Lithia Motors Inc (LAD) 2006 Q1 法說會逐字稿

Good afternoon, my name is Garrety and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lithia Motors first quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Dan Retzlaff, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Garrety and good morning to everyone or good afternoon to those of you on the east coast. 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 in included in our first quarter earnings press release and in the Company's filings with the SEC. Now I would like to thank you for joining us for the 1st Quarter 2006 earnings conference call. I have with me today Sid DeBoer, the Chairman and CEO of Lithia; Dick Heimann, our President of Corporate Affairs; Bryan DeBoer, our President and Chief Operating Executive; and Jeff DeBoer, our Chief Financial Officer. At the end of their remarks we will open the call to questions. And now it is my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer.

Thank you, Dan. Good morning and good afternoon, everyone. I'd like to thank you again for joining us, I know there's a high level of interest after our press release today. For the first quarter, net income from the continuing operations as you saw increased to 10.6 million and earnings per share from continuing operations were $0.50, including the adjustment for FASB 123R. As mentioned in that press release and I'm sure you are aware, our reporting earnings include that effect of accounting for equity-based compensation which had the effect of decreasing our earnings by $0.03. Earnings per share from continuing operations excluding the effect of the accounting change were $0.53 per fully diluted share as compared to $0.50 in the same period last year. Lithia's first quarter results can be characterized by sequential improvement throughout the quarter. With a very weak January and improving February, and then a very strong March. Total sales increased about 14% and total gross profit increased 12%. Same store sales and gross profits were up across all of the business lines, except unused which were gross profits were essentially flat with last year. The benefits of Lithia's strong operating systems, integrated store network, and regional market focus were apparent in our being able to increase same store sales in all business lines, and especially in the new vehicle business where nationally the sales environment was very lackluster. Our response was to push new vehicle sales in an attempt to gain market share and create long-term future business for our parts and service departments that will benefit the Company. We were successful in those efforts and as a result produce new vehicle same store sales up 11.5% for the quarter.

New vehicle same store unit count for the quarter increased by 10.9%. This is well above the industry increase of 1% for the quarter. A number which, in the case of the industry included fleet sales, of which we have very few. Domestic same store unit sales increased 11.5% and import same store unit sales increased 9.7%. Again this is compared to an industry decline for domestics of 2.3% and an increase of 5.8% for the imports in the quarter. On a monthly basis, the heightened seasonality of many of our stores that are located in cold weather areas was apparent in January. And some pull ahead from December had taken place. As our new vehicle, same-store unit growth of 4.4% trailed that of the other month in the quarter, but was still ahead of the industry. As you know the industry had growth of 7.6% in January, but this number, again, included large amounts of fleet sales. We estimate that excluding fleet sales, the industry was flat to down for the month of January. In February, sales began to pick up even more for Lithia. And we posted same store unit sales gains of 11.3% verse an industry gain of 0.6. And then in March, the seasonally strongest month of the quarter, Lithia posted same store new vehicle unit growth of 15.5%, in contrast to a national decline of nearly 3% in sales.

I'm highlighting these monthly numbers here because it helps demonstrate how we were able to turn the needle on new vehicle sales in a declining environment particularly with our Chrysler, Dodge, and Jeep stores. I'll also like to highlight our General Motors unit sales in the month of March were up 3.4% verse a national retail sales decline of almost 17% for GM. National brand performance, as you can see is of less importance when you have well-run stores in the right markets with strong retail practices. For the quarter, total used vehicle same store sales increased 0.3% and same store units declined by 6.5%. Average retail prices, however, increased by $943. Our region mar -- our retail margins were the same as last year and gross profit per vehicle increased by $137 per unit. For the quarter, the shift in focus in our stores towards more new vehicle sales hurt the used unit numbers, but we were able to maintain margins and boost our average gross profit per unit on those vehicles we did so. On a combined basis new and used vehicle same store sales for the quarter increased 7.5% and units increased by 1.1%. Related finance and insurance same store sales increased 4.1% in the quarter. Service and parts, same store sales as you saw, increase 5.1% for the quarter. This was on top of the 0.3% growth in the first quarter of last year. Same store warranty sales were up again, a small amount, 2.4%. Domestic brands have continued with their quality improvements and as a result had a de -- decline by 8.9%, which surprisingly was opposite for the import brands. Import warranty work increased by almost 30% for the quarter.

Lithia service and parts business continues to benefit from our focus on service advisor training, and increased traffic as a result of the success we've had in selling our lifetime oil program. In addition, the large number of units sold, new units we sold in the first quarter should continue to benefit our service and parts business. Finally, our total same store sales were up 7.1% and total same store gross profit grew again up 4.9% for the quarter For the first quarter of 2006 Lithia's Board of Directors has approved again a dividend of $0.12 per share as we announced earlier. Investors can refer to our press release for the record date and the payment date. I would now like to turn things over to Dick Heimann, our President of Corporate Affairs, who will comment further on the sales, brand mix and inventory positions. Dick.

