Lithia Motors Inc (LAD) 2008 Q1 法說會逐字稿

Good afternoon. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithia Motor's First Quarter 2008 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 floor over to your host, Dan Werthaiser-Kent. Sir, you may begin your conference.

Thank you, Crystal. Good afternoon to everyone. Welcome to Lithia Motors First Quarter 2008 Earnings Conference Call. 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 our first quarter and year-end press releases, and in the company's filings with the SEC.

I'd like to thank you for joining us on our First Quarter 2008 Earnings Conference Call. Presenting on the call today our 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 up for questions, and 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's my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer. Sid?

Verify, everyone, you can hear me.

We're good, Sid.

Okay, good. Thank you, Dan. Good afternoon to everyone and thank you for joining us today. Our first quarter net loss from continuing operations was $1.9 million, or $0.10 a share, and that was for continuing.

Excluding a one-time after-tax charge of $1.3 million, or $0.07 per share related to the recently completed investigation, losses from continuing operations were $0.03 per share. The Company's guidance for the quarter was for a loss of between $0.05 and $0.10 per share. So we succeeded in beating that guidance.

As we mentioned in the press release, business has progressively improved throughout the quarter. We made money in March in all six of our major brands with the exception of Ford. Our prime selling season is now upon us. When the warmer weather returns, our customers come back out and sales improve. The incrementally higher sales volume in March, combined with our cost-cutting measures, has brought our SG&A in March back into the low 80% range, and we will continue to work on improving that.

Let me fill you in on some of the changes we are making in response to the recessionary climate. We are reviewing all costs and cutting any expenses we can. We had an 8% decrease in same-store expenses for the first quarter of '07 due to cuts in personnel, benefits, and travel costs. We are reducing personnel count in response to lower sales volume throughout our organization. With our improved sales model, most of these positions will not be refilled, even upon recovery of the economy.

We have modified our acquisition strategy. Preservation of capital has caused us to hold off acquisitions until the macroeconomic landscape settles and the falling prices for stores reach what we consider to be a more attractive levels. At that time, we will move strategically to continue our growth plan. The dismantling of our acquisitions team has provided us additional savings as well, since many of these acquisition staff members replaced other people within the Company, further reducing the personnel cost.

Our improved sales model is also allowing us to combine many positions within the Company. Many general managers have been assigned to lead multiple stores, and those benefits will be realized in the months to come. Office manager positions at the store level are also being consolidated as we continue to take more of the administrative functions out of the stores and centralize them here in Medford at support services.

In fact, our centralized Used Car Inventory Management Center will begin to take out costs going forward, as well. It enables us to reduce the number of people involved in selling and appraising vehicles, and also in managing those inventories. In total, these efforts should amount to an estimated $5 million to $7 million in annualized savings for Lithia. These benefits are not apparent in our first quarter numbers, but we shall see them beginning to take effect in March's numbers.

Customer satisfaction is what drives all that we do within the company. Our new and used vehicle sales experience begins with our Drive It Now price that is always at or below MSRP. This means there are no additional dealer markups or other hidden costs for our customers.

Transparency is what customers want. This, and solid guarantees that bring peace of mind to the transaction, are what we are providing. That is with our three-day, 500-mile return policy. A customer can buy, then, from Lithia with confidence.

Satisfying customers is what is also driving changes in our service and parts business. We believe a customer should be able to bring their car into a Lithia service department on their schedule, when it is convenient for them. We have increased our hours of operation in most of our service departments to accommodate the customer. We also stand behind every repair we make for a full three years or 50,000 miles. If the repair fails, we will fix it for free, and that includes parts and labor for that period.

Our upfront pricing also assures the complete and detailed quote for the work that needs to be performed before any work begins. We guarantee that we won't charge any more than the price promised.

It is important that we clarify Lithia's no haggle or negotiation-free strategy. At our higher performing stores, we currently employ a more traditional sales method. We find that in these stores, it continues to function well for that customer base and for that sales staff, but still has those new customer-centric experiences we mentioned earlier in the call.

When negotiating the price, the swing now is for hundreds of dollars rather than thousands of dollars, because we have shifted to the Drive It Now starting price on all of our vehicles. That said, we are currently testing a completely negotiation-free environment at a few of our underperforming stores. We know that negotiation-free sales processes work, as demonstrated by other public and private dealership groups.

Our goal at this time is to increase customer satisfaction and maximize volume at all our stores at the lowest possible cost. How we progress with a negotiation-free sales model from this point forward will be determined by whatever will serve Lithia and our customers the best. Pure science.

There have been recent leadership changes within the senior management group. Our President and Chief Operating Officer, Bryan DeBoer, has adopted a larger role in overseeing the operations of our stores. He continues to pull together a cohesive set of store leaders with a clear vision of how to cut costs and sell more cars. He is engaging our RVPs with optimism and a can do attitude.

