Lithia Motors Inc (LAD) 2007 Q2 法說會逐字稿

Good afternoon. My name is Henry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithia Motors second quarter 2007 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 floor over to your host, Dan Retzlaff, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Henry, and good afternoon to everyone. The Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty, and actual results could differ materially due to certain risk factors. These risk factors are included in the second 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 second quarter 2007 earnings conference call. Presenting the call today Sid DeBoer, the Chairman and CEO of Lithia; and Jeff DeBoer, our Chief Financial Officer. At the end of their remarks, we will open the call to questions.

We also have with us today for Q&A, Bryan DeBoer, our President and Chief Operating Officer; and Dick Heimann, our Vice Chairman. And now, it is my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer.

Thanks Dan. Good afternoon everyone, and thank you for joining us today. I expect that all of you on the call have had the opportunity to review our press release. We've added more data points to the press release, which we have removed from the conference call. We expect that this will provide more clarity for investors, shorten up our conference call, and provide more time for Q&A at the end of the call. Our second quarter net income from continuing operations was $10.7 million and earnings per share from continuing operations was $0.50. Earnings for the quarter were down 12% as we continue to see the impact of the challenging retail vehicle sales environment that exist in the markets we do business in. Particularly, with our domestic brands in the metro markets. This is related to the ripple effects from the slowdown in residential construction, high gas prices, and consumer concerns over personal debt. If you look in the press release you will see that new vehicle same store unit sales were down 7.3%. However, prices were up nearly 5%. So same store new vehicle sales were only down 2.8%. We have broken out the losses from discontinued operations to help better demonstrate that the majority of the loss of $0.11 is from a one-time non-cash write-off of intangibles related to those discontinued stores. And we had only real one set of losses from the operation of those stores.

I will try to provide some more clarity about how our businesses is impacted by slower retail sales. In this business incremental units sales make a big difference. For example, in any given store monthly sales of 125 units may equate to a loss for that store and the units of sales of 150 units could be a breakeven point. But if we sold 175 units, we would be -- we would generate very good profits. Now, we also have tied into these numbers factory incentives, which you receive -- where you receive additional money from the manufacturers for hitting certain volume objectives. These objectives are based usually upon the prior year's volume so if you have prior months or quarters with strong sales, like we did last year, it becomes very difficult to achieve the factory targets. This quarter, in most of our markets, we did not see the additional sales that we needed to achieve incrementally higher profitability. And because of the difficult comparisons with the last year we were further away from hitting our factory objectives. And the additional factory incentive money that would have been -- that incidentally would have been a significant amount in many of our stores was missed.

On a monthly basis, sequentially, through the quarter we face the most difficult comparisons at the beginning of the quarter in April and May. We had our best performance however, in the latter part of this quarter, in the months of May and June. So, we saw our business improve steadily from April to June. April was a very tough month. The Company's SG&A as a percentage of gross profit was higher in the quarter increasing by 190 basis points to 75.6%. The largest contributor to the increase in SG&A expense in the quarter was related to corporate initiatives and from the ramp up of our L2 auto operations. It is also a function of a lower gross margin -- gross profit. Our SG&A as a percentage of gross profit did however improve consistently throughout the quarter. And in the month of June was 72.8% of gross profit. This demonstrates how incremental sales and a stronger month, even though June wasn't that strong, can really make a difference in our gross profit improvement.

At the store level we did see some decline in expenses as a percentage of gross profit, which is encouraging. While we saw encouraging trends as the quarter progressed we are continuing to take steps that will help the Company perform in the current retail environment for the brands that we handle.

Now, a quick update on acquisitions. So far this year we have completed the acquisition of four stores representing Honda, Acura, Nissan, Infiniti, BMW - excuse me VW and Audi brands. With approximately $100 million in revenues from those stores. All the stores are located in or near the Des Moines, Iowa area. We do expect to make further acquisitions in the year and we will continue to evaluate the performance of our portfolio of stores with an eye towards disposing of those weaker performers. As demonstrated in our inclusion of more stores this quarter in discontinued ops. Over the last four quarters we have completed the acquisition of $410 million in annualized revenues. Approximately 60% of those revenues are from import and luxury brands. So we expect to see continued improvement in our import domestic mix going forward. Particularly, as we continue to dispose of our lowest performing domestic stores.

