Lithia Motors Inc (LAD) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is India and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Lithia Motors Incorporated fourth quarter and full year 2005 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Dan Retzlaff, director of Investor Relations. Sir, the floor is yours.

Thank you, India, and good morning everyone or good afternoon to those of you on the East Coast. I would like to thank you for joining us for our full-year and fourth quarter 2005 earnings conference call.

I have with me today Sid DeBoer, the Chairman and CEO of Lithia; Dick Heimann, or President of Corporate Affairs; Bryan DeBoer, our newly appointed President and Chief Operating Officer; and Jeff DeBoer, our CFO. At the end of their remarks we will open the call for questions.

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 it is my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer.

Thank you, Dan, and good day everyone. Thanks again for joining us.

This is our 37th quarterly conference call since we became a public company in December of '96. And as you know, we have continued to succeed and have maintained the track record that we established in those early years.

We had a solid performance again in 2005. For the full year our net income, as you saw from the press release, from continuing operation increased by 18% to 51.8 million. Earnings per share from continuing operations, including the effect of the accounting change for convertible notes which is the basis for company guidance, increased 12% to $2.46 per fully diluted share and 15% on an apples to apples comparison before all GAAP accounting changes. And I think this is the last time we have to talk about the impact of those convertible notes because we'll be on a comparable basis now, year to year.

Lithia's performance for the year resulted from improvements in total tales and gross profit growth across all business lines. Margin improvements in the Retail Used Vehicle and Parts and Service businesses and expense savings as a percentage of gross profits in sales. Same-store sales increased across all business lines and same-store gross profits increased in all business lines but New Vehicles, where it was down -- in all our lines except the New Vehicles, where it was down only slightly.

Total same-store sales grew 1.8% for the year and more importantly total same-store gross profits grew at a 3% rate.

Gross margins for new vehicles in the fourth quarter were 8%, a 20 basis point improvement over the fourth quarter of last year. For the year, new vehicle gross margins were 7.9%, the same as last year.

The used vehicle fourth quarter gross margin was 15.7%, a 130 basis point improvement over the fourth quarter of last year. For the year, the retail used gross margin improved 120 basis points to 15.7.

We continue to manage this business well. We have now increased our fourth quarter and full-year retail used margins for three straight years.

In addition, the wholesale used vehicle business continues the strength that began more than two years ago. In the fourth quarter Lithia had a wholesale used margin of 1.1% and gross profit per unit was $68. For the year, Lithia had a wholesale used margin of 2.7% and gross profit per unit of $159. We've now had two and a half years of positive wholesale gross profits. Our success is due to a combination of managing the disposal of these units by using our centralized controls, holding our own used vehicle auctions, and managing the disposal of units at third party auctions.

Parts and Service gross margin for the fourth quarter was 48.8, a 70 basis point improvement over the prior year in the same period. For the year, the gross margin improved 40 basis points to 48.7. We continue to see improvements in this area -- important area of our business. For the year, the primary drivers to margin expansion have been a focus on that critical service advisor training which leads to gains in the sale of the higher margin service items as well as a number of pricing and cost saving initiatives across our entire service and parts business lines.

For the quarter, we increased total gross margin by 80 basis points to 17.8%, and for the year our total gross margin increased by 40 basis points to 17.2%.

SG&A as a percentage of gross profit went up by 60 basis points for the quarter to 75.8. However, for the year SG&A as a percentage of gross profit improved or went down by a substantial 220 basis points to an all-time annual low of 73.5%.

As a result of our gross margin growth and expense savings relative to gross profit, our operating margin increased 50 basis points to 4.1% for the full year. This is the highest annual operating margin that the Company has ever achieved as a public company and it highlights three straight years of operating margin improvements. It is also notable that we achieved year-over-year operating margin improvements for every quarter in '05.

Finally, for the year we had an increase of 20 basis points in our pre-tax margin to 2.9%. I want you all to know we still feel that there is room for continuous improvement in our operating and our pre-tax margins.

As many of you know, in the past few years, seasonal or even month-to-month swings in vehicle sale have become extremely unpredictable and varied and not in our control, often driven by manufacturers' agendas. Well, 2005 was no exception. In fact, with very unusual trends during the year as a result of strong manufacturing incentives in the summer months which led to a pull-back in vehicle sales in the late part of the third quarter and during the fourth quarter of the year. That is why in our retailing industry it is important to focus on annual numbers and not get sidetracked by month to month or even quarterly SAR numbers that can vary greatly throughout the year.

As a result of this unpredictability, Lithia is changing its guidance strategy to one of only providing annual guidance. We do not intend to update this annual guidance as we report each quarter. Jeff will touch upon our increased annual guidance for 2006 later in the call.

Finally, for the fourth quarter of '05, Lithia's board of directors has approved our dividend of $0.12 per share again. You may recall that we increased that dividend by 50% at the end of the second quarter in 2005. Investors can refer to our press release for a record and the payment dates.

Now I would like to turn things over to Dick Heimann, our President of Corporate Affairs, who will comment on the sales, brand mix, and inventory positions. Thanks for listening. Dick?

Good day, everyone, and I wish you all a belated happy, healthy, and prosperous new year.

As you probably all know, we have operations in twelve states. Our annualized sales mix by state, including all announced acquisitions and excluding the two stores in discontinued operations, is currently: Oregon with 16% of sales; Texas with 16; California with 15; Washington, 12; Colorado, 8; Idaho, 7; Alaska with 7; Montana, 6; Nebraska now with 6; Nevada, 5; and South Dakota and New Mexico, our newest state, each with about 1%.