Our Chief Financial Officer and Senior Vice President, Jeff, has expanded his role within the accounting functions and centralization of office administration. We expect to reap the benefits of a unified vision there and lower costs with these recent transitions.

We also have news regarding our L2 Auto Group. Our fourth store has opened in Cedar Rapids, Iowa. Customer response is as expected and we look forward to good thing from this store, in addition to our three other L2 Auto stores.

We are also seeing a significant amount of vehicles purchased from customers through out Sell To L2 program. Currently, more and more of our L2 inventory is obtained with this simple and easy process, and we plan for this to grow to as much as possible of our inventory as we expand it to the rest of our Lithia organization.

When a customer brings in their car for appraisal, we provide them with a written offer that is valid for seven days or 300 miles. So they can take some time to think about it, if necessary. We provide this offer whether they are purchasing a car from us or not. We believe this program builds trust with the customer, as well as building our inventory with quality cars and trucks.

We have also discovered that the potential within the L2 business model is useful for all of the Lithia organization. We have begun to leverage some of the best practices within the L2 organization into some of our Lithia stores. In some of our stores, all acquisition pricing, redistribution, and disposition of the used cars is being run by the used car team at our used car center here in Medford.

We intend to capitalize on the strengths and the experience of this talented group to improve the ratio of our used to new sale. Currently, that ratio is 0.7 to 1 and was 0.65 to 1 in '07. We have a set a goal to grow our used car business to a ratio of 1 to 1 used cars to new cars, and a ratio, incidentally, that we had achieved in 2001. And we believe that we can get to that point once again in the near future.

The impact of this growth in used cars on our bottom line can be as much as a $1.00 per share in EPS, in and of itself, and is a large opportunity for Lithia going forward. We are committed to follow through on the improvements we are making. We see the current recessionary environment as the opportunity to pursue these improvements. What we might sacrifice in the downturn does not compare to what we stand to gain in a healthy economic environment.

We will arrive out the other side of this challenging economic environment as a better company, positioned with more operational strength and greatly enhanced earnings potential. The driving motives are always happier customers, happier employees, and more volume in a more efficient model. We thank you for your continued support.

And with that, I'll turn the call over to Jeff, our CFO, who will comment further on the Company's financials. Jeff?

Thank you, Sid, and good afternoon, everyone. We currently have all 15 of our states in our same stores sales mix, and you can refer to our press release to see the contribution by geographic region. No one market is larger than 25% of sales, so our geographic diversification plans are working well.

As Sid has already outlined, sales continue to be slow in most of our markets. The only exceptions have been in the states of Texas and Iowa, where we have seen healthy retail sales, and these states comprise approximately 30% of our total same store revenue mix. States with the next best performance in the quarter, meaning least declines, were Montana, Alaska where Assured has been in place for quite a while, Nebraska, Washington, Idaho, New Mexico, California, Oregon, Colorado, Wisconsin, South Dakota, Nevada, which has been very weak for us, and finally North Dakota.

Again this quarter it happens that our biggest state, Texas, is also one of our strongest states. We still expect to see continued growth from this market with the strength of oil prices and agricultural commodities. Our domestic/import mix for the quarter on a same store sales unit basis was 60/40, in contrast to the first quarter of last year, when it was 65/35.

The truck, SUV, crossover and minivan segment decreased only slightly for us from 64% of total unit sales in 2007 to 63% of unit sales this quarter. We saw this slight decline across both domestic and import lines. On a sales basis, 68% of our sales were truck, SUV, crossover, minivan versus 71% last year in the first quarter. So still a large majority of the vehicles we're selling are in this important segment.

If you look at our brand mix in the quarter, Chrysler brands were 37%, GM and Saturn were 17%, Toyota, 15%, Honda, 7%, Ford, 5%, Nissan, 4%, and BMW as well at 4%. Hyundai and Subaru came in at 3% an then we have a few other brands there for a total of 26 brands, I believe.

Let's look at our inventories. At the end of March our new vehicle inventories were 5 days higher than our five-year historical average days supply. So we are maintaining our inventory discipline and avoiding the exceedingly high levels we saw two years ago.

Used vehicles have been more of a challenge, but represent a great improvement for Lithia versus the last quarter. Our days supply for used vehicles at the end of the quarter was eight days above historical average levels in March, and much improved from our 15 days above average levels back in December. We are working hard with our team to respond quickly to the changes in consumer demand that created the inventory issues.

In the finance and insurance business, we continue to show strength. Our F&I per vehicle for the first quarter $1,160, which is $16.00 higher per vehicle than in the first quarter of last year. We had penetration rates for the financing of new and used vehicles of 79%, very high historically for Lithia, service contracts of 42%, and our lifetime oil and filter product at 36%. All areas showing about 100 basis points increase over the prior year.

