Lithia Motors Inc (LAD) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Lithia Motors first-quarter 2005 conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following today's presentation.

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 risk factors. These risk factors are included in today's press release and in the Company's filings with the SEC. Now I would like to turn the floor over to Sid DeBoer, Chairman and Chief Executive Officer of Lithia Motors Inc. You may begin.

Good morning, everyone. I'd like to thank you for being on our call this morning as we share our earnings release with you and we hope to share a little more information so you can understand better our numbers. I'm joined today by Dick Heimann, our President and COO and Bryan DeBoer, our Executive Vice President and Jeff, our CFO, and Dan Retzlaff, our Director of Investor Relations.

For the first quarter, as you saw, net income from our continuing operations increased a little over 30% -- 31% to $10 million. Our pretax margin improved 40 basis points to 2.4%. Earnings per share from continuing operations grew 30% to $0.52. In order to show a fair comparison with the same period last year, we're going to report our numbers for the quarter excluding that additional share count for the convertible shares that's required to be counted in our share account as a result of FASB ruling EITF Issue No. 04-8. Earnings per share were $0.48 when you factor in that, including the effect of those accounting changes for those convertible notes and the discontinued operations. Remember, the actual conversion price on these notes is $37.69 over a 45% premium to our current share price.

For the first quarter of 2005, Lithia will continue the payment of its dividend of $0.08 per share. Investors can refer to our press release for information on the record and the payment date for that dividend. Lithia's performance for the quarter resulted from overall sales growth and margin improvements across all our business lines, particularly in the used vehicle and the parts and service businesses. While the sales environment of the first quarter showed mixed trends, we were able to maximize our profits through continued strategic initiatives and operational improvements. This was demonstrated by gross profit margin that improved 110 basis points to a 17.8%, an all-time high level for Lithia in this first quarter of the year. We also saw a drop in SG&A as a percentage of our gross profit of 350 basis points to 76.9. That's from the prior period last year.

The benefits of Lithia's strong operating systems, its integrated store network and its regional market focus were apparent in our being able to increase margins in all the business lines. While total same-store sales were down about 4%, our total gross margin was about 110 basis points. This led to a 1.1% increase in same-store gross profit for the quarter.

I'll go over the gross margins now by business line. Gross margin for new vehicles first quarter, 8.1%, 60 basis points over the quarter last year. Our historical average for this quarter in this business line is 8.3. The used vehicle gross margin was 15.2%, which is 100 basis point improvement over last year for this quarter. Our historical average for this margin in this business line is 13.2%.

The wholesale used vehicle business continues the strength that began in the third quarter of '03. In the first quarter, Lithia had a wholesale used margin of 4.4% versus 3% last year and our gross profit per unit was $259 versus 161 per unit in the first quarter of last year. We have now seen seven consecutive quarters of wholesale gross profit gain. We continue to manage the disposal of these units by using centralized control, holding our own local used vehicle auctions and managing the disposal of units when we send them to the larger auctions.

The parts and service gross margin for the first quarter was 48.5 compared to 47.4 last year. 110 basis point improvement. Our historical average gross margin in this business line for the first quarter is 46.1, so we remain well above that level. The primary drivers to margin expansion here have been a focus on our training for our service advisers and service managers, which has led to gains in the sale of those higher margin service items as well as a number of pricing and cost-saving initiatives across our entire service and parts business. Our operating margin was 3.6%, an improvement of 80 basis points over last year for this period. This was a record margin level for Lithia in any first quarter.

I'd like to turn things over to Dick Heimann, our President and COO, who will comment on our sales brand, mix and our inventory position. Dick?

Good day, everybody. Let me first begin with reviewing our annualized sales mix by state, including all announced acquisitions. Beginning with Oregon was 16% of sales; California, as well, 16%; Texas and Washington at 12%; Colorado, 8%; Idaho, 7%; Alaska was 7%; Nevada, 6%; Montana, 6%; and Nebraska now was 6%. South Dakota, 3%; and New Mexico, our newest state, now with 1%. The most notable additions over the past twelve months have been to Alaska and Montana. And more recently, Omaha, Nebraska. We continue to diversify across a wide range of markets and we expect this will provide even more stability to our Company's revenues and profits.

For the quarter, I'll list the states in order of same-store sales performance. California was the best followed by Montana, Nebraska, Colorado, Oregon, Nevada, Idaho, Texas and finally, Washington and South Dakota. Most notable is that the Colorado market, my home state, turned in the first quarter and did a wonderful job with positive same-store sales. Montana was new to same-store sales mix in the second quarter of 2004 and has been a solid performing market for us all over the past twelve months, which demonstrates the improvements we have been able to make to those stores. Oregon, Texas, and Idaho are still very strong markets for us and performed well in the first quarter. However, they faced difficult comparisons in the first quarter of last year. The weakest market for Lithia continues to be the state of Washington.

