Lithia Motors Inc (LAD) 2009 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 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 session. (Operator Instructions) Thank you. I will now like to turn the conference over to Mr. John North, Corporate Controller. Please go ahead, sir.

Thanks, Traci. Good afternoon. Welcome to Lithia Motors' fourth quarter 2009 earnings conference call.

Before we begin, the Company wants you to know this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainties. Actual results could differ materially due to certain risk factors which are outlined in the Company's filings with the SEC. During this call, we may discuss certain non-GAAP items including adjusted income from continuing operations, adjusted earnings per share from continuing operations and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We have also posted an updated investor presentation on our website under Investor Relation and then Calendar of Events.

Presenting on the call today are Sid DeBoer, Chairman of the Board and CEO, Dick Heimann, Vice Chairman, Bryan DeBoer, President and Chief Operating Officer and Jeff DeBoer, our Chief Financial Officer. At the end of their prepared remarks, we will open the call to questions. It is now my pleasure to turn the call over to Lithia's CEO, Sid DeBoer.

Good afternoon, everyone. Today we reported our fourth quarter adjusted income from continuing operations of $0.01 per share compared to an adjusted loss of $0.16 per share a year ago, an improvement of $3.3 million in earnings. This marks the first time in the last three years that we have made money in what is typically our weakest quarter. Considering the significant year-over-year declines in revenues and the retail sales performance of our manufacturer partners, especially Chrysler, this is good news. We believe our results demonstrate that the automotive market has reached equilibrium. While the industry is not showing signs of improvement, it is no longer deteriorating. Even at these depressed sales levels, we are profitable and have proven the concepts discussed in theory since becoming a public company over twelve years ago.

As we previously announced, the fourth quarter results were impacted by weak new vehicle sales at our Chrysler stores and unexpected delay in the release of the 2010 Ram heavy duty pickup and reduced spending by Chrysler on advertising, and incentives impacted our floor traffic and sales more than we expected at our Chrysler stores. So far, we are on target with our first quarter projections in the current quarter, and the guidance that we have provided appears okay. Since we resumed guidance earlier this month, we have received questions regarding the amount that our first quarter projection contributes to our full year results. As you may recall, we project our first quarter earnings to be in the range of $0.04 to $0.06 and the full year to be in the range of $0.55 to $0.63.

Jeff will give us more detail on this, but the seasonality has become more pronounced given our geographic concentrations in colder weather states like Alaska and Montana. This is important because at current sales level, the seasonal decline in our business brings our gross profit much closer to our fixed costs. In this environment, we will make the majority of our profit in the second and third quarters when we gain leverage on our fixed costs. However, when volumes improved, we will keep as much as $0.80 of each incremental dollar of revenue as the leverage in our model increases, and it will level out some of this extreme seasonality issue.

Before Bryan walks through our operational results, I want to make a few general comments regarding our acquisition pipeline, the Toyota situation and our recent experience with Chrysler. Regarding acquisitions, we have accelerated our search for acquisition targets since October of last year when we completed our follow-on stock offering and amended our credit facility to permit acquisitions. Since then, we have announced only one acquisition, a good store in Anchorage, Alaska, picking up the Kia franchise there. I believe we're the only Kia dealer in the state of Alaska.

As a reminder, our practice is to announce acquisitions once they are completed. We currently have several deals in the pipeline and are looking forward to providing more information on these stores and these acquisitions as the deals are completed. To reiterate, our goal is to actively grow through acquisition of new vehicle stores. We believe we are well-positioned to make at least four or five acquisitions per year and can handle more if the right opportunities appear.

Now a few words on Toyota. We are 100% behind Toyota's efforts to identify and correct these recall issues quickly for the safety of our customers. Our customers have been very understanding and flexible surrounding these campaigns and do appear to be very loyal to the brand and to Lithia. Toyota continues to support the dealer body, and we are following their lead in solving these issues.

Finally, a discussion on Chrysler. As the partnership between Chrysler and Fiat continues to mature, we are encouraged by what we're seeing. For the first half of 2010, year-over-year comparisons for Chrysler won't necessarily paint an accurate picture of the new Chrysler. The old company had some unnatural actions in the first half of 2009 as it tried to avoid then ultimately went through the bankruptcy reorganization. Chrysler's goal for the first half of the year is to steadily improve month over month and build its brands and its earnings and build the confidence of customers with the great high quality products.