Our service and parts business continues to be a stable profit center for Lithia. Although our profit margin in service and parts was down by 110 basis points to 46.1%, same store sales increased 1.5% for the quarter in a difficult retail environment. This, again, demonstrates the counter-cyclicality of this business line.

Though it was actually less than our internal projections, the downward trend in margin is due to a mix shift towards more parts sales, as we described to you last quarter. Warranty work accounts for approximately 19% of the Company's same stores service parts and body shop sales. Same store warranty sales in the first quarter were up 1.1% with domestic brands increasing 2.5% and import warranty work declining by 4.1% for the quarter.

We also did well on the customer pay business in this area, which represents 81% of our service and parts business. Customer pay was up 1.6% for the quarter. New vehicle margins were down 20 basis points from first quarter of last year to 7.7% with the challenging retail environment, but were actually better than our internal projections. Used retail vehicle margins were also down by 330 basis points from the first quarter of last year, to 11.5% for the same reason, as well as the shift in consumer demand that we talked about earlier.

SG&A as a percentage of gross profit grew to 87.6% from 79.1% in the first quarter of 2008, as we lost leverage due to the sales declines in one of our seasonally weakest quarters. To illustrate how significant these incremental sales are to this SG&A percentage, we should point out that our SG&A percentage of gross profit for the month of March was 81%.

Some of our SG&A that we'd like to touch on is the increase related to acquisitions, which was up $1.7 million. There was an increase related to the investigation expense that we've talked about in the press release of $2.1 million. The other expenses increased $1.8 million and then we had savings of $7.7 million in salaries, bonuses, and benefits with more to come, as Sid indicated.

Savings and sales compensation totaled 1.9% for the quarter. Our overall gross margin decreased by 60 basis points from the first quarter of 2007, largely due to a shift in demand for used vehicles, as explained earlier. Operating margins were lower by 240 basis points to 1.3% in the seasonally weak first quarter, but we expect them to return to levels between 2.6% and 2.8% for the full year 2008 as seasonality kicks in, and our cost reduction efforts described earlier beginning to take hold.

Now, we'll 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 1.7% and was 20 basis points higher than last year. For the quarter, we had a decrease in flooring expense of approximately $1 million. The decrease in this expense is largely due to LIBOR interest rates being lower than last year. Lower interest rates contributed $1.4 million to the decrease, while volumes had a negative impact of $274,000 and a decrease of $360,000 related to our interest rate swaps.

The first quarter's other interest expense increased by approximately $972,000, essentially all of which was due to higher outstanding balances on our line of credit. Including all fixed rate debt obligations and hedges, approximately 43% of our total debt now has fixed rates. Including swaps, our average annual interest rate on all of our debt is 5.6%.

Looking at the balance sheet, we had $27.9 million in cash with approximately $42.6 million of contracts-in-transit, which is essentially cash, for a total of $70 million at the end of the quarter. Our long-term debt to total cap ratio excluding real estate is 35%, unchanged from the prior year. Our goodwill as a percentage of total assets is less than 19%.

We would like to provide a breakdown of our non-flooring debt as of March 31, 2008. Convertible notes, $85 million, the line of credit, $173 million, mortgages, $198 million, and other, $7 million, for a total of $463 million. As you know, we have an $85 million convertible note that will be put back to us in May of 2009.

We have availability on our recently expanded credit line and sufficient internal resources to pay this back in full. Lithia owns about two-thirds of our 110 store locations and some of that property is currently unfinanced. Mortgage financings and selective sale leasebacks have already been completed, or our currently in process with various financial institutions to raise sufficient funds from these internal sources.

We are already about 40% completed with this plan, with about a year to go until the payment. This is where our strategy to own our real estate is proving its merit. We have approximately $368 million of real estate at depreciated book value on our balance sheet at the end of March. We estimate that the value of that real estate is somewhere north of $400 million.

We currently have mortgages of $198 million on these assets and are tapping into the unfinanced portion at this time. I'd also like to point out that our bank group, comprised of U.S. Bank, Chrysler Financial, Toyota Financial, and Mercedes Financial, recently increased the availability on our credit facility by $75 million, to a total of $300 million, and also added another year to the facility until August 31, 2010.

We were also able to successfully amend our covenants to allow us to have more room to get through this difficult operating environment. We are in compliance with all of our covenants and expect to be able to comply with these throughout the coming year. We have a dependable, small group of lenders that know our business well and our all excellent long-term partners for our company.

Lithia's book value per basic share is now $25.55. This does not include the appreciated value of real estate that I mentioned earlier. Our non-financial CapEx for the full year of last year was $24 million. This year we're looking hard at all CapEx expenditures and reducing where we can, and we currently project only $20 million to $25 million of CapEx for this fiscal year.