Our new vehicle sales mix by manufacturer as a percentage of total new vehicle sales was 41% Chrysler Dodge and Jeep; 21% General Motors and Saturn; 9% Toyota Scion; 8% Ford Lincoln Mercury; 4% each for Nissan and BMW; 3% each for Hyundai, Honda, and Subaru; 2% for Volkswagen and Audi; leaving approximately 2% other brands for a total of 25 different brands. We saw a definite shift in sales from trucks and SUVS to smaller SUVs and sedans this quarter. In fact, 64% of our sales were trucks and SUVs versus last year's sales, which was 74%.

Our inventory planning for the quarter with our centralized inventory control process has been successful. You may recall that we had taken an aggressive stance with inventories in December of '04 in order to take advantage of the strong incentive environment we expected for the first quarter of this year. New vehicle inventories at the end of March were actually down approximately nine days compared to our year-end 2004 inventory levels. They are only ten days above our average levels for this time of year. The decision to have higher inventories was strategically designed to improve our same-store sales as we move into the seasonally strongest selling period of the year.

It's important to have a good allocation of popular models and good inventories at our stores going into the important summer selling season. We will be able to take advantage of what we think will be a strong retail environment supported by incentives in the months to come. Over plan is to increase new vehicle volume throughout the rest of 2005 and aggressively, inventories are a key part of that.

Used vehicle inventories at the end of March were three days above year-end 2004 models and again only two days above our average levels for this time of year. We feel we have the correct inventory of the used vehicles going into the second quarter of the year, as the used vehicle market continues to strengthen. There continues to be a shortage of used vehicle and the prices should remain firm throughout the year.

Lithia still continues to generate consistent improvements on the profitability of our stores in the finance and insurance area, F&I. Our F&I per vehicle for the first quarter was $1065 as compared to last year's $985. This was driven by the improvements in the penetration rates for financing of new and used vehicles and our lifetime oil product. Now, I'd like to have Jeff give you more details on our financial results. Jeff DeBoer, Chief Financial Officer.

Thank you, Dick, and hello, everyone. I'd like to look at sales a little more in detail -- look at the breakdown by businesses. 55% of our sales this quarter were new vehicles. 30% came from used vehicle sales. Parts and service was 11%. And finance and insurance came in at 4%. These are all the same levels of last year, so no change in our sales (technical difficulty).

Now by gross profit, break the business down by business line. 25% of our gross profits came from new cars this quarter. 22% from used; 31% from service and parts; and 22% from F&I, the finance insurance. These are also unchanged from last year, so very stable sales and profit balance this quarter for Lithia. We posted record first-quarter sales of $670 million, an increase of 6% over the same period last year. We experienced growth in all business lines this quarter. New vehicle sales increased 4%, used vehicle sales were up 7%. Parts and service increased 11%, and finance insurance was up 10%.

In the first quarter, new vehicle same-store sales were down 6.4% and new vehicle same-store units declined 7.5%. General Motors was our weakest brand for the quarter and excluding GM, same-store new vehicle sales were down only 1.6% and units were down only 3.1%. Keep in mind as Sid mentioned earlier, margins in the new vehicle business were up 60 basis points and pricing was up as well. This led to an increase in new vehicle gross profit per unit of $201 for the quarter.

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 the first quarter, the used vehicle market demonstrated clear signs of improvements in pricing and margins. Total used vehicle same-store sales declined 1.9% and same-store units were down 7.9% for the quarters. So average price went up quite substantially for used car, as you can see.

Retail margins improved 100 basis points on used cars and retail prices increased 3.9%, which led to a $237 increase in gross profit per unit in the used business. The average wholesale price improved 12% for the quarter and gross profit per unit increased $98. As a result of margin improvements, same-store gross profits in the used vehicle business were positive. Actually, there was positive growth in same-store profit for the used vehicle business. So once again, same-store sales declines are not the whole story.

Finance and insurance same-store sales were down 1.8%. We see no concerns in the finance and insurance business. We face difficult comparisons as we have seen gains in the first quarter of the year for the last four years. In fact, we improved penetration rate in finance and insurance to 79% of all new and used vehicles as compared to 75% last year. We also had lifetime oil and filter product penetration of 39% as compared to 36% last year. Service contract penetration was 43% this quarter versus 44% last year. However, it remains well above our historical average for service contracts at 40%.

Finally, as we stated earlier, we increased F&I per vehicle by $80 to record levels of over $1000 per vehicle. Parts and service same-store sales for the quarter were essentially flat. We faced a difficult comparison of 8% growth in the first quarter of last year. We continue to apply our efforts on service adviser training, as Sid mentioned, and our lifetime oil program, which have paid dividends in the service side of the business.

