength that began in the third quarter of 2003. In the fourth quarter, Lithia had a wholesale used margin of 1.5 percent versus 0.5 percent last year. The gross profit per unit was $86 versus $25 per unit in the fourth quarter of '03. We have now seen 6 consecutive quarters of wholesale gross profit gains.

For the year, Lithia had a wholesale used margin of 2.9 percent versus negative 0.2 percent last year; and our gross profit per unit was $157 versus a loss of $8 per unit in '03. We continue to be successful at holding our own local used vehicle auctions and managing the disposal of units at the larger auctions.

The parts and service gross margin for the fourth quarter was 48 percent compared to 47.3 in the same period last year, up 70 basis points. For the year, the gross margin improved 90 basis points to 48.1. Our historical average gross margin in this business line, both for the quarter and the year, is 46.4. So we continued to improve above those historical levels.

For the year, the primary drivers to margin expansion have been a focus on service advisor training, which has led to gains in the sale of higher margin service items, as well as a number of pricing and cost saving initiatives across the entire service and parts business line, not to mention our lifetime oil change, which continues to bring in more and more service business.

Total gross margin for the quarter was 16.9 percent, a 60 basis point improvement over last year. As I mentioned for the year it improved 80 basis points to 16.8.

SG&A as a percent of gross profit for the quarter was 75.8 compared to 75.5 last year. For the year, as a percent of gross profit it improved 160 basis points to 76.1. The combined effect was an operating margin of 3.5 percent for both the fourth quarter and our full-year 2004.

The full-year operating margin of 3.5 percent marked a 30 basis point improvement from last year, and an improvement over the last 3 years as we have now returned to our historical average full-year operating margin levels. This is the highest operating margin for the full year that we have seen since the year 2000.

I would like to turn things now over to Dick Heimann, our President, who will comment on our sales, brand mix, and inventory positions. Dick?

Good morning, everybody. It is hard for me to believe, but we now have stores in 13 states. Our annualized sales mix by those states including all announced acquisitions is currently Oregon with 16 percent of sales; California with 15 percent; Texas 13 percent; Washington 12 percent; Colorado 8 percent; Idaho 7 percent; Alaska with 6 percent; Nevada 6 percent; Montana 6 percent; and Nebraska now with 6 percent; South Dakota 3 percent; Oklahoma 1 percent, and New Mexico as well, our newest state.

The most notable additions over the last year have been to Alaska and Montana, both markets which affect our seasonality as previously mentioned by Sid. We are now seeing more diversification across a wide range of markets, which should provide even more stability in our Company's revenues and profits.

For the quarter, I will list the states in order of same store sales performance. California was number 1; followed by Nebraska, Montana, (technical difficulty) Nevada, Oregon, Alaska, Texas, South Dakota, Washington, Colorado, and finally Oklahoma. Montana was new to the same store sales mix in the second quarter of 2004 and has been a very successful market for us over the past year, which demonstrates the improvements we have been able to make to those stores.

Texas and Alaska are still very strong markets for us and performed well in the fourth quarter of this year, despite difficult comparisons from the fourth quarter of last year. The weakest markets for Lithia continue to be Colorado, Washington, and Oklahoma.

Our new vehicle sales mix by manufacturer as a percentage of total new vehicle sales was as follows. 40 percent for Chrysler Dodge Jeep; 24 percent General Motors Saturn; 9 percent Ford Lincoln-Mercury; 8 percent Toyota Scion; 4 percent BMW; 3 percent each for Hyundai, Honda, and Nissan; 2 percent each for Subaru, Volkswagen, Audi; leaving approximately 2 percent other brands, for a total of 25 different brands.

74.4 percent of our sales were truck SUV sales versus 72.3 percent last year. This increase in truck SUV sales is also partially responsible for the 5 percent increase in year-over-year new vehicle average price for Lithia. As apparent from the numbers, we operate mostly in regions where truck, SUVs, and domestic brands dominate the sales environment and our way of life.

Our inventory planning for the year, with our centralized inventory control process, has been very successful. You may recall that 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. This strategy worked well for us in the third quarter, and by the end of September new vehicle inventories were at the normal to low end of our average levels for that time of year. And we are in a good position going into the seasonally slower fourth quarter.

New vehicle inventories at the end of December were up approximately 12 days compared to our average levels for this time of year and 19 days above the third-quarter end levels. At year-end, we made a decision to take extra product from our key manufacturer partners that has increased our year-end inventory levels above normal levels.

We want to stress that the manufacturers did not force inventory on us. We made the decision to take on more inventory in order to strengthen our ties with our best manufacturer partners. And we are able to get a better allocation of popular models, and now have good inventories at the right time of the year going into that strong spring selling season. We will be able to make take advantage of what we think will be a strong incentive environment in the months to come. This strategy began to pay off already in the latter part of January. Our plan is to increase new car volume throughout 2005, and proper inventory is a key part of that.

