Lithia Motors Inc (LAD) 2010 Q4 法說會逐字稿

Greetings and welcome to Lithia Motors fourth-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, John North. Thank you, you may begin.

Thanks and good afternoon, everyone. Welcome to Lithia Motors fourth-quarter 2010 earnings conference call. Before we begin, the Company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially due to certain risk factors which are outlined in the Company's filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements.

During this call we may discuss certain non-GAAP items included adjusted selling, general and administrative expenses, adjusted operating income, 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. These presentations are not intended to be provided in accordance with GAAP and should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables to today's press release. We have also posted an updated investor presentation on our website, www.lithia.com, highlighting our fourth-quarter results.

Presenting on the call today are Sid DeBoer, Chairman and CEO, Bryan DeBoer, President and Chief Operating Officer, Chris Holzshu, our Chief Financial Officer. Also in attendance is Dick Heimann, Vice Chairman. At the end of our prepared remarks, we'll open the call to questions and I will be available in my office after the call for any follow up that you may have. It's now my pleasure to turn the call over to Sid DeBoer.

Good afternoon, everyone, today we reported adjusted fourth quarter income from continuing operations of $5.6 million, compared to an adjusted loss of $0.7 million a year ago. We earned $0.21 per share in the fourth quarter exceeding the high end of the guidance we had provided in October by $0.08. This is also the best fourth-quarter net income we have reported since 2005. The new vehicle SAAR continued to improve throughout the fourth quarter and increased to a 12.4 million annualized rate. Additionally in the quarter Chrysler increased national market share 60 basis points as their product offerings continue to resonate with consumers. Pickup truck sales were strong as we sold approximately 45% more trucks in the fourth quarter over the prior quarter in the last year. In short, the automotive recovery is continuing to gain momentum.

2011 is shaping up to be better than 2010, with most industry analysts predicting a SAAR between 12.5 million and 13 million units for the year. This is a significant improvement from our view in October when we provided our outlook for 2011. We are pleased to report that our January and February results support the improving forecast, and we believe 2011 SAAR will be approximately 12.75 million units. As a result of this increase, and internal initiatives that will also increase our revenue, we are raising our full-year 2011 guidance 16% to a range of $1.20 to $1.28 per share. Chris will provide additional color on these assumptions later in the call.

We continue to monitor the health of our manufacture partners particularly Chrysler as it continues to integrate with Fiat. Marchionne has indicated that Chrysler may complete an IPO in late 2011. The new products that have been introduced since their reorganization are encouraging as well including a redesigned Grand Cherokee, which is a hit with consumers and the 200 and 300 Sedans for Chrysler that have been very well received. Chrysler has reported an operating profit each quarter of 2010 and appears to be on the way towards an amazing recovery that many people thought improbable even 12 months ago. This recovery, coupled with a successful IPO at General Motors, improves the outlook for both of these companies in the future.

We are well positioned for the future with General Motors and Chrysler, all but 1 of our Chrysler stores have all 4 brands, Chrysler, Jeep, Dodge and Ram, which allows us to offer our customers the full vehicle line. All but 1 of our General Motors stores are the Chevrolet brand which we view as more desirable than GMC. One other point to mention is that Chrysler has increased both its market share and truck unit sales. This improvement increased the percentage of new vehicle revenues we received from Chrysler, despite our efforts to continue to diversify our sales mix through acquisitions. We remain focussed on increasing our diversification through the acquisition of other franchises and through reducing the number of domestic branded rooftops. To that end we have reduced the number of domestic rooftops from 61 in 2007 to just 39 today.

Would also like to take this opportunity to thank our nearly 4,000 employees who continue to take personal ownership and pride in what they do for our customers and their results. I am pleased to report the entrepreneurial spirit is alive and well within our stores. Our leaders are empowered with our values to earn customers for life, respect everyone, improve constantly and to always have fun. As a result, our employee turnover is at an historic low and our productivity is up throughout the organization. Thank you, again, for being a part of the family. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Thanks, Sid. Good afternoon, everyone. Our fourth-quarter results came in above our expectations as many of the cultural changes and initiatives we have put in place over the past 18 months really took hold. Now to discuss operations.