Most importantly, total same-store gross profits of the quarter were up 1.1%. This is compared to an increase of 6.8% last year. In spite of declines in same-store sales, we continue to see gains in same-store gross profits.

I'll now look at the debt and capital side of our business. For the quarter, the total of flooring and other interest expense as a percent of revenue was 1.2% as compared to 0.8% last year. We have seen an increase in interest expense, which is to be expected in the current rate environment. However, in the first quarter of last year, we did take advantage of the low interest rate environment and locked in fixed rates on a good portion of our flooring. We currently have 175 million in interest rate swaps with fixed rates. Including all fixed-rate debt obligations and hedges, approximately 51% of our total debt now has fixed rates. For the quarter, we had an increase in flooring and other interest expense of approximately $2.7 million. Of the total increase, 52% was due to higher rates and 48% was due to higher volume. Our average interest rate increased by 80 basis points year-over-year. If you compare this to the market increases in rates, we were up less than half. Time (ph) went from 4% to 5+3/4%, 175 basis points, and we were only up 80 basis points on our average rate. So you can see the clear benefit from the interest rate swaps that we have in place.

I'll now look at the balance sheet. Cash on the balance sheet is $20 million. Long-term debt, excluding used vehicle flooring, is mostly debt from our convertible offering last year. Real estate debt and equipment financing and long-term debt totals 280 million compared to 267 million at the end of 2004. The breakdown of this 280 million is 148 million in real estate mortgages, 45 million in equipment debt, 85 million from the convert and 2 million of other notes.

Our long-term debt to total capital ratio, including real estate, is 24%, unchanged from the end of 2004, and we still have a very unlevered balance sheet. Our goodwill, as a percent of total assets, is 19%. Shareholder equity rose by 3.3% to 419 million from 406 million in the end of 2004. Lithia's book value per basic share is now $22 a share. Our price to book ratio as of the close of the market yesterday was 1.1 times.

Looking at free cash flow, net income plus depreciation and amortization for the quarter was 13.5 million, nonfinancial CapEx for the quarter was 7 million. Dividends, 1.5 million. So we had free cash flow of approximately $5 million for the quarter.

As a final note, for the full year 2005, we are providing guidance of $2.25 to $2.33 per fully diluted share, which assumes a steady pace of acquisitions. The guidance includes the effect of accounting for convertible notes, the effects of including the convertible notes is to reduce fully diluted EPS by approximately $0.16. We have removed the accounting for stock options as the effective date for this change will now potentially take effect in the first quarter of 2006. The effect of this change was $0.05. For reference and for your models, the effect of accounting for convertible notes in 2004 was $0.10. So the comparable full-year 2000 earnings EPS would have been $2.12.

For the second quarter, we are also providing earnings per share guidance in the range of $0.55 to $0.57. That includes the effect of the convertible notes, which reduces earnings per share by $0.04. Excluding the effect of the new accounting pronouncements for convertible notes, guidance would have been $2.41 to $2.49 for the year and $0.59 to $0.61 for the quarter.

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

I have one correction. The long-term debt to total cap ratio, excluding real estate, not including real estate, is 24%. Thank you.

Thank you, Jeff. Those are quite exciting numbers. Good morning or good afternoon depending on where you are in the country. It's good to be here today.

You may recall that in 2004, we acquired approximately $340 million in annualized sales. This represented nearly 14% growth on our total 2003 revenues of $2.5 billion. 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. In February, we added Lithia Chrysler Dodge Jeep in Omaha, Nebraska. This store will be a good complement to our Ford and Mercedes stores in that market already.

Finally, just last week, some of you may have read our press release that we added Lithia Chrysler Dodge in Eureka, California. Combined, the stores and franchises represent approximately $178 million in annualized revenues already in 2004, which is over half of what we did in 2000 -- excuse me, that was in 2005. It represents over half of what we've done in 2004, what we did in 2004.

Now, to move on to operations, as was mentioned earlier by Dick, the used vehicle market so far in 2005 has shown signs of strengthening, especially in pricing and margins. As Sid touched on earlier, for the rest of 2005, our used vehicle focus will be on regionalized, independent used vehicle wholesaling, our used vehicle promo pricing strategy, and the utilization of procurement specialists in our support services group to increase the procurement of the highest demand used vehicles.

On the human development side, we are continuing to execute and implement a very progressive human development strategy. In the first quarter, we strengthened the implementation of multiple programs that we refer to internally as AMP. This stands for accelerated management program, which is really the intent of what we are trying to accomplish in HD. We have developed each component intending to accelerate opportunities for three groups of people -- our existing employees, college graduates and new employees. For new employees, we have internship programs that can help jump start and track careers in our Company. We also create career paths that include a defined timeline for advancement, earning potential and job expectations. The most important element of our human development strategy is focused on our existing employees. Our store advancement program focuses on mentoring individuals for advancement within their current roles to better prepare them for future management roles. Our management training program focuses on providing current managers within the organization the tools and direction needed for future success within the Company.