It has been widely discussed that Chrysler does not have a robust 2010 product lineup. Want to take a minute to clarify this. Starting with a redesigned Ram truck in late 2009 followed by the new heavy duty Ram pickup, the Motor Trend Truck of the Year and its soon to be introduced the all new Grand Cherokee in May, 75% of Chrysler's lineup of vehicles will be all new or refreshed by the end of 2010. There is a lot more that is being done. 16 vehicles in 2010 will be all new or a substantial refresh. Looking to the future, Chrysler will continue to emphasize fuel efficiency, expecting to achieve a 25% improvement by 2014 and expects to spend approximately $4.5 billion per year on research and development. Obviously, Chrysler is at least planning on a very bright future.

In summary, despite our optimism surrounding the changes at Chrysler, we have worked diligently to reduce our reliance on any one manufacturer. We have mitigated the risks where we could, kept the stores that fit our model and are seeking acquisitions to improve our brand diversity. 2010 will be a year where Chrysler's plans will be tested, and their ultimate success will remain to be seen. With that, I will turn the call over to Bryan, our President, to provide you with more operational details. Thank you, Sid, and good afternoon, everyone. We sold 6,500 new vehicles in the fourth quarter and 29,000 new vehicles for the full year 2009. Our same store new vehicle sales increased 1.2% in the quarter. As announced in our press release, excluding Chrysler, our same store new vehicle sales in the quarter increased 18.5% over the prior year. Since we last updated you, we have continued our focus on retail used vehicle sales. We sold 6,400 retail used vehicles in the fourth quarter and just under 29,000 retail used vehicles for the full year 2009, and this puts us at approximately 1:1 new ratio. Same store used vehicle retail sales were up 17.9% over the same quarter of 2009.

In the fourth quarter, our margins experienced some pressure for two reasons. The difference between new car and used car selling prices shrank, plus there is a typical seasonal weakness in the used car auctions during the quarter. We continue to focus on lower priced vehicles, capturing consumers seeking less expensive cars. Additionally, we believe we can still make better improvements in retail used car opportunities through stocking plans and better inventory management. We remain confident that we can maintain a retail ratio of used to new of 1:1, even as new vehicle sales volumes are increasing. We also believe we can achieve a gross margin of 14% to 14.5% in 2010. In the fourth quarter, we arranged for financing on approximately 68% of the cars that we sold. We sold 40% of our customers a service contract and 34% of our customers a lifetime oil product.

Our F&I in the fourth quarter was $945 per vehicle. We estimate this profit per vehicle in the fourth quarter was reduced by approximately $85 because of the deferral of profit associated with our lifetime oil product. Lithia service body and parts business was down 2.7% on a same-store basis in the fourth quarter. The biggest driver of this decline is a decrease in warranty work. Our domestic brand warranty work decreased by 15.5%, and import luxury warranty work decreased by 9.8% for the quarter. We have worked diligently to improve our customer pay business to offset these negative warranty trends. Sales in the customer pay service and parts businesses, which represent 81% of the total, was actually flat for the quarter. We continue to face headwinds in our service body and parts business as a result of declining units in operation.

The low new vehicle sales levels, coupled with the loss of market share from domestic manufacturers will be a challenge in the future. This factor is a primary driver in our assumptions that same-store sales will be down 1% in 2010. Our experience shows most customers returned to the dealership for approximately five years after purchasing a new vehicle. We have continued to emphasize our lifetime oil and filter product to extend the length of time customers returned to the stores. We also have been developing other areas of the business to improve our incremental revenues in this area. For example, we continue to grow our commodity sales of tires, batteries, wiper blades and other quick fix items to be a real one-stop shopping center for all of our customers. We also recently introduced a pilot program at 19 stores to sell extended warranties to customers in the service drive. We believe we can provide a nice boost once this is successful. In summary, these focus areas will mitigate some of the impact of lower units in operations.