Thank you, Sid. Good day, everyone, and thank you in advance for your continued interest and support in our Company. We continue to have operations in 12 states. Our analyzed total sales mix by state including all announced acquisitions and excluding the stores and discontinued operations is currently California with 17%, Texas with 16%, Oregon with 15%, Washington with 12%, Colorado with 8%, Idaho with 7%, Alaska with 7%, Montana 6%, Nevada 5%, Nebraska 4%, South Dakota 2%, and New Mexico with 1%. The most notable sales additions over the last 12 months have been to Texas, California, Montana, and Washington. We've been successful at broadening our regional diversity across a number of these strong and diversed economies. For the year, I'll list the states in order of total same store sales performance. Texas leads followed by Oregon, Idaho, Washington, New Mexico, Montana, Alaska, California, Nevada, South Dakota, Colorado, and finally Nebraska. The states of Texas, Oregon, Idaho, and Washington even experienced strong double digit gains in same store sales. Montana and California performed well, but faced difficult positive comparisons to the first quarter of last year. Our new vehicle mix by manufacturer as a percentage of total new vehicle units for the quarter was 44% Chrysler, Dodge, Jeep; 17% GM, Saturn; 11% Toyota, Scion; 7% Ford, Lincoln, Mercury; 5% Honda; 4% each Nissan and Hundi; 3% for Subaru, 2% BMW; and 1% Volkswagen, Audi leaving approximately 2% other brands for a total of 25 different brands. We continue to see a shift in unit sales from trucks and SUVs to the smaller SUVs and sedans. 64% were truck/SUV versus last year's 68%. On a dollar sales basis, 69% were truck/SUV versus 70% last year in the first quarter. Our numbers demonstrate that we operate mostly in regions where trucks, SUVs, and domestic brands dominate the sales environment and our way of life.

Our centralized inventory control process continues to demonstrate its flexibility and nimbleness particularly well in the first quarter. As many of you are aware, we took an aggressive stance with inventories at the beginning of the year. In December of December of '05, we have additional [incentives] from our largest manufacture partner for taking and selling extra vehicles. This ended up increasing our year end inventory levels and was a strategic decision very similar to what we did at the same time last year. We also took on additional inventories in February and March, which were necessary in order to receive additional incentives for selling vehicles in February and March, which helped make March such a great,month. Throughout the first quarter, through Company wide promotional initiatives, we are able to reduce our success inventories to normal levels going into the stronger spring and summer selling season ahead. This strategy worked well for us in the first quarter, and by the end of March, our new vehicle inventory [day of supply] was 35 days below year-end 2005 levels and an average level for this time of year. We also believe that we're at the correct inventory levels with used vehicles, with good quality vehicles brought in at favorable prices that should benefit our used vehicle business in the spring and the summer. Used vehicle inventories at the end of March was six days above arrange levels for this time of the year, and only four days above where we -- last year, we were last [through] the end of March. We plan on being more aggressive in the used vehicle business and are going to push used vehicle sales in the second and third quarters.

Pricing continues to stay firm in the first quarter as demonstrated by a $943 increase in used retail prices, a -- which is a $474 increase in used wholesale prices and $137 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 first quarter was $1,050, an increase over the same period last year. We had penetrational rates for the financing of new and used vehicles of 78%. Service contracts of 43%, and our lifetime oil product of 39% in the first quarter. Now, it's my pleasure to turn this over to Jeff DeBoer, our CFO. He'll provide you with the same more -- same -- detail on the financial results.

Thank you, Dick. And good morning, everyone. Let me start with our revenues. We had record first quarter sales of $748 million. New vehicle sales increased 19%, total used vehicle sales increased 6%, finance and insurance sales increased 12% and service, body, and parts sales increased 11%. New vehicle sales comprised 57% of total sales versus 55% in the first quarter of last year. Total used vehicle sales comprised 28% versus 30% last year. Parts and service was 11%, the same as last year, and finance and insurance also was 4%, the same as last year. You can see the shift towards new vehicle sales that occurred in the quarter. The contribution to gross profits by business line is as follows. 26% from new vehicles versus 25% last year. 22% for used versus 23% last year. 31% from service and parts and 21% from the F&I, the same as last year in both businesses. You can see here how little these numbers change due to the stability of Lithia's auto retail business model.

I'll now go over the gross margins by business line. Gross margins for new vehicles in the first quarter were 7.9%, a 20 basis point decline over the first quarter of last year. As Sid mentioned, we decided to go after volume in the quarter. And as a result, the margins pulled back a bit. I would point out that our deal average on new vehicles, only declined $50 per unit, which, given the double digit volume increases, is pretty good. Our historical average gross margin for this quarter was -- is 8.2%. The used retail vehicle first gross -- first quarter gross margin was 15.4%. This is the same as last year. Our historical average gross margin for used cars in the first quarter is 13.7%. We have been seeing an increased used vehicle margins in the first quarter since 2002 when they were at 12.5% compared to the 15.4% this quarter. The wholesale used vehicle business continues the strength that began in the third quarter of 2003. In the first quarter Lithia had a wholesale used margin of 5.1% versus 4.4% last year. And gross profit per unit was $325 versus $262 per unit in the first quarter of 2005. We have now seen 11 consecutive quarters of wholesale gross profit gain. We continue to manage the disposal of these units by using centralized controls, holding our own local used vehicles auctions, and managing the disposal of units at larger third-party auctions. The parts and service gross margin for the first quarter was 48.8% as compared to 48.6% in the same period last year, a 20 basis point increase. Our historical average gross margin in service and parts in the first quarter is 46.6%, so we are well above historical levels. The primary drivers to margin expansion here have been a focus on service advisor training, as Sid mentioned, which has led to gains in the sale of higher margin service items as well as a number of pricing, capacity efficiency, and cost-saving initiatives across the entire service and parts business.