We have provided second quarter EPS guidance of $0.25 to $0.30 per share. We maintain our full year 2008 guidance with expectations to earn between $1.00 and $1.30 per share. These projections call for a continuation of difficult economic conditions throughout 2008, but we expect that our centralization efforts and our selling and service programs, which Sid detailed, will prevail in growing EPS.

Our guidance is based on income from continuing operations and assumes the same $0.15 to $0.20 in annual development costs from L2 Auto that we explained on the last call. Any acquisitions or dispositions will affect this guidance, as they are not included. Further details are provided in the table on the press release on our assumptions behind our guidance.

That concludes the presentation portion of the conference call. I'd like to thank you all for joining us and we'll open the floor to questions. Crystal?

(OPERATOR INSTRUCTIONS) Your first question comes from Rich Kwas.

Hello, Rich. You still on? He might have hung up. You want to take the next call?

Thank you. At this time, Deron Kennedy.

Hi, there. Can you hear me?

Hi, how are you?

I guess one question would be on L2. You're cutting pretty deep into your core business and you have no real plans to pull back at all on your investments for L2. Is that how I should understand it at this time?

In the past, we gave it a 12 to 18 store range for L2 and as part of the reduction in CapEx that I talked about in my section, that includes lowering the L2 target to the low end of that range. So it'd be closer to 12 stores.

So we are looking at that as well and reducing where we can.

But the $0.15 to $0.20 that you spoke of for startup costs, you're maintaining a guidance for this year, correct?

That is correct. There's no change in that.

What was in this quarter of that? I don't know if I missed that.

We didn't break it out for the quarter but it's on track exactly to be in the $0.15 to $0.20 range for the year.

If it's in the quarter, I'm just wondering how I should look at it through the year. Are we looking at a relatively consistent expensing, even if I don't have a quantification?

As stores mature, the profitability curve obviously improves and store openings affects it negatively. So anytime there's a store opening you'll have a hit during that month, and then the mature stores coming into profitability. So it's a mix of those two elements.

Okay, and then in terms of your expectations, if things don't really get better for the year, I think you have corroboration on that from a lot of peers. But our number for Q2 is a lot higher than your guidance, and as I look at our year, you're really embedding expense cuts. But are you looking for margin improvement, if not sales improvement in some of your categories, particularly used which was beat up pretty bad this quarter?

Yes, the used cars, start with new cars. We expect our new car margins to be pretty stable to increasing through the year, through our pricing efforts, which we've centralized.

The used cars as well, now that we've got through some of the shift in consumer demand that we talked about, we expect those to come back to more normal levels throughout the year, which would be in the 13% to 14% range, roughly, possibly a little better. But that would be more normal.

Last, service and parts, I think is pretty stable where it is.

Okay, and lastly can you explain again something you just said about store manager consolidation?

Bryan, why don't you get that?

Yes. We are in the process and we started this in mid-February, early March, where we started looking at positions being combined into one role, where there was possibly two positions that now became one. We're looking at in office manager functions, in service and parts manager functions, in general manager functions.

As some of our stores' new vehicle volumes have decreased, their ability to oversee a certain unit volume or RO volume in the service department, they're able to now cover multiple stores in some cases. So it's really a means of expanding our good personnel into bigger roles.

Was there an issue of, I mean in terms of volumes is one thing, was there an issue of oversight identified in the issues you had in your store?

What was that?

The incentives issues that you just rectified in your stores, was there an issue of oversight identified there?

No, that had nothing to do with investigations. It was merely cost cutting.

No, I mean was there an issue of-- how did that happen in the stores, I guess. I'm wondering how that jives in with consolidating some of them, management and oversight.

As you saw in the investigation results, I mean there was any rampant reporting problem. They were just concerned there might have been. So they did do a thorough inspection, and thankfully our internal audit group had pretty much caught the only stores that were really violating our rules. And that was not something that was endemic.

Thank you.

Thank you. Your next question comes from Rick Kwas.

Can you hear me now?

You are there.

Practicing for a Verizon commercial here. So I just want to check in on light trucks here on the used side. Some of the other public retailers had talked about margin pressure on the used side, and that's come through the last couple quarters.

How are you going about trading for trucks now? It's a difficult wholesale environment. The majority of unit sales in your markets are trucks and what's your strategy to kind of offset the margin deterioration that's occurring?

Well, really the margin deterioration occurs when you have vehicles priced at the wrong amount and then you have to work your way through those. But we're appraising them now at the appropriate wholesale amounts. There still is a market for them and thankfully we have some pretty good rural markets. Texas is pretty much flourishing. We're able to shift some of those inventories into the other areas as well, and that car center is right on the money.

