Lithia Motors Inc (LAD) 2007 Q1 法說會逐字稿

Good afternoon. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithia Motors first quarter 2007 earnings 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) Thank you.

It is now my pleasure to turn the call over to your host, Mr. Dan Retzlaff, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Cheryl, and good afternoon to everyone. To begin, the Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risks and uncertainty, and actual results could differ materially due to certain risk factors. These risk factors are included in our first quarter and year-end earnings press release and in the Company's filings with the SEC.

Now I'd like to thank you for joining us for our first quarter 2007 earnings conference call. I have with me today Sid DeBoer, the Chairman and CEO of Lithia; Dick Heimann, our Vice Chairman; Bryan DeBoer, our President and Chief Operating Officer; 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 afternoon, everyone. Thanks again for joining us today. For the first quarter, as you've seen on our press release, the net income from continuing operations was $7.1 million and the earnings per share from continuing operations were $0.34. Discontinued ops really had no effect on that, as well, which meant the Company's internal forecast for the quarter -- and I think that's a very important point to make: We don't give quarterly guidance. The guidance and the Street's numbers out there were not ours so we had no responsibility to report anything different earlier because we were on target for the goals that we had set at the $0.34. As such, then we have not had to change our full-year guidance 2007 because of what appears to be a lower number. It is the number that we were shooting for.

The analyst estimates for the first quarter were too aggressive, especially when you consider the slow retail environment that we have seen over the last few quarters. And when you consider that we had a very difficult comparison of positive same-store sales growth last year -- over 8% -- and positive total same-store gross profit growth of almost 6% in the first quarter of '06.

As mentioned in the press release, sequentially through the quarter, vehicle sales were very weak in January, a little better in February, and then improved substantially in March. In fact, this was the first strong month that we have seen since March of last year, so we're very encouraged by this trend.

New vehicle same-store sales for the month of March were down 1.9%, but this was compared to the growth of almost 20% last year in March, so we will see -- so we did see then these healthy sales. In addition our used vehicle sales were up 5.7% on top of growth last year in March, as well, so we really did see an overall healthier sales environment in the month of March.

We will have to see how the year plays out, but we hope to get a couple more months similar to March during the strong selling season. We are doing remarkably well considering the declining sales of the domestic manufacturers that we largely represent.

As many of you know, over the last few quarters, the Company's SG&A as a percentage of gross profit, has been trending somewhat higher. The added costs from the initiatives that we have been working on have contributed to some of this increase. However, the problem has also been lower total sales and total gross that are a result of the weaker-than-usual sales environments, particular with the brands that we predominantly handle.

Our SG&A as a percentage of gross profit for the month of March, which was a very encouraging month, was 71.8%, and this is near all-time low levels for the Company, and helps demonstrate how incremental sales in a strong month make a marked difference in our performance.

While March showed encouraging trends, we continue to take steps that will better help the Company perform in the current retail environment for our brands. We've continued to maintain a disciplined approach towards the inventories, and as a result, new vehicle inventories at the end of March were 16 days below historic level and at the lowest levels we have seen in the last five years. Bryan will add a little more color on the inventories later in the call.

On the cost side, we've worked hard to maintain store-level discipline, especially in those areas that we can control, for example those variable expenses like sales commission and advertising, as a percent of gross profit, on a combined basis, are down 60 basis points year over year. Health care and employee benefits, however, have been rising considerably.

Now to update you on acquisitions. In the first quarter, we completed the acquisition of four stores representing the Honda, Acura, Nissan, Infiniti, VW and Audi brands with approximately $100 million in annualized revenues. All the stores are located in or near the Des Moines, Ohio, area. We expect to be making further acquisitions throughout the rest of the year and we will be disposing of at least a couple of more domestic stores located currently in metro markets this year, as well. This latest acquisition is in line with our strategy to better balance our domestic import and luxury mix in the years ahead.

Finally now, we are excited about our independent used vehicle operation that is now under construction in Loveland, Colorado. The name will be "L2 Auto" and we should complete construction and begin operation of the store in the late summer of this year. At this point, we're also beginning construction on at least two more stores this year and our expansion plan is based on positioning stores in attractive midsize markets.

The retail concept behind L2 Auto is to provide a transparent and customer-friendly buying process. Sales associates will be focused on assisting the customer with the process of buying a vehicle from start to finish. We will have non-negotiated pricing on all products and services. Finance and insurance products will be sold via computer, aided by a menu-driven process. We have developed a customer-facing web-based IT solution for purchasing vehicles that is easy to use and identical, whether you're shopping in the store or doing it from your home, or from any Internet access. All aspects of the vehicle sale will be able to be managed online directly by the consumer.