In the quarter, overall gross margin was approximately 18% compared to approximately 19% in the same period last year. Our gross profit per new vehicle retailed was $2,524 compared to $ $2,629 a year ago. Gross profit per used vehicle improved to $2,353 compared to $1,865 a year ago, and this is an increase of almost $500 per unit. Our average wholesale gross margin also improved to a loss of only $13 per vehicle compared to a loss of $247 per vehicle last year.

Now, a few thoughts on acquisition opportunities we are seeing. Our current goal, as Sid mentioned, is to diversify our portfolio franchises to achieve no more than 20% of our new car sales from any one manufacturer. While the divestures we have completed over the past 18 months have moved us towards our goal, strategic acquisitions will get us the rest of the way there.

Dealership acquisitions face three hurdles in three key areas. First, sellers want to use financial results from prior years that were occurring in better times. As the economic recovery remains slow and gradual, we are seeing some rationalization in this area as expectations are reset because we are not quickly returning to the boom times. This is helping improve things. Secondly, multiples must continue to fall from the highs from a few years ago. Obviously, the past few years have proven there is more volatility in the business and investors, including us, are more cautious given the capital they're investing and the ROI thresholds expected.

The final area is regarding real estate pricing. There is still a gap between seller's expectations and the current commercial real estate realities. Also, the amount of automotive real estate on the market has dramatically increased over the past year as dealerships have been closed or have had to reduce their size. These areas continue to be challenges and negotiating agreements acceptable to both parties are still to come. With that being said, we do believe we can complete acquisitions at around 2 to 3.5 times EBITDA, or 10% to 15% of annual revenues on a pro forma basis. While acquisitions remain our preferred method for growth, we continue to invest internally to improve our results. As Jeff will discuss in more detail, we are projecting after tax income for 2010 between $14.4 million and $16.5 million. This is an improvement of approximately 30% to 50% over our adjusted 2009 full year net income. We believe that vehicle sales will remain relatively flat in 2010 compared to last year.

The increase in earnings we are projecting this year are driven by improvements in two key areas. First, selling more vehicles. We believe we can increase our market share for new vehicles on increased sales volume through competitive pricing and new marketing initiatives. We believe we can grow our used vehicle retail sales by digging deeper into the pool of potential purchasers through lower priced vehicles and through exclusive methods of acquiring desirable used cars with our used car teams. Secondly, employee productivity is an area we continue to focus on. Helping our dealership personnel become more effective and efficient means employee headcounts can stay flat, even as sales volumes increase. Our employees will make more income, which also reduces turnover and improves individual and store performance. With that, I will turn the call over to Jeff, our CFO, to discuss our financial position. Jeff? Thank you, Bryan, and good afternoon to everyone. There is three areas I would like to update you on today. First, like to discuss our balance sheet and then a few thoughts on debt maturities and liquidity and finally, an overview of our guidance for 2010.

Our balance sheet is in very good shape, thanks to much of the work we have done over the past 18 months. At the end of the year, we had approximately $74 million in available liquidity, including $12.8 million in cash, $25.7 million in availability on our revolving credit facility and $35.7 million in unfloored new vehicle inventory. Since the completed the equity offering last year in the fall, we have parked the proceeds to pay off debt, primarily floor plan financing, which can be accessed again as cash is required for acquisitions or other general purposes. Our goal is to minimize the dilution of the additional stock through the selective reduction of debt until it can be deployed for a higher return.

Regarding inventories, new vehicle inventories were at $235 million, or a day's supply, which is six days lower than our five year historical average for the end of the year. Used vehicle inventories are at $74 million, or a day's supply, which is three days lower than our five-year historical average for the same time of year. Our inventories are clean and we are positioned to take advantage of the seasonal uptick that should occur late in the first quarter. Our current ratio was 1.3 to 1 at the end of the year. Our book value was $13.93 per basic share.

We were comfortably in compliance with all debt covenants at the end of the year and expect to remain in compliance in the future. Our credit facility with US Bank does mature in October 2010, but we are currently working with US Bank to extend this maturity and believe we will continue the strong partnership we have had with them over the last 40 years. However, in the event we are unable to extend the facility, we have more than enough liquidity to both retire any outstanding balance and deploy capital for our strategic acquisition plans. While our first choice is obviously to obtain a longer term facility with US Bank, the primary collateral on the facility is our used vehicle inventory, which would be then unencumbered and could be pledged for a credit facility with any other lender as needed. The only other significant debt outstanding is the individual mortgages on dealership properties. We have no mortgages maturing this year and have approximately $26 million maturing through 2011. We are currently working with our partners to extend these maturities and believe these efforts will be successful.