Now, I will provide you with a brief update on where we are currently with our initiatives. The rollout of our automated [car deal] process in all of our stores has been completed as scheduled. We are launching now our Assured vehicle selling program in all our stores. It has been fully installed at this time in Alaska. The program is designed to provide the customer with premium customer service. This program for both new and used vehicles has transparent, no hassle pricing, on our entire vehicle selection. Customers will also have three days or 500 miles to drive the vehicle and return it if they choose with no questions asked. This is 100% money back guarantee on both new and used vehicles, which includes returning their trade-in to them.

Our office automation continues on schedule and we expect both accounts receivable and accounts payable from the stores centralized and actively managed here in Medford with support services by the end of the year. And we are beginning to reduce headcount in the stores. Finally, we would like to provide you with an update on our L2 auto operations in Loveland, Colorado. The store will commence operations at the beginning of August. We will have an official public ceremony for the store on August 29. All of you or any of you are welcome to come and attend this opening ceremony if you wish. We will be having a walk through the store and demonstrations of the buying process. We also have construction underway on two more stores located in Amarillo and Lubbock, Texas. We have in place a disciplined five-year growth plan for our L2 auto operations. Near-term, we're focusing our expansion on midsize markets.

The retail concept behind L2 auto are independent used vehicle operation 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. The sales associate will normally handle all the sales process there will be non-negotiated pricing on all products and services. We have developed a customer facing Web-based iSec key solution for purchasing vehicles online that is easy to use and identical whether you are shopping in the store or shopping at home. Finance and insurance products will be sold via computer aided menu driven process. This is truly a clicks and bricks model. All aspects of the vehicle sale can be managed online. Inventory can be purchased from any location using this system. We will also be providing a comprehensive 60 day, "if it breaks we fix it" warranty or/and a three-day "no questions asked" return policy on every vehicles we sell. Including again returning the trade-in or the purchase to the customer of the vehicle they may have sold us.

In addition, an L2 auto facility will purchase any vehicle from consumers. L2 will become the consumer's first choice in the markets it operates in when they want to sell their vehicle. Whether they purchase the vehicle from ours or elsewhere. We expect to realize a number of long-term benefits from this model. 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. This model will serve as an enhancement to Lithia's current growth and ultimately we expect to see higher return on investment than what we are achieving with our current new and used vehicle model. The higher ROIs will largely be driven by not having to pay goodwill for the stores.

We will 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. L2 will also have L1 migrate to a customer focused selling systems under the Assured brand. We believe L2 auto should give us a competitive advantage in the used vehicle market and it will be embraced by our customers. With that I want to turn the call over to Jeff our CFO who will comment further on our financials. Jeff?

Thank you Sid, and welcome to our call. I would like to start with the breakdown of the sales by state and give you a little more color on the performance of the different regions of our Company. Overall, as Sid outlined we have seen a real slow down in the retail environment in most of the regions where we do business. The exceptions however, are the states of Texas and Montana, where we have seen continued healthy retail sales. And these states comprise 29% of our total same store sales mix. We will now list the states -- I would like to list the states in the order of increased same store sales performance starting with Montana and Texas, and then South Dakota, New Mexico, Washington, Alaska, Colorado, Idaho, Oregon, Nebraska, and California as one of our competitors or peers have mentioned as well it is the worst performing region for us as well. We believe Texas has the best overall performance considering it was up against large double-digit same store sales gains in the second quarter of last year. Montana was also up against fairly strong positive same store sales in the second quarter of last year and it still did well.

Our domestic import mix for the quarter on a unit basis improved and was 60% domestic and 40% import. As compared to 64% and 36% in the second quarter of last year. So we are making progress with our diversification plans. The second quarter 2006 numbers include the removal of those stores that are in discontinued ops. Although one of these stores our domestic stores in metro markets as Sid indicated. We continue to see a shift back towards trucks and SUVs in the quarter despite the higher fuel prices that you would normally expect to impact SUV sales. 62% of total unit sales were truck, SUVs at Lithia as compared to 58% in the second quarter of last year. We saw these gains across both domestic and the import lines. On a sales basis 67% were trucks and SUVs with the higher ASP versus 65% last year in the second quarter.

