Lithia Motors Inc (LAD) 2009 Q1 法說會逐字稿

Good evening, my name is Lynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lithia Motors' first quarter 2009 conference call. (Operator instructions.)

I would now like to turn the conference over to Mr. John North, Corporate Controller. You may begin your conference.

Thank you, Lynn. Good afternoon, everyone. Welcome to Lithia Motors' first quarter 2009 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 the Company's filings with the SEC.

Now, I'd like to thank you for joining us for our first quarter 2009 earnings conference call. Presenting on the call today are Sid DeBoer, the Chairman and CEO of Lithia, Bryan DeBoer, our President and Chief Operating Officer, Jeff DeBoer, our Chief Financial Officer, and Dick Heimann, Vice Chairman. At the end of their remarks we will open the call to questions.

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

Good afternoon. Thank you for joining us. Today we reported first quarter net income from continuing operations of a penny a share, compared to a year ago a net income of a penny a share. Despite the change in the declining markets that we're in and the revenue base and continued double-digit decreases in same store sales, Lithia posted a profit in the first quarter. We were able to improve gross margins in each of our business lines, as well as continued to reduce costs.

Consolidated net income was $0.06 per share for the first quarter of 2009 compared to the consolidated net loss last year of $0.11 per share. When we had our last earnings call in March, we discussed -- our yearend, actually, call in March -- we discussed the significant events occurring in the economy and in the industry. The credit panic triggered by the bankruptcy of Lehman Brothers continued to negatively impact the first quarter. Automobile retail sales have been flat really since November of 2008, and continue to run at those historic low levels.

We are pleased to see the recently announced Treasury initiatives included in the TALF Program, which offers the potential to help thaw consumer credit. The financial support offered to domestic captive financing companies has allowed lenders to provide more financing options to a broader pool of borrowers.

We are closely following even today the situation with the General Motors and Chrysler bankruptcies. Every day additional information is in the press, speculating on these prospects, ahead of the deadlines mandated by the Government.

Obviously, no one can predict the exact outcome for these companies. We do believe that the industry, the country, and the broader economy have an interest in seeing these companies continue to exist in one form or another.

We think we have positioned Lithia for success and have mitigated most of the risk to our business related to these events, these external events, that we have little control over.

We have been restructuring our operations for almost a full year now. Over that period of time we evaluated each of our stores for divestiture based on profitability and brand exposure. We have sold a number of stores in metropolitan markets with too many competing franchises. We have closed some locations with franchises that could be eliminated, even where brand alignment was not possible or where operations were too small.

We have converted assets into cash to reduce debt and improve liquidity. We have reduced costs to reflect a drop in consumer demand. Finally, we have sought expert legal and industry advice to evaluate potential ramifications and to prepare Lithia in the event of a filing.

Based on our research and information from Chrysler and General Motors' restructuring plans we believe the majority of our franchises would be retained in a reorganization. We currently have only one Saturn store that is still open, one GMC store, and it is properly aligned with Buick and Cadillac, and only one Saab franchises, which is just a dual that we sell very few of in one Chevrolet store. All of our other GM franchises represent the core Chevrolet brand, where Cadillac may be dualed even in some of our Chevrolet stores, we have no standalone Cadillac stores.

Of our Chrysler locations we believe only a few franchises would be negatively impacted by our reorganization. We believe that termination of these locations would be an event we could weather. Plans may change or be different than we anticipated. However, we believe we have done all we can do to position Lithia for whatever uncertainties the industry is now facing.

Now, to talk about the impact of this uncertainty on our consumers. While our new car, same store sales were off by 40% in the first quarter from last year, our Chrysler stores were actually slightly better than the overall results, with sharper declines at both General Motors and our Toyota stores.

We believe that the continued popularity of the Chrysler brand, as well as Government backing of the vehicle warranties, helped to reduce some of the anxiety surrounding the purchase of a new vehicle, a new Chrysler vehicle. Additionally, gross margin on Chrysler vehicles was one of the strongest by brand in the first quarter, proving that retail demand for these products is still there.

We continue to focus on new vehicle inventory control. The acceleration of the weak new vehicle retail environment since the third quarter of '08 has driven inventory levels higher despite a prudent approach to inventory acquisition.

New vehicle inventories were at $299 million today at the end of the quarter, which is approximately 23 days, higher days' supply than our five-year historic average days supply for March. Assuming vehicle sales levels remain as they are, flat, we are targeting inventory reductions to overall levels of around $240 million by the fourth quarter of this year.