For the quarter our total gross margin declined by 30 basis points to 17.5%, mostly, as a result of a shift towards our lower margin new vehicle business. SG&A as a percentage of gross profit went up by 100 basis points for the quarter to 77%. This was up against an improvement of more than 440 basis points in the prior year and still marks an improvement of over three -- 340 basis point s on a two-year basis. Also SG&A as a percentage of revenue held steady with the first quarter of last year at 13.5%. So we can see the mix shift, the lower margin new vehicle sales affected our SG&A leverage this quarter. In addition, approximately half of the increase in SG&A as a percentage of gross profit, or 50 basis points, was due to the option related expenses that were new this quarter due to the accounting rules. The other increases were due to higher investments in personnel for our centralization efforts and future projects. As these initiatives take hold, we will realize the intended cost savings. The next four largest cost items; sales, compensation -- or sales compensation, payroll taxes, rent, and advertising were all down as a percentage of gross profit. Even advertising was such a big in the new -- in the new car -- big increase in the new car business was down as a percentage of gross profit this quarter. As a result of the lower gross profit margin and higher SG&A, our operating margin of 3.5% was 30 basis points less than the first quarter of last year. This is still 40 basis points above our 3.1% average for the first quarter of the year.

I'll now look at the balance sheet. Starting -- actually, let's talk about flooring and other interest expense. As a percentage of revenue, the flooring and other interest expense was 1.3% as compared to 1.2% last year. The small 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 our flooring debt with interest rate swaps. We currently have outstanding 150 million in low fixed rate interest swaps with average remaining terms of two to three years. Including all fixed rate debt obligations and hedges, approximately 45% of our total debt now has fixed rates. For the quarter, we had an increase in flooring and other interest expense of approximately $2 million. Approximately 55% of this increase was due to higher rates, and 45% was due to higher volumes. Including the swaps, our average interest rate increased by only 60 basis points year-over-year to 5.3%. On average, market rates went up nearly 200 basis points for the same period, so we increased substantially less than what the market did. You can see the positive affects of our hedging strategies.

Looking at the balance sheet, we had nearly 33 million in cash on -- and approximately 52 million of contracts in transit for a total of 85 million in cash and equivalents 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, and equipment financing, and was 291 million, the same as at the end of 2005. The break down of this 291 million is 167 million in real estate mortgages, 37 million in equipment debt, 85 million for the convert, and approximately a million of other notes. Our long-term debt to total cap ratio, excluding real estate is 21%, so we still have a very unlevered balance sheet. Our good will as a percentage of total assets is 18%. We continue to execute our acquisition strategy at good valuations. Shareholders equity rose to 470 million at the end of 2005. Lithia's book value per share is now $24.21. Our price to book ratio as of the close of market yesterday was around 1.4 times. Looking at free cash flow for the quarter, net income from continuing operations plus depreciation and amortization for the year was 14.7 million and [non-financeable] CapEx was 7.2 million , dividends paid were 2.3 million. So we had free cash flow of approximately 5.2 million for the quarter.

As a final note, in the first quarter of 2006, you may have noticed that our tax rate was lower than that of the prior year period. This is related to a change of interpretation of a tax rule which benefited the Company as a reduction to tax expense. For the rest of the year, our tax rate should be more in the normal range of 38 to 39%. In addition, I would like to note that included in the numbers for discontinued operations for the first quarter of 2006, our unexpected legal settlements that were incurred from stores that we had sold in previous years. The majority of the loss and discontinued operations this quarter was from these one-time legal settlements.

Now to our guidance for the full-year 2006. Our guidance remains unchanged at $2.46 to $2.58 per share. The full-year 2006 guidance is for continuing operations and assumes a steady pace of acquisitions and dispositions and includes the affect of FASB 123R, expensing for stock options, that took effect starting in the first quarter of the year. In the first quarter, we had the same two stores classified as discontinued operations as we did at year end. One of which, a Chevrolet store in Salinas, we sold in February. In addition, in our forecast model, we have included 50 basis points of further interest rate hikes over the next two quarters, beginning this quarter. That concludes the financial summary. And I'll now turn things over to Bryan. Thank you, Jeff. And again, welcome to everyone across the country listening in. You may recall that in 2005 we acquired approximately 356 million in analyzed sales. This represented more than 13% growth on our total 2004 revenues of 2.7 billion. Most recently in April, we added the Lithia Dodge of Fresno with analyzed revenues of approximately $50 million. Fresno, California is a good market for Lithia with some of our best stores and strongest personnel, which will be great to leverage from in the coming months and quarters. Along with the acquisition, we were also awarded two additional Chrysler, Dodge, and Jeep open [points] in and around the Fresno market area. Once the addition of the open points are completed over the next few years, Lithia will be the exclusive Dodge dealer in Fresno and the two closest surrounding markets. Chrysler's awarding us these open points, really speaks to the strong relationship that we have forged with our manufacture partners. Further, we have a number of good acquisitions if the pipeline for Q2 and the rest of the year.