Total same-store sales were up 27% in the quarter reflecting increases over the prior period in all business lines. New vehicle, same-store sales increased 34% due to higher volumes. On a unit basis, we sold approximately 8700 new vehicles, an increase of 2100 or 33% from the previous year. Used retail vehicle same-store sales increased 21% in the quarter. We sold 8200 retail used vehicles resulting in a used to new ratio of 0.9 to 1. We are especially pleased in our performance in this area given the significant increase in new units sold. For the full year, our used to new ratio was 1.03 to 1, the highest in the sector.

We view our used vehicle business line in 3 distinct groups. 1 to 2-year old units including certified pre-owned vehicles, 3 to 7-year old vehicles and value auto, which are vehicles 8 years and older with higher mileage. As we have previously discussed, we continue to focus on selling more of the 3 to 7--year old vehicles to reach new customers. We are developing new sources for these vehicles as the traditional channels of wholesale auctions and trade-ins do not provide as many vehicles in this category. In 2011 our goal is to maintain a 1 to 1 used to new ratio even as vehicle SAAR continues to improve.

Our F&I in the fourth quarter was just shy of $1,000 per unit. We arranged financing on 73% of the vehicles we sold. We sold 41% of our customers a service contract and 33% of our customers a lifetime oil product. Credit availability continued to improve throughout 2010. Banks have come back to the auto finance market and are again competitive with credit unions for retail contracts. As a result, our finance reserve increased $42 to $359 per unit in the fourth quarter of 2010. Of the vehicles we financed, approximately 12% were sub-prime customers. Compared to the fourth quarter of last year, the closing percentage for customers with a credit score of 620 or lower improved 25% to 18.6%. Over our entire customer base the average credit score in the fourth quarter was 720. This increase from prior quarters is due primarily to mix shift as we sold a greater number of new vehicles in the quarter which are typically purchased by customers with higher credit scores.

We are pleased with our results in service, body and parts. Overall, same-store sales increased 5.4% in the fourth quarter. This marks the third consecutive improvement in same-store sales from a decrease of 6% in the first quarter to an increase of 5% in the fourth quarter. This overall result is impressive considering the same-store warranty work was down 9% for the full year 2010.

Our service team has taken proactive steps to increase customer pay revenues through increased advertising, shorter cycle times, customer service initiatives and new IT solutions to reach additional customers. As a result, customer pay service work increased 5% in the quarter and we posted double-digit increases in both wholesale parts and body shop sales.

Regarding regional performance, all states posted double-digit increases with Montana, North Dakota and Nevada performing the best. It appears that many of the Western markets that have been lagging in the economic recovery have started to see improvement. We are closely monitoring this trend and will continue to update you as more data becomes available.

In the quarter, overall gross margin was approximately 17% compared to approximately 18% in the same period last year. This is primarily a result of a shift in sales mix as new vehicle sales increase more than other business lines. Our overall gross margin remains industry-leading due to franchise exclusivity which provides insulation from pricing pressures and our domestic store exposure, which typically have higher gross margins than import franchises.

Our gross profit per new vehicle retailed was $2545 compared to $2528 a year ago. I would point out that gross profit dollars were higher in 2010 than 2009, despite a decline in new vehicle margins. As consumer preference shifted to trucks in the quarter, which have a higher average selling price, margins were pressured although gross profit per transaction increased. This is an important point of differentiation as we were able to maintain deal average and did not have to sacrifice gross dollars to increase new vehicle sales. Gross profit per used vehicle decreased to $2253 compared to $2347 a year ago, and is primarily due to a shift towards vehicles in the 3 to 7-year old and value auto categories. Our average wholesale gross margin was a loss of $16 per vehicle.