As many of you know, we will also provide a comprehensive warranty and a no-questions-asked return policy on every vehicle we sell, which includes the return of the trade-in in the event they did have a vehicle that they sold or traded to us. In addition, an L2 Auto facility will purchase any vehicle from consumers, so L2 becomes the consumer's first choice when they want to sell their vehicle or trade it in somewhere, whether they purchased the vehicle from us or elsewhere.

The benefits of this model are many. There are no barriers to entry so it offers unlimited growth potential, and we will be entering a fragmented industry with little or no market dominance by any one competitor. We'll also be able to leverage many of the functions of the core Lithia support services group, such as accounting, HR, inventory management, legal, marketing, payroll, just to name a few. We believe L2 Auto should give us a competitive advantage in the used vehicle market going forward.

With that, I will turn the call over to Bryan, our President and COO, who will comment further on our same-store sales, brand mix, inventory position, and provide a brief update on out initiatives. Bryan?

Thank you, Sid. We currently have 12 states in our same-store sales mix. Our total same-store sales contributions, broken out by state, for the first quarter was as follows: Texas with 20%, Oregon with 16%, both California and Washington with 12%, Idaho and Colorado with 7%, Alaska and Montana with 6%, Nevada 4%, Nebraska and South Dakota 2%, and New Mexico with 1%.

I will now list them in order of increased same-store sales performance for the quarter. New Mexico did the best, followed by Texas, South Dakota, Washington, Idaho, Alaska, Montana, and Colorado, and then Nevada, Nebraska, Oregon and California. We believe that Texas had the best overall performance, considering it was up against double-digit same-store sales gains in the first quarter of last year.

California continued to struggle due to the weak economy in the state and the strong presence of import brands. Our mix is a little different than that here.

Our new vehicle mix by manufacture as a percentage of total new vehicle units for the quarter was as follows: 41% Chrysler Dodge Jeep, 18% General Motors and Saturn, 12% Toyota Scion, 6% Ford Lincoln Mercury, 5% for Honda and Acura, 4% BMW, 3% each for Hyundai and Nissan, 2% for Subaru, and 2% for Volkswagen Audi, leaving approximately 3% for other brands. That's a total of 30 brands.

We are continuing to see a shift back towards trucks and SUVs. 66% of total unit sales were trucks and SUVs as compared to 64% in the first quarter of last year. Most of these gains were from the domestic brands obviously. On a sales basis, 71% were from truck SUVs versus 70% last year in the first quarter.

Now let's talk about inventories. You may recall that, by the end of the year, our day supply of new vehicles was eight days below the average levels for the same time last year, and in our fourth quarter financial press release, we had also announced that January new vehicle inventory levels had dropped 11 days further. As Sid mentioned earlier, we maintained this inventory discipline throughout the quarter, and as of the end of March, new vehicle inventories were 16 days below historical average levels. We were able to have a strong March, even with the low inventory levels that we were carrying going into the month. Our plan is to remain conservative with inventory levels throughout the rest of the year.

As a side note, used vehicle inventories at the end of March were about at our historical level.

In the finance and insurance business, we continue to do well. Our F&I per vehicle for the first quarter was $1,137, which was about $74 higher than last year in the first quarter. We had a penetration rate for the financing of new vehicles and used vehicles of 80%, service contract penetration rates of 43%, and our lifetime oil products of 38%.

Now I'd like to provide a brief update on where we are currently with initiatives that we've been working on over the past couple of quarters that we've talked about in the past. Most of you are familiar with these initiatives; however, if you need more information on what we are accomplishing with these initiatives, feel free to call Dan after the call and he can provide you with a little more depth.

First, at the end of March, we completed the rollout of our automated [car deal process] to all of our stores. We also just announced the launch of our Assured Vehicle program in Alaska. This program is for both new and used vehicles, and has a transparent no-hassle pricing on our entire selection of vehicles. Customers again will have the three-day or 500-mile to drive the vehicle and return it if they don't like the vehicle, no questions asked. It also has many other customer-driven changes that you'll be excited to hear about in the future.

Our office automation is continuing on schedule and we expect to have both accounts receivables and accounts payables from the stores centralized and actively managed from support services here in Medford by the end of the year.

The initial rollout of the First Look technology is complete, and is continuing with the ongoing training and utilization and is going well. Sid provided you with a good update on what we're doing in L2 Auto, so now I'm going to turn things back over to Dick Heimann, our Vice Chairman, and he can provide you with some more detail on the financial results.