Operationally I would like to provide an update on a number of different initiatives that we have been working on over the past few years and that have been taking shape nicely in 2006. We have developed and formalized a more streamlined and customer centric sales process. This new process will provide all Lithia sales personnel interactive personal computers. These PCs will allow the salesperson or the customer to quickly and efficiently enter data that will immediately be downloaded into the DMS system in order to streamline the rest of the sales process and all but eliminate the need for paper work done by hand. This is a big step for Lithia. The goal is to create a simplified and much more efficient process for both the salesperson and the custom or -- customer in order to improve customer satisfaction and communication. These personal computers will also help us leverage the benefit of our sales department [LSMS]. Remember, &S is the system that allows us to track advertising effectiveness, provide [word] tracking for our salespeople for followup, increase the productivity of our sales task by providing them with daily work plans, and individually focus our training and sales certification. All of these things will ultimately enhance the effectiveness of our sales departments. We have also continued to improve the functionality of our centralized inventory control processes, as Jeff mentioned earlier. In the near future, all new vehicle inventories and orders will be essentially managed by support services. This allows our managers in the stores to spend more time on the retail push and growing their staff and less time managing inventories, and this is a real thrust of Lithia over the coming years is to really put our focus back on retail.

Our internet initiatives involved -- involved developing a centralized department that will be staffed 24/7 with brand specialists capable of communicating with customers by phone, by e-mail, or even live chats, and then at the right moment in the sales process transferring the customer over to the appropriate stores in a seamless manner to complete the transaction. We will continue to work on improving and enhancing our used vehicle operations. We believe this is continuing to be the key to our future. Recently, we announced our new partnership with First Look and our expanded relationship with Car Facts. Both will be rolled out through all of our stores throughout the remainder of 2006. Our focus and expertise in the used vehicle business has been apparent over the past couple of years and can be seen in our op -- in our margin improvements and overall gains in used vehicle business. However, we also believe this new First Look technology combined with the modification of our internal processes and disciplines will take our used vehicle business to the next level. Simply put, we will be better prepared to get the right inventory to the right store, at the right time.

In conjunction, Lithia's assured used vehicle customer equities will be rolled out, as well. Lithia assured used vehicles will be sold at what we term low haggle pricing, very similar to our promo price models on the new vehicle side. Two important components of this strategy are the 60-day warranty with exceptional coverage and a three day return policy, where if the customer is not completely satisfied with their purchase for any reason, within three days of the purchase date, they can return the vehicle and get a complete refund of their money and their trade-in. We are excited about each of these initiatives, and most importantly, we expect great execution throughout 2006 as Lithia has demonstrated in the past. We believe it is critical that you have a glimpse of what we are focusing on operationally. And we look forward to watching them enhance our operations over the coming years. Now I'd like to turn things back over to Sid for some closing comments. Sid. Thank you, Bryan, Jeff, and Dick, and I'd like to close now. I would just like to say that over the past few years, we have made a lot of progress in developing and improving our operating model. And as you can see, there's still much more that we can and will do. And I'm confident that we will continue to find new and exciting ways to enhance the model in serving our customers over the next few years. Lithia's initial operating model began back when we had only five stores here in southern Oregon. Our model was developed steadily and only improved over time while being fully integrated into each of our 94 stores. We now don't have to reinvent the wheel, we only need to improve and continue to improve on it in a consistent and dedicated manner. We're looking for better ways to empower our employees and believe that by doing this we will be able to implement new initiatives more quickly and more efficiently, even than we have in the past. We are creating a Company that is customer centric. We need to explore and find ways to say yes to the customer. We have to get better at that than anyone else. We really need to become like a Nordstroms, where all of our actions are focussed on doing what is best and right for our customers. We have a strong group of operating managers at our stores and support services personnel here in Medford, Oregon, and also scattered in our regions that are working from the same playbook with common systems and standards. We believe that this is our competitive advantage, that will allow us to implement initiatives more effectively over time. We are marching towards the most customer centric model in the industry. I want to thank you all for joining us on the call, and we will now open this floor for questions.

[OPERATOR INSTRUCTIONS] Rick Nelson, Stephens, Inc.

Thank you. Good afternoon, or I guess good morning for you guys.

Hi, Rick.

Same store sales have been quite volatile the last couple of quarters anyway, with big tradeoffs between sales, and margin, and expenses. How -- how should we think about that as we move forward?

Continued volatility, but on an annual basis, those estimates and things we've done, it will average out, Rick. I mean, you can see that the dom -- the dynamics of the first quarter, a really poor January, and then a strong March. One of the reasons we drop -- dropped giving quarterly forecast, and we might get three boomer months in one quarter and then drag along in another quarter. So I mean I don't think we're in control of that piece but I do think it will average out over a year and we have a pretty good view of how it will work out.

And when the manufacturers get a -- a grasp of in terms of pushing inventory to the dealer, are you more inclined then to take that inventory and -- and, we'd see above average same store growth as we did this quarter?