We're still purchasing trucks. If they come in and want a purchase price, we'll give a figure on anybody's rig, because everything still has a value. Your margin pressure happens when you've bought at an old price level and then have to sell at a new price level.

But can you catch up with that? I mean, because trucks, you look at the Manheim Index, it's come down pretty dramatically over the last few months overall, but particularly for SUVs and pickup trucks. I understand that at some point that stabilizes and then you make up for it. You get caught up, but just overall it seems that generally speaking you get behind the curve for a little while.

Well, that's why we think we're experts at it. You try to guess that as well as you can, where those numbers are headed, and be there in anticipation of that when you make your bids on the rigs.

It does our ability to finance some people because they have a worse negative equity and it's harder for them to buy a car, but those are realities and that's obviously represented in the numbers. You saw the 330 basis point drop in used vehicle margins and that's largely driven by that demand for different rigs. Also a lower priced selling rig, I believe.

But you don't expect any further deterioration?

Well, if we are, we're forecasting that in our current bids, but no. We have seen that now in our favor, and certainly, I mean we've been through the worst. Who knows what is ahead beyond the 90 days that we need to look at, but we don't see anything accelerating.

Okay, thanks. That's helpful. Appreciate it.

Thanks, Rick.

Thank you. Our next questions comes from Edward Yruma.

All right, thanks very much for taking my question, guys. Can you give us a little bit more color behind the ramp up of some of your mature L2 stores? Are they meeting your expectation and can you give us some idea as to how long the ramped up profitability takes? Thank you.

Jeff, you want to take that?

Bryan, I think you're going to handle it.

Sure. We obviously had three stores open through the end of March and two of those opened in the January timeframe in Texas and they actually met expectations. In March, we actually were trending through the 16th of the month to exceed our internal expectations by a considerable amount. And then we lost a little bit of momentum that we've since regained.

So we still met expectations in those stores. We believe that the ramp up of those are still as expected. They're trending the direction that we want. We're able to stabilize personnel in the stores pretty easy. The customer responses are amazing. The ability to cross multiple stores with inventories and actually have consumers that want to bring in cars from other stores is amazing.

It's great experiences. We're learning a lot from these early days of this new venture.

I guess given some of your early successes then, why are you slowing up the store rollout?

Well, there's still a negative to earnings for a period of time, because you still have these additional expenses and advertising, and overamping, and personnel costs, and inventories until you have stability in the market.

The other part of your question was how long to profitability. I mean, we modeled those stores to be profitable within the first 12 months, which means they're a drag on earnings when you open them. And if you're trying to meet earnings targets you don't want to open too many at once. So it's just being practical.

Thank you very much.

Ed, this is Sid, and remember we've also decided that this whole L2 team can have a tremendous impact on Lithia, and so we're turning a lot of that energy into Lithia. And it's going to be more and more one company.

Thank you very much.

Thank you. Our next question comes from Scott Stember.

Good afternoon. Can you talk about assured pricing, this whole process? Last quarter you had some disruptions in some of your stores and some reduced sales productivity. Can you talk about how that feathered out in the first quarter and maybe just illuminate that a little?

Yeah, I think we've pretty well rooted into the assured pricing. That's there and believe me, that's not negotiation-free. I think we've made that clear now. That's just a good price on every automobile that starts at a lot closer to what we're willing to accept. So there's not these wide ranges of bargaining taking place.

But that's pretty well proven itself and most of the fear of us moving all the way to negotiation-free in our high performing stores is gone. We've made that clear that we have no long-term plan that says we have to do that. We're going to do that, as I said earlier, based on the science, and we're only doing that in underperforming, smaller stores where we think it may be some way to prove out, whether it's our whole tack or not, how far we should go with it.

But it's just science at this point, and no, that fear is behind us.

See, I think Sid said it best, Scott. I mean we're now transitioning our people so they have to think in hundreds rather than thousands, and it's taking a couple months, and we're really to that point about now. And it's taken us that 90 days to get them understanding that when a consumer walks in, they now have to be able to negotiate at a number below MSRP, rather than a number that originally started above MSRP.

Going forward, rather than having this across the board haggle-free policy, you're going to do it on a store by store basis where it makes sense, essentially?

Correct, that's it right there.

Okay, and you mentioned $5 million to $7 million in cost savings related to some of these consolidation of store managers and back office functions. Is this in your guidance?

Yes. There's a range there, $5 million to $7 million as you saw. So the guidance reflects some of that variation.

That's all I have right now. Thank you.

Thank you. Our next question comes from Rex Henderson.

Good afternoon. A couple of quick questions. First of all, a mechanical question. The press release I have has unit volumes only a same store basis and not a total basis, which you normally release. Is that available somewhere?

Sure, we can get that to you, Rex.