Thanks, Bryan, and welcome, everybody. I always thank you for your support and interest in our company.

Lithia's total sales increased 9% to a record $800 million, and sales were up across all business lines except the fleet business. Total gross profits increased 10% and were up across all business lines except in the wholesale used and fleet business.

Looking at same-store sales for the quarter, new vehicle same-store sales declined 3.9% and used declined by 4.5%. Average same-store retail prices increased by $195. Retail margins declined by 20 basis points and gross profit per unit declined by $41.

For the quarter, total used vehicle same-store sales declined 1.9%, and same-store unit sales declined slightly 0.7%. On a combined basis, new and total used vehicle same-store sales for the quarter declined 3.2% and units declined 2.6%. However, related finance insurance same-store sales did increase 2.9% in the quarter.

Service and parts same-store sales also increased 4.9% for the quarter. This was on top of 5.8% growth in the first quarter of last year.

Warranty work accounts for approximately 18% of the Company's same-store service. parts and body shop sales. Same-store warranty sales in the first quarter were down 1.2%. Domestic brand warranty work increased by 2.9%, while import warranty work declined this time by 8% for the quarter. We view this as a short-term phenomenon, as the long-term trend we've seen over the last few years is for the domestic warranty work to decline while import warranty work has grown.

The part of the business that we can control is the customer-paced service and parts business, which represents 82% of this business and was up 5.9% for the quarter. Finally, total same-store sales were down 2.1% and total same-store gross profit for the Company was down 1.6%.

As mentioned earlier, we've faced difficult comparisons of 8.4% and 5.7% growth in the first quarter of last year. New vehicle sales comprised 56% of total sales, versus 57% in the first quarter of last year. Total used vehicle sales comprised 28% versus 28%.

Parts and service sales represent 12% versus 11%, and finance and insurance sales made up roughly 4% of total sales, the same as last year.

There was s small shift away from new vehicle sales and towards parts and service sales in the quarter. The contribution to gross profits by business line this quarter was 25% new vehicles, versus 26% last year, 20% used vehicles versus 20% last year, 33% service and parts versus 30% last year, and 22% F&I, and compared to 21% last year.

It is important to note that the shift toward more gross profit from the parts and service and finance and insurance businesses led to an overall increase in our total gross margin, even though individual gross profits for the margin for the new and used parts and service business declined for the quarter.

Now I'd like to have Jeff DeBoer, our CFO, review the rest of the financials with you.

Thank you, Dick, and good afternoon, everyone. Let me start with gross margin. Gross margin for new vehicles for the first quarter were 7.7%. This is a 20-basis-point decline over the first quarter of last year, and 20 basis points below our five-year historical average for the first quarter. The used retail vehicle first quarter gross margin was 15.0%, 20 basis points less than last year. Our five-year historical average gross margin for this business line in the first quarter is 14.1% so we are still at a very high level for used vehicles. Over time, we've seen used vehicle margins increase in the first quarter since 2002, when they were at only 12.5%.

In the wholesale used vehicle business, Lithia had a wholesale used margin of 4% versus 5.1% last year, and gross profit per unit was $269 versus $324 per unit in the first quarter of '06. We continue to try and bring in our trade-in units at closer to fair market value, and over time, our gross profit dollars from this business will probably continue to decline, although remaining positive.

The goal in this business is to be closer to break-even and sell more used cars at retail.

The parts and service gross margin for the first quarter was 47.5% as compared to 47.9% in the same period last year, a 40-basis-point decrease. Our five-year average gross margin in service and parts is 47.7%. The reason for the margin decline here is due to a mix shift towards selling more wholesale parts and accessories that carry lower margins. Approximately 60% of the improvement we saw in the parts and service business was indeed lower margin businesses, so while margins are down and same-store sales are up, we are driving more volume and, as a result, same-store gross profit was also up for service and parts by 3.3%.

For the quarter, our total gross margin increased by 10 basis points to 17.5%. As I mentioned earlier, this was due to the shift towards more gross profit dollars from our higher margin service and parts and finance and insurance business lines.

SG&A as a percentage of gross profit went up by 290 basis points for the quarter to 79.3%. Our five-year average SG&A to gross profit is 79% so we are very near our average level, even though we are carrying much higher costs due to the investments in personnel for our centralization efforts, L2 Auto, and future projects that we have ongoing throughout the year.

And as Sid mentioned earlier, an incremental improvement in the retail sales environment can really have a positive impact on these numbers, as demonstrated by the 71.8% SG&A to gross profit percentage we realized in March.