To recap our acquisition and divestiture activity in 2010 we purchased a Toyota store in Billings, Montana and Chevrolet and Honda stores in Bend, Oregon. We also sold a Chrysler franchise in Fresno, California. Looking ahead, there are several acquisitions in the pipeline and we believe it remains a buyer's market. Lithia has significant liquidity available to invest, given the right opportunities. I would also remind you that the stores we target typically do not meet the acquisition criteria of our public peers. Our strategy is to seek exclusive domestic and import franchises in mid-sized rural markets. This is a key differentiator and allows us to focus on stores that many other large auto retailers are not interested in. We also continue to seek luxury franchises in metropolitan markets and are focussed on increasing the number of high line stores in our portfolio to round out our brand mix. With that, I will turn the call over to Chris, our CFO, to discuss our financial position.

Thank you, Bryan. I'd like to start by discussing our liquidity and debt levels. At the end of the quarter we had approximately $98 million in available liquidity including $9 million in cash, $23 million available on our revolving credit facility and $66 million in unfinanced new vehicle inventory. We continue to work with our lender partners to extend mortgage maturities and believe this form of debt is less expensive than bonds. To recap upcoming mortgage maturities, we have $3 million due in November 2011 and have no maturities in 2012. Over the past few months we were able to extend a number of mortgage loans to 2018 and continue to focus on obtaining longer term extensions for debt due in 2013 and 2014. The appetite among banks for this type of debt continues to improve, and will continue to have success in obtaining longer duration loans at lower spreads.

Our long-term debt to total capitalization is approximately 46%, mainly related to our mortgage debt. We have no sub debt, converts or bonds outstanding. Our current ratio is 1.5 to 1 at December 31, 2010, and we are comfortably in compliance with all debt covenants at the end of the quarter.

New vehicle inventories were at $306 million, or a day's supply 9 days lower than our 5-year historical average for this time of year. Used vehicle inventories are at $87 million, or a day's supply 10 days lower than our 5-year historical average for this time of year. While inventories are up on an absolute basis when compared to the end of 2009, we are comfortable with the current levels. We have increased the available inventory to allow greater new and used vehicle sales and to ensure we have adequate levels of high demand units.

Now I want to discuss the results relative to our projections for the fourth quarter. As Sid mentioned, we exceeded the upper end of our guidance by $0.08 in the quarter. Throughout the fourth quarter, the vehicle sales environment improved and our advertising initiatives drove additional traffic and sales. Given our relatively high fixed cost base due to centralization, incremental increases in revenue have a dramatic effect on profitability above certain levels. As we eclipsed our revenue and gross profit targets in the quarter, the incremental throughput drove earnings above our forecast. This is evidence that the leverage we have discussed over the past year and I believe we are poised to continue to deliver solid results in the future as revenues increase.

In the fourth quarter, SG&A was 80.8% of gross profit on an adjusted basis, the lowest level since the fourth quarter of 2005. Incremental throughput, or the percentage of each additional gross profit dollar over the prior year quarter we retain after selling cost, was 40% in the fourth quarter. We have continued to increase our marketing spend in order to increase the percentage of vehicle sales we capture in each of our markets. The fourth-quarter sales results demonstrated the effectiveness of our initiatives as same-store sales increased over 30%. In 2011 we anticipate advertising spend will remain constant with current levels on a dollar basis although better leverage will be realized as volume increases.

Coming back to the throughput number I discussed a moment ago, if advertising spending had been consistent with 2009 levels, our incremental throughput would have been nearly 52%. Many people have asked us to discuss our earnings power as SAAR continues to improve. We are confident we can retain at least 55% of our incremental gross profit on a full-year basis from 2010 levels as the economic recovery continues.

We are very focused on improving the leverage in the organization and believe significant upside and earnings potential exists if the cost controls we have brought to the organization are retained. One of our key initiatives in 2011 and beyond is to maximize our operating leverage and we believe we are well positioned to capitalize on the improving automotive market. Based on these results, as well as an increased outlook, we anticipate earnings in a range of $0.19 to $0.21 per share for the first quarter of 2011 and full-year expectation in a range of $1.20 to $1.28. This is an increase of 16% to our 2011 guidance. For specific assumptions related to these earnings numbers, I would refer you to today's press release at lithia.com. This concludes our prepared remarks. We would now like to open the call to questions. Operator?