Now, let us look at the inventory side of our business. We have successfully maintained inventory discipline throughout this year, as you may recall. As of the end of March new vehicle inventories were 16 days below historical average levels. As of the end of June, new vehicle inventories were still low and nine days below historical average levels. In terms of used vehicles, inventories at the end of June were only one day, above our historical average levels and very much where we would like them to be.

In the finance and insurance business we continue to do well. Our F&I per vehicle for the second quarter was $1,116 per vehicle. This is $17 higher than last year in the second quarter. We had penetration rates for the financing of new and used vehicles of 75% service contracts where it is at 43% penetration and our lifetime oil and filter products of -- that was 37%.

Our service and parts business was a highlight for the quarter as many you have noticed. So, I would like to go a little deeper into the numbers. Service and parts, same store sales increased 4.6% for the quarter. This was on top of a strong 8% growth in the second quarter last year. So as a particular note warranty work accounts for approximately 18% of the Company's same store service parts and body sales. Same store warranty for Lithia in the second quarter was up 8.3%. Domestic brand warranty work increased by almost 10%, while import warranty work increased by 5.5% for the quarter. We also did well in the customer pay part of the business, which represents 82% of our business. Customer pay was up 3.8% for the quarter.

While same store sales were strong for the quarter the margins in the parts and services business were down 110 basis points to 48.2%. But still a very high level. Margins were down as a result of a negative mix shift towards selling more parts and accessories that carry lower margins than the service business. Much of the growth we saw in parts and service was in these lower margin businesses including tires and other accessories. So while margins are down slightly in this business line we are driving more volume and as a result the all-important same store gross profit for the quarter was up 1.3% and up 2.7% year-to-date. As a result of the strong parts and service business there was a small shift away from new and used vehicle sales towards parts and service sales in the quarter in the overall sales mix. You can see this in our press release.

New vehicle margins held steady during the quarter at 7.3% versus last year but were down sequentially from the first quarter due to general weakness in the retail environment and lower factory incentives earned in the quarter as Sid has already explained. Used retail vehicle margins declined 80 basis points to 15%. This is more of a normalization of extremely high used margin levels to a more normal level and it is not something we are concerned about at this time.

Our overall gross margin declined 20 basis points as a result of the declines in the parts and service and used retail vehicle businesses. Operating margins were negatively impacted by 50 basis points in the quarter by higher SG&A as a percentage of gross profit and other interest expense.

Now, we will take a look at the debt and capital side of our business. For the quarter the total of flooring and other interest expense as a percentage of revenue was 1.5% as compared to 1.4% last year. For the quarter we had an increase in flooring expenses of approximately $680,000. The increase in this expense is largely due to the change in accounting for interest rate spot. This was offset by a year-over-year decline in new vehicle days supply of vehicles of nearly 28 days at the end of June. Higher interest rates contributed 500,000 to the increase and $1 million of the increase was related to the changes in accounting for our interest rate swaps. These increases were partially offset by an $800,000 increase as a result of decreases in the average outstanding balances of our floor plan facility. Our interest rate swaps did not qualify for hedge accounting in 2006, which had the effect of increasing second quarter earnings per share by $0.03. The average fixed rate on our swaps before the accounting adjustment was 3.7%. Upon valuation of the swaps at 12/31/06 the average interest rate changed to 5.2%. As ours swap base for LIBOR rate so the effectiveness of our hedge on our GAAP financial statements was decreased as a result of this change.

On a cash flow basis however, we are still receiving the benefit of the swaps. The second quarter's other interest expense increased by $1.7 million. This increase is a result of higher balances on our working capital line of credit, which is mainly, used vehicles borrowing. Including all fixed rate debt obligations and hedges approximately 42% of our total debt now has fixed rates, which is right in the range of our target for this area. Including swaps our average annual interest rate increased by 110 basis points year-over-year to 6.3%. Increasing in flooring rates were the largest contributor to our rate increases with some of this related to the new swap accounting as I just described. We expect that the rate increases will be mitigated some in the coming quarter as rates have held fairly steady since this time last year.