As a result of the higher SG&A, our operating margin of 3% was 60 basis points less than the first quarter of last year. This is, however, consistent with our five-year average operating margin of the same 3%, so we're right at our five-year averages for operating margins this quarter.

Now to the debt and capital side of the business. For the quarter, the total of flooring and other interest expense as a percentage of revenue was 1.5% as compared to 1.1% last year. This increase is due to both higher inventories from acquisitions in the year and higher interest rates.

Including all fixed-rate debt obligations and hedges, approximately 46% of our total debt now has fixed-rates. For the quarter, we had an increase in flooring expense of approximately 2.3% with the majority of the increase due to higher market interest rates. Our interest rate swaps did not qualify for hedge accounting in 2006, which had the effect of increasing first quarter 2006 earnings per share by $0.04 due to a change in fair market value.

Our swaps do qualify for hedge accounting in 2007, however, but there was no comparable effect on earnings per share in the first quarter. The first quarter's other interest expense increased by $1.7 million. Including swaps, our average annual interest rate increased by 100 basis points year over year, to 6.5%. Increases in flooring rates were the largest contributor to our rate increases. We expect that the rate increases will be mitigated in the coming quarters, as rates have held fairly steady and we reach anniversaries for the rate increases.

Looking at the balance sheet, we have $21 million in cash and $62 million in contracts in transit, for a total of %83 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 and equipment financing, and totaled $306 million. Our long-term debt to total cap ratio, excluding real estate, is 34%. Our goodwill as a percentage of total assets is only 20%, one of the lowest in the sector.

Shareholders' equity rose by 6% to $498 million as compared to the end of the first quarter of last year. Lithia's book value per share is now 25.54 on an actual stated basis. It does not reflect the hidden value in our real estate reflecting current market values.

I'd also like to comment on the share repurchases during the quarter. As you all know, we have a million shares approved on a program. In the first quarter, we purchased 121,800 shares, leaving 621,000 or so shares still available for repurchase under this program.

Our guidance for the full year 2007, as Sid mentioned, is unchanged at $1.90 to $2.10 per share. A number of key items will impact 2007 earnings. These have remained unchanged from what we announced in our fourth quarter 2006 press release and conference call. However, I will go over them again here briefly. First, company health and benefit plan costs will be increasing, lowering earnings by $0.10 to $0.12 per share. We will also see a continued impact from our operational projects and initiatives, which Bryan and Sid discussed earlier.

Also this year, we will have startup costs for our independent used vehicle retail outlets -- L2 Auto. These startup costs for this initiative will impact earnings by approximately $0.10 per share. Once again, none of this has changed since our last conference call. And we also expect that this year, we will continue to fight the headwinds of declining domestic sales nationally.

That concludes the presentation portion of the conference call. Thank you all for joining, and now we'd like to open the floor to questions.

I have a couple of comments first, before you go to that, Jeff.

Sure.

Just a couple of things I heard when you guys were reading. Dick, you had one thing. You said used vehicle sales were up 20% this year versus 20% last year, and it's 22% last year. And Jeff, you had an increase in flooring expense of approximately $2.3 million, not 2.3%. Minor issues, but technically this thing is recorded and we want to be sure we get all the information right. So with that, we can turn this over now for questions.

(Operator Instructions) Your first question comes from Matt Nemer of Thomas Weisel.

Hi. Good afternoon, guys.

Hi, Matt. How are you?

Good. Just first question is it sounds like the cadence of sales improved at the end of the quarter. Can you give us any idea of how April started off?

Yes, April's doing as predicted. It's fairly good, not anything from what we have predicted in our models, so nothing to be alarmed of there.

Okay, great.

April normally is fairly soft in the first half, and then it gets stronger as the month goes on, and we're seeing that trend.

Through tax season.

Got it. Okay. And then second, it sounds like -- I guess I'm wondering, obviously the quarterly breakout that we're predicting is a little bit different than the way things are shaking out. Can you give us any detail on the second quarter, in terms of should we expect it to be up year over year? Up sequentially?

I don't know. We kind of go down that slippery bridge, we start doing quarterly forecasts. And we've tried to avoid that, so you guys are going to kind of have to figure it out. I mean, you can look at what we've done in the past. That first quarter is always where we've had an issue with some of the forecasts in the past, and in the fourth quarter obviously we've had issues with some of you being too high in the past there, so I think you can find a balance there. I don't have that right in front of me. You want to give any indication of any of that, Jeff?