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)Our first question is from Simeon Gutman with Credit Suisse. Please go ahead with your question.

Hello, guys, congratulations on the quarter. Question on gross margins. I think we've heard from everyone now, the public companies, most have said that they're pleased with sales growth despite some of the pull back on gross margin they've seen. Curious what your thoughts on that are, realizing your markets are more insulated from that and realizing your gross margin is relatively outperforming what we've seen from others.

Well, Simeon, I think your question directly related to gross margins goes back to what our approach and our strategy is. I mean 2 of the things that we talked about on the call from an SG&A perspective was advertising and our inventory levels. And so I think rather than sacrifice -- rather than sacrifice margin, our approach right now is to drive traffic into our stores and maintain the margins that we believe are positive for our markets.

And in your markets are you seeing anything unusual that where there are pressures that you're either holding back from and I mean clearly you have the top line here. It feels like, though, it's sort of a market share environment. But is there anything brewing on the negative side that you're seeing around you?

Simeon, this is Bryan. The trends that we saw last quarter, we don't see things changing a lot there. It really seems like they've stabilized. There's no question that incentives in the import manufacturers are becoming a little bit more aggressive as well, that helps stabilize things. On the domestic side, I would say incentives are still somewhat volatile and maybe even a little lower than they've been in the past. But I think as inventories begin to build again, and it sure appears that that's going to occur, I think it's going to put incentive pressures again and it will help stabilize our margins.

Okay. And then turning to the incremental throughput, or the gross profit retention, if I heard it right, I think Chris mentioned that advertising expenses would be flat in dollars if I heard that right, and if that's the case, then the assumption is that incremental throughput, I mean could it-- should it potentially build? And just on 1 item within the SG&A lines, the personnel piece, I see you've leveraged because it didn't grow as much as the gross profit, but are there pieces that are going to start to come back, and could you have leveraged that even more, or was that a great performance on that line?

Yes, Simeon, this is Chris. I think as we mentioned in the call, our new vehicle sales and used vehicle sales continue to outpace the industry. And 1 of the things that we're doing right now is continuing to push initiatives to increase our market share. And so if you looked at what our sustained throughput is into the future, I think we're going to get back to a 55% or SG&A as a percentage of gross close to 70%. But a lot of that's going to continue to be based on our volumes.

Specifically to the advertising point we have some pretty good metrics in place now. We think we may have pushed a little too hard in terms of our advertising and there are pockets that we can save some funds as well. It is a matter of really putting our fingers on those and now we have the ability to do such.

Okay, thanks.

Simeon--

Yes.

This is Sid, I just wanted to personally thank you and your group for initiating coverage on our Company and paying attention to what we consider to be a great little retailer, so thanks.

Thanks, sure.

Thank you. The next question is from Rick Nelson with Stephens. Please go ahead with your question.

Thank you. Good afternoon. My congratulations, as well, terrific quarter. I wanted to ask you about the same-store growth in new cars far outpaced the overall market. What do you think are the big drivers behind the performance, and are you seeing any resistance of late in the truck segment to the rise in oil prices?

Rick, this is Bryan, again. I would say this, I mean we began on a, I would say a cultural change quest, to really focus on performances and organization. And we actually increased our market share in aggregate by about 4% to 5% over the last number of quarters, and we're starting to gain some pretty good traction there. Now, that's on top of whatever the SAAR increases are. And our team is pretty focussed on making sure that they capture every customer they possibly can. We thought it would impact margins but so far we have been able to hold pretty firm and still improve that top line in so many different ways in so many of our markets.

And on the truck side, Bryan, is -- with the rise in gas prices, are you seeing any resistance at all? I know trucks were a big driver this quarter.

Did you want to talk to gas prices? I haven't seen anything most recently.

Well obviously today most of the sector had a decline in prices, and I think it was driven by the fear of higher gas prices. I mean, we have a completely different approach than we did when gas prices accelerated in 2008, I believe it was. I mean, we're managing inventories much better. We're also very attune to-- and the consumer is more used to this whole gradual increase. And as I said before, as long as increases are gradual, that there's no impact on our ability to achieve our margins and our throughput and we won't have inventory issues. And right now, so far, we've seen no slowdown in truck sales. I mean, the first 2 months of the year I notice-- I mean, we mention that we're-- certainly see the same signs for these improved environments that we've been, and a lot of that is still trucks, so--.