Again, Rick, that's a business case, each time they offer a program, we examine it and look at the benefit and cost and balance it and so far it's made sense for us. We're also doing quite a few promotional things in terms of inventory planning with some of our other manufacturers besides Chrysler. Ordering a lot of a certain kind of unit that we can market strongly around the promo pricing theme and try to gain share in each segment that we know there's opportunity in. And also in the areas where the manufacture can supply us with the volume that we need. I think a lot of those strategies will play out and help us get improved same-store sales on new cars, certainly one of the goals for the year.

With inventories now at, normal levels for the season, you -- you would expect, I would think a moderation on same store growth this quarter, but with more favorable tradeoff with margin?

I hope we get same store growth. Those inventory levels didn't really help us sell that extra, and we can do it without them. It helped us on the incentive side and we were able to have a better quarter, maybe than we would have had without it. But, Rick, I -- there may -- the April business continues to uptrend, and we don't see the fall off. I think we'll see a pretty good strong quarter hopefully like we've forecasted. We'll need a couple good quarters in here to make our annual numbers.

And the growth rate in service and parts same store, we haven't seen that type of growth in -- in a while. Is that level sustainable in your mind?

That's our goal is at 5%. And we did achieve it in the first quarter. There were fewer days in some of those months, and, again that's always impact on service days. Service days are huge, hopefully someday we'll be open 7 days a week and we'd take that variation out quarter by quarter.

And then on the discontinued operations, I know you mentioned legal settlements were a big piece of that $0.06, can you quantify that?

We're not able to give you anymore than what we gave you on that. And we did want to give you some color to it so you understood that it wasn't all coming from discontinued ops. We actually -- we only have one store in discontinued ops so far this quarter coming up. We sold the one in Salina, as we announced, so we have only one left, and it should be disposed of this month.

And then lastly, on the tax rate, I see that declined a bit. Maybe you addressed this in the remarks, but I missed it.

Yes, Rick there was a one time change from a reserve we held for tax that the -- really we decided that we didn't need it and it was brought in this quarter. So it's -- we'll be back at the 38, 39% level next year, I mean for the next quarters.

Okay, thank you very much.

You bet. Nice to hear you. Thanks, Rick.

Matthew Nemer, Thomas Weisel Partners

Good morning or afternoon, everyone. First question is I'm just curious how if you could give us a little bit more detail on how you were able to drive sales given what you said about advertising being down as a percent of gross profit, was a change in the type of advertising, or was it pricing?

Bryan, why don't you take that. Matt, I think the single biggest driving factor is our operational teams and the stores now are finally comfortable with the campaign management functionality in our LSMS systems. So what they're doing is when we have excess inventories or special programs, or any of those things that are occuring, what we're doing is driving those campaigns into the daily work plans with our salespeople. So it's -- it's now a front line thing to be able to drive results. And that we saw as big pushes at the end of March, especially, that really took -- took hold and we hope to be able to do that more consistently in the coming months where it's not just on a special program and we're really focusing on that. [Mark] I'm going to have to give you a little more color on that, during the month of March, we developed a special pricing package, we didn't advertise it, you noticed advertising costs didn't go up. But we gave every salesman a daily work plan based on all of the people they had talked to in the last three months about a vehicle they hadn't purchased and they directly contacted each one of that was a daily task. And we got the additional units really from a lot of that effort. And with no additional variable cost to get it. So, I -- the strength of this whole model of using our own internal systems, using Lithia.com and doing things in a cost effective way to increase sales is key to our strategy and we're going to continue to explore and find ways to do that.

Okay so it sounds like traffic necessarily wasn't up, but conversion rates were much higher.

That's accurate. That is accurate.

And then another question on the sales and margin -- new car sales and margin side. I'm wondering if you can shed some light on the Daimler-Chrysler deal that takes some additional inventory from the bank, and how -- I would have expected to see that, maybe, benefit new vehicle margins slightly given the extra thousand dollar bogey. Just wondering if you could comment on that?

Well, Matt, we use that money to sell more cars, that's that simple. That's the benefit of having those incentive plans, you just -- you want to just layer it right in and give it to the customers as quick as you can and be sure that you get that additional volume. And we became very competitive against Chevy, and Ford, and Toyota in those markets we were at. In all reality, Chrysler sales -- same store sales were up 16.4%.

Okay. And then --

Most of that was in March.

Can you give us a sense of how much of that vehicles with that money is left in the inventory, or is a that pretty much already played out?

Well, you saw the inventory days supply fell by 35 days, so we're about where we want to be on that. The difference in swing in between January, we sold like 1500 and some Chrysler products and in March we just nipped just short of 3,000, almost doubled our sale between those two months. So that's the volatility of it. The reality is -- that's why the whole thing with an annual forecast is the way to look at our Company.

Okay. And then the last question that I have is on the assured used vehicle program. How many stores are operating under that right now?

Actually, we'll be piloting the first stores in May. And it's fully developed and it's ready to roll out behind that, so I would say by July 1st, it'll be -- it'll be all stores go.

And same for the -- for the First Look software? Is it ab -- on about the same time frame?

Yes, those are all getting rolled out simultaneously.

Okay.

And that's actually why we delayed it just a touch on the assured so we can go in once and talk to the used car managers, retrain the sales personnel, et cetera, et cetera, on those equities. That First Look piece, we're just initiating it in the store. It did have a lot more potential to increase our performance in used cars beyond this initial implem -- implementation. So there's a lot we're going to continue to do with that. That's going to be one of the best partnerships we formed, we hope.