Our used vehicle revenues were down by 13% in the first quarter, with the unit count sales down over only 1%, since the average price per vehicle declined 12%, we are selling more used cars at a lower price because we're reaching down further. Bryan will speak more to that later.

Consumers continue to seek value, which has manifested in a lower average vehicle price. Although revenues were down we are pleased with our progress in this area. We continue to control used vehicle inventory levels, reducing exposure to the volatile used vehicle market and maximizing opportunities as demand for used vehicles has been more resilient than the new.

We have reduced inventories to approximately $70 million at the end of the quarter, from over $157 million, a high we had in May of 2008. Our days supply per used vehicle at the end of the quarter was at the five-year historical average levels for March.

So we have currently the proper inventory level in used. We retailed approximately 1.1 used vehicle for each new vehicle we sold in the first quarter compared to a ratio of 0.7 to 1 in the first quarter of last year.

The overall decline in vehicle sales has reduced the number of trade-in opportunities, which is our first choice for acquiring used vehicles. To counter this we have continued to utilize auctions and other methods to ensure the right selection of vehicles is available on every lot we have for all of our customers. We have also begun to pilot other used vehicle sales methods, including the lower priced, value line vehicles.

Our F&I per vehicle for the first quarter was $1,012, which is $204 lower per vehicle than the first quarter of 2008. We had penetration rates for the financing of vehicles at 71% of the cars we sold. We did arrange the financing.

Service contracts, we were at 43%, and our lifetime oil product was purchased by 34% of our customers.

Lithia Service and Parts business declined only 6% on a same store basis in the first quarter. Domestic brand warranty work increased by 4.6% and import luxury warranty work decreased, actually, by 3.2% for the quarter.

Sales in the customer pay service and parts business, which represents almost 80% of the total was down 8.2% for the quarter. This decrease was primarily a result of a very weak economy and a low consumer confidence.

With that, I want to turn the call over to Bryan, our President and Chief Operating Officer, to provide you with some more operational details. Bryan?

Thanks, Sid. Good afternoon, everyone.

In the first quarter there were two main areas of operational focus. First, was improving profitability through used vehicle sales, commodities in our service lanes, and a dedicated focus on each transaction. Second, a continued focus to further reduce both fixed and variable costs in the organization.

We are pleased to see our margin at nearly 20% compared to approximately 17% over the prior year period. We saw margin improvement in all business lines in the first quarter, including new vehicle margins at 8.7%, a 90 point basis improvement over the prior year, and used vehicle margins at 12.4%, a 40 basis point improvement.

Our focus on maximizing each transaction and enhanced manufacturer incentives contributed to this increase. Our gross profit per new vehicle retailed was $2,604 compared to $2,312 a year ago. Gross profit per used vehicle fell slightly to $1,916 per unit compared to $2,095 a year ago.

Our average wholesale gross profit improved to $120 per unit compared to an $83 loss last year. As Sid mentioned earlier, used vehicle retail unit sales were down only 1% year-over-year, however, our average price per unit was down, as well, 12%.

Three factors can be attributed to these solid results. First, we modified our marketing consumer guarantees and internal processes to allow for value line vehicles in mid 2008, and they're finally taking hold.

Second, we rearranged our store used vehicle and support services personnel, allowing for improved frontline focus in the stores, while maximizing enterprise level oversight.

Third, internal sales incentives and accountability to inventory levels reduced aged inventory and improved our inventory mix dramatically.

Our store personnel have embraced a back-to-the-basics approach, where each transaction is consistently executed based on our proven sales techniques. This improved focus has really shown in our numbers.

The other area that we continued to focus on is cost reductions. You may recall that we announced $18 million in expense reductions in June of last year. Throughout 2008 we continued to find additional areas where we could drive cost out of the business. As a result, we increased our estimate of annualized savings to $43 million at the end of last year.

As the economic environment continued to falter in the first quarter we challenged our store personnel to do more to bring costs in line. We now anticipate annual [wise] fixed cost reductions of $55 million. These cost reductions are all fixed cost reductions on a continuing operations basis and they are all permanent.

I want to emphasize that the reductions do not take into account the variable portion of commissioned management positions, the sales stores, inventory interest expense reductions or debt interest savings, nor do the reductions count sales and technician production positions. Total costs reductions including variable costs, and discontinued operations are much higher at approximately $85 million.

We are pleased that we have maintained a positive sales environment and mitigated adverse reactions to our cost reduction efforts. Our Team is engaged and focused on strategic ways to minimize expenses and costs wherever possible. This strategy continues to gain traction as we see store leadership finding new ways to do more with less.