The most notable additions over the last year have been to Texas, where we added four stores and seven franchises in the fourth quarter of the year.

Lithia now has a good diversity. We do have more stores located in cold weather states than a few years ago, and this increases the seasonality impact in the first and fourth quarters. However, we also have a broader spectrum of stores in the strong, diverse economies that would help minimize the impact of any regional slow-downs that could potentially occur.

For the year, I will list the states in order of same-store sales performance: New Mexico, Texas, Nevada, Idaho and Oregon, Alaska and California are tied for sixth, then Colorado, Washington, Nebraska, Montana, and finally South Dakota.

Probably most notable is that the Colorado market demonstrated positive same-store sales growth for all four quarters of the year. As many of you know, this market was difficult for a number of years prior to 2005. The market really hasn't improved in that area, but I am pleased to say that we have. It is nice to see that the corner is turned on my hometown Denver area market in particular, and we look forward to doing even better in the coming years.

Our new vehicle mix by manufacturer as a percentage of total new vehicle units for the fourth quarter was 41% Chrysler-Dodge-Jeep; 16 General Motors-Saturn; 11 Toyota-Scion; 7 Ford-Lincoln Mercury; 5% each for Hyundai and Honda; 4 for Nissan; 3 each Subaru and BMW; and 2 for Volkswagen Audi, leaving approximately 3% for the other brands for a total of 25 different brands.

We continue to see a shift in unit sales from trucks and SUVs to smaller SUVs and sedans. 64% were truck-SUV versus 72% last year. On a sales basis 68% were truck-SUV versus 74% last year in the fourth quarter.

As apparent from the numbers, we operate mostly in regions where trucks, SUVs, and domestic brands dominate the sales environment and are a way of life. It is important to note that this mix shift did not negatively affect our margins for new vehicles.

Our inventory planning with our centralized inventory control process has been successful all year. Many of you are aware that we took an aggressive stance with inventories since the beginning of the year. Our decision to have higher inventories was strategically designed to improve our same-store sales as we moved into the seasonally stronger spring selling months. Our plan was to increase new vehicle volume throughout the year and aggressive inventories were key in helping us achieve the goal. This strategy worked well for us in the third quarter, and by the end of September, new vehicle inventories were four days below our average levels for that time of year, and we were good and in good position going into the seasonally slower fourth quarter.

New vehicle inventories at the end of December were up approximately 28 days compared to our average levels for this time of year. The reason for the higher inventory levels is that in the latter half of the fourth quarter we received additional incentives for taking the extra vehicles from our largest manufacturer partner that increased our year-end inventory above our normal levels.

This was a strategic decision of our Company, very similar to what we did at this time last year. Our manufacturer partner made it so attractive for us to take on additional inventories that it was a good business decision to bulk up on these vehicles. We will have strong inventories at our stores going into the spring selling season. And we will be able to take advantage of what we think will be an aggressive incentive environment in the months to come.

We feel we are at a correct inventory level with used vehicles with good quality vehicles brought in at favorable prices that should benefit our used vehicle business on the long-term.

Used vehicle inventories at the end of December were three days below our average levels for this time of year and eleven days below our third quarter end levels.

Pricing continued to stay relatively firm in the fourth quarter, as demonstrated by a $383 increase in used retail prices, a $452 increase in used wholesale sale prices, and a $262 increase in gross profit per retail unit.

Lithia continues to generate industry-leading finance and insurance, F&I, per vehicle numbers. Our F&I per vehicle for the fourth quarter was $1,106 and for the full year, $1,059. We had penetration rates for the financing of new and used vehicles up 74%, service contracts at 42%, and our lifetime oil products of 37% in the fourth quarter.

Now I will give you all the opportunity to hear from our CFO, Jeff DeBoer. He will provide you with more in-depth details of our financial results. Thank you all for your continued confidence and support.

Thank you, Dave, and good morning, everyone.

Looking at revenues first, total revenues increased 2% and operating income increased 5% while earnings from continuing operations declined by a little under 4% because of higher interest expense in the fourth quarter.

We posted record fourth quarter sales of 667 million. New vehicle sales declined 2%, total used vehicle sales increased 8%. Finance and insurance sales increased 4%, and service, body, and parts sales increased 9%.

New vehicle sales made up 55% of total sales versus 58% in the fourth quarter of last year. Total used vehicle sales combined to total 29% versus 27% last year. Parts and service were 12% this year versus 11% last year. And finance and insurance made up 4% of sales, the same as last year.

One can see the shift away from the lower margin new vehicle sales that occurred this quarter toward the higher margin used cars and service and parts businesses that helped our overall results for the quarter.

The contribution to gross profits by business lines this quarter was 25% from new vehicles versus 26% last year; 21% used vehicles versus 20% last year; 33% of gross profit came from service and parts this quarter versus 32% last year; and 21% from F&I compared to 22% last year. Notice how little these numbers change due to the stability of Lithia's auto retail business model with its multi-faceted businesses.

In the fourth quarter new vehicle same-store sales were down 7%, and new vehicle same-store units were down 6.6%, pretty much in line with the industry decline of around 7%. For the year, new vehicle same-store sales increased 0.8% and new vehicle same-store units increased 1.4%.

For the quarter total used vehicle same-store sales increased 2.5% with units increasing 1.1%. Average retail prices increased by $383. Retail margins improved 130 basis points for used cars, and gross profit per unit increased by $262.

For the year, total used vehicle same-store sales increased 3.8%, and same-store units declined 0.3%. Average retail prices for used cars increased by $445 for the year. Retail margins improved 120 basis points, and gross profit per unit increased $248 per unit.