Looking at the balance sheet we had $33 million in cash and approximately $60 million in contract and transit for a total of $93 million. Our long-term debt to total cap ratio excluding real estate is 34%. Our goodwill as a percentage of total assets is only 18%. Lithia's book value per basic share is now $26.01. This does not include, of course, the appreciated value of real estate on our books. We have lowered our guidance for the full year 2007. Our initial 2007 guidance was in line with what we had earned in the full year 2006. We are adjusting guidance lower to take into account the slower than expected retail environment in the first half of the year and the fact that earnings are $0.23 lower than last year through the second quarter. The costs associated with the investments in the future of Lithia are also included. These include L2 auto startup costs and other initiatives. We do not foresee an impact to the Company's dividend or current operating initiatives as a result of our updated projections for the year.

In the second quarter we had five stores and one body shop classified as discontinued operations as we continue to proactively dispose of our lowest performing operations. Of the 12 since in disc-ops $0.01 is related to operating losses and $0.11 are due to a one-time non-cash write-off of intangibles related to these discontinued stores. The full year 2007 guidance is on a continuing operations basis and assumes a steady pace of acquisitions. That concludes the presentation portion of the conference call. Thank you all for joining us and we will now open the floor to your questions.

Thank you. (OPERATOR INSTRUCTIONS) your first question is coming from Rick Nelson from Stephens. Please go ahead.

Thank you and good afternoon. I know you met with the folks at Subaru wondering how you see their plan rolling out, how it is going to affect the brand and specifically your dealerships. I know they are talking about some store closings.

Yes, all of our stores that we have currently are either all three brands and they are all doing well enough that they won't be ones that anyone is going to close that we can see, Rick. Subaru is, I don't know is a motivator and I think that is more a natural attrition for underperforming stores in America. And I don't know if there is any new initiative that could be a rumor to an extent. We, of course, heard today their new lifetime warranty on the drive train was kicked off today. Suddenly we had no pre-warning of that and it's a terrific new marketing tool and certainly we will reassure people of the quality in Chrysler cars. Having met Steve the new head of Subaru at a national dealer council meeting I was totally impressed with the commitment level and particularly now that they are having to pay more for the money to buy the thing that they are in. And I think that it may mean one of the biggest turning points for an American manufacturer. We will have to wait and see, obviously, but they will do the things that are really required. I know they have upped their marketing budget significantly. And that was always one of the issues we thought they really lagged and it was one of the first the first things Steve lit on. He grilled all of us about what are the things that Chrysler could do in the next six months to make a difference. And that was one of the things we all recommended that they get more voice out there quickly about the new products and all the great things they actually have going on. And with that new message about a lifetime warranty we think that there is certainly momentum in the right direction as a result of Subarus coming in.

So I guess that deal closes by the end of the month here, and I know they've had to pay more for the money, but I guess the willingness to do that indicates certainly the commitment that's being made. So I think it's a good turning point. Steve is a Harley-riding guy that believes in American industry. And he wants to revive the brand strength of these products and that's great to hear because obviously, we have some feelings for those things as well having started as a Dodge Chrysler dealer.

What is your appetite these days to acquire domestic dealerships like Chrysler stores?

We are not aggressively pursuing those today, Rick, if we found the right deal at the right price and the markets we've identified we will still proceed. But as you know, some of the stores we're disposing off are Chrysler stores in the metro. So those kind we're certainly avoiding where we think they have too many stores or where their market share has really suffered. I mean, California has a huge issue with market share for Chrysler. It's one of the great opportunities for them if they could find a way to reach Californians because they get really miserable share there, and that's where some of the stores are that we're discontinuing at this point. And that's -- those are stores that they have too many of. So we'll work our way through that, and I think most of that's behind us.

Any light at the end of the tunnel in terms of a new car environment when you see that possibly strengthening, obviously, your guidance seems to incorporate more weakness for the remainder of the year.