So you're not starting to adjust inventories at this point?

Well we adjust inventories immediately to any change. I mean, that's always something that's going on. And thankfully most of our domestic brands have an improving pool of -- I mean of more fuel-economy cars than we ever had before. Both Chryslers and General Motors have really expanded their offerings.

And how do you think you're able to buck the trend of fewer units in operation to service and parts business performed well and it has actually for all of the dealers that have reported to date?

Rick, what we're really driving is commodity pricing, and that's really being a one-stop service department for our customers, where we're actually not only selling warranty work, but we're selling all the maintenance items that are there, including tires, batteries, windshield wipers, so on and so on. On top of that, if you recall, our body shop and our wholesale parts business, were actually up double digits so that's helping offset some of the impacts in the warranty business.

Rick, said that curve-- this is Sid, that curve on the units in operation, I mean it's flattening already. I mean it's not going to be as severe. We had the worst of that, I think.

And then on the acquisition front, if you could comment how the pipeline looks, the pricing, the brands, it sounds like they're non-domestic brands primarily.

We're definitely more focussed on the non-domestic brands. I would say this, it's pretty apparent that there are attractive offerings out there. There's a lot of them. It takes a lot of time to digest and find the ones that are the best fit for our organization, and our criteria and filters are so stringent now, that it slows the process down a little bit. So far we haven't lost any, but there's so many opportunities out there. We're going to make sure we get the best ones and I think you'll be pleased in the future with the ones that we've chose.

Great. Thanks a lot, and good luck.

Thanks, Rick.

The next question is from David Whiston with Morningstar. Please go ahead with your question.

Good afternoon, guys.

Good afternoon.

Follow up on the acquisition question. Is it fair to say you're still seeing sellers with unreasonable asking prices, or have they adjusted to the new reality of the industry?

David, this is Sid. Yes, we're still finding lots of acquisition opportunities. We are being very strict about the criteria, and we're being fussy about the brand mix so that we can continue to approve that. But it is a buyer's market in a sense, because people with available cash and credit availability is a huge thing that we're public and we have a great balance sheet and cash in the bank, so that's not true everywhere. And banks are not as easily able to lend any longer as they were, and that I think is helping us. So there's still a good buyer's market out there and we're going to take advantage of it as we find the right brands at the right prices. It's-- we're not going to overwhelm anybody with an immediate surge, but it'll be steady.

Okay. And back to incentives, you guys made comments, if I heard you right, that the domestics are lower, but volatile. So are you guys at all concerned that the Detroit 3 are falling back into their old bad habits at all and over incentivizing just to move metal?

We-- I mean-- like I said, I think they're a little bit softer than they've been in previous years and they have some room to move there without getting back into that if I'm going to sell cars I have to double incentives. And I think-- I don't know that they have the budgets to do that, so they're more focused and more pointed on specific models. They may be more volume-oriented where there's stair step programs or possibly related to other accomplishments in the dealership. So I don't think they're on that treadmill where it's going to get back to the 7,000, 8,000 pace they were at, I hope it doesn't. And I think it's really a matter of what happens to inventories and with rising SAARs, I don't know that they're going to be able to produce enough vehicles to keep up with the rising demands.

And are you guys against their step programs as much as some of the other CEOs are?

This is Sid. We don't think that they're healthy if they institutionalize them and make them an everyday practice because it creates a disparity between dealers. But as a market share leader and a Company that's picking up market share, we should benefit from stair steps and incentive programs over dealers who don't do well. So I mean I So basically they're not healthy if they're institutionalized but we can benefit from them.

Okay. And last question for Sid, obviously there's-- I think we all know why we should all be upbeat on Lithia's chances this year, but in your opinion what are the biggest challenges for the Company in 2011?