On a combined basis new and used vehicle same-store sales for the quarter declined 3.9%, and units declined 2.5%. For the year, combined new and used same-store sales grew by 1.8% and units grew by 0.5%.

As a result of the weaker than normal new vehicle sales environment and a tough comparison in the fourth quarter from last year, finance and insurance same-store sales also declined 5.3% in the quarter. However, F&I per unit increased $40. For the year, F&I same-store sales grew 1.4% and F&I income per unit grew $45 per unit.

Service and parts same-store sales increased 3% for the quarter and 2.5% for the year. This was on top of similar growth for the full year and in the fourth quarter of last year. The service side of the business continues to benefit from our focus on service advisor training and increased traffic as a result of the success we have had in selling our lifetime oil and filter program.

Finally and most importantly, total same-store gross profit for the Company was up 0.3% for the quarter and 3.1% for the year. So overall, we had positive growth in same-store gross profit in the fourth quarter.

I will now discuss the debt and capital side of the business. For the year, the total of flooring and other interest expense as a percentage of revenue was 1.2% as compared to 0.9% last year. The increase is due to higher inventories and higher interest rates in the period.

We have minimized the impact of higher rates by fixing a substantial amount of flooring debt with interest rates. We currently have outstanding 150 million in low fixed rate interest swaps with average remaining terms of 2 to 3 years, so the protection will continue. Including all fixed rate debt obligations and hedges, approximately 45% of our total debt now has fixed rates.

For the year, we had an increase in flooring and other interest expense of approximately 9.5 million. Approximately 66% of the increase was due to higher rates, and 34% was due to higher volumes.

Including the swaps, our average interest rate increased by 80 basis points year-over-year to 4.9%. On average, market rates went up approximately 190 basis points for the same period, so we increased by less than half of what the market did. You can see the positive effect of our hedging strategies.

Looking at the balance sheet, we had nearly 49 million in cash and approximately 52 million of contracts in transit for a total of 101 million at the end of the quarter. Our long-term debt, excluding used vehicle flooring, is largely composed of debt from the convertible offering, real estate mortgages, and equipment financing, and totaled $291 million versus 267 million at the end of 2004.

The breakdown of this 291 million in debt for Lithia is 154 million in real estate mortgages, 50 million in equipment debt, 85 million for the convertible notes, and 2 million of Other debt.

Our long-term debt to total cap ratio excluding real estate is 23%. So we still have a very unlevered balance sheet. Our goodwill as a percent of total assets is 18%. We continue to execute our acquisition strategy at good valuations.

Shareholders equity rose by 13% to 460 million from 406 million at the end of last year. Lithia's book value per share is now $23.97 per share. Our price to book ratio as of the close of market yesterday was only 1.2 times.

Looking at free cash flow for the year, net income from continuing operations plus depreciation and amortization for the year was $66 million for operating cash flow. Non-financeable CapEx was 21.1 million. Dividends paid were 7.7 million. So we had free cash flow of approximately $37.2 million for the year.

As a final note, for the full year 2006, we have raised the high end of our guidance by $0.11 to $2.46 to $2.58. We exceeded the high end of our fourth quarter 2005 guidance by $0.03 this quarter.

In the fourth quarter we also classified two stores as discontinued operations. This had the effect of increasing earnings per share from continuing operations for the full year 2005 by $0.08. The total revenues of the stores and discontinued operations, which analysts should take out of their models for 2005, were approximately $50 million.

The full year 2006 guidance assumes a steady pace of acquisitions and dispositions and includes the effect of FASB 123-R for the expensing of stock options that will take effect starting in the first quarter of the year.

In addition, in our model we have included 75 basis points of further interest rate hikes over the next three quarters, beginning with the first quarter of this year, which we've already seen.

That concludes the financial summary and I will now turn things over to Bryan.

Thank you, Jeff. And again, welcome to everyone.

I would like to spend a few moments and comment on the acquisition pipeline and then run through just a few operational issues.

In 2005 we added revenues of approximately $356 million from acquisitions. This represented more than 13% growth on our total 2004 revenues of $2.7 billion.

To break it down regionally, we added revenues of 144 million in Texas, 110 million in Nebraska, 48 million in California, and 54 million in the states of Montana, Oregon, and Washington combined. The acquisition pipeline continues to look very stable going into 2006.

Operationally, we will continue to focus on expense control initiatives and human resource strategies that will lead to ongoing improvements in all business lines. Lithia's focus on growing people from within the organization is on track and our accelerated management program, which is comprised of components designated to accelerate opportunities for our existing and new employees, is now really bearing fruit. We have now proven how to develop high quality operational personnel at multiple leadership levels of our organization.

Additionally, we have made good gains in the implementation and execution of the Lithia store management system. This was initially developed to improve measurements, increase our sales productivity, focus training and focus advertising and begin to streamline the sales processes in our stores.

This quarter I would like to discuss two initiatives that will be implemented throughout 2006. First, we will continue to improve on and enhance our used vehicle operations. This focus has been apparent over the past couple of years and can be seen in our margin improvements and overall gains in our used vehicle business. We at Lithia see that our used vehicle business is probably our single biggest growth opportunity in the future.

Lithia's assured used vehicles is a new change and a large step forward for the Company and our customers. Under this program, used vehicle will be sold on a one price model without haggling. We will provide a 60-day warranty with exceptional coverage and be able to promote, "if it breaks we will fix it, no questions asked," to our customers. We will also have a three-day return policy on all used vehicles sold by Lithia. So if the customer is not satisfied with their purchase, for any reason at all, they can return the vehicle and get a complete refund of their money.