Our senior leadership program, designed for our best managers, encourages individuals to volunteer to visit stores on a temporary basis, be a go-to person for that store, do training in that store, and then return home to their current job. In addition, our interim manager program prepares qualified individuals for a promotion to the next level. This program provides travel opportunities to multiple stores to gain experience very, very quickly. We are also making great progress in having all employees Lithia certified for their positions. Finally, we are strengthening our training and assessment of leadership skills to assist in growing and designating our best people.

Lastly, I'd like to touch again on Lithia's store management systems or LSMS as we refer to it internally. This program is designed to automate and increase productivity and streamline the sales process and customer experience in our stores. First, it involves the sourcing and tracking of advertising dollars to most effectively deploy them in the right media and promotions.

Secondly, it measures customer traffic and the effectiveness of our personnel in dealing with our customers. This helps our managers better focus training, which allows our people to become more productive and successful.

Finally, we create daily work plans for our managers and sales personnel that highlight and clarify the most important things to be doing at any given time throughout that day. LSMS is the foundation that will give Lithia a competitive advantage concerning customer and employee satisfaction in the future. We are excited about each of these initiatives and look forward to watching them enhance our operations over the coming years. Sid, I'll turn it back over to you for closing comments.

Bryan, that's exciting stuff. I'm glad you shared some of those operational things that I know you've personally been involved in instigating and seeing that they take effect in our Company. And I know that long-term, those will make the differences for us in our retail efforts in this sector. So thank you for that explanation today.

In closing, I'd like to say that we are pleased with the progress we have made developing and improving our operating model over the past few years. Our work is by no means done and we still see areas where we can gain efficiencies and improve the model. We have put together a strong group of operating managers at our stores and support services personnel here in Medford and throughout our different regions. We operate on a fully integrated network of information systems, operating procedures and standards. This has to produce tremendous synergy and team spirit, which is the strength of human organization and we believe in it and practice it throughout our Company. Working from the same playbook is a competitive advantage and we believe a necessity to sustain long-term growth and consistency in performance and operation. I want to thank all of you for joining us on the call and we'll open the floor now to questions.

(OPERATOR INSTRUCTIONS). Rick Nelson of Stephens.

Thank you and congratulations. Afternoon here. But good morning. Sid, how do you view the trade off between same-store sales and margin? They seem to be going in opposite directions and now with the inventory commitment, should we maybe see more sales growth and less year-over-year margin improvement?

One quarter doesn't make a year. We're just starting on that volume efficiency issues. And I think the margins are critical to our success. But we don't think there's a necessity for a trade-off. And I don't think you'll always see it, Rick.

And how do you drive service and parts same-store growth? I understand how you do it in the new car side with inventory, but --?

It's largely done through training and taking advantage of the opportunity to present to people a full line of services at every occurrence as they appear in our stores. We're getting plenty of traffic. In fact, many of the stores are overloaded with service work based on the lifetime oil change program that's bringing our customers back. So just focusing on selling and effectively presenting to people the products that we offer and service, and then finding ways to schedule that around people's busy schedules. We're working with a lot of experiments, including providing loaner vehicles at times so that they can come back and leave their car at the time that we recommend the service. A lot of work to do there yet. I don't think we've even begun to see what we can grow that.

It sounds like you're perhaps capacity constrained. Are you going to be adding bays (ph) and --?

I tell you what, Rick. I'm not one to add bays. We will add hours of performance opening. In other words, we'll shift our stores rather than add the expense of more bays. We're going to try to do this out of the same square footage and grow service and parts just through the same square footage and hold our costs down. So we have another 16 hours a day on almost every shop or at least 14 that's available to us to utilize. And we have some stores running a good two shift program now. And we will continue to advance that. We have some competitors that are running 24 hours a day in parts and service. And we see that as a model that we will be looking at.

And F&I per unit, 1067 -- how much more room is there to improve that number?

You know, Rick, back years ago when I was doing 200 a car, I didn't think we could get to 300. I don't know. As a percentage of the sale of an automotive, it's still relatively the same, so I'm sure it will grow as time goes on. We continue to find ways to find value-added products that our customers are interested in purchasing at the time of sale. We're somewhat constrained and increasing those sales by the amount that we can finance on our customers because it's limited, but that's the only real hold up there. And I don't think that that's -- 10 years from now, I'm sure it will be a considerably higher number.

And one final question, on terms of real estate, you're sitting on real estate on the balance sheet, 233 million. Any idea what the market value of that real estate is?

Rick, unless we did appraisals, I'd hate to guess, but I think it's common knowledge that real estate, particularly in the most markets where we're in, is appreciating, certainly, not depreciating. So we fixed our costs by owning that real estate and I think that's a strategic advantage we have in the long-term. And hopefully it shows in our numbers as we go forward.