No, we don't give quarterly guidance any longer. Sid is correct, the first quarter was always historically the quarter when there were problems with analyst estimates. And that was one of the risks going away from quarterly estimates, but we knew that and we did it, and we're comfortable with our current annual guidance.

There's such a volatility in the markets quarter to quarter, and that's why we went away from quarterly guidance. If we'd have had a good January and February, then we'd have had a lot better quarter than what it showed.

I guess I'm trying to gauge, relative to your guidance, you're now down about a dime year and year. And your guidance -- the low end of your guidance is to be flat year over year. I guess what I'm trying to gauge is do we make it all up in the back half? Is it a back-end loaded year?

It's very typical of what we've seen in the past. I think you can look at that.

Okay, fair enough. And then lastly, I know it's early, but can you provide any comment on the build out costs for your initial L2 stores? And then it sounds like there are potentially three or maybe more this year. Is that a good number to use for next year or do you think it ramps -- do you think you test these for a while or should we expect it to maybe ramp next year?

There is no test here. We're going forward. We've tested it already. We're very satisfied that it'll be successful so it's a matter of just scaling as we go forward. We're not announcing any more than the three that we've got under construction.

And the costs?

Those won't all -- I mean, all three won't be open this year, we don't think.

The capital costs are in the estimate that Jeff gave. And we've given in the past.

Okay, great. Thanks very much.

Thank you. The next question comes from Rick Nelson of Stephens.

Thanks, good afternoon. Just want to follow up on L2. Sid, you mentioned that you tested the stores already. Where was that test conducted?

We tested all the processes, Rick, and not the store itself, but we're not nave in the car business, nor the used car side. We're confident everything we're doing will work very well.

Obviously we'll need to evolve, you know, the operational focus in that operation as it grows, but there is no test here. I don't want people to get the idea we're going to test this and then change our mind about it.

Got it. Are you going to open stores outside of Colorado this year or is it just the few that you're opening in that state?

I don't think we said where the other two are yet.

We said today Loveland, Colorado for the first store. The other two, we just said they're under construction without identifying where they are.

They're not in Colorado.

I got it. Okay. The outlook, I guess, for gross margin on Chrysler, we're talking to a bunch of Chrysler dealers that are not happy with the incentives and the targets and the impact that that's had on gross margin. How do you see that, Sid, evolving? You know, Chrysler has not backed off of their plan.

Well, you know, I'm on the National Dealer Council. I'm confident Chrysler will do whatever it takes to sell automobiles. They may adjust those if they're not fair. We've gone over ours; they all appear to be somewhat reasonable -- a couple of them aren't. But you know, it's a good company we're working with. They've got lots of good plans and these guys are remarkably running their business pretty darn well considering they headwind they've got, not knowing who their bosses are going to be or who their owners are.

And you know, I'm just commending the heck out of them for continuing. And I think that's the reason VPA couldn't change this year. It's just because hey, we'd better do what we've been doing and stick within it in here until we know what our new owners are going to want us to do.

So hopefully Daimler keeps it, as I've said all along. If they don't -- and it looks like they may not -- then we think there are some other people that have to do the same thing that Daimler would do with it, and I'm sure it will go on, but then we may see some changes in a VPA. Because it does create turmoil for dealers to have an objective arbitrarily set by some formula, that may or may not make sense, and then have a different cost basis than another dealer down the street. Those are dynamics that they're well aware of. And we did have a partial solution for that worked out, but because of the announcement, I think they backed off on making any changes. So we're going to work with it. I don't think it's an issue. I do believe they'll respond. If they're not seeing the results from their incentives, they will go ahead and increase them in different ways. There's a lot of ways they give us money: dealer cash, stair-step programs. They're terrifically good, really, at marketing and finding a way to get consumers to buy their product.

Rick, I have some data for the first quarter on Chrysler gross margins for Lithia. We saw the same 8% level for Chrysler gross margins. And I'll note 8% is higher than our total company averages for gross margin, so we had 8% in the first quarter of last year. We have 8% this quarter. There was no change and continued to be above-average margins for our products.

Jeff, can you quantify at all the cost savings that you're expecting from the accounts receivable/accounts payable consolidation in the headquarters? I guess that'd be savings beginning next year.

We're not going to do that until it's completed.

Yes, until we actually take people out of the stores, we won't have any cost savings. We've just got additional costs right now.

Got you. Okay, thank you.

You bet, Rick. Thanks for following us.

Thank you. Your next question comes from Scott Stember of Sidoti Company.

Good afternoon.

Hey, Scott.