The second initiative to hit the Lithia showrooms in 2006 is a customer-centric sales process. This will be a new way of selling vehicles for Lithia. Under this program, all showrooms and sales personnel will have interactive personal computers. These PCs will allow the salesperson to quickly and efficiently enter data and interact with the customer to speed up the sales process. Vehicle and customer information will immediately be downloaded onto the appropriate forms necessary to complete the purchase. There will no longer be paperwork being done by hand in our stores.

The salesperson will also be able to now fully utilize the power of LSMS that I discussed earlier for follow-up, for word tracking, and overall performance enhancement. The goal is to speed up the sales process and improve our customers' experience.

We are 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 things back over to Sid for some closing comments. Sid?

Okay. In closing I would like to add that Lithia has done well in 2005, as you have seen, by increasing margin and sales and gross profits in what has been a very erratic sales environment. And again, this demonstrates the benefit of having strong operating systems throughout our organization and a group of people that are dedicated to raising the performance of our stores.

What is really exciting is that our ability to integrate new stores and improve the performance of existing stores is improving day by day, yet we still find areas of improvement and new initiatives, as Bryan has just explained a couple of, that we can implement throughout our organization. And that is a unique ability of Lithia in this sector. We have the ability to initiate and implement initiatives across our whole organization all at one time.

We don't feel like we are anywhere near the end of what we can do. We have never been more excited about our future and the potential to continue to develop and become one of America's great retailers of automobiles.

At Lithia we are dedicated then to providing that sustainable and profitable growth we have demonstrated over the last nine years as a public entity. We are 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.

I wanted to comment on a couple other things. Bryan's points on the assured used cars, I don't know if you guys all picked that up, but it's probably one of the strongest marketing strategies and customer friendly ways of doing business and it has taken us quite a while to design that and we will roll that out very shortly across all of our platforms all at once.

I also wanted to comment that we do own and as Jeff pointed out, the debt on our real estate is really less of a payment draw-down than payments for leases would be, and we think that's a huge advantage in Lithia for the long-term and fixing our real estate costs and the hidden value and the value of that real estate for the long-term is a hidden asset in our company.

I also gave today to one of the reporters at Automotive News an exclusive story on our new ownership program, which they will reveal at the NADA convention. And it's a new way of paying our general managers that I think you will all find interesting. Watch for that. They have the exclusive rights to it until Monday so I can't answer questions about it.

Okay? And with that, we will conclude this presentation. India, if you want to take the questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Rick Nelson of Stephens. Please go ahead, sir. Your line is live.

Thanks. Congratulations on a great year and congratulations to Bryan on the promotion.

Thanks, Rick.

Can you talk a little bit about this no-haggle pricing on used cars? Is this something you've tested? And if so, how has it worked?

Hey, Rick, I think if you -- if you refer back to some of our previous conference calls we were stepping into transitioning into the full model of one-price selling. And that was through having promo priced used cars on payments to simplify that process. We're just taking it the final step now and making it very simple for the customer and the sales person.

And are you contemplating any freestanding used car stores separate from the dealerships?

Rick, we're not at liberty to discuss the future plans of that initiative. It is out there that we are working on that strategy and we will, over time, yes, be able to announce that we will be doing that. Bit it's premature to explore that at this time.

Okay. We've seen pretty steady growth in operating margins, as you eluded to, three consecutive years. How much more opportunity do you think there is there and what sort of targets do you have in mind for the long haul?

We're targeting that 5%, Rick. We think over time we can achieve that. It may take us five, six years. And the problem is we continue to buy stores and they hold us back some because we use a lot of resources, but we think that's potentially there, and I don't know if we'll go beyond that. I am a ten-year guy. But at some point we think the efficiencies that we have will make our retailing model the most efficient way of delivering automobiles to consumers there is in America. And we're not going to let up until we know we've achieved that and even then I don't think we'll let up.

If we can get increased volumes, that number becomes less critical to us, obviously, because if we can get a higher return on the invested dollar, that's the long-term goal. But we do believe that potentially -- we have a lot of stores doing that now.

And that 5%, is that an operating margin before floor plan?

Correct.

Okay. And rather than --

That's the number that we're --

-- discontinued ops, did I get that right, is 50 million?

Yes. 50 million in revenues that were discontinued.

Annualized.

Annualized revenues, correct.

How much more do you think is coming on that front in terms of revenue takeout?

That's all we're able to talk about right now. We hope there is none. But we're going to be forced by any non-performance issue to dispose of stores by our own internal discipline. And we plan on disposing of a couple stores a year.

We have very strict return on investment guidelines, and if over a two to three year period stores don't meet that, we almost have to sell them off under our system. It is a very disciplined program. And as you know, we've sold off very few.

Right. SG&A I see widened a bit as a percent of gross profit in the quarter. What caused that, I guess, and how should we think about SG&A as we move forward?

Yes, the fourth quarter is usually the most difficult quarter. If you look at the year we had a 220 basis point improvement. Like Sid said, we really try to look at things on an annual basis. Usually the fourth quarter is a slow selling period and you lose leverage on your SG&A and it is only accentuated when the highest dollar amount product that we sell, the new vehicles were weak, so that's really the only thing that we can point to. All the initiatives and all the trends that we have at our Company are very much in place, and so that's really the only thing --

Are there any SG&A new initiatives going into place? Well, there are certainly those things that Bryan mentioned in terms of the used car program will lower our costs for sales commissions over time, and also our centralized wholesaling is continuing to produce results and lowering SG&A, and we have other initiatives that we'll announce shortly as they come forward. We've made some partnerships with some other strategic software utilization that will enhance our ability to lower our costs again in the store on an operational basis, including the centralization of many of our processes on the accounting side. We're making continued progress in those areas.