Okay. Second thing, I heard Sid mention that the franchise acquisition teams had been dismantled. I'm just wondering about what that means, long-term, in terms of growth?

Well, they can be put back together fairly quickly, Rex. I mean, remember, they're all experience people that know how to run stores, and work in stores as well. They're not like they're guys that deal in deals and acquisitions.

They're auto dealer people and that's what we have as an acquisition group, and we just deployed them in existing stores where we've got other personnel out for the time being, and we can ramp that back up within a month or two, whenever we want.

So the way I should think about it is, is this year or near term we can expect not a lot of activity in acquisitions, but ultimately you will reconstitute that group and we'll see a resumption in growth through acquisition?

Correct.

Okay, the other thing was I know you had some land in Colorado Springs where I think you were going to put a Lithia store, move a Lithia store there and it's on the market now. I'm just wondering if there's any other land sales going on, or any other efforts for liquidity purposes? Or whether this was kind of a one-off thing?

Well, as Jeff mentioned, the internal sources for funding the payoff of the convert, and that includes disposing of some land that we were holding that was tentative in terms of maybe a better location or something that we can put off for now, and go ahead and sell, and buy again if we want later on. And that falls into that category. There are several pieces like that.

And just generally, Jeff talked extensively about efforts to raise cash to fund the put of the $85 million in debt. I'm just wondering whether or not on a broader sense you feel there's any liquidity constraints in the business in terms of your ability to fund the operations, acquire inventory, or any other issues right now?

No, we don't see any.

No, we have our credit facility was recently increased and we have the real estate and sale lease-backs that I described in the call, that are in the process of being financed, and as part of our normal financing process in stores. So there's no issues there.

Rex, I've been through four or five recessions in my 40 years of doing this and cash is king. You get smart. You cut costs. You save capital. You don't know the depth of a recession until you're through it, and so you've got to be damn smart at this front end, and we're doing that.

I also have the numbers here for you. The new vehicles, total units were 12,655. The used retail, 9,487, and used wholesale, 5,916 for a total of 28,058.

Thank you very much.

Thank you. Your next questions comes from Matt Nemer.

Good afternoon, everyone. My first question is can you give us any color in terms of how many of your L1 stores might be unprofitable right now? And then the second part of that is, for the stores where there's a lease involved, how flexible is the lease and does it allow you to put in either another franchise or an L2, or something else?

I think in the case of all leases where we have underperforming stores, there are some issues with site control with some manufacturers, but those can be alleviated and I don't believe there's any major issues that would restrict our ability to use the properties we have currently in whatever way is best for the Company.

But I don't know the exact number, nor we have just said of the stores that were unprofitable for the first quarter, but it's obviously some. And those are all being clearly examined and looked at in terms of both disposal or closure if necessary, or converted.

But there's a real reason not to convert, just to L2 alone as a standalone use. If you can maintain some presence as a new car dealer and gain the parts and service business, and then take the L2 model into the used car department there's tremendous upside in those stores, even if they're underperforming. So we're looking really hard at that.

We're going to certainly experiment with the L2 team running a few new car stores in the next quarter.

Okay, so the point would be to sort of dial back the new side of the business and increase the focus on used, and keep the service and parts operation running?

Right, because it's huge. It pays half the overhead or more in every case and you just wouldn't want to drop that and just do a used car alone in those stores. And I don't mean dial back the new, but certainly increase the focus on used, if we can't dial up the new.

And then there was some commentary that I missed about mortgage or sale leaseback activity, that there's something in the pipeline. Can you just explain that and what you meant by the timing around that?

Jeff, why don't you get that?

Yes, we mentioned in the script there about we're 40% completed with raising the funds to pay back the convert through normal financings of stores, mortgage financing. So we're almost 40% done with that project and that's ongoing, Matt. We're always doing financing of real estate, but that process will just continue here to raise the funds that we need.

We had a couple deals with Capital Automotive REIT, too, and a couple other REITs we're looking at, just where we think it's appropriate.

This is where owning our real estate is a big plus, Matt, because we've never sold our real estate off to a REIT and now we're doing a couple selective transactions. And more importantly, the mortgage financings, which has always been our source of capital from our real estate, and those are in process. We completed about four of them in the last couple months.

It provides flexibility, and with two-thirds of our stores that we own, the actual real estate, it sure is an advantage.

And who are you doing those financings with? I understand on the sale leaseback side.

There's a whole slew of banks that we use, Matt. It's not one in particular. It's from regional banks to national banks, and as well as the captive finance companies.

And are the REITs eager to do deals on the domestic brand stores? I mean, my understanding was that some of the major REITs were only looking at the five, the big import and the two midline import brands?

Well, we do them as packages, Matt, and you can get them done, and if it's a profitable domestic store we've found that it's doable. And you can package stores which are domestic and import and get them done. And we've gotten domestic stores done with REITs.