No sale leasebacks in the cards?

Not intentionally, no. We do buy some stores that have those in place. And we have to accept those obviously. We do have some with capital automotive reach. And we'll be negotiating with them on and off,. For strategic reasons, we may in fact lease some property. But generally speaking, we prefer to own the real estate.

Again, thank you. Congrats.

Gerry Marks of Raymond James.

Hello. Just a few quick questions. First of all, I just want to clarify. The 30% net income growth and 20% EPS growth, that difference is because of the convertibles that can start in the second quarter, net income growth should match EPS growth?

You guys answer that, Jeff?

Yes, basically, that's correct, Gerry.

And I'm just kind of curious. It seemed to me like your first quarter was your toughest period from a year-over-year earnings comparison standpoint. How come you're only looking for 10% earnings growth for the rest of the year with kind of 20 to 30% growth demonstrated in the first quarter? Is it just because the environment could still be tough, or --?

Yes, in our model, Gerry, we have interest rates rising. We have conservative assumptions relatively on same-store sales and so forth. So we try to be as conservative, but realistic as well. We're not forecasting big increases in the economy or in our markets. And basically a continuation of what we see in terms of the macro economy.

We also thought the first quarter was pretty strong for us, especially earnings wise. And we're not positive that that will continue, as Jeff said.

We're not going to forecast, Gerry. We're always conservative there. And the upside is if the markets are better than we predict or if interest rates don't continue to rise, then those things can all influence our outcome.

And actually, I was hoping I could get a little bit of a geographic viewpoint from you guys. You mentioned your specific states, that Washington was kind of weak and California was pretty good. But did you get any sense that -- we've bee kind of hearing just in the general retail world that the West Coast has been a little bit more difficult than the East Coast. Did you get that sense in the vehicle market as well?

Yes, I think some of the increases are not related to the macro picture. And we're doing really well in California I think in spite of maybe that really improving that much. A lot of operational improvements -- an improvement in management training and the type of managers we've got running stores. We're not very patient any longer with underperformance. And I think that we're seeing some of that. So to use us as an economic indicator, I'm not sure is the complete answer at this point, because we're not seeing any real increases in any of the markets we're in.

Gerry, what may help you, and I can give credit to a couple of our operational vice presidents, over the last 18 months or so, we've strongly focused on seasonality in our stores from a top line and an expense control basis. And we believe that we've got a better grasp on seasonality than what we had in the past, which should take out some of the macro concerns when those things occur. And that's probably the biggest improvement that you saw in the first quarter was that understanding that there is going to be a market there. It's just not going to be the same as what it is in Q2 and Q3.

And actually, Bryan, I just wanted to follow up with you in terms of the promo price you guys kind of mentioned on the used. Could you talk a little bit about that and some of the efficiencies that you're sitting? We're actually even, down in Florida, starting to see more even private dealers going with a low kind of limited haggle type concept based on the idea that it shortens the wait time and negotiation time. Are you seeing real efficiencies because of that?

Absolutely. We're pushing close to 50% of our new vehicles now are promo vehicles. And the initial concept that we had developed was to gain an easier buying experience for the customers, obviously. It shortens that experience, takes away the negotiations, okay? But what we found has been the biggest complement to that program is that the internal training on that program within the store and how a salesperson now has to explain things becomes very simplistic, which makes our success rates on those type of vehicles with our sales people also very well. So it's a win-win situation for our employees and for our customers again.

Great. So have you noticed your closing rates go up with the promo price when it's been implemented?

Absolutely, absolutely our closing rates are going up. Also, we -- Gerry, you know we started promo pricing on used vehicles a little over a year ago. And that's simplifying it on the used vehicle side as well. And we see this trend as do the dealers that you were talking about down in the Southeast continuing. I mean the environment to some extent is changing; our customers are demanding that type of experience, which is shorter and easier.

So if 50% of your new vehicles are kind of promo priced right now, does that suggest that about 50% of your stores are onboard with the promo price on new and --?

No. 100% of our stores utilize promo pricing. Okay? Let me back up. I don't know if our BMW stores do. But other than our high line, there's 100% utilization of promo pricing in new and in used.

The 50%, Gerry, comes from the reality that you've still got a whole lot of vehicles that you don't promo price because they are not -- they're specific vehicles you stock in limited numbers and what not in specialty areas. When you get into a truck franchise, in order to cover what Chevrolet offers for instance in a Chevy store, you've got to have 70, 80 trucks in stock. And they're not all going to be just that popular model that we promo price.

And remember promo prices, we pick out specific models that we believe are the best values for the customers and good demand vehicles that we can buy in quantities and they can have a choice of a few at the same exact price, of 20 or 30 actually at the same price.

Okay. So it's determined on a product line as opposed to a store line?