Used vehicle inventories at the end of December were 3 days below our average levels for this time of year and 8 days below our third-quarter end levels. We feel we have the correct inventory of used vehicles going into the first quarter and stronger sales period.

Lithia continues to generate consistent improvement on the profitability of our stores in the (technical difficulty) insurance area, F&I. Our F&I per vehicle for the fourth quarter was a proud $1,084 and for the full year $1,027, both improvements over the prior-year periods. This was driven by across the board improvements in the penetration rates for financing of new and used vehicles, service contracts, and our lifetime oil product.

Now I will have Jeff DeBoer, our CFO, continue to provide you with detail on our financial results.

Thank you, Dick, and good morning, everyone. I would like to start by looking at revenues and breaking out the mix of businesses. New vehicles made up 58 percent of total sales; used vehicles made up 27 percent; service parts and body shop was 11 percent; in finance and insurance was 4 percent. These were all unchanged from last year; so no change in the mix of businesses.

The contribution to gross profit by business line this quarter was 26 percent new vehicles versus 28 percent last year; 20 percent used vehicles versus 19 percent last year; 32 percent of our gross profit came from the service and parts business, this compared to 31 percent last year; and F&I was the same at 22 percent. You notice the increases were in the used and parts and service businesses this quarter, due to the margin improvements in those businesses.

We posted record fourth-quarter sales of $669.8 million, an increase of 9 percent over the same period last year. New vehicle sales increased 8 percent; used vehicle sales increased 10 percent; F&I, which is finance and insurance, increased 15 percent; and parts and service increased 13 percent.

In the fourth quarter, new vehicles same store sales were down 3.3 percent. New vehicle same store units declined 5.5 percent. For the year, new vehicle same store sales were down 2.4 percent and new vehicle same store units were down 6.1 percent. However, as Sid mentioned, margin in the new vehicle business were up 10 basis points for the year, and obviously prices were up, as well -- average prices. This led to an increase in new vehicles gross profit per unit of $65 and $145 respectively for the quarter and the year.

Lithia now consolidates the used retail and used wholesale numbers to come up with a combined used vehicle number when reporting same store sales. For us, the two parts of the used vehicle business are closely tied together, and we believe they should be viewed as one business. We will from now on be reporting it that way.

In the fourth quarter, the used vehicle market demonstrated some signs of improvement. However, this occurred mostly on the pricing side. Total used vehicle same store sales increased 1.7 percent for the quarter. Same store units declined 9.2 percent. Retail margins improved 50 basis points and retail prices, average prices, increased 5.4 percent, which led to a $184 increase in gross profit per unit. The average wholesale price improved nearly 25 percent for the quarter.

For the year, used vehicles same store sales were down 5.7 percent on a same store unit decline of 12.3 percent. Used retail vehicle margins improved 50 basis points to 14.3 percent; and average retail price increased 3.7 percent, which led to a gross per unit increase of $142. Wholesale prices increased nearly 15 percent for the year. Due to the margin improvements, same store gross profits in the used vehicle business as a whole were up and positive both for the quarter and for the year.

On a combined basis, new and used vehicle same store sales for the quarter declined 1.7 percent.

For the quarter, finance and insurance same store sales were up 6.2 percent. For the year, F&I same store sales were up 1.9 percent. This makes for 8 successive years of positive same store sales improvements in F&I. For the quarter, we improved penetration rates in all of our F&I segments. We arranged the financing on 79 percent of all new and used retail units that we sold. This is well above our historical average level of 75 percent.

We also had 43 percent penetration on service contracts. This compares to a 40 percent historical average. Lifetime oil and filter, that Sid mentioned, came in at 37 percent penetration, which again is above our average levels of 32 percent.

Parts and service same store sales for the quarter were up 2.9 percent. For the year, parts and service same store sales were up 3 percent. Our continued focus on service advisor training and our lifetime oil program have led to increases in the service side of the business. We continue to experience gains in the customer pay side of the parts and service business. Same store sales in this area were up 1.8 percent for the quarter, and 3.3 percent for the year.

For the year, the improvements in the quality of Chrysler, General Motors, Ford, Toyota, and Subaru vehicles continues to be apparent, as they all had declines in warranty work. Other brands continue to demonstrate increases in same store warranty sales.

Most important, total same store gross profit for our entire business for the quarter was up 2.6 percent. For the year, total same store gross profit was up 1.9 percent. So in spite of declines in same store sales and a difficult economic environment, we continue to see gains in same store gross profits.

I will now discuss the debt and capital side of our business. For the quarter, the total of flooring and other interest expense as a percentage of revenue was 1.1 percent, as compared to 0.8 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 5-year interest rate swaps for a total of $50 million. This resulted in a minor decrease to our flooring expense in the fourth quarter. We currently have outstanding 175 million in interest rate swaps with fixed rates.

Including all of these hedges and all of our other fixed rate obligations, we have approximately 52 percent of our debt which is now fixed. This compares to 28 percent at the end of the year. If we did nothing we t would be about 10, 15 percent fixed only.