We certainly see a similar environment to what we've experienced, Rick. I don't think there is anything going to turn that around. I think we have to see housing recovery, and we -- I don't know whether oil is going to change its price, and maybe that isn't the biggest driver, but certainly the housing thing is huge in California and Oregon, I mean, there is the largest supply of houses for sale that we have ever seen. I have lived here for -- since 1960. I mean, they are like 12, 14, 16 months supply, and it's increasing everyday. So there is no way to borrow against your home any longer to get money to buy a car and maybe that costs a store 10, 12 sales a months, and those things build up and you lose that little bit of incremental business. We can restructure around a slower sales environment and eventually improve the earnings, and that may have to happen, and we certainly are responding to that. So -- but -- and it's worse on the domestic side. Certainly, there is more of a decrease there than there certainly is. I mean, look at Chrysler they sold 2 million cars just five years ago, now it's 1.5 million. That's a pretty significant drop, and I think in the face of that headwind we've done remarkably well.

One final question for Jeff. Can you separate the cost of the L2 development and the other initiatives that you spoke about?

At the current time we're not doing that. It's not material at the current time, and down the road as we get more data points and right now it's really the startup costs and it's pretty minimal, so --

We had given guidance on that Rick, and I think that still stands.

$0.10 a share is the last guidance that we gave on L2 cost.

The faster we open the more than accelerates. So I mean -- because your stores don't make money to start with, and right now we have all that expense without any revenue.

And the three to four that you talked about, the three to four stores this year, is that it, or --?

What do you mean that's it, this year --

There's going to be more?

It won't be more this year.

Okay.

There is a five-year business plan in place, so we're following that business plan.

Got you.

And that does include more than those three stores. Yes.

Absolutely.

And three is what we said this year, and --

Thank you.

We haven't said exactly when those open in Lubbock and Amarillo but it's well know where they're at. So we're disclosing at least that much, Rick, and we obviously own property in other markets.

Thanks a lot.

Thanks, Rick.

Thank you. Your next question is coming from Matt Nemer of Thomas Weisel Partners. Please go ahead.

Good afternoon, guys.

Hi, Matt.

First question is on the guidance, the second half guidance obviously, is basically flat with the second half of '06, which was a pretty tough period. As I look at the third quarter I think your earnings were down 50%, and you had a very abnormal inventory situation, which I think you would agree doesn't seem to be playing out this year. So I guess I'm wondering why there is not an improvement, albeit maybe even a small one against the second half of 2006.

Certainly the comparisons are easier than the first half of the year, and that's why $0.23 in the first half of the year compared to last year and less in the second half, and we're trying to do, our guidance has always, as realistic and conservatively as we can, and we've looked carefully at the numbers and tried to come up with a fair range for our estimates.

Matt, also we believe that the environment in the second half of the year is not comparable to what the environment was in the second half of the year last year. It's a worse environment, and we expect a worse environment than the second half of last year.

If anything changes there we will take advantage of it. We have enough inventory to certainly take advantage of any upturn that may take place. I don't know what the Fed will do about this recent situation with the sub prime debt and the housing thing and what impact that might have. But obviously, lower interest rates may be in the cards.

And I think the last time you gave guidance you did provide a few of the assumptions, one of them interest rates. Has there been any change or can you give us any more detail on the assumptions behind the guidance?

Interest rates, before we had 25 basis point increase built in. At this point we're leaving the interest rates flat. We're not forecasting any decreases. We generally don't provide other, the same store assumptions or [SAAR] assumptions around our estimates. So that's about it. The other things that we've stated in the past on our guidance are still relevant in terms of healthcare cost and L2, those haven't changed.

Okay, fair enough. And then on the discontinued ops, you haven't shutdown many stores in your history, and obviously, this is a pretty large number relative to your base. I'm wondering if you can give us a little more detail on what was behind the decision and, sort of, what was happening behind the scenes.

Let's be sure we understand, we're not shutting them down, they're being sold.

Yes.

Yes. It's quite different than shutting them down. I mean, we will give significant dollars for those, and we've already recognized whatever impact they might have in terms of the sale of those. So some of those are already in process, and we pretty much have deals on most of them and that's not that significant because the volume in those stored has dropped significantly from what it was two years ago, so that's the reason they've been chosen. They are in markets where the domestic brands have really suffered, and that's largely what they are. So we just rather than waste our resources trying to pick some up, we'd rather go on with more import and export, more import stores, you need to acquire those and pour our resources into those items instead of working on those that we've proven haven't worked out. And we got have a firm discipline on disposing of a certain number of stores each year.