Yes. Yes, we typically in a store have a couple trucks that are the promo vehicles, okay? And it's really just a choice of a color; they're all exactly the same price.

And if there is difference in accessories, we stair step that so it's clear to the customer. We're not improving the margin by selling him a higher-priced option. It's a very simple process for the customer and mainly for our salespeople so that they can become more consumer-oriented and more friendly in dealing with the customer and get rid of that haggle. But it's not a no haggle price, Gerry. We're not there. Ten years from now maybe we will formally all be there, but it takes time to change cultures, including our customers.

If you have more questions on it, Gerry, we can talk offline too.

Scott Stember of Sidoti & Co.

Can you talk about how lower SUV and truck sales in the quarter it at all impacted your gross margin on the new side of the business?

Scott, basically, most of the new products that are not the bigger trucks and SUVs are new products, and so the margins are actually higher on those. So that's actually a positive thing for us. And you can see that in our gross margins in the new car business. So the fresh product is right where the demand is and those are where the good margins are. So it hasn't hurt us at all to shift.

We actually had improvement in new vehicle gross margin. So -- but we are selling a little less expensive rig.

Okay. And if you look at -- you guys had, obviously, a very good gross margin in the quarter, 17.8. Was there anything in this quarter that you would identify as maybe onetime in nature? And would you caution not to expect to see something north of 17 or 17.5 in coming quarters?

Well, there is nothing unusual or we would have broken it out. It's pretty much our operational practice to try to achieve those kind of -- we historically used to have those kind of margins. So -- but our forecast internally don't go at those levels, so that's a little higher than normal.

But there's nothing unusual in the numbers, Scott. So typical income and nothing dramatic or unusual. (inaudible).

Okay. Could you talk about warranty work and then break it out by, if possible, by domestic and any foreign currency that you have?

There were quite a few recalls this quarter and so warranty work was positive for us. And that was a positive number for us. Especially on the domestic side. There were quite a few recalls that helped us.

We've got a real profitable recall going now with Chrysler on their Durango pickups -- I mean their Dakota pickups; they've got chains (ph) in the ball joints in the front.

Okay. And last question. On the F&I side of the business, could you just give another time just to let us know how much of that business is from selling new products and outside of the finance arena, like oil changes and service contracts in total?

Well, you know, I think we're about -- 30% of our income is from the direct -- the fee from financing the vehicle or the interest discount we get in brokering the contract to finance sources. We're getting a feedback. Is that okay, our coordinator? Can you all still hear us?

Yes, I can still hear you.

Okay fine. Does that answer your question?

Yes, it does. Thanks a lot, guys.

Mark Irizzary (ph) of Banc of America.

Hey, guys. Good quarter. A question actually on acquisitions. First off, it seems like you guys have a pretty proven strategy of going out and shopping kind of for some underperformers and fixing them up. I'm just curious if number one on the multiple side of things, if you're seeing the multiples kind of where they've been historically, are they creeping up? And then also, is there anybody who's kind of playing the same game that you are? You're seeing some increased competition there?

Mark, no, there isn't increased competition. At least we haven't seen that as of yet. And in terms of multiples, it's surprising how stable they've been over the years. It's the same multiples that we've typically been paying and that's what the market is commanding. Remember, we're in small to medium-sized markets typically. Okay? So our competitor is really again the independent dealer that may have one or two stores and enough capital to step into one more store. So we're typically able to stay above what they are able to offer and still purchase stores.

So you're not seeing the likes of maybe some bigger well financed groups kind of dipping into your markets?

No, we haven't had run-ins with the major groups in our size markets.

Okay. And then (inaudible) I guess that (inaudible) anybody. Sid, if you look at the inventory position that you're in and kind of the incentive environment that we're in and what the outlook or commentary that we've gotten from some of the manufacturers has been, how do you kind of see the second half of the year or just the next kind of couple quarters playing out in the incentive front? And are you comfortable kind of with the composition of the inventory by brand?

We're really comfortable and a lot of the stuff we have is the newer, hotter selling stuff too. So we've been able to get a lot of that, taking some of the slower stuff and finding ways to sell that. And they do work with us. We're planning on a strategic initiative with General Motors to improve retail volume in those stores. In fact, we have a meeting in a very short while with some of their head people, and all of our people that are involved in that because we're not going to give up on that. We can sell Chevrolets in volume as we did last year. I'm confident that in the markets we're in, we can still penetrate at a very high level for General Motors. And that alone would pick up any slack that we've shown in same-store sales this quarter in the first quarter. But our inventories there are terrifically well balanced and they're all strategically done now. There's no overage problem or problems with units that we shouldn't have in stock that we didn't intentionally take on. So it's strategic and I think we need to improve your volumes with our core manufacturers and we'll be very aggressive.