In summary, we are pro actively managing debt maturities, have plenty of liquidity, and we look forward to updating you on our progress in this area in the next quarter. I would also like to note that excluding real estate debt, our long-term debt to total capitalization is a record low 1%. We have no subdebt converts or bonds outstanding.

We are confirming our guidance today in the range of $0.04 to $0.06 in the first quarter and project a full year to be in the range of $0.55 to $0.63, the same as in our pre release. These projections are based on the following assumptions, which again, remain unchanged, but I will repeat them here for you. Total revenues of $1.8 billion to $1.85 billion, new vehicle same-store sales increasing 3.5% as Bryan outlined, new vehicle gross margin between 1 point -- or 8.1% and 8.3%, used vehicle same-store sales increasing 7.2%, used vehicle gross margin in the range of 14.2% to 14.5%, service body and parts same-store sales declining 1%. Service, body and parts gross margin in the range of 47.5% to 47.7%, finance and insurance gross profit of 955 per units. Effective tax rate of 40%, estimated average diluted shares outstanding of 26.2 million, maintenance capital expenditures of approximately $2.7 million, Chrysler market share consistent with full year 2009 levels. This guidance does exclude the impact of future acquisitions, which we would expect to be accretive as well. Dispositions and other potential one-time items are also excluded.

As Sid mentioned previously, we have received a number of questions on low contribution from the first quarter adding to the year projections. I would like to drill down on this in a little more detail to help answer some of your questions. We have grown our model, our business in recent years in colder weather states including Alaska, Montana, North Dakota and Iowa and have sold a number of locations in warmer weather states such as California and western Washington. In 2006, approximately 15% of our vehicle sales volumes were in the cold weather states. Today, that number has increased to 23% of our total vehicle sales. This shift of vehicle sales to colder weather states magnifies the seasonal drop in sales that occurs in the first and fourth quarter of each year.

Our vehicle sales contribution by quarter can move by as much as 10% with the current geographic mix. For example, to 20% in the first quarter, 30% in the second and third quarters and 20% in the fourth quarter. This incremental change in volume, coupled with the already depressed vehicle sales levels, brings us to a smaller profit in the first and fourth quarters, with the majority of our profits being made in the second and third quarters as has been described. Frankly, we do have a higher fixed cost base than some of our peers, but the upside to this is that as sales volumes increase, our leverage on the cost base improves more rapidly as we leverage our centralized costs. For example, in the third quarter of 2009 when volumes accelerated due to the CARS program, our SG&A as a percentage of growth was 74.5%. We believe we can have significant leverage on our costs once sales have returned to a more normalized level. We believe we would break even on an annual basis today at 8.5 million SAAR, but to be clear, with the SAAR this low, we would lose money in the first and fourth quarters and make money in the second and third quarters to break even for the year.

Finally, I also want to discuss that we have seen what we have seen in the first quarter thus far. Our results for the first quarter are tracking at our projections, and we believe SAAR has remained stable and consistent in our markets with the levels experienced in the fourth quarter of 2009.

It is important to remember that SAAR does have two components, retail sales, which is for the customers who visit the dealerships and fleet sales to government agencies, rental car companies and the like. The improvement in SAAR in January has been driven by increased fleet sales which does not add incremental sales to our stores. We believe retail SAAR will remain flat throughout 2010 and our projections are based on this assumption. We are hopeful that our outlook proves to be conservative when it is evaluated against history. However, we aren't dependent on an improvement in retail results to meet our objectives, and our mix may perform differently than national trends.