Matt, additionally, we looked at real estate exposure from a long-term on long-term leases as part of our decisions. Also one of those stores is actually a swap where we're selling a domestic franchise and picking up an import franchise, which is a real positive thing we thought. So we've been taking each of these discontinued ops and looking at how to make the best out of those situations. The other stores are really domestics in metropolitan areas. We've had a couple of those type of divestitures over the last two or three years.

And for modeling purposes, what should we pull out from a revenue standpoint for these stores going forward?

Dan has that -- I believe.

Yes, for the year-to-date the -- let me get that for you real quick here. Year-to-date total is about $76 million on those stores.

That's for the six months?

For the six-month period, yes.

And then --

It [350] for the year.

That's for six months.

Right. And that is that group of stores because they've been isolated now.

And then lastly on this topic, given the write down in goodwill associated with this decision can we read anything into that in terms of the goodwill on your balance sheet. I mean, obviously these are metro stores that were underperformers, but I'm just wondering if the value of the stores that you own is in anyway impaired based on this transaction.

Matt, we have a strict testing model on the goodwill that's on our books and it significantly undervalued. It's just that there is a certain amount allocated to each store, and it's compared to what we sell it for. And so the formula actually shows a loss on those because they've been earning so little. Actually they help us on a goodwill basis getting rid of them because our cash flow improves.

Got it, okay. That's all I've got. Thank you.

Okay.

Thank you.

Your next question is coming from Rex Henderson of Raymond James. Please go ahead.

Thank you for taking my question this afternoon. I was little -- wanted to look back at the gross margin in the service and parts business, you got any programs in place or anything you can do to drive -- to try to drive more service business and get that margin back up a bit?

Well, I'll tell you what. The more we drive the accessory sales and tire sales the smaller the margin might be. As long as we can get great increases in total gross that's still the goal. The margin itself only reflects the mix of business we're doing. As we explain there is a lot bigger piece. We're beginning to sell tons of tires, and the gross margin in tire business is very low. But it does bring people back. And it's part of our full service initiative and we end up making more money than we did if we didn't sell the tire. So -- but it will hurt the margin. So I don't think you can rank us on just margin. It certainly needs to be in same store sales growth and gross profit growth as an aggregate.

Okay. And I did want to touch on the L2 spending. Did I understand you -- your comments earlier to mean that most of the L2 spending this year is still ahead of you in the third and fourth quarter?

Well, we'll have some revenue finally. So I don't know if they're --

But the $0.10 of spending that you talked about as being a weight on the SG&A line --

It's -- yes, it's back end weighted that is correct, Rex.

Okay.

Yes it is and it is in those numbers we gave in our guidance.

And that's because we had a start up on two additional stores only one that's really been taking hold in the first half of the year.

Okay. All right. The rest of my questions have been answered. Thank you very much.

Sure.

Jeff wants to clarify on L2. We had the question what impact did it have --

We had the question, I'd like to address the L2. With the two stores that we announced that we're going to be opening at the end of the year after Loveland and the associated startup costs. Our prior guidance for $0.10 impact this year is being raised to $0.14 to $0.15 this year. So that's related to those additional stores being moved up. So it's quite simple.

So it's part of the reason for the lowering of guidance.

Yes.

We're actually getting those open quicker than we originally thought.

And as we continue to develop stores those losses will be there, and that's just a factor of life when you're opening a new store.

Thank you. The next question is coming from Scott Stember of Sidoti. Please go ahead.

Good afternoon.

Hi, Scott.

Hi, Scott.

Can you maybe talk about how your foreign luxury or just foreign brands are performing versus your domestic brands; Toyota in particular?

We have that data, hang on a second. Generally speaking, Toyota is improving slightly, and where our domestics are -- where most of our drop is. Ford was particularly down in the quarter.

Yes. For the quarter both imports and domestics were down on a unit basis. But as Sid mentioned, the imports did perform better than the domestic.