Got it, okay and then my last question was, when is your annual goodwill impairment assessment? When in the year is that?

We just did that, Matt. In October, at the end of the year, we completed the analysis in February, but it was based off of October. So we just completed that process and that's where the $1.7 million charge that we had last quarter came from, from that annual process.

Okay, and is there anything in the covenants, I haven't looked at all the covenants, but is there anything there where a goodwill write down will impact them? Or has it all been written in?

It's all excluded from the covenants.

Okay, both the leverage and the capitalization ratios?

Yes. Any unusual items such as goodwill write offs are excluded from our covenants. They just want the underlying profitability.

Cash, perfect. Okay, thanks guys. Appreciate it.

Thank you. Your next question comes from Peter Siris.

Hi, guys. I've got a couple questions that I'm a little confused about. Let me start with the guidance for the year was $1.00 to $1.30, right?

That's correct.

I'm trying to get some idea of normalized earnings. In the $1.00 to $1.30, am I correct in assuming there's $0.20 of cost for L2?

That's correct.

I remember on the last call somebody asked Sid, why are you making all of these changes when the market is so crappy, and Sid's response was the best time to make changes is when the market's crappy.

So what other costs are in there that would be non-recurring? Is there a way to figure that out?

The only things, Peter, are the one-to-one used to new ratio that we talked about. That's existing stores, existing business that we are yet to realize and our plans are in place to improve that. That's the biggest thing on our earnings. I mean, that in itself is $1.00 of EPS on its own.

The $3.00 per share that we put out there in 2011 included a part of that but not even fully, and the cost reductions with the more efficient selling system that we have, as we described, $5 million to $7 million is our first chip at that, and we're making good progress.

To get to your answer, when we ramped up office operations, for instance, we had non-recurring expenses related to ramping up one group of people before we could dispose of the group of people they replaced.

And we're doing some of that currently with the car center in terms of the used car appraisal center, and we've got additional costs there that are really kind of wrapped in the L2 group. That's why I mentioned earlier we're going to have to eventually marry these two statements and realize that L2 is going to help us run Lithia at the same time.

So yes, there probably is some non-recurring expense, in this quarter certainly. It'll be less and less of it as we go forward because most of those investments have been made.

Okay, so in this quarter there are some of those expenses but there's not a lot more of the sort of--

Restructuring.

Yes, restructuring expenses. We won't see a lot more restructuring expenses going forward?

Yes, we don't anticipate any major changes now. We're pretty much on track and most of the group is pretty well bought in and the cost related to those things is pretty well behind us.

Okay, now if I go to this $3.00 number that obviously nobody wants to believe, because if anybody believed it, the stock wouldn't be at $7.90, what does the $3.00 imply?

Just a steady growth in terms of the company. Not a lot and a normal sale environment, not a recession, and that's pretty much it, and then those cost savings that we've planned. And really we've only put in that $3.00 forecast a lot less than we think there really are cost savings out there. And we haven't been aggressive in terms of the improvements in the markets themselves, or in same store sales growth.

So we still think that's a conservative estimate of what we can make.

Okay, now I have two more questions. One is the Big Three, and you guys have much more domestic than other people, they've been making noises about closing dealerships. What do you see out there and how does that positively or negatively impact you?

We don't see a negative impact. There's a possible positive where there'd be less competition in some of the markets we're in, which can only benefit us. Everything that we've got for sale and discontinued ops, there's stores that might be impacted by that already, and we don't anticipate a whole lot more of that. There may be a couple, but--

Do you see those guys closing a lot of stores? Will there be less competition or is that just noise?

They're all going to try, but to effectively do it you'd have to pay out billions of dollars, and I doubt if they want to budget that.

And the last question I have is the dividend. Tell me what the risks in the dividend are here?

It's the last thing to go, Peter, if we got an accelerating recession and cash became even more important to us. But at this point, all the plans we've got, it's going to continue at the levels it's at.

And you can sell enough real estate to keep the dividend?

We can make enough money to keep the dividend.

Peter, this is Bryan. I think an important thing to remember is we lost $0.18 in Q4 of 2007. That was in a less difficult environment than what we just went through in Q1 of 2008 and we lost $0.03. So we're curbing these things fairly quickly. We're headed back up the hill again. So I think that quarter over quarter improvement is showing where we're trending.

I appreciate it and I look forward to seeing the $3.00.

Peter, one more point on the store closures, domestics. I mean, I don't think it came out but our stores are in small markets where there's one store of each brand and most of that consolidation is in large metro markets east of the Mississippi where you have population growth that shifted away from those markets. And they're over-dealered in Atlanta, and New England, and Chicago.