Rick, I would like to point out, in the fourth quarter of any given year the final annual adjustments always take place, and it is why I really want to move this company and all of us to thinking about an annual plan. Because it's really hard to predict what those adjustments might be as you go forward each quarter, and we do the best we can, but the fourth quarter is a hard quarter to look at and draw any conclusions about anything.

Where are you in terms of consolidating some of the back office, accounts payable, accounts -- some of the accounting functions that you mentioned consolidating that into headquarters.

Bryan is in charge of that and I will let him answer.

Hey, Rick, we had a general manager meeting a couple weeks ago, and we talked to all of our people of how we are intending to run support services, and run our stores in the future, and it really has one simple focus. And that's to maximize our stores' ability to spend time with our customers and our employees.

So we're doing many different initiatives and the [inaudible] operations is just one of those things that we're going to simply or streamline or remove from our existing operations or possibly centralize, like Sid said, and those things will happen gradually over time with that single focus in mind.

Thank you.

Sure, Rick.

Thank you. The next question is coming from Scott Stember of Sidoti & Co. Please go ahead, your line is live.

Good afternoon.

Hi, Scott.

Can you maybe talk about how used car valuations, primarily on trade-ins for SUVs and trucks, might have impacted sales for new vehicles at all, if at all?

You know, it was odd in the fourth quarter, the used vehicle didn't decline. Actually most of the decline took place in the third quarter, and used vehicle values, and so it flattened out and then began to improve as the quarter ended, and it is still quite strong.

I don't have an answer for that, generically. We maintain a very low day supply on used cars and continue to turn. You notice we improved our position dramatically from the end of the third quarter to the end of the fourth quarter, and that was still in the face of a fairly good sales environment. So I think used cars represent a huge opportunity for us ongoing. And the SUVs, I mean, they've fallen and I think they represent a value where they're at, and if the incentives on the new car side soften, it will only increase the value of the used ones because that somewhat drives that late model SUV valuation.

I get a weekly report from our major buyer that's out buying the late model SUVs, and he and I bet that the SUVs would drop a lot more, I bet that they drop a lot more and he said, Sid, you're wrong, and he was right. They did not drop to the extent that I would have thought.

So, I am not the guy making those choices. We have got people doing it day to day and they watch like hawks. And we've got software now that tracks all of that, and we're right on top of our inventory. I think our risk in terms of used vehicle inventory is always manageable.

Okay. And as far as in the quarter, I know it was a tough quarter for most brands, if not all of them, but were there any brands that stood out worse or better than others for you guys?

Bryan, do you want to speak to that? Or do you want --

I do.

We had a brand mix chart.

There's really not a lot of variation, looking at the quarter's numbers, from what national numbers are. There is nothing unusual. If you look at the annual numbers, we did very well with Ford. We actually had positive same-store sales growth with Ford, which was down nationally. So that's the only outlier.

Everything else is pretty much as -- according to national trends. We're doing a little better with most of them, but there is nothing really unusual other than the Ford thing that I mentioned, we've done so much better than the nation with our Ford stores.

Okay. And you guys made it clear that you're not going to be talking, I guess, quarterly guidance any more. But if you just had to make general anecdotal comments about the year, is it safe to assume that obviously that you would be looking for more of a punch towards the back half of the year, given the erratic sales volume that's been going on over the course of the last couple months?

Well, the first and the fourth quarter are always the slow periods, so we're always cautious about those two quarters, and we encourage analysts to be cautious as usual in those quarters. Spring and summer are when we sell most of our cars. That hasn't really changed and I don't think anyone has a different view this year about that. March is when the selling season starts, and we're ready for it.

I think this year, the 2005 year, represented a fairly representative estimate in our minds of how those quarters should shake out. We've had years before where the fourth quarter came out a lot stronger than it probably should have. I mean, you don't know about that, but once in awhile something happens with the manufacturers and it makes a big fourth quarter. In reality it looks pretty even last year, the way it came out. That's about as much help as we can give you there.

Okay. That's all I have. Thanks a lot.

Thanks, Scott.

The only thing I would say is, again, if you have excess, put it in the second and third quarters. If you're wondering where to put stuff, don't ever put it in the first and fourth quarters.

Okay. Thanks.

Thank you. Our next question is coming from John Murphy of Merrill Lynch. Please go ahead. Your line is live.

Good afternoon, guys.

Hi, John.

Sid, looking at what you're doing with used cars, do you see a time -- you're talking about a ten-year horizon here, and maybe five to ten years out, where you're more of a used car retailer, maybe not giving away [jack] mixes, but that being more of your focus than the new vehicle side of the business?

Well, you know, it's a great opportunity for us. As a real retailer, and that's what we are becoming, we can open stores, do whatever we want when we've got our own used car model. We won't have to buy existing businesses. We won't have to -- yes, and when you go out ten years, I don't know how much of it it will be, but it certainly has the potential to be a big part of our future.

Okay. And second question, on the pricing environment, GM is pressuring their dealers quite a bit on the dealer discount, they're really pressuring dealers on their gross margins. Are you seeing any of that from GM directly and are you seeing that happen or occur with any of your other brands?

Bryan is going to take it and then I will add something.