And Toyota was the best of the import.

Toyota was the best, correct.

Some of the smaller branded imports are also down quite about -- about the same as the domestics. And Honda is about flat.

Toyota was up slightly you said?

Yes.

Wait.

Is that right?

Okay. And as far as -- you said that your mix right now was 60/40, luxury import versus domestic, where was that last year at this time?

We gave it in the call. It was 64, what was it Dan?

Yes, 60/40 versus 64/36. 36 import last year in the second quarter, 40% now.

Hey, I'll give some more color on same store sales performance by manufacturer, we'll give guys that the ones here on the phone. Chrysler was up 0.5%, GM was down almost 8, Ford was down almost 30%. Toyota was up 14, BMW up 16, Honda up 5, Subaru down almost 30%, Nissan down 13, Hyundai down 8, and Volkswagen down 7. So, yes, the domestics were down 5.3 and the imports were up 2.1, largely carried by BMW and Toyota, does that help you?

That is perfect. Up 2.1 on the imports and down 5.3 in the domestics.

Right. And most of that domestic was Ford, Chrysler actually was up.

Now, is that same store sales?

Yes, same store sales performance my manufacturer, not unit count sales.

And you said Toyota was up 14%.

Yes.

Okay.

I don't -- we will probably try to give that in the future. It gives you guys color on the brand mix.

And you said that was units? I'm sorry.

That was the dollar sales amount, so units would have been different than that slightly but it's generically close.

Okay. And with your disposition process that you're going through right now, are you targeting any of these domestic stores in the smaller markets, or you're just focusing primarily on the larger metro markets?

Our smaller market performance in domestics is still very strong.

No, we're not targeting anything really except metros. There may be an occasional swap in the small market or something. But we will generally pickup share there. We're doing really well on that markets. The midsize, the small markets we are fine on domestic brands. There is a better brand recognition and less shifting.

There is less import pressure.

And there is less dealers selling them. We're normally the only dealer selling the brand. So you don't get the run off.

All right. That's all I have. One last question the weather in Texas, did that have any impact on your business --

No, there is a lot of rain, but we -- Texas is booming, and we're in West Texas where they're drilling for oil in your backyard. If own land in Texas right now you probably got an oil rig in the backyard.

It hasn't been good weather though.

The weather there in both Lubbock and Amarillo, is-- we're building stores there, and it slowed construction a little on there too, but --

Still ahead of schedule.

There is nothing serious, no. There is a normal weather pattern even though there is lot of rain. I mean, it's a little more than average but they always get rain this time of the year. The hailstones worry us.

That is nothing like what they're seeing up in Northern Texas and in Oklahoma.

No.

Okay. That's all I have thanks.

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

Thanks, good afternoon everyone.

Hi, Jonathan.

Hi. If I could just follow up, Sid, you made some comments that if you thought you were in an environment of lower selling rate for sort of a longer period that you could adjust the cost structure further, can you just talk little bit on the SG&A side about what you could do with that personnel, with that advertising, and maybe try to quantify how much on a dollar basis you think you could take out without really hurting the business?

I wouldn't attempt to quantify it specifically, a lot of it's variable, Jonathan obviously, but more than that it's mainly inventory and advertising expense that we have a direct choice matter on. Bryan, can you add to that?

Yes. I would say that the real backbone of Assured as well as our model in L2 is to focus on personnel cost and increasing productivity. So when we have a little more aggressive environment, where it's not quite as lucrative that we're able to react to that quickly in personnel cost as well.

Yes, we are assured as a selling method we will eliminate cost in the stores as we move L1 to that, but that's more longer range in the next three months.

So, have you made that call yet. I mean, given what you have been seeing lately. Have you made the call that we are in sort if a weaker for longer environment, and you want to take those actions or are you still kind of watching it?

Well, as we said before, Assured is in what, 15 stores and it's being rolled out to the rest by the end of the year, so then we'll be positioned to be able to take advantage of those scenarios.

Yes. There is a lot going on there, and a lot of it's in place certainly, and we -- the summer is our best selling season. So it would be premature to start making very drastic cuts. We still hope for a big August, I mean it's possible, or even July hasn't been terrible by any means.