For the year, we had an increase in flooring and other interest expense of approximately 5.8 million. Of the total increase only 20 percent was due to higher rates, and 80 percent due to higher debt levels.

Our average interest rate increased by only 10 basis points year-over-year. The increases came primarily from three areas, 42 percent from flooring, 27 percent from mortgages, and 31 percent from the new convertible notes. Flooring expense grew 19 percent year-over-year, of which was 17 percent was due to higher rates. Mortgage expense grew 46 percent, of which only 19 percent was due to higher rates. Finally, we added $2 million in interest expense from our convertible notes. On the contrary we had declines in interest expense on our acquisition line with DaimlerChrysler and our U.S. Bank credit line, which have both been paid down since the convertible offering.

I would like to look at the balance sheet. Cash, $29 million at the end of the quarter. Our long-term debt, excluding used vehicle flooring, is largely composed of debt from the offering, real estate, and equipment financing, and stood at $267 million versus 178 million at the end of 2003. The majority of our additional debt was in real estate as we added a number of properties from acquisitions and financed several properties that we owned from before, that had been unfinanced.

Our long-term debt to total cap ratio excluding real estate, which is how we look at it, was 24 percent versus 22 percent at the end of 2003. We remain with lots of availability on all of our credit lines today.

Our goodwill as a percentage of total assets is 20 percent as compared to 19 percent at the end of 2003. Shareholders equity for the year rose by 13 percent to 406 million. Lithia's book value per basic share is now $21.62.

Free cash flow, measured as net income plus depreciation and amortization less nonfinanceable CapEx and dividends, was approximately $7 million for the quarter. For the year, free cash flow came in at $37 million. On average, for the year, depreciation from the income statement tends to be about the same as nonfinanceable CapEx; so net income less dividends is a good indicator of free cash flow for the Company. That is what allows us to grow (technical difficulty) to fund our 10 to 15 percent growth just from free cash flow.

As a final note, I would like to touch on guidance. We're providing guidance for the full-year 2005 of $2.12 to $2.22 per fully diluted share, which assumes a steady pace of acquisitions. This guidance, please note, includes the effect of the new accounting pronouncements for convertible notes and FASB 123R accounting for stock options, and the employee stock purchase plan.

For the first quarter, we are also providing earnings per share guidance on the same basis in the range of 40 to 42 cents. The effect of including the convertible notes is to reduce fully diluted EPS by approximately 16 cents in 2005 and 3 cents in the first quarter.

The effect of FASB 123R for stock option expensing will be to reduce fully diluted EPS by 5 cents in the last 2 quarters of the year, because it does not come into effect until the third quarter of this year. Excluding the effects of the new accounting pronouncement, for the convertible note and the outstanding stock options, guidance would have been $2.33 to $2.43 for the year, which is higher than our past guidance; and 43 cents to 45 cents for the first quarter, which again is higher than our past guidance.

For reference and your models, the effect of the accounting for stock options for the final 6 months of 2004 would have been 7 cents; and the effect of the convertible notes was 10 cents. So comparable full-year 2004 earnings per share would have been $2.05 if we had done everything the way that it was going to be required this year. That concludes the financial summary, and I will now turn things over to Bryan who will comment on acquisitions and operations.

Good morning, everyone. Thank you, Jeff. I would like to comment on acquisitions and operations. For the year 2004, we acquired approximately $340 million in annualized sales. This represents nearly 14 percent growth on our total 2003 revenues of $2.5 million. To break it down regionally, we added revenues of 140 million in Alaska, $98 million in Montana, $55 million in Nevada, $20 million in Texas, $20 million in our new state of New Mexico, and approximately $10 million in California.

So far in the first quarter of 2005, we added Chrysler and Jeep franchises to our Dodge store in Concord, California. We also added a Chrysler franchise to our Dodge store in Eugene, Oregon. Our most recent acquisition was a large Chrysler Dodge Jeep store in Omaha, Nebraska. We look forward to a productive year of growing within our primary strategy of dominant franchises within medium to small size markets.

Now to move on to operations. As was mentioned earlier by Jeff, the used vehicle market in 2004 was weak. However, there were signs of strengthening by year-end. Hopefully this will continue into 2005 as well. In 2005, we are planning to continue to emphasize two previous initiatives in the used vehicle business that were effective in increasing margins in the face of slow sales. In addition, we also implement -- are beginning to implement a new used vehicle initiative that I will talk about in just a few minutes.

First, we will continue our strategy of used vehicle wholesaling at regionalized auctions; that is again independent from our stores. The benefits of our focus in this area were evident last year as we recorded wholesale profits per unit for all 4 quarters.

Secondly, we will continue the rollout of our used vehicle promo pricing strategy to all of our stores. You may recall that this strategy takes a new approach by marketing vehicles with a $99 down payment and then grouping vehicles by payment level on the lot. This promo pricing strategy reduces haggling; it speeds up the sales process; and it enhances the customer buying experience by resolving the issue of price, down payment, and monthly payment for the customer and our salespeople in a very simple way.