Can you talk about the sales? You were talking about how things progressively got better throughout the quarter into March. Which brands, in particular, would you say did better than others? And were there any pricing pressure that led you to go after market share, which maybe boosted one particular brand over another?

All domestic, really.

It was domestic based.

Chrysler, GM.

Chevrolet, in particular -- like the fourth quarter last year -- we did well with again. Chrysler was strong, so it was the domestic brands, in particular.

You know, some of that may have to do with the reality that there quarter ends and they enhance the incentives in some ways. You know, it can make a difference at the end of the quarter. We're more monthly driven at our store level, but as a company, obviously the quarters are important.

BMW was strong for us, too.

Okay, and Jeff, with regards to guidance as far as these interest rate swaps, do you have any particular numbers you could throw out there that's built into the forecast, or should we just leave it as it is?

Yes, there's nothing new on guidance in terms of swap. (inaudible) we provided that before. There's really been no change.

That's all I have. Thank you.

Thank you. Your next question comes from Edward Yruma of JP Morgan.

Hi. Good afternoon, guys. Thanks for taking my question.

Absolutely.

Thank you. Nice to have you aboard.

Oh, glad to be here. You've had very robust parts and service growth, particularly in customer pay. How sustainable is that going forward, and what initiatives do you have under way that will allow you to maintain that above cadence?

Bryan wants to comment on it, but my comment is we've just begun there. This Assured Service is another part of this customer-friendly thing we're really going to do. Bryan, go ahead and expound on it.

Yes, let me talk a little bit -- we believe that it's definitely sustainable. We believe that we've really been, over the past, a warranty station for the manufacturers and haven't been quite as customer-focused in those areas as we need to be, whereas when people come in and they don't have to pay for their service, they don't expect as much. Well, when they are paying, they expect a lot and we're really focusing on, as Sid said, in the Assured Service process, streamlining the time and the functions in the dealership so the customer can improve their experience. And it really boils back down to time, consistency of pricing, explanations, etc. etc. And we have many things that we're doing in that area. We have a new gentleman named Ron Stoner, who took over our fixed operations in May of last year, that is one of the forefront personnel in the country in regards to that type of changes in our service department. And those things are starting to roll out in the coming months.

Great. And I know you noticed the weakness -- or the relative weakness -- in California. And coincidentally, I believe you're approaching the one-year anniversary of your purchase of the Porsche dealership in Seaside. You know, what has that particular market taught you about your ability to sell those type of higher end luxury vehicles, and are you confident that you can make more of those types of acquisitions going forward? Thank you.

That's probably one of the exceptions in California. That's obviously -- it's a little easier, less competitive store to operate than the typical domestic stores that we have in the central valley or in the Bay Area. So it obviously, again, proves out our model in terms of we look for those franchises that mean something in the area -- that's the only franchise within a 50, 60-mile radius as those franchises are. So it's been a good experience in there and we plan on continuing with future acquisitions such as those. It just happens to be in California, but it is high-line, obviously, that's a little easier to operate.

Great. Thank you very much.

You bet, Edward.

Thank you. Your next question comes from John Murphy of Merrill Lynch.

Good afternoon.

Hi, John.

As we -- just getting back into the strength that you saw toward the end of the quarter, and particularly in March and maybe into April a little bit, has there been stepped up incentive activity by Chrysler or any other OEMs that are pushing this? And in particular, what are you seeing in the pickup market, because you have a pretty good look into what's going there on incentives on pickups right now. It's a pretty competitive market right now.

Hey, John, this is Bryan. One quick thing is we got notification in the last day or so that General Motors, somehow through GMAC, has expanded their 0% for 60 months to D and E-tier customers, which is their lower end credit customers. And that's a big statement, which they haven't actually done a lot in the past. So that's one example. I'm sure Sid has others in Chrysler as well.

You know, I don't believe there's anything unusual that they've done at the end of the first quarter. Chrysler had a wonderful truck month and they really pushed it. They had a truck program with stair steps and we really maximized that. They've got some of that going on with a minivan now. It's almost an ongoing thing each month.

That thing with GM taking D and E paper -- on all credit scores, they'll give them their special rates, no matter if their credit's down. I think an E is in the 500s, or low 500s even, on a credit score, so I don't know where that all goes years from now, for sure, but we're going to take advantage of it and sell all the people a car we can. And we right away have what we call [loop] events. They're wonderful events where we call all the customers. We've got it all set up internally. We know with our Lithia store management system who's been in, who didn't buy or who didn't qualify, and boom. They're all going to get calls. I'll tell you that. That's all everybody's going to be doing all weekend is trying to sell cars.