Actually, John, the GM pressure that they're doing is really just getting rid of some of the incentives. The margin reductions are less than 1%. But what they're trying to do is become more competitive with their sticker prices on the windows. We think it is a great compliment to promo pricing, how we price our new cars on our lots, because it's more of a one-plot price, non-negotiated type model that's more reflective of what market conditions are. The other manufacturers may eventually go there. We're not seeing a lot of that as of yet.

Just so you know -- I'm going to add something. Our gross profit's determined by two main factors: the ability of a customer to come up with a down payment and how much we paid for something. The MSRP is just a reference price that is out there. Transaction prices are determined by our own strategies of pricing our inventories based on availability and consumer demand, and we set a price internally. And ultimately I think we will be a one-price store and adjust our prices weekly, even on the new car side. But those are realities that good retailers like ourselves have to be able to execute in a business that doesn't now do that.

If you look -- Scott, I'll add one thing. If you look at our General Motors margins in the fourth quarter, they were exactly the same as they were the year before. We had no deterioration in General Motors margins at all in the fourth quarter. So a good retailer determines margins, not the manufacturer.

Those are really good trends for the industry, I think.

Just to follow up on that, if they're lowering their MSRP or their sticker price and going to a pricing strategy that's one price, similar to what you're doing, then you guys are also expecting them to get a lot more aggressive with incentives, I mean, that's what you said, later in the year. It is just disconcerting and you have the ability to move around that. I am just wondering from their perspective, it seems like a dangerous game to play, for them.

I can't evaluate their strategy. I know that we know that if they don't -- if it doesn't work -- Chrysler tried the value pricing, lowered their prices quite a bit about three years ago and ended up with incentives that were just as high or higher than they were before, including the lower prices. They're going to have to go with incentives, what it takes to get people to buy the automobiles. And the biggest single criteria is down payment. Without a large rebate or some kind of dealer cash, there's not enough equity in most people to trade. So, incentives are not going away. We'll see increases in GM incentives in the second quarter. I don't think there is any doubt of it.

And you mentioned that they made it attractive for you to take inventory in the fourth quarter. How did they make it attractive and by how much?

It varies between $500 and $1,000 per car that they help us on the retail side or in advertising support or in wholesale flooring allowances. It is a combination of things. But you have to take the units to qualify.

Okay. And then just one last question on the customer centered sales approach with the interactive computers. What's sort of the cost and the payback period for that? Because it sounds like a great tool.

The costs are actually in the -- just over a million dollars for the entire company. And the paybacks are very quickly, in terms of productivity for the sales person. We believe that this process will take out approximately 30 to 40 minutes of the customer's and the employee's time and we've done those studies already and know exactly where we're going to lie, and that equivolates to millions of dollars over a year period of time.

That's great. Thank you very much, guys.

You bet. Thanks, John.

Thanks, John.

Thank you. The next question is coming from Jonathan Steinmetz of Morgan Stanley. Please go ahead. Your line is live.

Thanks. Good morning.

Hi, Jonathan.

Hi. A few questions. Many of them have been asked. But can you go a little deeper on the gross profit per vehicle retailed on the used side? It looked like you're up about $260 on a $383 increase in revenue. Was this selling roughly the same type of vehicle for a better margin? Was there a mix shift that helped out within this? I am just trying to get a little granularity if you parse it deeper.

It's probably efficiencies we've gained from our acquisition and the appraisal methods to get the right vehicles in stock and more than trying to find a trend where we're able to make more because of the market being better. It is us. We're just getting much, much better at buying the right automobiles and getting them priced right and turning them quickly. The sooner you turn a vehicle on the used car side, the more your gross profit is, and we're getting a lot better at it, and I don't think we've even begun to excel there yet. We can do even better.

Jonathan, the key in used car business is finding the right cars. We'll be announcing later this year some partnerships with different companies on how we find those vehicles, appraise those vehicles, value those vehicles, and get them to the front lines, and it really boils back down to mining. You've got to mine vehicles, which isn't just going to the auction and finding those cars. You need to go to other dealers. You need to find other resources to get those vehicles into the showrooms. That's what determines your gross profit more than anything.

So if I am reading your comments and trying to translate it into a number for a model, I hear that $2500 a car, in that range, you think is sort of a sustainable level.

Yes.

Okay. Secondly, on the discontinued operations, which specific stores were those, which metros were they in?

We can't say that, because employees and things don't necessarily know.

The stores haven't been sold yet. They're just in discontinued op. So we haven't --

They are for sale.

And under contract.

And under contract.

Okay. And last one is more of an industry question for you, Sid, but I also found your comments on loading up in inventory in December, presumably for Chrysler or Dodge, to be interesting. Are you so heavy on things like Rams right now that you wouldn't be ordering more at this point, you're sort of stocked, you've got a good deal and you're waiting for incentives to come? Or are you still ordering that type of product on any type of -- with any real magnitude?

As you know, Jonathan, Chrysler has built sales bank regularly. You guys have been in Detroit and so the mix of vehicles that they have for sale doesn't always match what we need, and those incentives are relative to taking mostly those bank units. They're going to continue that in this next quarter. Right now, the quarter we're in, and again they've got a myriad of incentives that they're putting in front of us right now to try to take more cars, and we may end up at the end of first quarter with still an excess inventory. But they make it so lucrative you can't pass it up. That's their decision. We certainly are going to be a player when it makes a business case.

We don't like having all those extra units in stock, but it ends up being productive for us on a gross margin basis and on a sales rate basis. It is something we'll have to continue to grapple with. We are a great partner for Chrysler and they are for us. And so there is a mutual responsibility to one another as well. They have no hinges on us being able to acquire and buy stores and they're excited about our future as we are. We've got to continue to cooperate and find ways to make money in those stores. They still are -- some of the our most profitable and successful stores are the Chrysler stores.