Thirdly, and new to our Company, as a complement to the ongoing used vehicle operations at each store, we will utilize specialists in our support services group to increase the procurement of used vehicles. We believe that this initiative will help to bolster sales volumes in the 3 to 7-year-old vehicle range.

All right, now we are going to move on to human development. We're very excited about many new and previous initiatives within our Company. We have implemented multiple programs that we refer to as AMP, which is an acronym for Accelerated Management Program. We have designed components intended to touch every level of employee within our Company, focusing on accelerating opportunities for existing employees, and then we have a couple of components focused on providing opportunities for college graduates and new employees.

The first component for new employees is internship programs that provide real-life experiences that can help jumpstart a future career in our Company. Secondly, for high potential new individuals, we create a career path that includes a defined timeline for advancement, earnings potential, and job expectations.

For existing employees we have a number of plans that include all levels of employees within the Company. Our store advancement program focuses primarily on mentoring individuals for advancement within their current store. This prepares them for future management roles in the Company.

The next step in the process is management training. Those that have already made it to the management level in our stores, as well as qualified managers that have joined the Company through acquisitions or outside hiring, can take part in a training program that provides the tools and direction needed for future success within our Company.

Next is our senior leadership program, which is designed for our best managers. Under this program, top individuals in our Company can volunteer to visit stores on a temporary basis. They can be a go-to person doing training and then returning to their current job.

Finally, we have an interim manager program in which the goal is to prepare highly qualified individuals for promotion to the next level. This program requires travel to multiple stores to gain experience more quickly and increase their advancement opportunities.

Last but not least, I would like to discuss our Lithia store management (technical difficulty) or as we refer to it, LSMS. This program is designed to automate, increase productivity, and streamline the sales process in our stores. First, it involves the sourcing and tracking of advertising dollars to most effectively deploy them into the right media types.

Second, it measures customer traffic and the effectiveness of our personnel in dealing with our customers. This helps us better focus our training, which allows our people to become more productive and successful. Finally, we create daily work plans for our managers and sales personnel that highlights and clarifies the most important things to do at any given time throughout the day.

LSMS is the foundation that will give Lithia a competitive advantage concerning customer and employee satisfaction. We are very excited about each of these initiatives and look forward to watching them enhance our operations over the coming years. Now I would like to turn over the conference call to Sid for closing comments.

Thanks Bryan, Dick, and Jeff. I want to comment briefly on our performance for the last 4 years. We have been operating within markets in which total new and used vehicle sales have been declining. It is important to keep in mind that in our markets we tend to do better than the market with our sound operating strategy. For 6 out of the last 8 years we have had positive new vehicle same store unit growth in spite of a declining market.

Due to low interest rates and high incentive levels, the new vehicle market has been taking sales away from the late model used vehicle market. Therefore the combined new and used vehicle sales environment has been declining for over 4 years in most of our markets. In spite of all that, we have met expectations and performed. We believe that there is good potential for a healthy total vehicle market ahead of us with an improving economy. If interest rates do go higher it will mean that the economy is doing better, and it is not a threat to our earnings.

In closing, I would like to add that on a long-term basis we are still targeting a goal of 15 to 20 percent growth in earnings per share. We did well in '04 by increasing margins in what was a very difficult sales environment. This demonstrates the benefit of those things we have, the strong operating systems and a group of people that are dedicated to raising the performance of our stores.

Our ability to integrate new stores and improve the performance of existing stores is better today than it has ever been before. But we still see room for improvements throughout our organization. At Lithia we're dedicated to providing strong, sustainable, and profitable growth. We speak a common language and execute best in class processes in all our operations, and we have a dynamic and dedicated leadership group that is committed to their standards and missions of the Company.

We're building Lithia for long-term success, and we will continue to execute our plan with an eye towards what is best for the long-term health of our Company. That concludes our presentation, and we would now like to open the floor to your questions.

(OPERATOR INSTRUCTIONS) Rick Nelson from Stephens Incorporated.

It is Joe Franger for Rick. I have just two questions. First, some of your public peers reported new vehicle gross margin expansion and that dealer cash among other factors played a hand in it. What was holding your new vehicle margin back in the quarter? Did factory to dealer incentives have much of an impact to you guys in the fourth quarter?

There were no new dealer incentive monies different than what we have been dealing with for the last 2 years, 3 years. So our percentage was very stable and actually increased overall for the year. We are very pleased with progress in that area.

You know you have to balance gross margin versus volume; and volume is a critical element for us. In order to gain manufacturer approval for sales and purchasing of stores in the future, we have to exceed volume expectations. So we're always going to be balancing those two issues.

I think quite frankly it was quite a good performance relative to volume and to that increase -- I mean that we held our own in margins. Our margins are fairly high relative to the group.

Do you see different levels of incentives geographically within your markets? If so, which ones tend to get more than others?