Did you guys say warranty was up? Did I hear that right?

Yes, I believe it was. Yes, 2.8% or something.

More than that.

Not a significant amount.

[8.7] that is right.

8%.

8%.

10% for domestics and 5% for imported.

Okay.

We realize that's only 18 --

You got a lot on Chrysler or something. It's interesting because AutoNation has sort of been weak in that area and I think Mercedes is still weak but it seem more pervasive which brand there was a recall driving that?

I don't -- I can't tell you. That's not significant enough for us to have an awareness here.

Yes, we checked with AutoNation and said now Mercedes was down a lot too. So -- I mean, that's what we saw. But we have a different mix in them, so --?

We don't have much Mercedes. I think it's probably mostly with domestic, but I'm not -- we saw the mix, we gave you the important domestic mix on that.

Okay. Are you guys able to share -- the one you think the breakeven time or point is for L2?

We hope that each store will be profitable after a year and that's our plan.

Okay. So when you map out against that five-year plan if you were to start going along and they weren't profitable that quickly you'd have to rethink the growth of it?

Certainly.

Okay -- with oil on it, do you?

Pardon, what was that?

I'm just kidding. I said, you don't have any stores with oil in Texas, do you?

I don't know. We actually have the auto mall in Odessa, when we bought it they wouldn't let us have the oil. We lost all that. Thanks for calling us, Jonathan.

Thank you. Your next question is coming from Deron Kennedy of Goldman Sachs.

Hi, there, (inaudible) I guess a lot of my questions have been answered but I was curious if you're going to share any further details about your five year plans at any point.

Hear us?

Hello there.

Yes, we could hardly hear you. I upped the volume. Would you repeat? What did I give you guys?

I don't know.

Hello, can you hear us?

Is it muted?

No.

Mr. Kennedy your line is live.

So we are still on. He lost his line.

We lost him, can you hear us?

Let's move to the next question.

Go to the next call. Next call, please, yes.

Your next question is coming from Rich Kwas of Wachovia, please go ahead.

Hi, guys how are you?

Good, can you hear us Rich?

Yes, I can.

Hi, Rich. Okay.

I can. I am sorry that I missed this, what was the truck mix for the quarter versus last year?

It was -- we'll get it for you in a sec, what's your question?

Well, that was my first question and did you buy back -- repurchase any shares for the quarter?

No, we repurchased none.

Okay, is there any -- what's your thoughts on share repurchases given where the stock is right now?

Well, we want to use our capital for the growth modes we are in, and I think we are going to need lot of it so we are being conservative on that at this point.

Okay. And that's all I had.

We do have a buy back in place in our program approved so we may exercise that at times when we feel necessary or attractive. Trucks, as a percentage of the total went up from 58% last year to 62% this year. That's one a unit basis, sales basis it's 65% last year versus 67% this year. Okay.

Okay. Great, thank you.

Thank you. (OPERATOR INSTRUCTIONS) The next question is coming from Edward Yruma of JP Morgan, please go ahead.

Hi, good afternoon guys, most of my questions have already been answered but one clarification point if I may, Sid, you said that the trends improved in [three] quarters, is that correct?

Yes, they were improving throughout the quarter and that's normally the seasonal way it happens. We were making the point that last year it was a different trend. So normally, June is the strongest month of the quarter and April is the worst, and that's kind of what we saw.

Well, I guess I am just trying to reconcile then because I believe on your first quarter conference call it was toward the end of April. You said that April was actually okay, so did something happen at the very, very tail end of April that caused that quarter, or that caused that month to be soft?

Yes, it just died. The second -- I mean the last week we just didn't get hardly anything.

Great. Thank you very much.

Thank you. I'll now turn the floor back over to your speakers for any closing remarks, please go ahead.

Hey, thank you all for being patient and being involved in our Company. Believe me, we are doing the right thing for the long-term benefit of this Company and these are necessary steps we are taking. And we could not be more excited about our future. I am looking forward to a great future for this Company. Hopefully the markets will wake up to the reality that we've got a great plan shortly. Thank you for your participation.

Thank you. This does conclude today's teleconference. You may now disconnect your lines at this time and have a wonderful day.