Great. Thanks so much, nice work.

You bet, thanks, Matt.

Scott Stember, Sidoti & Co.

Good afternoon.

Hi Scott. Hi Scott.

Most of my questions have been answered already, but can you talk about service [base] capacity where you stand and any plans to increase the amount of base you have over the next 12 to 18 months?

Yes, you know I love that one, Scott. I don't know if you heard me spout about that but I'm not for adding stalls, I don't know where some of the competitors in our sector think that's a great idea. The manufactures require a certain amount, we always have to do that. But we have 24 hours a day 7 days a week available in those stalls, and we're going to find a way to use them more and not add stalls. We don't want to add fixed cost, we want to get our -- just add variable cost as we grow those service and parts businesses. So we have plenty of space currently, we don't need to add stalls in very few stores. Some of the high-line luxury, and that was where maybe some of this come from from some of the others in the sector. They have huge demands for space utilization, they don't recognize the shift and they'll ask you to build 50 stalls when you could really get by fine on 20. But that's the reality, we'll have to face that. We don't have a lot of luxury stores and most of the manufacturers don't have the same stall requirements, to meet their manufacturing performance issues. So we think we can leverage our fixed cost a long ways. We can certainly, at least double service without adding fixed. We have a lot of levers we can pull in regards to teams and different shifts and hours and express lube, et cetera, et cetera on the service drives so.

And the last question. I think, Sid, you mentioned that you saw a 30% increase on foreign cars warranty work, can you maybe talk about that a little?

I didn't really look into that number. Sometimes there's a campaign by one of the manufacturers that may drive that up. I know at one time one of our import manufacturers had an engine replacement thing, it was kind of a silent recall and that really drove those numbers. So I'd have to examine it. I can't tell you offhand. That was the number and I was shocked by it too. I don't think it's a quality issue overall, but it does show a nice trend on the domestics. they're getting much more the same in terms of warranty repair.

That's all I have, thank you.

Thanks, Scott.

Jerry Marks, [Auto Retail Stocks]

Good afternoon.

Hi, Jerry.

Bryan, how do you work through the framework agreements as you go to a centralized inventory management approach? How are the auto makers reacting to this and what -- what are you telling them, as more of it is coming from I assume kind of recommended purchasing to your GMs?

You know, it hasn't been an issue because when we centralized the ordering, what we've been able to do is take bulk vehicles from the manufacturers, so it ends up being about the same. It's easier for them to really deal with us. So we -- we haven't had push back on that really, and I understand what you're saying in regards to the framework agreement and the general manager having the authority to do those things. But as long as it's -- it is a manufacture see it as a partnership and they're getting the results that they want, they're -- they're -- they're obviously pretty gracious about that.

In addition, you get an extra $1,000 or however, when you -- you take extra bonus money from some auto makers, maybe you're also moving them in that direction of allowing you to do more centralized purchasing?

There's just no push back on it at all, Jerry. They think it's a great saver for them. Basically our one guy here in Medford can order 3,000 Chrysler products within a few hours and who in the heck can accomplish that? Their personnel cost and everything go down in dealing with it. Where we're able to see -- what we're able to make sure is that the communication line goes directly into the -- into support services rather than getting dispersed out into the stores, so when we find out about new products or packages or models or something that's going on, we can react quickly and make sure that all of our stores are taking advantage of it. So they know that if they have to send that message once rather than 40 times in the Chrysler case or 20 times in the -- in the Chevrolet case. That's what we're seeing good effects on -- we're working with General Motors right now in regards to Cobalts and then the classic heavy duty, that will be the transition truck when the new 2007 comes out. And trying to really load up on some of those products in spec -- specific promo type vehicles to really take advantage of this. And that wouldn't be something you'd -- a single dealer would be able to do. And the manufacturers look at that as wow this is a great way for us to transition out of this product line, so --

Okay. Great. Last two questions. Your contracts in transit went down from 52.5 to 51.7, usually when you have a 19% sales increase that doesn't happen. Is there some new technology that's allowing you to speed up that process?

Are there -- there are a number of different lenders that is we do have drafting privileges on now. And that should, over -- over the continuing years continue to go down as a percentage of that because it's -- I mean it's just a matter, I mean everything's becoming E-trades. Depends on when the month ends too. If it ends on a weekend it could be worse. Sid, that's a good point, it ended on a Friday.

Okay, and your real estate versus lease percent in terms of owned real estate versus how much you rent, is it like a 70-30 mix still?

Yes, I think it's actually 60-40. Yes, 60-40. 62-38 something like that.

thanks, that's all I had.

Kelly Dougherty, Calyon Securities.

Hi, thanks, most of my questions have been answered, but I'm just wondering if you can give me some more color on your acquisition pipeline, if you guys are still looking to keep acquisitions around the $300 million level. And whether you're finding any stores that some of your other public peers are looking to divest if they're interesting to you guys.