I mean, you guys have typically not bought down in the credit spectrum in the past. How many times have you seen them do this? I mean, you've been watching this industry for a long time. I mean, that's unusual.

That's really unusual.

That's the first time I've ever seen it.

I've seen D before, and I know Chrysler goes down into B-minus sometimes with their programs, but that's a big step.

Okay. And then on the cost side of the equation, as things might be slowing down here -- or maybe generically as things slow down -- how fast can you respond on your variable cost structure within a dealership, maybe on advertising and also on personnel? I mean, how much opportunity is there to kind of work down costs as things slow?

You know, I listened to Earl today on the Group One call, and he had a very good answer. I mean, you've got about a 90-day window on those things that are directly, like advertising and sales costs, but it takes longer on personnel cuts. If you're actually going to make cuts, it would probably take you six to nine months because you don't want to understaff a store and miss an upturn.

So, you know, right now would be a very poor time to downstaff because we're coming into the spring and summer selling season. So you look harder at that in September than you do now. And I think we're pretty well focused on the seasonality mix and how that all works. We can respond as much as we need to. We can build a store down in size pretty quickly. We can't get rid of rents, but other than that, we're pretty well there.

And as we begin to take some of these costs out, in terms of processing and appraisal and all the kinds of things that have to happen in a store that we can do centralized -- I don't want to talk about that too much because it takes time to get those things in place, and we've still got the duplicate costs of setting them up and getting them trained and putting them in place while we're doing it. So it's a balance right now. We're at a cutting-edge change moment. There is a turning point at Lithia and you don't want to miss it.

And Sid, maybe if we just think sort of further down the line on the brand mix here. I mean, it looks like to us, through our work, that Chrysler has a reasonably good or competitive product set over the next four years. GM's okay, Ford much weaker. I mean, what are you seeing in the product portfolios? Do you look for -- and not just in the domestics, but in the Japanese and Europeans?

Well, you know, BMW's got a terrific new lineup. They've got all kinds of new all-wheel drive stuff and they're doing the 1 Series. They're talking about 400,000 units in 2010, and that's the kind of dynamic that happens in our industry. And we've got to try to get those brands in our stable that are growing more than these ones that have meant fading. And obviously we still think Daimler has a bright future if they keep it. If they don't, we'll have to work and evaluate that.

The beauty of our model is most of our income comes from service and parts and used cars, and we can shift franchises within a storefront, as it were. We can add Suzuki franchises to a Chrysler store, if it came to that, to support the new car volume. So all these things are short-term for us. We're a retailer first and we will find a way to make these stores -- every one of them -- profitable over time or we get rid of them.

Okay. Thank you very much.

Thank you. Your next question comes from Rich Kwas of Wachovia.

Hi. Good afternoon, guys.

Good afternoon, Rich.

On just the initiatives that you have in place here for the rest of this year, can you just rank them on what's going to have impact in '07 and then what's going to have impact in '08?

Rank them?

We've given so much information on the initiatives at this point, I don't think it's really useful.

I know you guys are trying to build models looking forward, but we're going to talk about them as they achieve the results instead of trying to forecast when we get the benefits. I think that's the best way for us to go right now.

We're committed to doing them.

Because I think some of the expectations about what needs to happen in our company have been ahead of what really takes place. It takes longer.

So when you look at the initiatives, is there one that finishes faster than some of the others? Or are they finished kind of at the same time, the end of the year?

The initiatives are obviously ongoing. Probably the ones that take hold the quickest, and actually make differences in profitability in our stores, are probably the service related things, because that's quick responses from the customer where they can see differences. That repetition, in terms of that experience can happen on a quarterly basis or a monthly basis because the consumer can come in a repetitious manner -- unlike the sales department -- when they get a great experience. Hopefully you get word of mouth fairly quickly, but their return experience may not happen for two to four years -- five years. I hope that helps a little bit.

The service thing is what should give us the most benefit, and we're seeing that already in the same-store sales growth in service. I mean, that begins to happen and that helps our overall profitability the most. I mean, it's where the most opportunity is, and it's easiest to get.

Kind of like our F&I thing. I mean that's huge. I mean, you saw the 1,100-and-some bucks a car, and that continues to grow. And that's an opportunity that we're just taking advantage of. And a lot of those things that we're doing there are paying for some of these other initiatives. I mean, L2 obviously is a major investment, it's going to take time, and we've got to all be patient to see that come about, because we've got a bill in overhead before we really have any sales. And it's going to take the time to do it.