There really isn't much of that. You can see small variations just for short-term periods on specific units at times within one or two markets. But we never track that on an aggregate basis, and we don't notice any manageable differences. Those things create huge amounts of problems when there's a lot of differences between regions internally with the manufacturers; and they tend to avoid it.

Okay. Secondly, what is your interest rate assumption for 2005?

We factored in 25 basis point increase each quarter, so a full 100 basis point increase over the year.

That is from year-ago levels, or from current levels?

From current levels.

Okay. All right, thank you, guys. Good quarter.

Jerry Marks from Raymond James.

Sid, you mentioned that you took on higher inventories because you're expecting higher incentive programs. It's been tough to kind of measure net price with automakers giving $5,000 incentives while raising their sticker prices by $6,000. Are they giving you any indications that they are going to plan on coming out with some real incentives when we get into the spring months?

Nothing different than what we had seen long term happening. We know that Chrysler particular will focus heavily on incentive. They have pretty well given us our annual plan for each store. It is really a much more organized incentive program at Chrysler than anything we have seen in the past. They're focused on pricing through incentives.

As you said, they do tend to raise prices and increase incentives at the same time. But effectively we're getting down-payment money to keep people in a car and being able to afford it. I think that we are betting on there being strong incentives throughout the first and second quarter. Particularly the first quarter. If business really gets better they will back off, and that is okay, because we will have more volume anyway.

All right. Not to stay on Joe's question too much, but in terms of the margins that you were taking, a lot of your competitors -- at least the indications we have gotten -- have kind of pushed back on the automakers to bring the inventories more in line. Yet we're hearing like you said about dealer bonus cash. You guys really didn't seem to get that, even though you took on more incentives.

Does that mean going forward, since you don't book like floor plan credits and maybe some of the other credits until you sell the vehicle that it would be a benefit in the future quarters?

Strategically we know that volume is limited by inventory to a large extent. If you don't have enough inventory in the right models, you just don't sell the volume. I am not one that preaches that manufacturers could run their operations on 30-day inventories, knowing the nature of our customers.

Particularly in the regional markets we are in, we have to have a decent inventory in our stores in order to reach every customer that comes and get them at the time they want to buy, which is always that day. So I don't see a lot of trends there changing from where we have been.

Our inventory management system is more in control. We strategically now choose when we are going to bulk up and when we are going to thin down. I think we will be real effective in managing both the opportunity of selling more vehicles because of inventory strength and that negative of being caught with the wrong things. Those are the issues, really, relative to inventory from my viewpoint.

You mentioned that SG&A as a percentage of gross went up, but a lot of it seemed to be because of the seasonality. If you were to kind of exclude out Alaska, Montana, on a year-to-year basis would it be down in some of your other markets?

Jeff, do have any information on that?

For the quarter, one of the biggest factors is the mix of businesses. Service and parts continue to go up, and it has the biggest percentage of SG&A of any of our businesses. So that is always a drag. Then the seasonality really what results in that. That is really the only factor that we have been able to identify.

I still have a quick question. Your long-term liabilities came down about 20 million; well, it was up year-over-year, but in general now over the past couple of years it's been coming down. If I remember, you have deferred revenues in that line. Can you refresh my memory what is totally in that other long-term liability line?

Yes, there are some deferred revenues from service contracts, I believe, and other elements. I don't have a breakout here in front of me, Jerry. Maybe we can talk about that when we have more detail.

Okay. Last question.

Let me answer that a little bit too. Obviously we have excess cash flow relative to purchasing stores, and we are paying down debt with that.

Okay.

Real good cash flow coming, and we have not purchased that many stores relative to that cash flow. So we have got plenty of extra cash, and that is showing up in a reduced long-term debt.

Most of our growth is funded through cash flow. We actually have extra cash, and we have paid down our debt. So that is probably one of factors there, I think, Jerry.

That actually kind of is related to my last question, which is what is your owned versus leased percentage, because of the more that you have been buying versus leasing?

On real estate?

Yes.

We're right around 50 percent currently. If you include options which are solid options to purchase, we are in the 60 to 65 percent ownership of real estate.

So we might be seeing you exercise some of those options as we go out throughout the year?

Yes; we're working on quite a few right now, actually.

Actually, every option we have we will exercise. It was strategically done at the time of sale because the owner didn't want to pay the extra tax and wanted time to find an exchange. So we require a fixed-price option for a period of time, and we normally always exercise those.

Okay, thanks a lot.

Scott Stember of Sidoti.

Can you maybe quantify in the quarter, this quarter versus last quarter maybe, on a percentage basis, sales in Montana and Alaska? So we can get a better sense of the seasonality. I think you said it was 12 percent for those two this quarter.

I think we might have that. Hang on.

I've got that here. That would be right here, right, Dan? Is this it here? That's not the percentage, though is it? (inaudible). Alaska is 3 percent of the total same store; and we have feedback. Montana is 3.5 percent. So about 7 percent combined. There's other states. Nebraska and a lot of those northern states, Idaho, are also impacted by the weather.