Finally, I would like to provide an update on our restructuring and rightsizing plans that we announced last June. Since that time, we had identified 31 stores for divestiture, primarily based on poor operational performance, but also due to their location, facility improvement requirements, or geographic or logistic considerations.

To date, we have disposed of 20 of those 31 stores. In the first four months of 2009 we have sold five and terminated two stores, four of those sales were Chrysler stores. The simple fact is there is still demand from private dealers for domestic brand stores. We are optimistic about even more progress, especially as the future of General Motors and Chrysler become more clear.

We have continued to reduce our domestic exposure, particularly to the Chrysler, Dodge brand. At the peak of 2007 over 40% of our new vehicle revenues came from the Chrysler products. Today we have reduced this to 34% Chrysler products on a continuing operations basis. Our longer term strategy is to continue to deemphasize brand diversity and achieve a more balanced revenue base.

We are pleased with the results of our strategy, overall, concentrating on developing the right stores and the right markets to maximize profitability.

With that, I'll turn the call over to Jeff, our CFO, to provide you with some financial data.

Thank you, Bryan. And, hello, everyone.

I'd like to talk first about our balance sheet, which we've worked on, shoring up in the first quarter of 2009. Our objective has been to eliminate all debt except for mortgage and floor plan financing. We are pleased with our progress that we've made in these areas, and I want to update you on the two major sources of debt that we are looking to retire, the credit facility and our convertible notes.

The balance on our credit facility has continued to decline. At the peak, 18 months ago, in December of 2007 the balance was $184 million. At March 31st, the end of this last quarter, the balance was only $75 million and it is under $50 million as of today.

The facility matures in April of 2010, and it is our intention to pay-off the balance. Once complete our used vehicle inventory will be unencumbered and available in the future as a potential source of capital as needed.

To that end, we executed an amendment to the facility at the end of March. The most significant changes include an adjustment to our required current ratio in order to allow the facility to come into current portion and to incorporate measured step-downs over the next year to reduce nonuse fees as we require lower overall capacity.

The minimum net worth requirement was also reduced by about $70 million, and this provides additional cushion to operate and sell stores in this uncertain environment. We are thankful to have such a great group of partners in our credit facility. We anticipate remaining in compliance with all covenants throughout 2009.

In 2004, going back five years, we issued $85 million of convertible notes which paid 2-7/8s interest. These notes had a put option, as many of you know, that required them to potentially be repurchased at May 2009, next month.

We began repurchasing in the third quarter of 2008 and have been acquiring amounts as transactions were presented to us by the holders. Through March 2009 we had repurchased $45.7 million of the notes. In April of 2009 we repurchased an additional $32.4 million of notes for a total of $78.1 million retired, all at a discount. Only $6.9 million of the notes remain outstanding, and we have sufficient availability to retire them.

Now, to discuss free cash flow from operations and cash generation in the quarter. Consolidated free cash flow was a positive $5 million for the first quarter of 2009. This is defined as consolidated net income including discontinued operations plus noncash items, depreciation and amortization, and stock comp expense, minus non-financeable CapEx, so a basic operating cash flow.

We are pleased to be generating an operational cash flow which is a great internal source of funds to retire debt and improve liquidity. In the quarter we generated cash totaling approximately $41 million. We closed on four mortgage loans in the first quarter of 2009 and have several other mortgages in the pipeline. We've sold certain development properties and store locations with more sales to come.

Finally, we have been examining other areas within the Company to generate cash. One of the areas we identified was an existing pool of lifetime [LOF] contracts, oil and filter contracts. We had initially sold the contract obligations to a third party who reimbursed us as work was performed.

We received proceeds of $15 million in exchange for acquiring the obligation to perform these oil changes in future periods. We estimate the cost to perform the service work to be approximately $15 million, so the transaction will be financial statement neutral. However, in the meantime the $15 million was received upfront in a onetime cash payment.

As we evaluated this transaction we decided to retain the liability on lifetime oil and filter contracts in the future, rather than assigning them to a third party. As a result, we will be recognizing the revenue of the contracts over the expected contract life which impacts near-term profits in a small way.

We estimate our finance and insurance profit per vehicle in the first quarter was reduced by approximately $31 per vehicle compared to the first quarter of last year because of this deferral. This amount will increase slightly to approximately $80, $80 to $90 per vehicle in future periods.

However, this change keeps 100% of the cash associated with the contract in our possession upfront and saves, and additionally saves approximately $800,000 per year in administration costs from the third-party administrator.

In conclusion, our liquidity at Lithia is strong, including cash and availability on our credit facilities we have total liquidity today of $52 million.