Bryan, why don't you take that. Yes sure. Actually, if you were to talk to me two months ago I would have said things are a little slow, but over the last two months the pipeline has filled back up just like it has typically been for us, so we still expect that that $300 million very achievable with good franchises in the right kind of Lithia markets. Terms of -- of our other public peers, we have heard of a number of different stores, but, remember our model is somewhat different from them, we usually buy average performing stores, we usually stay in small to medium sized markets, and those typically aren't stores that our peers have. So that's -- that's not really something that we've -- we've entertained or had to, so -- We haven't -- I don't think we've seen any stores that we purchased where they were out trying to bid us. Yes I think she was asking about -- were you asking about purchasing?

Right, in their divestiture strategies, they're saying smaller stores, one off stores, smaller markets, domestic brands, so that just seems like it would kind of fit with the stores that you guys are looking for.

Yes, and we know probably over a half of dozen stores that the other publics have, they're just -- they don't fit our model so they probably won't be stores that we're going to be attacking.

Okay. Great. Thank you very much.

All right. Kelly.

Thanks.

Jonathan Steinmetz, Morgan Stanley

Thanks. Good morning, everyone.

Hi, Jonathan. Hi Jonathan.

Hi, a few -- a few questions here. You talked about, I think, Sid, in your comments with the divergence between the new units and the used units perhaps you install you would have took a little bit from the used, can you just elaborate on that? The price points are pretty different. Did you see some stuff on the low end where you're cannabilizing a used unit with a new unit?

Yes, we did see some, and not -- look at the Dodge Neons for instance, we took a bunch of extra Neons when they were closing them out, and we used them to make a lot of numbers to hit the volume incentive numbers. And it was cheaper to buy a new one then it was a one year old one basically, and we had a lot of '05's which were brand new. And so that kind of switch over just happens. It's mostly just on that very late model vehicle. I was disappointed to see the average sale price of our used car go up that much. I want to see a trend where we're selling deeper and having a lower price. But it's all driven by market demand and what our people can make money on. So it appears still the bulk of the business down there on 12, 13, $14,000 and that's enough difference between the new one and there's still about where the market we seem to get most of our volume on the used car side.

Okay. Just to be clear. Some Neons allowed you -- basically there are incentives based on unit numbers, doesn't really matter price point and they helped you hit them?

Right. Those incentives are paid on all units, so if we sell Neons, $1,000 a lot more incentive on a Neon than it is on a $30,000 rig. We had Neons at [99.99] and we had them at 10,999 -- depending on the equipment on them, and they sold.

Okay. Makes sense. And the second is you talked at April sounded like it was going fairly well, can you just talk about in the very recent last week or ten days or so whether you're seeing any impact on the ground from higher gas prices in terms of either floor traffic, number of ops, or mix, or anything like that?

Nothing yet that we can measure. Our up count's pretty steady every day and has been all month. We're pretty neat Jonathan, we get our traffic counts from the stores every day now. Yes, I get it every morning, there it is, and I can tell you how many people came in every store and the totals, and what was closed, how many demo rides, and how many turns. It's that LSMS thing we're finally getting a result out of a lot of that. And it's actually pretty good information too. These guys are actually entering everyone that comes in. Which is something a lot of people say they have a 30% close rate, you can have a nice high close rate if you don't count everyone.

Thank you very much, guys.

Thanks, Jonathan.

Rich Kwas, Wachovia Securities

Hi, good af -- good morning, actually.

Hi Rich, you're on the west coast too? He's east coast.

East coast, but I get screwed up though from time to time. I wanted to ask about the wholesale margin, 5.1% it's pretty healthy. Where do you see that going here? I know there's some seasonal factors, it's usually trended down the second half of the year, what -- what's your sense for that going forward?

Pretty normal year so far. The good seasonal upturn in the late winter. And we took advantage of that obviously and cleaned out stuff we didn't want at profitable prices and that whole [wholesaling] group that is installed in the Company, all of their control processes and handling all of the wholesaling, that continues to benefit. We're going to expand it up in the curve, and we, at one point, only did those cars that are under 10,000. I think we're moving it up to 15,000 this year, and taking control of those as well and eventually we'll probably be wholesaling everything. And that we should see improvement, because of that, because we actually get a better margin when we manage it and don't allow the used car managers to sell the used cars. So I think some of that's our operational improvement. But that seasonality that you forecasted in the past, is probably pretty real. Yes, I would expect it to be not quite as high in the other quarters of the year. Our model doesn't hold that high of number. It's going to be a little lower than that so --

And then on units, you said 64% light trucks versus 68 last year but put in dollars it was 69 versus 70. I guess the average transaction price was pretty healthy. What's going on there? Are you just selling -- continue to sell a pretty mi -- rich mix of trucks?

Yes. That's pretty much the, there's a big spread, the people that have the wealth are buying the most expensive thing they can get. We had one fellow the other day buy $13,000 worth of accessories on a Dodge truck, and we sold it to him without a lot of gross in it because it was on a special price, but then we made $3,000 selling the accessories. There's lots of ways to make this thing work.

There's not a lot of shift to the kind of cross -- or cross utility vehicle as much with the lower transaction prices, it seems like you're not seeing that as much.

No, not yet. We're going to respond, and whatever happens in the inventories, reality is three months is the worst we're ever out in terms of being wrong with what we have in stock and it -- hopefully change takes place gradually, and so far we've managed it pretty well. And I think we can continue to.