The inventory that we've got represents what they've had to build and what we want. We didn't order much in January, and so they had to build bank again. That's not just us. It was nationwide.

I can understand where, from your perspective it might make sense to take an extra $1,000 on a vehicle and then get a little lower gross margin or pay a little more floor plan. Any there any other OEMs across the board where that's sort the same problem, or is this a unique situation?

I don't think the others are doing that. I think -- seems to be the only one that we have had to deal with the sales bank issue. The others try to sell what they have in their production schedule, and they bring a lot of pressure on each store, but they never have had incentives that are based on you taking the units.

Okay. Thank you very much.

Thanks, Jonathan.

Thank you. The next question is coming from Kelly Dougherty of Calyon Securities. Please go ahead. Your line is live.

Hi. Thanks for taking my question. I just wanted to get your thoughts on demand or reception for the GM T900 SUVs.

Well, it's not that much different than the old one. It is still a fairly good-size SUV. It is certainly a great rig, but it is in that market segment that is softening, so I don't think that it's going to materially change. They had a lot of fleet sales in January, and it looked pretty good, but I don't know about the retail environment on them. We don't see any huge uptick.

So you're not expecting the launch to have any meaningful impact on GM sales as we go throughout the year and more models are introduced?

We haven't seen signs of it yet. We hope it happens.

Okay. How about -- what are your expectations for how they affect Ford sales levels?

That's a real competitive struggle. I don't know if you see those leases that Ford has on the Explorer models. Those are very aggressive retailing messages. I don't know that GM can come up with those to compete with that, even with their value pricing, although their residuals did improve when they did the value pricing because that's a percentage of our sales price.

That battle is just going to take place. We're going to respond to it as we see the market and we'll continue to manage our inventories so it reflects what people are buying. I don't think I can answer totally in terms of what those manufacturers are doing.

Great. Thanks for that.

Another quick question on -- what your acquisition pipeline is looking? Do you still plan to do acquisition levels similar to the levels you did in 2005? Are you seeing any pressure on multiples or more competition for stores that interest you guys?

Kelly, everything looks real stable, and the pipeline is typical for this time of year. We expect to do similar levels that we have done over the past couple years.

We've targeted at least 10% of our revenue base a year as a minimum. And that's already factored into our guidance.

That's in the guidance. Just want you to -- if you study the history of our company, we've never stopped buying stores. It is a way of doing business for us. Because we are buying the single store, the one or two stores at a time, and there is still 11,000 of them out there that ultimately will turnover in any given 20-year period. And we're going to be a player all the way along, continuing to go acquire those.

And since no one else is really looking for the kind of stores that we buy, the multiples haven't changed for the nine years that we've been public. We're paying the same prices we always have and that shouldn't change and it hasn't changed. So that's not really something that changes for us.

Are you guys looking to move more into the Metro markets or you're really pretty much content staying where you are in the rural and the smaller markets.

It is always our primary strategy. We are looking at moving into Metros with luxury brands and maybe some high volume import brands, but that's it.

And we'll be working a little bit east of the Mississippi as well.

Okay. Great. Thanks very much for that. Congrats on the good year.

Thank you.

Thank you, Kelly.

Thank you. The next question is coming from Marc Irizarry of Goldman Sachs. Please go ahead.

Hey, guys.

Hi, Marc.

First question is on GM's new pricing strategy. Bryan, you said it's going to cost you less than a point in margin reductions. I am just curious if it is going to cost your competitors, who maybe are operating in your backyard but maybe are relying on kind of getting closer to MSRP, i.e., the customers maybe doing less research on what the invoice price is. Do you expect the competitive environment in your markets to get tougher and for the GM price reductions to maybe disproportionately hit kind of the smaller town dealer?

I think you're -- I think we sure hope that it happens that way and that we're better prepared than our competition to accept those lower margins and that more, let's say, market-centric pricing model, and that's really what they're trying to do is get their pricing more in line with what they're selling the cars for.

Just so you know, we did not have a 1% loss in margin on GM vehicles. They lowered the MSRP and took it away. But it hasn't affected our gross profit margin that we're achieving.

And even when employee pricing was on in the summer, our deal average went down by about $100, which is less than a half of a point, and that was at employee pricing levels. I don't think the point is even real.

It is really just a marketing strategy. It is a reference price. And they're trying to get a reference out there that is lower than the competition.

I think the way to simply it is we were never getting MSRP for those cars. Okay? So that reduction of the 1% really just brought it back to what we were always getting and what most dealers were getting.

And the competitive nature of your kind of smaller markets, where maybe it is the mom and pop that you're competing against more likely than in, say, a big metro market, that mom and pop is not kind of operating his business with kind of this strategy of getting closer to MSRP, you're saying?

That's probably not as typical in metro markets.

Probably not as typical in metro markets. More typical in small -- okay. That's makes sense.

And then, I am really intrigued with the used car model that you guys are -- kind of seem to have more enthusiasm over than ever. I'm just wondering, a lot of your wholesale, you had a big increase in wholesale units, up 15%. How are you going to kind of manage the wholesale business versus the used car business as you move to more of a one-price model? Are you going to make changes to the way you think about sourcing? Are you going to make changes to the way that you think about maybe investing more in some of the cars that are kind of coming your way and should we expect to see the wholesale unit growth kind of slow and the unit growth for used car accelerate?

Marc, you remember how we disposed of our wholesale unit through third party auctions and then with our own individual auctions?