I'll now turn the floor back to Sid for closing comments and then your questions.

Finally, in closing, I want to bring you up-to-date on the second quarter and our strategy then for the rest of '09. April is performing as expected, and we are continuing to cut costs and improve margins. We believe vehicle sales will remain stable but flat for the remainder of the year.

We continue to focus on four key areas. First, rightsizing our Company. Second, removing costs from the business. Third, reducing debt and maintaining good and strong liquidity. And, fourth, improving sales and gross margin in both the used vehicle, service and parts, and where we can in new vehicles. We believe these areas are critical to our success in '09, and we are building a much stronger Company for the future.

That concludes the presentation portion of the conference call. Thank you, all, for joining us, and, Lynn, if you would, open the floor for questions? We're happy to entertain those.

(Operator instructions.)

Your first question comes from the line of Rex Henderson with Raymond James.

Good afternoon, and thanks for taking my call. Sid, the first question I wanted to ask is had you seen the news, automotive news that President Obama is going to announce the bankruptcy of Chrysler in the morning?

And the second thing was what direct impact will that have on you in terms of two things, one is inventory values, how much inventory do you think is at risk in the event of a Chrysler bankruptcy? And, secondly, what's happening in the value of the franchises, of remaining Chrysler franchises you're trying to sell?

Rex, that's an awful lot of information. We're not going to deal with all of that. And that news story is still speculative, that's not final. And, as you know, we are prepared in either case, as we said in our conference call here.

Those numbers will be in the queue and we'll file that shortly, hopefully, by tomorrow. And anything you want to get out of that will all be in those numbers. We've tried to give you as much as we can here, and if you want more detail on the actual inventory numbers for Chrysler and this and that and the other thing we can get them for you.

Okay. And what have you been seeing with Chrysler, the value of Chrysler dealerships over the last several months? Have you seen any change?

No, we have seen no change. I mean there's no goodwill being [fronted] for any Chrysler store that we're aware of, but their asset values are still there and there's still people willing to buy them.

Okay. The other thing was just looking at the press release, there was some mention of some asset impairment charges, can you give me some detail on what those charges were, how much they were pretax and after-tax, and where they were -- were they in the SG&A line? Where they're located in the financial statement?

There's less than a million dollars in the discontinued operations line, Rex, that's very small.

Okay, okay. And, finally, you mentioned a -- Jeff, you mentioned a free cash flow number, what was that number again? I'm sorry, I missed it?

$5 million for the first quarter.

Okay. And I guess, finally, Sid, I was just wondering whether or not you have purchased any Italian shoes or Italian suits yet to get prepared for the change of ownership?

You know what, I didn't get a letter written in Italian, I thought it was a good sign from Chrysler.

All right, all right. Thanks a lot.

All right. Thank you, Rex.

(Operator instructions.)

Your next question comes from the line of Rick Nelson with Stephens.

Hi, good afternoon, guys. Wanted to follow-up on the expense cuts, you had talked about $55 million being permanent reductions, how much of that did we see in the first quarter and how much is coming?

Virtually all of it is realized in the first quarter. There's approximately 20% that is still to come that's unrealized.

So that's an annualized number, so take about a quarter of that.

Yes.

Right, right. Okay, thank you. And continuing out number does that include the gain on early test extinguishment and the gain on the asset sales?

Yes, it does, right, John?

There was only a small portion though in Q1. Most of the repurchase was done in April which is Q2.

Yes, this quarter the gain was very small.

Can you quantify that, Jeff?

It's in the table in the Q.

The trend and the gain on the asset sales?

Rick, it'll be in the Q.

It's around $100,000.

Okay, for the two combined?

Just in the quarter. Overall, the gain on the repurchases over the entire life since last quarter was about $5.6 million, but that's spread over three quarters, of which $100,000 only within this quarter.

Okay. And the gain on the asset sales is that above the line in continuing ops or is that below the line? And if you could quantify that, please?

The gain from the sale of the Toyota store, is that right?

Well, together several items into a net benefit of $1.5 million, one of which include a net gain on asset sales, it was at -- in discontinued operations, or is that in continuing operations?

Yes, there was three items, they're all in continuing operations, and they're all a million dollars or less pretax.

Total.

Total. Okay, and that totals $1.5 million, so about $1 million each or less and they're all in continuing operations pretax.

Okay, and the asset impairment was lumped in there, as well?

Correct.

One to three, less than $1 million is in continuing operations and SG&A.