Okay.

(multiple speakers) Dakota. If you add them all up, there is at least 10 to 15 percent of our sales or more that are in severe winter states. (multiple speakers) More than it was, right.

Last year it was in the single digits, I imagine?

Yes, much less. I mean those big stores in Alaska we added this year were huge. Two big Chevy stores.

Just the last question regards 2004 for housecleaning here, regarding the shares related to ETIF over here. Can you just talk about -- do you have any breakout by quarter what the numbers would have looked like for 2004?

We will give you that as the year progresses. We need to give those numbers each quarter. It doesn't affect anything until the second quarter. So you won't get anything until then; but we can provide that breakout.

It is pretty close to (multiple speakers) It's pretty even.

It's pretty even. There is nothing unusual.

(multiple speakers) What we give -- the number we gave is for 6 months.

10 cents for the full year; and it started in May. So Dan can get you those numbers.

Okay. That would be good. That's all I have, thanks.

John Tomlinson, Prudential Equity Group.

On the incentive front here, do you see -- we're hearing that the OEMs are increasing incentives in February. Do you think, is that going to have any impact on your used retail volumes? Or how does that kind of play out through the year in your estimates, do you think?

We're focusing used vehicle sales growth on the 3 to 7-year-old vehicle now. That is going to be the strategic plan, and that is not impacted by incentives to a large extent. The swing between new and used, obviously with incentives increasing we're not going to see an increase in the sale of late model used vehicles. Because new cars will still be a better choice.

It is largely driven by the rebate in the down payment available on those cars. That makes it affordable for people, and they can qualify for a loan on them. So not just pricing. You can't really overcome that by having a used car be cheap enough, because these rebates actually show as a down payment. Don't ask me why, but they do.

Okay, so it's not going to really have an impact going forward if we see another tickup here; and you would suspect that your used strength that you saw in the quarter will continue, I guess, at least on the pricing side?

Yes, and the signs in all the markets are that there is definitely a reduced amount of leased return vehicles that is really beginning to impact pricing on used. So used, there is a bigger shortage of used cars than there was certainly a year-ago.

There is a lot fewer cars coming back to banks, credit unions, all those people that were involved in leasing. GE, a bunch of them have all gotten out of it 3 or 4 years ago, and now there's no cars coming back. So there is quite a difference, and we are seeing it at the auctions. I think if you read that Manheim report that was just recently -- it's pretty accurate.

Okay. In terms of just a couple of housekeeping items, it looks like the tax rate was a little bit lower in the quarter. Is there anything going on there? Is there any reason why I should use a lower tax rate going forward?

Tax rate is always dictated by principally the states that we're operating in and the mix there. We have to do an analysis each year of how that mix changes to get the effective rate. So that is really the only factor there.

Alaska helps us.

So in your guidance, I guess, I am trying to get at -- are we looking at any benefit on a lower tax rate going forward?

Nothing material.

Right around the 38.5 percent, right in that range. (multiple speakers)

Okay. Then what about flooring ratio in the quarter? Do you have any feedback there?

What do you mean by ratio, John?

There was a credit to the assistance to expense ratio?

No, assistant flows into gross profit in our bookkeeping under GAAP. So it is all just a number changing hands. We show real true interest cost. (multiple speakers) For this year it should be pretty consistent.

It will help obviously. We're going to get a lot more if we sell more, because we don't book that until we sell the car.

All right. That's all I have. Thanks guys.

Jonathan Steinmetz of Morgan Stanley.

A few questions, just to follow-up on the decision to take inventory up the little bit. I think you mentioned feeling potentially inventory constrained on some hot models; needing manufacturer approval for some acquisitions; and then the potential uptick in sales. I was just wondering if you could you talk about which of those factors is maybe most important? Are you having difficulty getting manufacturer approval or getting the models you have wanted?

Well, you obviously know we can't buy Ford or Nissan stores right now, and that is public. That is in all of our stuff. So those models we are really focusing on, because just a small number will make a big difference there. So it is critical that we enhance volume with this two manufacturers. We have no issues with Chrysler relative to that.

But, yes, product mix from them is -- they were hooking 300s to the pickup. If you bought a certain number of pickups you get some extra 300s. There is a lot of that going on, and we took advantage of it. We think it's going to help us. We also got a lot of extra marketing dollars, which will help sell those vehicles during the better selling seasons. You know at the worst, you take a 30-day risk.

Sure.

And is well worth it for our partners.

Could you talk a little bit about brand performance on the new comp? I am just trying to disentangle whether Chrysler was up here, and it was just GM and Ford that were really weak. Was Chrysler unit volume up? What happened with that?

Do we have it by brand, you guys, right there? We're getting it.

Jeff DeBoer; Is this year to date?

We try to anticipate these questions. Dan has got sheets with answers.

For us, is that growth? No, unit sales and --

Unit counts.

Unit count. Right here?

Let me see. What do you got, guys?