Thankfully this company doesn't have to go through what CarMax went through and crash clear down to nothing while they build something, because we've got a core support services and L1 to help support our initiatives. And all we need is a couple of great months this year and all of a sudden, the numbers look real achievable.

Okay. And then just lastly, inventory, you mentioned that you're down 16 days versus historics. Are you happy with the inventory?

Yes. We're right where we need to be.

Okay.

We proved in March, interestingly, that we could still do volume with a lower inventory.

Okay, thanks.

Thank you. Your final question comes from Alex Yaggy of Morgan Stanley.

Good afternoon. Thanks for taking my question. I wanted to follow up on some of the more recent questions primarily around expenses. I think it's a very legitimate question to ask when we should expect to see some benefit from the initiatives. You have a number of initiatives out there.

Your SG&A expenses were up almost 14% this quarter. If you look at the past five quarters in a row, your SG&A has grown more rapidly than your gross profit. At what point are we going to start to see some results from these? I don't think anyone on this call would object to investing in the business to improve it, but you want to get a return on those investments.

And just to put it in context, you guys talked about an SG&A ratio of 73%. That's right in line with your five-year average. Your company is I think 70% bigger at this point. Shouldn't there be some leverage? Shouldn't we see a better SG&A ratio? And is that March number of 71% indicative of what we should think about if, say, 2008 is a normal sales year?

Alex, we look at all of our initiatives in a couple of different ways. They obviously are intended to reduce costs, increase sales over a period of time, but most importantly, I think, is that we look at these initiatives as a way to grow our people in our stores and to be able to grow our company for the future. Because there's obviously things that occur in any business, that are setbacks, okay? These initiatives help clean things up, organize, simplify our employees' and our customers' experiences, so for us to quantify really what the expense savings are, that's one of the benefits that we hope to gain out of those.

But even without those, we look at those of an ability to be able to grow our people, to be able to replicate what we're doing in a more systematic and expedient way in our future.

Right. I understand --

My answer --

Go ahead.

Go ahead. My answer has to do with gross profit production. Obviously when we produce the adequate amount of gross profits, relative to the investment we're making, like we did in March, that number drops dramatically. I mean, in reality, we could take out our acquisition group, all the initiatives, and fall right in line on SG&A based on the current volume of business, and that would be a silly sellout for the future of this company.

So we're not managing through the SG&A managing; we're managing to the cost it takes to grow this company into what we want it to be. And we're going to get these spurts in gross profit, which will bring it in line, but we're not going to cut back on SG&A in order to achieve an SG&A number right now that looks great, because that's not the objective. The objective is to build a company that can be the best retailer of automobiles in America, and grow consistently.

We'd love to see a day when we're growing same-store sales at 10% because of the customer-friendly environment we've got and because of what we're able to do, and when we can have the lowest cost in the industry because of what we've centralized. But it's like building something bigger than you need right now to get by with in order to produce some numbers for the short term. I'm sorry, but this company's not going there.

And on the last call, if you remember, Alex, we laid these initiatives out as a major cultural change for our company that no other company in the industry is attempting to do. And when we get there, we will be incredibly powerful as a retailer and no one else will even have attempted these things, so you cannot underestimate the depth of the changes and the evolutionary processes that we're attempting. It's very dramatic and I think people can underestimate that real easily.

We're pretty committed there, aren't we, Alex?

You are committed, but you know, can you clarify maybe a little better for these initiatives, when you come out of this transition period, is there going to be a margin improvement or is the payoff just in accelerated sales?

I mean, shouldn't you get leverage to the bottom line from these investments?

Hey, Alex? We'll help in the coming quarters -- try to help you guys understand what we expect to gain, how we expect to grow in the future a little bit better, okay?

Particularly when we put in the L2 growth plan -- business plan -- so you can see how that dynamic works out.

I don't think any of us would object to investing to grow, but I think it's a little frustrating to see continued expense growth and not seeing the results come to the bottom line.

Are you the only one left here? Is Jonathan there?

He's the one on the line.

Yes, Alex? Did Jonathan go home?

No, it's just me.

Okay, good. I'm just checking.

Okay.

Thanks, Alex.

Thank you. There appear to be no more questions at this time. I will turn the floor back to your host, Mr. DeBoer, for any closing remarks.

Okay, thank you all very much for listening, and we'll be with you again as needed, and look forward to talking to you at the end of the second quarter. Thanks. Bye.

Thank you. This concludes today's Lithia Motors first quarter 2007 earnings conference call. You may now disconnect.