I mean you got all these big cities with lots of dealerships that aren't needed anymore. And small markets like Sioux Falls, Helena, and Anchorage, Alaska, there's always going to be a Dodge store. There's always going to be a GM store and that's 90% of our stores.

So there's no risk of those stores going away or being closed, and that's important to notice that because our strategy has been small market strategy, and that's not where the problem with the domestic dealership is at, at all.

And I think it's important to clarify the difference between a small market, which is Sioux Falls, that's 200,000 people in the area, and a small market that's 20,000 people, which is Brookings, or Watertown, or any of those other towns that have dealerships outside of Sioux Falls.

There still has to be serviceability points for the customer base.

Right, but what I'm saying is if they close Brookings or Watertown, won't that benefit Sioux Falls? That was, I guess, my question.

It very likely could. Yes, so the cuts are going to be in those ultra smalls or in the metros where there's still serviceability, where they can go from 12 dealers to six dealers.

And we're in markets of 100,000 to 500,000 people, which are always going to have a dealership, which is my point, and they're very profitable, solid brands in those markets that are going to be there.

And we're willing to buy some of those small stores too, Peter, and close them.

Can you buy them cheap?

Yes, obviously we wouldn't pay anything. It's mainly an asset purchase and you reutilize the assets in some other way. But, I mean we could help that part of the plan if the manufacturers want to try to do that, and there have been some inclination of that.

Interesting. Thanks, Sid.

Thank you. Your last question comes from Deron Kennedy.

Again, I just had a follow up question to the used to new ratio target, and the way I looked at this business, and correct what I'm missing here, but is there anything about becoming less reliant on new that might strain your relationships with the OEMs?

I mean, is there a point where they start to worry about the focus on the new business because of all the emphasis on the used side?

There's only one place that hurts us, and that's with OEMs that don't want us to buy stores anyway, and like the import brands, they're really not very excited about public entities buying their stores.

But with the domestic manufacturers and our partnership with them, and realizing the realities of all that, I mean they're all in for the same thing we are, to make as much money as we can as a dealer group, so that we can be profitable enough to buy stores and flourish in the future. So no, we'll balance those issues as we go forward.

I guess the other element of it is support for existing stores in terms of incentives, and ways that they can push back. Is there any concern like that, or am I-- ?

No, they never single dealers out for those issues. I mean, whatever they do for one dealer they do for everyone.

Can I jump in here real quick?

You sure can, Bryan.

As long as you're selling MSR, which is the manufacturer sales responsibility for your market, they're going to be content. But as a domestic manufacturer, I mean many of them are down double digits year over year. Obviously it's a 50 car store that goes to 40, we need to recapture that volume somewhere and you recapture it through program sales and used vehicle sales.

They're pretty content as long as you keep your market share.

And a couple other things there, Deron. When we went public back in '96, our company was 1.5 to 1 used to new and everything was fine, and in 2001 we were 1 to 1. We've been at those levels. It's nothing unusual or extraordinary. It's very ordinary for a dealership, well-run, to be at levels even higher than that. So that's definitely not a concern.

What happened? I don't know the history well enough that you've gone from 1 to 1 to a ratio more like your peers in seven, eight years.

Well, we purchased stores that do 0.4 to 1. Remember, that original group is still there and they still do better than the rest of the group average, obviously. So it's not like we took it down. What we added did very poorly in used cars because that's the norm in the industry.

And another point on that new to used ratio, most new car manufacturers, and we have great partners there, recognize that their best new car dealers are also their best used car dealers. They push and support it. I don't think there's ever an issue and Bryan was right, as long as you do MSR or above, they are delighted by your improvement in used car sales.

One other thing is since 2001 when we were at 1 to 1, 9/11 hit and that's when the high incentives, which some people would say are almost not irrational, but very high incentives. You had 0% financing. You had the subsidized, the big incentives, and the used car customer shifted to a new car from 2001 until about 2005, and that's a shift in the marketplace that we went through, and everybody had to deal with that.

And the manufacturers are back on rational incentive levels, and they're not doing the crazy programs like they were. And so that also allows us to get back to what normal levels are with our company, with that more normal environment, with competition between new and used not being so heightened towards the new. That was pretty extreme in there.

There's absolutely no risk to anybody upsetting our cart about used car improvement in sales, except our ability toe execute it. That's the only thing that might stand in our way, and we're confident that we've found all those issues and are identifying them and pushing forward in that area.

Thank you.

Thank you. There appears to be no questions at this time. I will now turn the floor back over to our leader for any closing comments.

Thank you all for listening and we'll update you as necessary going forward. Let's all hope this recession doesn't get any worse and we can find a good upswing this summer. Thanks. Bye.

Thank you. This concludes today's Lithia Motor's 2008 First Quarter Conference Call. Thank you. You may now disconnect.