(indiscernible). So for us, let's see. Ford was up, and GM was down a lot, and Chrysler was down a little bit.

That was year-to-date.

So that was not a 4Q; that was full year?

That is full year, yes. Because we did super good with Chrysler the year before. So it is not really a fair comparison. We did really good with Chrysler.

Do you think those same trends would have held for the fourth quarter, or was the fourth quarter different from (multiple speakers) ?

Our Nissan sales were up 41 percent.

In 4Q?

In same store sales, yes. Full year. We can manage volume. You're trying to balance volume and gross. You can get more volume if you're willing to give up a lot of gross. Obviously want to try to hold onto gross, so you've got to manage both.

Sure. Okay, thank you very much, guys.

Marc Irizarry, Banc of America.

First question is on acquisitions. If you could just kind of give us an update on the Omaha market. That seemed like a little bit of a bigger market for you guys. I wasn't sure if that says anything about the opportunities that you guys have. Also can you just kind of talk about how clustering the stores in that market kind of benefits your expenses in that market?

Bryan, why don't you take that?

Marc, this is Bryan. That store that we purchased is directly across the street from our Ford store that we have made huge strides with in the last 14 to 18 months. We have been developing people that were able to assist in a new acquisition; and that was really our thought process behind purchasing that store.

The synergies in that market, obviously, and the economies of scale are really coming from the people. That store was actually two stores, and had actually slipped to some extent with their expenses, and had overstaffed in a great extent. We believe that it was a great acquisition because we can hopefully defer some those people to possible future acquisitions in the Omaha market or surrounding markets.

Great. If you can just comment kind of overall on the acquisition opportunities you're seeing in the pipeline perhaps?

I would say that it is as stable as it has been over the last 2 to 3 years. We are actually really focusing on that primary strategy of small to medium-size markets. We're starting to explore a little deeper into markets that are even smaller than we typically have went into that are surrounding our existing stable stores. So we would look at a Dodge store outside of a market where we have a strong dominant Dodge store. Or vice versa with a Chevy or Ford store or something like that. But we believe that that should help our growth in 2005.

Great. Whoever wants to take this, great. Just the kind of environment late January, kind of what you are seeing now, into the beginning of mid-February here?

We did comment that sales had improved quite strongly in the latter part of January for us. I think that is in our press release information. We have not commented about February, but we are seeing now trends that alarm us at all. We think that the strategic initiatives and the inventory levels we have chosen will pay off.

We did raise our guidance for the first quarter.

That indicates that strength that we see, and I don't think that is market driven. I think that is us. Every market share is determined by the local retailers in that market. It is not just determined by the product choices that people can make. The best retailers sell the most cars.

What happens nationally?

National trends don't always follow in Billings, Montana, or Anchorage, Alaska. Our plan is to be the dominant retailer in every market we are in. That is the strategy, and I think we can achieve that in spite of what product differences some manufacturers may have weakness in.

Thanks.

Peter Siris from Guerrilla Capital Management.

I wanted to thank you for taking my call. Dan emailed me last night that I would be blackballed from the call, so I really do appreciate that everybody overruled him on this.

Yes, I overruled him personally, Peter, because I always like talking to you.

Thank you, Sid, I appreciate it. I have two questions. The first question, and I can't get a handle on how to understand this, but when you sell a car today, a typical car, let's say, what is an average selling price for a car?

About 27,000, 28,000 on a new car.

Make it 30 so I got a new round number.

Okay.

And you make how much when you sell that car?

A couple grand.

Okay. So you make 2 grand.

This is without F&I. Add another 1,000 for F&I.

Okay, so now you make 3, 4 grand. (technical difficulty) of that car, how much profit would you make servicing an average car?

Another 3,000 probably.

So theoretically, the more -- somehow I should be able to model that, A, that if you sacrifice margin to sell a car -- to sell an extra car at a little lower margin today, (technical difficulty) that there is a tail down the road to that sale. I should be able to model somehow a future earnings flow from the car that you're selling today.

It is critical that we build an owner body in every market that we are in, because it does build huge future profits for us.

So when you look at margins, are you looking at margins and saying, by sacrificing short-term margins -- I'm not saying you should -- but by going after short-term volume, which obviously makes the manufacturers happy, but does that also, if you're doing a good job in service, doesn't that also give you better long-term earnings?

Peter, it is a real truth that the more volume the more long-term earnings. But gross profit in an auto dealer is mostly a result of the processes and how we handle each customer. And our willingness to reach further on a deal is dictated by that. You can not just say we're going to price every car and make this much money. Every deal is an individual deal and we try to make every deal.

So our goal is to get more traffic, so we have more opportunities to work our processes. If the competition is more heated in a particular model then gross margin will suffer. But if it is not, in regional markets, we should not see any decline in gross margins and still be able to increase volume.

But it's reasonable to say that half the profit from selling a car comes in the tail?

Downstream, yes.

Downstream.