As retail SAAR recovers, the guidance we have provided in the past projecting earnings at increasing SAAR levels remains unchanged. Our business model will still continue to have significant upside potential as the economy improves and we lever our lower cost base. Sid, I would like to turn it back to you for closing remarks. Thanks, Jeff. Want to thank most of all, all of our employees for their hard work, especially during the last two years. They have taken a lot of extra effort and a lot of personal sacrifice, but we do have a great team, probably a stronger one than anyone would ever be able to have in when these things have occurred in such a rapid fire way. Second, the past two years have challenged us to restructure and respond. Our results have proven the resiliency and set us up to capture the significant upside we believe lies ahead as the economy continues to recover. I want to personally thank as well, our manufacture partners, the finance sources, particularly US Bank and GMAC and the support they have given us and certainly, we are looking forward to a great year in the partnership with these people and our manufacture partners. This concludes our prepared remarks. I would like to open it now to questions. Go ahead, Traci.

(Operator Instructions) Your first question comes from the line of Rick Nelson with Stephens.

Thank you, and good afternoon.

Hi, Rick.

Want to ask you about SG&A. In the reported number, it looks like it is down $1.3 million a quarter over the prior year quarter. I realize there is some impairment charges and some other non-operating items in that number. Can you break out the SG&A -- the operating SG&A so we can see how much it is down?

On adjusted basis Rick, in Q4 of '08, it was $67.4 million. In Q4 of '09, it was $66.1 million adjusted. Most of the impairments we reclassified are called out in a separate line on the income statement.

Okay. So of that decline in SG&A, how much of that is permanent and what part is variable and how should we think about that in terms of the $65 million that you have talked about in the past as being permanent cost cuts?

The $65 million has grown a little bit from then. It is not something that we're tracking any longer, because we believe we're at the thresholds that we need to be at for this type of environment. Other than that, I think that -- 65 and an additional cost that we've reduced are all permanent. There is another $20 million, up to $85 million total, which are somewhat variable and will return as volumes return.

And where do you see that SG&A to gross profit? What's implied in your guidance range for 2010?

It varies by quarter, Rick, obviously because of the factors that we described. For the year, we didn't give an exact range, but I think your model will show the appropriate numbers, and you can get to where you need to be on that. We're happy to help you with that if you need any help.

Also, I;m wondering about the stores that you brought into continuing ops from discounts. What sort of revenue would be associated with those and the profit of those stores?

John is looking that up real quick.

I think you could see the profit from them are losses based on what we had in disc ops in the third quarter, Rick. The volumes related to those.

It is about $250 million to $300 million, Rick.

On revenue?

In top line revenues.

Okay, and the dealers lose money?

As a group, they were slightly profitable. They have also improved dramatically over the previous couple years, Rick. We kind of have our feet underneath us on those again, and a few of those are pretty good opportunities. There was a Subaru store in there and a couple other nice stores in there. So we're pleased with how they're performing now. Even though they were for sale, we continue to cut costs and restructure and got them as a group to be in profitable last year, so pretty pleased with that.

And the cost cuts that you've talked about in the past, is that inclusive of those stores or --

No, it is not, so that number will go up. That was only on the same stores.

$65 million is just continuing operations at the time.

Most of those savings have been recognized at this point, Rick, and as you recall in disc ops, you recast you financial statements retrospectively as if they were always part of it, so most of those will be baked into our historical results.

Okay, thank you for that. Also, like to ask you about the new vehicle margin pressures that we saw sequentially and year-over-year. It looks like your guidance implies some improvement on that side. What would be driving that?

Primarily the return of incentives from Chrysler and other manufacturers.

And is that something you're starting to see?

We are.

Great. Thank you. Good luck.

Thanks, Rick.

(Operator Instructions) We currently have no questions.

Thought there was one more.

We now have a question from the line of John Murphy from Bank of America.

Sorry about that, guys, thought I was in the queue already. A couple questions for you. The break even SAAR of 8.5 million units, is that retail or total? And you guys did a great job of helping us out on the last call, sort on on a stairs step function under different SAAR scenarios where you think your earnings could be. If you could remind us where that is or if you have new projections for that?

Total SAAR.

That's total SAAR, okay.

That makes it tough to use a number, because it does change with the mix. But you're pretty good at finding the fleet and what's retail. That's so hard for us to find. We're working on developing better sources for that.