Right.

Does that sound familiar?

Sure.

We're going to continue with that and we're going to expand it into higher priced vehicles as well.

On top of that, we're always trying to drive our average price of used vehicles down, so if we're able to reduce some of our margin in the service and parts department to be able to recondition some of those lower priced vehicle so we can get them on the lot, we are doing that and we're always coming up with ways of trying to do that better.

We'd love to see the average selling price drop and sell more volume in used, because the gross margin would improve if that happened.

Right. Now, Sid, if I kind of look at -- as somebody else kind of pointed out -- your prices of the used cars are actually up and so are your margins, and now as you move towards kind of a one-price model or no haggle model, is it safe to assume -- you're kind of getting the best of all worlds here but it just seems to me that one of those items and kind of a fixed-price used car model would have to give, should we expect that 16% margin on used cars, probably the top, and then it is going to be more volume driven going forward? Or are you willing to kind of trade off the margin to get the volume?

We're not expecting a lowering of margin. What we're expecting is to, again, more accurately reflect market conditions in our pricing. So we're going to be able to determine that this vehicle commands a $3,000 profit, this vehicle commands a $300 profit, and that's really how we'll be able to stay competitive and increase volumes by obviously having a one-price model. And then, obviously you have a customer-focused process that through word of mouth you hopefully will gain additional sales as well.

It is a really strong marketing message that we'll have. For instance, if we have five stores in one town, we're going to have one great big used car ad every week that has all five stores in it, and it's going to have -- just l blast this fact. Because there is nobody doing this. We're not going to pay off the trade-in. We're not going to cash their checks. We're going to hold the deal for three days. If they want to bring it back, we're giving them the money back, giving their trade-in back. There will not be any games played. This is real.

And 60 days, if it breaks we fix it, I mean, that's huge. No other --

No deductible.

No deductible even.

And are you sticking -- is this an absolutely no haggle price or is this a maybe a little bit of a haggle?

Oh, it won't be. It will be a no haggle price. We'll hopefully change them weekly.

Got it. And the systems, you've invested in some systems to -- do you have new systems that you've invested in to kind of help you price these used cars better? Or are they the same systems that you've had up and running for several years?

That was kind of what I mentioned. We'll be talking about that in the future, of some partnerships that we've been working on.

Got it. And then just quickly, do you guys compete against Car Max n any markets yet?

No.

Would you foresee having to change the model at all that you're thinking about rolling out now when you do kind of bump up against them a little bit?

No. I think there is plenty of room for two guys doing something similar.

It is a huge market.

Okay, great. Thanks, guys.

Thanks, Mark.

Thank you. The next question is coming from Jerry Marks of autoretailstocks.com. Please go ahead, your line is live.

Hey, guys.

Jerry.

Hi, Jerry.

A lot of the initiatives sound pretty exciting. I just had one question. Bryan, at what level did the negotiations with Chrysler go on? Was it the general managers discussing with the zone managers for that $500 to $1,000? Or was it all the way up at like Don Jones and yourself negotiating with Chrysler?

You know what, it works at all levels. The programs are set for the whole country, so it doesn't really matter where that occurs. The decisions are really made in the stores.

And I guess -- because you've been talking a lot about centralization of merchandising strategies and it seemed to me that a centralized strategy would prompt more of a negotiation up at the top level for those rebates.

Just so you know, there can be no negotiation on the top level that's different than every other dealer gets, period. And we've accepted that culture with our manufacturer partners. But the decision to participate or not is made at the very highest levels of our Company, and that is passed down to our stores, and there will be some stores that can't participate.

Okay. So when you're talking about centralization of merchandising, it is more just a recommended list to your dealers? Is that the way to interpret it, then?

What's that, Jerry? I missed that question.

When you're talking about your centralization of the inventory plans, that's more of just like a recommended list that you give to your dealers? Or how does that work, then?

It is model by model specific, that's broke down by what has sold in the past and what predicted sales volume will be. Manufacturers do a lot of that work for us, too, and each general manager is involved in the daily ordering of his vehicles. But given the allocation that the manufacturer first of all has asked him to buy and then secondly that we've approved through our corporate centralized inventory management group.

Okay, thanks. That's all I had.

Thanks, Jerry.

Thank you. The next question is coming from Richard [Keene] of Kensington Management. Please go ahead, your line is live.

Hi, everybody.

Hi. How are you doing?

Great. Great. Just -- I think most of my questions have been asked and answered. The only thing I was wondering about is taking inventory. If you take -- eliminate the incentive from Chrysler, what would the inventory you took in on that basis, what would your inventory look like?

It would be at least 30 days lower than it is currently, but other than that it is probably just that much. We need to carry a very broad mix of vehicles, and the smaller rural markets we're in we'll always probably have a little higher day supply than some volume seller in a big market can carry. Because we've got to cover the line, and if you pull into Pocatello, Idaho to buy a Dodge truck from us and we don't have the one, you will go up to Dave Smith and get it. Do you follow me? So we've got to carry enough cars so we can meet demand at every market and that will mean a higher day supply, generally. But I would say without the incentives that we would have thirty days less supply in cars.

So, about normal, Dick.

Okay. That was the only question I had. Congratulations on a good job done, and talk to you soon.

Thank you.

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

Well, if there is still anybody listening, thanks for participating. We enjoyed the questions and hopefully we've been able to answer them all and both Dan and Jeff are available to help clarify anything that's in the press release or in the conference call. Thank you.

Thank you.

Thank you. This concludes today's Lithia Motors conference call. You may now disconnect your lines and have a great day.