Okay, and we can follow-up, offline on that? The improvement in margin in new cars, I'm wondering what is driving that, and how sustainable you think that is?

Bryan?

Rick, that's primarily coming through -- we have our inventories fairly well under control in our '07 and '08 model lines now. We're not quite as panic selling, which is what was occurring in Q3 and Q4. That's assisting us, as well as manufacturer incentives especially through February were helping us in a pretty good way. We believe that they should continue with that type of strength.

I think (inaudible) too.

Incentive programs from Chrysler?

What was that, Rick?

The incentive programs are -- who were, the OEMs, actually that's the only company we've seen to report higher gross margins to date in the new car business.

Yes, and every manufacturer's incentives have been pretty robust, and we haven't had to pass as much of it along to the consumer.

You also have to remember, Rick, we're in protected middle-sized markets and it's a different competitive environment, so.

Got you. And then the improvement in the used cars, and that wholesale profit that we saw this quarter, I'm wondering about the sustainability there? I realize we had some increases in the used car values during the period, and--?

Rick, a couple of things. Throughout 2008 we struggled with a lot of over aged inventory. We're positioned nicely now, finally after about 14 months, and we're back to our typical red-light sales that we used to talk about, that we've continued to do, but now they're finally yielding the results that we intended.

And a lot of it comes from not having that frozen inventory where you're having to get rid of wholesale vehicles, and we noticed it also on the retail side. Most of the margin impacts that we had over last year were because of that over aged bucket of inventory that you end up selling and retailing through at lower margins than you typically do.

(Inaudible.)

We couldn't hear you, Rick. Repeat that again?

I'd like to move on to a question for Sid?

Okay.

In his prepared remarks you mentioned that only a few stores would be impacted by a Chrysler bankruptcy. I'm wondering how you come to that conclusion?

Well, we've done a lot of studying based on whether we're the dominate market player or whether the store has the three brands, and whether there is any reason Chrysler wouldn't want a store there.

Obviously, that's not a bankruptcy liquidation we're dealing with. We're dealing with a reorganization. Those two things are different, and we're planning on them doing a reorganization whether in bankruptcy or out, and we've looked hard at all of our stores. And that was what drove our decision to get rid of what we've gotten rid of or to close what we've closed, and we feel pretty well aligned at this point.

There's some question on a couple of them that aren't perfectly aligned yet, but in most cases we're the dominant store with the better facility, better CSI, better operating profits. So we're probably the one they would choose if, in fact, they force that.

We have estimates on GM as to what type of plan in terms of store downsize, number of dealers, downsize, has Chrysler put out any forecast?

I'm sorry, Rick, we--?

Does Chrysler have specific downsizing plans? We've seen reports out of General Motors about the number of dealerships they plan to consolidate over the next couple of years. Are you aware--?

No, Rick. And I know you and I have talked and made the point, and I continue to make it, there's not a lot of savings for a manufacturer in reducing dealer count. And Chrysler [will] let that happen, as it does, driven by market forces, and then their alpha program where they want all three brands in every store, and that attrition is taking place. I think they've lost 100 and some stores this year so far, and I mean it's pretty much a store a day.

And were they 3,100, they probably want to be -- I'm guessing, 29 -- I mean they're pretty good. They've got a nice plan, and they're way along on it. They've got a lot of work. And every market we've been in, we've been a participant in many cases, either buying at additional stores, selling one, I mean all of that partnership is paying off for Lithia in terms of that strategy.

Well, you don't see many Chrysler stores being closed under a reorganization?

We don't see anything material. There may be one yet or two but, overall, no.

Thanks.

Rick, everyone is still looking at the metropolitan areas and the very small markets. If you recall, Lithia's strategy has always been to go into medium sized markets that are regional hubs and we're the primary location. That's how we are in 75% of our domestic stores.

I mean it's the Boise's, it's the [Medford's], it's the Spokane's, it's the [Rosebose], it's Midland and Odessa, those are our kind of markets, and we're the only player in those markets. So we believe that because of the warranty accessibility, as well as being able to represent the franchise, there's not much risk to us even not having specifics from Chrysler on it.

That's great. Thank you, and good luck.

Thanks, Rick.

Thanks.

(Operator instructions.)

There are no further questions at this time. I would now like to turn the call over to Sid DeBoer for any closing remarks.

I really don't have anything to add. Thanks for listening, and we'll look forward to communicating with you as needed, and we'll continue to execute our plan. We're in good shape for now, and we'll have to watch and see what happens with these guys the next couple of days. But overall we've got a plan to mitigate any of those risks.

This concludes today's conference call. You may now disconnect.