So far in April, Mark, we're on plan with what we're expecting to see, so business has been like expected.

So there. We gave a report on April.

That's great. And then Bryan, if I can just ask operationally, are you seeing any changes at the store level in terms of turnover from some of the programs you are putting in? And maybe you can kind of just help quantify -- put some meat on the bones in terms of turnover?

Actually, Mark, our turnover has been decreasing over the last 18 to 24 months because these programs are more -- what we're trying to do is engage our leaders with their employees on a more one-on-one basis. And we're giving them tools in leadership competency and certification to give them reasons to engage those people. So there's actually more feedback back and forth, which is actually helping bond the employees more to our organization. As well as -- the biggest loss is lots of times where people don't see where their future is going to go, so we talk in interim programs and in-store promotion programs as to where their future could lie and how they can accomplish getting to there more quickly. So we're helping them with those.

And can you quantify it or -- no can be an answer as well I guess?

I don't think we've ever given turnover numbers, have we, Jeff?

No, not really.

I don't think we've ever given those numbers.

We're better than the industry on turnover and (technical difficulty) improving. We'll say that much.

Yes, we're not proud of (technical difficulty) we're better than the industry.

No, the industry has a lot of turnover with new salespeople.

It sounds like an easy comparison there.

Yes, exactly.

Okay, thanks, guys.

(multiple speakers) look outside our industry to compare to, so.

I had an interview last night with a gal that does our newsletters for each of the stores and she works with 70, 80 of our different managers. And the biggest single comment she gets from our employees -- the reason they are at Lithia is for the opportunity to grow within one business organization. And I think that's one of the key things for our strategy in keeping good people, is providing them with the opportunity. That's why growth is so important to us.

John Tomlinson of Prudential.

Good morning, guys. Congratulations on a nice quarter. I had a question. Can you guys maybe provide a little bit more color on the strength in new vehicle gross margins? In particular, are you seeing more strength in your Chrysler brands due to their product strength? Is that kind of what you're seeing? I know you mentioned that you're a little bit conservative in that going forward; but do you think there may be some upside there for the rest of the quarters?

I'm just looking at the margin improvements and they're pretty much across the board. Chrysler was up. Ford was actually our biggest increase on margins -- over 100 basis points. So it's really across the board. Nissan was the only brand that was actually down on margins a little bit. But it doesn't look like it's specific to any brand. It's across our network.

Now is that -- is that specifically new vehicle margins you are referring to or just all dealership margins?

No, that's just the new vehicle margins.

That was by brand. We keep that statistic.

Can you maybe then you point to -- I mean what are you seeing that allows you to -- is it the promo pricing that you touched on before? What can you really -- because there was a pretty nice uptick that you saw in the first time in awhile where you saw that improvement.

Well, we're still coming out of that period where we intentionally lowered margins to get volume a couple years ago. So we're in control of our destiny to a certain extent and we went for volume in a serious way two, three years ago when the economies were weak and we've gradually been getting back to our normal levels. So for us, it's really just a normalization.

Okay, so in the coming quarters your thinking was incentives going potentially up again and taking out a lot of inventory that that new vehicle margin might come down just to clear out the inventory?

Possibly, yes.

It's hard to predict. Manufacturer incentives are a huge part of that margin. And there's objectives that we have to hit and volume to get some of those. So particularly with Chrysler. They have an annual number called a volume planning allowance. And if you hit certain statistics -- I mean certain numbers at each store and it's broken down by store, by quarter, by month, or by year -- whichever one you achieve, it's 500 a car. I mean that's a pretty good number. That improves margins a lot if we can get those. So a lot of initiatives to get the volume. And that's one of the reasons for the increased inventories because they can help our margins.

Got you. And the final question that I have is in terms of the used vehicle margins -- and they obviously been strong for not only yourself but some of your competitors. Do you see that margin improvement continuing throughout the year?

If we can hold at these levels, We're doing super. We're way above our historic levels. But it's red (ph) plex (ph) that inventory management focus and finding the right cars that we can make money on and pricing them correctly. We've got a lot of work to do on the procurement side yet. We are pretty well clean now on being able to dispose of that which we don't want. Or that hasn't sold. But that buying the right car, we can really improve on. Yes, we're putting a lot of resources into that and I think it will show up. We're even --

That's what you're seeing right now as well.

Where negotiating with several software firms that will help us analyze that in a more thorough way. We have some software we developed on our own, but there's better stuff out there than what we've got. And I think that will help too.

All right. That's all I have. Thanks a lot and congratulations again.

Do I have any more questions?

Jonathan Steinmetz of Morgan Stanley.

Thanks. Good morning, gentlemen. A few questions. Most of them have been answered. But when you gave out the comp figures, it looks like if I do the back of the envelope math, GM was down something like 20, 25%. First of all, is this accurate? And second of all, is the GM margin -- the new vehicle gross margin radically different than the average such that it would skew the entire number?