David there's not a lot of them that we haven't identified or talked about already and we have plans in place to deal with them. I mean the macro economy is still always there, and well obviously that's not something we can control. And obviously the price of gas and what happens to consumers and the shift mix in inventory we got to stay right on top of. But I do, as I said earlier, feel much more confident we got a broader spread of higher fuel economy vehicles available than we've ever had so we should be able to buttress that pretty well. So those are my major concerns. I don't have any other that I'm really losing sleep over.

Okay. Great, thanks a lot, guys.

Thanks, Dave.

(Operator Instructions)The next question is from Mark Gaskill from MKG Financial Group. Please go ahead with your question.

Hi, congratulations, guys, what a great -- what a great quarter.

Thanks, Mark.

My question is-- if I can get rid of my cell phone.

At least it wasn't us this time.

My question is, when you talk about the customers and the improved quality of your -- that you're seeing in the financials of the customers that are coming in, is this something that you're seeing pretty consistent on an improvement basis on a month-to-month basis and would we say that that's improving even as we go into this far into first quarter?

Mark, are you referring to financeability of customers?

Yes, the finance ability, the quality of the customers, and obviously I'm looking more instead of a quarter to quarter, more of a sequential month-to-month basis and we're now into the second half.

I would agree with your statement that it's definitely been improving month over month for approximately, what, 16 to 18 months, Chris?

Yes, I think that, Mark, this is Chris.

Hi, Chris.

When we originally saw the biggest improvement in the lift especially in the sub prime customers was in the second quarter, late in the second quarter, and it's interesting to see the correlation with the rising SAAR with those credit improvements. So the fourth quarter wasn't an anomaly for us but it's definitely giving us some security that we're trending in the right direction.

Well and so that gives you, obviously, some good feeling on your focus going forward I'm assuming, so on your projections so that's what you're basing your outlook for the rest of the year?

Yes.

Sid, you talked about the energy efficiency and obviously with the price of fuel rising, let's look further out and say it's not temporary that we do start getting higher fuel prices, obviously you're already talking about the efficiencies of the demand on smaller cars that are more efficient. Is this something that, like you said, you got to stay on top of it, is this something that you guys are already making plans on, obviously we're already seeing the price rise anyway on fuel?

Yes, Mark, we look at it on a -- I mean, every store is in charge of their inventory and then we macro look at it as well. And these dynamic changes we look for, traffic counts, we look for people's response, and looking constantly where is the market going to be 3 months from now because basically you're ordering almost that far out on some of these brands. So we don't -- we are very flexible in terms of meeting the demands of the consumer. As I said in the said, sudden changes hurt us but anything that takes place over a 90-day period we can respond to. So I'm sure the fear today in the stocks was all about what's going to happen to gas prices and, gee whiz, will we sell as many trucks.

But we can make, I'll tell you what, I mean it's a reason for people to trade, it creates sales. If they have something that's-- doesn't get as good of mileage all of a sudden they'll be down here trying to buy a Prius or a Fiat or Honda Civic or a Chrysler 200 or one of the smaller cars that General Motors has now, the Cruze, and some of those products are really right on, the Ford and the Focus line, I mean all of that's new to the Chrysler. So I think we're in pretty good shape to weather whatever happens. I hate the sudden changes. If gas goes from $3 to $5 in 2 weeks then it's a hard issue to deal with on a short-term basis. But we can still adjust, it just takes a little while.

Right. Okay, well last question I have is, are you-- where are you at, Chris, on the share repurchase program, are you -- do you have more going on as we go forward?

We did a little bit of share repurchase late in the year and it's definitely on our capital strategy to look at, but it all depends on what the equity markets do.

Sure. Well I noticed that with the stock trading up in after-hours, so we won't be buying first thing in the morning, is that what you're saying?

Actually I don't think we can. We are locked out for 1 more day.

Tough, tough. Okay thank you, guys.

Thanks, Mark.

(Operator Instructions)There are no further questions in queue. I'd like to turn the call back over to Management for closing remarks.

Thanks to everyone for joining us today. I look forward and I know we do to updating you again on our results as only 2 months from now in April for the first quarter's results. Thanks again for being part of the Lithia family.

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.