Okay. As I recall, I think it was about, every million units was about $0.15 in earnings in total. I think that's what -- if you back into numbers the last call, and assuming that you should go to a standard fleet mix of 20% to 25%, would it be fair to say for 750 to 800,000 increase in retail SAAR, that you might get about a $0.15 increase, or is that just too simplistic?

It is probably too simplistic, and it accelerates as the SAAR improves. We get less out of it, a small increase. We get a lot more if it really booms.

Got you.

The leverage is huge out of our fixed costs.

Okay, then on the Chrysler inventory, which you cited as a bit of a concern over an issue in the fourth quarter and your prerelease. Just wondering where that stands, if you think they have enough inventory for you to sell out of and make these improvements in the coming months and coming quarters?

That's pretty well been mitigated. It was mostly just specific products that we were short of that had been not built during the bankruptcy, and then they had a model change over on the heavy duty, so we wouldn't have any to speak of. And that's a big piece of our business in Alaska and Montana, Texas, so that is finally coming online. They haven't incentivised it very heavily. They're hoping to sell it at a full -- at not much of a discount, because it is a great truck, and there is demand. And it is selling. It is selling. At good margins.

So that's the Ram heavy duty that was --the Ram and the Ram heavy duty, or was it just the heavy duty?

Just the heavy duty. It is really a separate line. They don't do those at the same time, as you know.

Yes. Okay, and then on parts and service you said customer pay was up to 81% of your mix. Did I hear that correctly? And then -- okay, so you had 81%.

You guys are doing a pretty good job of obviously pushing that -- not pushing that, but developing that business to offset the declines in warranty work. You have new initiatives that are coming out that sound like they will continue to push -- I don't mean push. But I mean to improve the customer pay business. It seems like you're being somewhat conservative relative to the performance that you've had in the parts and service business in your outlook. Is it possible that this parts and service business actually performs a little bit better than you're thinking as the consumer gets unfrozen on maintenance work and you work on these initiatives to improve this customer pay business?

John, I think anything is possible, but remember, there is the hangover of units in operations sold over the last three to five years that come into play, so our initiatives are focused again on being that one stop experience. We're really expanding our product offerings more than anything, and getting our expedience with the customers down to a lot lower cycle times, so we can actually retain those customers in our shops on smaller items as well as the bigger items. The big fall off in units in operation is coming from General Motors and Chrysler largely, and even Ford to an extent. For the last couple of years. If you look back at their market share five years ago, that's the customer that's now leaving us, and that has been shrinking, so you have you to play that in. If we hit that 1%, we're doing a good job, that 1% decline.

And then just lastly, if we look at a standard capture on a new vehicle buyer, it sounds like you were talking about four to five years as standard capture on keeping them in the parts and service base. Do you think you can -- ultimately, I know it is tough to do this in the short run, but can you potentially extend that capture rate nor another year or two in your service bays, or is that the focus to us get a couple more years out of them?

That's absolutely right. That's what all our focuses are at, is to make sure that we're meeting the customers' needs, so they want to retain with us after the warranty period expires. The LOF contract helps that to extent. The lifetime oil change keeps that coming back. And then we're finding new marketing ways in service using that internet connection and the email and being able to book online. There is a lot of tools that hopefully will make us an easier place for people to do business with, and maybe we can keep from losing so many as time goes on.

It is a big deal to us in Alaska, where the truck market has been huge for us and the units in operation with both. Because we're a big shivy up there and (inaudible) and that's a big piece of our service and parts volume. Our teams are ready for it, though. They have been seeing the decline over the last couple of years in the units in operations, and they're responding in great ways with our customers, and somehow, we're keeping our head above that -- right around that zero to 2% decline. It is a remarkably stable business, as you know. It is a huge part of our profits, about 17% of our sales, much bigger piece of our profits, so it is not something we're ignoring. I think we're getting only better as time goes on and trying to find things. Ron Stoner, our VP of Parts and Service in fixed operations is what I consider to be the guru of that in America, and I hope he is listening, but he is as good at it as anybody I have ever met.

Great. Thank you very much, guys.

Thanks, John.

At this time, there are no further questions. Sid, are there any closing remarks?

I think that's it. Thanks, again, for listening, everyone, and look forward to talking to you as we need to.

Thank you for participating in today's conference call. You may now disconnect.