Hang on a minute, I'll get you your number on the gross margin. Is he right about the (multiple speakers) volume decline?

Yes, that's about right. General Motors was our weak spot this quarter. I think we mentioned that in the call. All of their brands were pretty much on plan other than that one. General Motors' margins are lower in general than our other brands. It's been that way, so it's not new. They actually were up. Our margins for General Motors were up (multiple speakers)

Up from the first quarter last year.

Yes.

So we're not sacrificing any margin. That's not the answer. The answer is promotion and finding the right inventory mix that will sell in volume. And we're working hard with their people on a one-on-one basis. That company has got a lot of strength. They really are well-managed now and I'm not done with them by any means nor think anyone else should be. Those legacy costs are huge and I know that gives them a real deficit going in. But man, they've got some good stuff and those people are working hard. It's a good company.

What's your sense on the sales weakness? Do you think it's more product related just that some of the vehicles are a little long in the tooth and ready for a redesign? Or do you think it's more gas price, or crossovers? What do you think is the driver there?

Well the large SUV -- they're the strongest seller in that so they're feeling the biggest fallback. And that's probably the biggest single issue with their product line. But you get down there, building those new crossover vehicles and they've got new -- the new Cobalt is doing well on the car side. The margins aren't as good for them in those products, but it doesn't hurt our margin any in selling those. So again, I really feel like there's enough strategies going on inside that company. And it's pretty streamlined. Their people have a lot of accountability and we're not overburdened with people calling on us that don't know what they're doing any longer. I have a lot of confidence that we can work things out to improve same-store sales in our GM store yet this year.

I'm looking at the mix of General Motors a little bit for you, Jonathan. And it looks like the average price on General Motors actually went up a percentage point. So we didn't see a big mix in our General Motors sales. So if that helps you any. Wasn't a dramatic shift.

Let me switch gears to used just for a second. When you look at that little north of 15% margin, I don't know if you have data on this, but is this more a function of getting some higher gross profit margin sales in there or have you been able to reduce some of the really lower margin stuff?

I think a lot of it has to do with our performance on the wholesale side too and that strength that getting rid of vehicles and turning them quicker is still helping. As far -- and then if we sell a little lower-priced unit on average, has that happened yet, Jeff?

For the used vehicle business?

Yes, where are we at on pricing?

Average price was up 3.9%.

So the average price was still up. If we see a drop in the average price, our gross margin could go higher. Because the lower-priced unit, you make more as a percentage because you usually try to make a certain amount per car sold. And that tends to focus on that. But I keep looking for that and it doesn't seem to happen, so.

The average wholesale price was up 12%. So that was a solid number there.

All right, great. Thank you very much.

Kevin Dannon (ph) of ROC (ph) Capital.

Hi. Thanks for taking my call. I'm a little confused by the guidance because comparing it to what you'd said at the fourth quarter release, it looks like you could interpret that as a reduction in guidance in that there's a -- sticking to just let's say before the effect of the convertible, where you had said that '05 would be 2.33 to 2.43. And now the number is 2.41 to 2.49. But to the 2.33 to 2.43, you'd want to add the $0.05 that you mentioned. So it's that apples to apples, the fourth-quarter guidance would be 2.38 to 2.48 and now it's 2.41 to 2.49. So up $0.02 or $0.03, but it would seem in the first quarter here, you've beaten your top end by more than that, such that for the rest of the year, you're reducing your guidance. Am I missing something there?

I think there's some mixup with that convert (inaudible).

You have to look at the convertible. We raised our lower end by $0.13 and we raised our higher end by $0.11. So we raised it more than we exceeded, so we did raise for the year.

Jeff, on our last conference call, we gave two numbers -- one including the convert and one not including the convert. You're looking at the top number before taking the discount on the convert. (multiple speakers) guidance.

You might want to work on that direct with these guys. Because I'm sure we can get to the bottom of that, because we did -- we're raising our estimates.

We raised by what we exceeded, so we can go over that with you if you like.

I thought you raised and then there's also a $0.05 increase in there as a result of FAS 123.

Right, the delay in the stock option expense -- you need to take that out when you look at the numbers and we've done that in our guidance, so --

So that would reduce the inquiries such that now having outperformed the increase isn't particularly big or could be a decrease?

Yes, we'll talk to you about it. It's really clear if you look at the past press releases.

I think somebody needs to walk through those together with you. Let Jeff and Dan do that with you, Kevin, and we'll try to get your model so it lines up with ours.

Thank you. I'm showing no further questions at this time, gentlemen.

Well, thank you, everyone, again for participating and until the next time we have an announcement or next quarter, we will continue to execute our business plan. Thanks again for listening.

Thank you. That does conclude today's conference call. Please disconnect your lines at this time and enjoy your day.