Okay. The next question I have is, and somebody was asking before about the number of store you own, and I'm still confused about this. If I compare you to every one, to most of the other public companies, they all got rid of their real estate. Or most of them have gotten rid of most all of their real estate.

Is there any way to try to understand -- if I put you on apples-to-apples base with them, if you went to get rid of all your real estate, how would that change your numbers? Have you ever looked at that?

We certainly look at it, Peter, but it's not a public number that we display. Our real costs are -- that's one of those things we're trying to manage is the cost of our rent. So you manage it by owning the store and limiting your expense and being able to have the flexibility of ownership, which includes being able to move and change a store and sell it.

A lot of advantages, as you know, and we think there is a huge hidden asset inside our Company that we would have to -- in order to give a number to anybody but what our real estate is worth -- have to go get it all appraised. That is not something we're going to do and spend the money on but --

You could tell me; I wouldn't tell anybody else.

On a conference call, today, Peter.

I forgot there were other people listening in. But you don't have a -- do you do -- you have feeling as to what the extent of that asset is worth, it is just you have never codified it by having it appraised?

That is correct; and without having a real number I don't want to give a number to anyone.

It costs 4 to 500,000 to have that done, because we own over 120 parcels.

I thank you for answering my questions and overruling Dan. Thank you.

You bet. Take care, Peter. Thanks for your support.

(OPERATOR INSTRUCTIONS) John Tomlinson, Prudential Equity Group.

Just one follow-up. I know you have mentioned that your markets have been pretty much down the last 4 years. When do you think the first turning of benefiting (ph) for you? Is January and February an indication that your markets may be starting to do a little bit better overall?

Yes.

So you think this is the year that you guys start doing a little bit better in the more rural markets as the economic situation improves?

Our forecast for the year did not include any huge improvements at all. We are just looking for a flat market right now.

Okay, in terms of overall retail volumes.

Right. If we get some improvements in the markets, we should see -- our business is built around a variable cost structure, and when things change in either direction it is difficult to manage short-term, but boy, when it goes the other way, up, we can see dramatic improvements.

So this could be an inflection point, you think, in your markets this year.

Profits really jump when you increase volumes without adding any cost or relatively a little bit to cost. And that happens when markets improve finally. And hopefully, we will see some of that. We did have it happen once in '99, and it was a huge year for us.

Okay. Then just -- I mean, you guys continue to do really well on F&I. Where do you think long-term you can take that on a per-unit basis?

We are in the range. You can creep it, but as a percent of the sale of the automobile, it just kind of grows. But I don't think we're going to be able to maximize much more out of that. Obviously, every auto retailer in the country has got a finance business and it is huge, and the ability to arrange financing and find financing for people, a key part of our strategy. So we will continue to find items that we can lower our costs on that we can maximize profit opportunities that we can sell and market to our customers. There is still a huge opportunity for every car dealer in all of our organizations to sell accessories too, which is a layer on that we really haven't had the infrastructure to support yet. We are all working on that. That is another initiative in the company. And that isn't really F&I profit, but it is sort of like that because you sell it to the guy after he makes the deal on the car.

What about this legislation in California? Any worries there about trying to limit dealer profit on F&I in terms of flat fees?

Well, thank goodness we got a good governor down there. I don't know where that goes. I mean, flat flees wouldn't impact us immensely. They'd find another way to shift that. So much is driven by the amount of the payment. We're not alarmed by it, but certainly don't want to see legislation in that area. We don't think it is fair. We are a credit source for people. We arrange financing and the loan is actually made by us to the customer. Why would we be regulated when a credit union isn't or someone else isn't? It's a competitive environment. Any customer can go get a car paid off; there's really no penalty. If he paid too much interest, he can go down to his bank the next day and give us a check if we have done something that he thinks is overpriced.

So we just sell the rate we have got. We don't discuss the amount we make, and we try to negotiate the lowest cost when we discount that loan to someone. Obviously, we are in business to make a profit and not embarrassed about that.

Okay, but you don't view it as any kind of issue going forward here? You think it's just more California at this point, and you're not worried that's going to trickle onto other states at this point?

Well, you know, it may. I worry about everything, but I can't change those things. We do all we can politically, and we structure our business in a way that we can find ways to make that income.

The lenders are prepared to give us flat fees that are equal to what we get now, so it's not going to change our income materially.

John, if you get a chance, find out from CarMax, because they've pretty well got a flat fee set-up inside their finance organization, the way I understand it, and they're getting a flat fee from every lender and the lender is setting the rate. And that may be a model we're going to look at hard because I don't know what they're getting, but I think it approaches 300, $400 a contract, and that is about what we get anyway. So that would be nice if we didn't have to be involved in setting the rate.

It's not going to change any of your strategy there in terms of holding paper, right?

No, absolutely not. We don't -- unless we actually created a finance organization, we will not be holding paper.

Okay, great. Thanks, guys. That's all I had.

Thank you. At this time, I would like to turn the floor back over to management for any closing remarks.

Thanks again everyone for listening and supporting our company, and we hope to never disappoint you. 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.