And final question on acquisitions, the east coast or east -- eastern United States focus, any -- any news there, is that -- is that picking up steam in terms of opportunities?

A lot of people got worried about that, the [inaudible] talks about 10 years. And we're not leaping across unless we find something significant worthwhile. I just don't want it to be surprise. The first one we buy may be like 10 feet over the River, right on the banks, who knows.

Okay, thanks so much.

We've -- we've been tromping around all over east of the Mississippi and there's lots of great opportunities there. Encouraging, is all that we won't run out of opportunities, and that's why I talk about it. But our strategy is to try to fill the markets we're in, attack those 70 that we've identified in the west, we have a new map with 100 or so on the east, and we'll continue to work on those. But we'll do it if we do it probably a lot like west Texas, not a one off store. We'll buy somebody that's has enough of a presence where we can gain a group of people and not end up with a store just off somewhere that we have to try to manage from Medford. And those 100 markets east of the Mississippi meet our demographics. We've been very strict about low dealer per population, it exactly matches our target market in the west, so that we're not going into more highly, the over dealered markets, which there are a lot of those in the east but there's lots that are under dealered as well.

Absolutely.

That's an important point.

Great, thanks.

Thanks, good to hear you.

[Peter Cyrus, Guerrilla Capital Management].

Hi, Peter.

Hey, guys, how are you? I have a sort of a strange question, but I don't know if there's an answer, but I'm going to try it any way. When you sold a lot of cars in the first quarter, when you sell a car, do you -- I actually have two pieces of this question. First question, first part: When you sell a car, do you ever stop to figure out what the long-term revenues or earnings are from selling a car? In other words, it's my guess that extra sales now are going to help my earnings later because I'm going to pick up a bigger part -- I'm going to pick up some of the service from that car, is that a reasonable assumption?

Yes, [inaudible] we always focus on that. I don't have the exact numbers, but we're going to eventually be able to say what a customer's worth based on our own experience because this LSMS is tracking, we've got it now, gross profit by customer and gross sales by customer, it's all out there. And I don't -- I think somebody said the other day we have two million in our data base.

Seven million.

Seven million. We're going to have some real information to base that judgment on and keep our people focussed on the reality and never want to miss selling a car to someone for the price issue up front because it's way better to take a customer. You can only -- you can replace most cars, you can't replace a customer.

Well I'm -- in your market, it looks like you're taking significant share in your markets. And -- would that be a reasonable assumption?

Yes. Yes.

And if you're taking a significant share in your markets by being aggressive in pricing, you've been doing this for a bunch of years now. Shouldn't that lead to as it -- as we go forward higher and higher revenues from service and higher earnings?

That should follow Peter.

But there's no way to quantify it.

You're not going to see it in a straight line. Peter, what you want to get accomplished is -- is when that person is making the decision do I sell this car for $100 back of net cost or $100 over net cost? What am I gaining from that? And that's when our LSMS tools will -- are starting to provide information on the customer stream of business. This person has bought three cars from us, they're a regular in the service department, they're not a regular in service department et cetera, et cetera, and be able to look and train those guys to make the conscious decision that what -- you know what? We're going to gain in this -- in this transaction because of later, later wins and that's and that's [inaudible] --

Okay. So, Bryan, if I'm -- if I'm a regular in the service department and I buy a car for cost, what am I worth over a five year period?

We -- we looked at it and that's the exact period we looked at was five years, the gross profit was almost one to one. [what we made on the car deal we'd] normally make on the service -- It was almost one to one. for a customer that returns. We looked at it about three years ago, and that's -- that's -- they still don't see that because these sales department in most stores still don't get paid off what happens on the back end, and we're trying to transition pay plans so they start looking at big picture. And that's the general managers' duties today, to really sell that to the two departments to compliment each other.

The -- so -- so that -- so that you could conceivably continue to be aggressive on price to take share to build the back end?

You're absolutely right. And as LSMS and I talk a lot about this, we're -- we're bringing that out in the service end of things too. So when the sales and the service are integrated on followup and the decisions now have -- have facts behind them on both departments, they're going to -- I mean, things should start to really trickle in a nice way.

One other question, is it reasonable to assume looking at the -- the aggressive business you did with Chrysler in the first quarter, that the open points that you received, that the aggressive sales you had may have contributed to you receiving open points.

They were actually pretty long-term discussions with Chrysler on those issues. I think they're going to, I think they're either approvable or you aren't. And they do like us, there's no question of that. And we have a really good working relationship, but we negotiated that hard. We didn't steal the store, but because we paid a lot of the store, they gave us the open points. Peter, I'm think we need to get you on the calendar for our next general manager meeting too.

Okay.

[inaudible] on the synergy is between dual departments in the future business rather than the currents. We have -- we have -- we're in an industry that is somewhat short-term thinking, and we're growing to become more long-term, obviously.

Well, I'm available to come out and soak in those Lithia hot springs any time.

Okay.

Thanks, guys.

Thanks.

Thank you. There seems to be no further questions at this time. I'll turn the floor over to Sid DeBoer for any closing remarks.

Thank you all again for listening. And we'll continue to update as necessary, and hopefully talk to you soon. Thanks for following our Company.

That concludes today's Lithia Motors conference call. You may now disconnect.