Lithia Motors Inc (LAD) 2011 Q1 法說會逐字稿

Greetings and welcome to Lithia Motors first quarter earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. John North, Vice President of Finance for Lithia. Thank you, Mr. North. You may begin.

Thank you. Good morning, everyone. Welcome to Lithia Motors first quarter 2011 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 risks 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, including adjusted selling, general, and administrative expense, 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 the non-GAAP items is provided in the financial tables of today's press release. We've also posted an updated investor presentation on our website, lithia.com, highlighting our first quarter results.

Presenting on the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and Chief Operating Officer and Chris Holzshu, our Chief Financial Officer. At the end of our prepared remarks, we'll open the call to questions. It is now my pleasure to turn the call over to Sid DeBoer.

Good morning. Today we reported adjusted first quarter income from continuing operations of $9.1 million, compared to $2.3 million a year ago. We earned $0.34 per share in the first quarter. This is the best first quarter net income we have reported since 2005. 2011 is continuing the trend from recent years of both successes and challenges in the automotive industry.

First the successes. The new vehicle SAAR accelerated in the first three months to approximately 13 million units, above our full-year expectation of 12.75 million units. Domestic manufacturers also continued to improve market share. Fixed operations performance has improved despite a declining number of vehicles in operation. Consumer credit availability has expanded, particularly at the lower end of the spectrum as well.

Addressing the challenges. Commodity prices continue to increase, pressuring consumers. The instability in the Middle East has caused oil and by extension gas prices to rise. Rising interest rates and increased borrowing costs are likely in the near term. Finally, the tragedy in Japan has impacted the global economy, including the automotive sector. New vehicle supply will be impacted beginning in the second quarter. Also the constrained used vehicle market will experience additional demand as consumers substitute for a lack of new vehicle availability.

Our Company has proven the ability to adapt to these changing world conditions. Here are some of the initiatives we have put in place to respond to past disruptions. For example, improving our new vehicle market share in each of our local markets is a key focus. Our new vehicle, same-store sales improved 41% and 34% over the last two quarters. Secondly, we have focused on expanding our used vehicle sales as well. Our used vehicle retail same-store sales improved 17% and 21% over the last two quarters.

We also are reducing our dependence on any one manufacturer. Recent global events continue to reinforce our goal to have no more than 20% exposure in any one brand. As we will discuss in more detail, the recently announced acquisition of BMW Mini and Mercedes stores in Portland, Oregon add a meaningful amount of revenue diversification to our Company. We will continue to seek further opportunities to diversify.

Similarly, we are developing strategic responses to address the challenges outlined in my earlier remarks. First, on commodity prices, including oil. We are carefully monitoring consumer preference and our heavy truck and SUV used vehicle inventory levels. So far consumers have stayed fairly resilient in their purchases. Sales have not been materially impacted, and there is some benefit due to increased commodity prices in certain of our markets where strength in agricultural or energy products creates consumer demand for these vehicles.

We are prudently managing our debt levels as well. Chris will update on you on the balance sheet in more detail, but we have continued to extend maturities, pay down higher-rate debt where we can. As interest rates increase, we believe we are well positioned to absorb a higher cost of funds. We have strategically used swaps to limit our exposure to variability and rates. Also some of our floor plan financing has a minimum interest rate, meaning index rates can increase before we will see a meaningful impact in our cost of vehicle financing.

Finally on Japan. Most industry analysts believe the disruption in supply will defer sales from the second and third quarter to the end of 2011, and early 2012. We believe this is a reasonable assumption. However, the direct impact on the supply chain remains very uncertain. Therefore, we have updated our forecast to assume reductions in both our import and domestic sales, based on a lack of new vehicles over our peak summer selling season. Chris will speak more specifically on these assumptions in a few minutes.

In closing, we would like to thank all of our employees for their continued hard work and dedication. Our customer satisfaction, the sales and service process continues to improve in the first quarter and currently, and remains critical to our long-term success. We are all focused on earning customers for life. We would also like to welcome the nearly 250 employees from our recent acquisition to the Lithia family. With that I would like to turn the call over to Bryan to discussion our operational results. Bryan?

Thank you, Sid. Good morning, everyone. We are pleased with our results in the first quarter of 2011. January and February got off to a strong start, and our momentum accelerated throughout March. Our store personnel delivered exceptional performance, and I want to congratulate them. Total same-store sales were up 29% in the quarter, reflecting increases over the prior period in all business lines.

New vehicle same-store sales increased 41%. On a same-store unit basis, we sold approximately 9,700 new vehicles, an increase of 2,800 or 41%, meaning all sales growth came from volume.

Used retail vehicle same-store sales increased 17% in the quarter. We sold 9,600 retail used vehicles, resulting in a used to new ratio of nearly one to one. We made continued improvement in the three to seven year old, and value-auto vehicle categories. We increased the number of value auto units by 99% to 2,300 units. Our margin on these units was 21%.

Overall, our average used vehicle selling price declined 1.2%, despite an increase in the Manheim Index as we expand our lower-price offerings. Used vehicles remain a core strategy area, and we believe that there is still the potential for upside in our performance. Also given the potential disruptions in new vehicle supply a focus in late model, used cars will remain very important.

In the quarter our F&I per vehicle was back above $1,000 per unit. We arranged financing on 73% of the vehicles we sold. We sold 40% of our customers a service contract and 37% of our customers a lifetime oil product. Credit availability continued to improve. As a result, our finance reserve increased $47 to $364 per vehicle on a year-over-year comparison.

Of the vehicles we financed, approximately 14% were subprime customers compared to 12% in 2010. In addition, the number of vehicles sold to customers visiting our dealerships with credit scores of 620 or lower, improved 33%. Over our entire customer base, the average credit score in the first quarter was 710.

We are pleased with our results in service, body, and parts, as same-store sales increased 8.3% in the first quarter. Customer pay increased 7.2% and warranty work provided the first positive comparison we have seen in seven quarters which was up 2.4%. Note that the warranty result is compared to last year's quarter that included the Toyota recalls which makes it very encouraging.

Regarding regional performance. For the second consecutive quarter all states posted double-digit increases with Nevada, Montana and North Dakota performing the best. In the quarter, overall gross margin was approximately 17% compared to approximately 19% in the same period last year. This is primarily a result of a shift in mix as new and used vehicle sales increase more than other business lines.

Our overall gross margin remains industry leading. Franchise exclusivity which provides insulation from pricing pressure and domestic store exposure which typically have higher gross margins than import franchises are primary reasons for our relative strength in this area. Our gross profit per new vehicle retailed was $2,350 compared to $2,673 a year ago. Gross profit per used vehicle increased $2,404 compared to $2,265. Our average wholesale gross profit was $108 per vehicle.

Last week, we announced the acquisitions of Rasmussen BMW MINI, Mercedes-Benz of Portland and Mercedes-Benz of Wilsonville. We anticipate these stores will provide $176 million in revenues over the next 12 months. They also add nearly 8% to our 2010 revenue base in luxury branded revenue. With these acquisitions we expect import and luxury new vehicle revenue to comprise more than 50% of our total revenue. We are excited to have completed this transaction and are continuing to focus on new acquisition opportunities that are also accretive to earnings at two to four times EBITDA. We have sufficient liquidity to acquire stores and return to growth.

As we have mentioned before, our strategy to seek exclusive domestic and import franchises in mid-sized role markets 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 to increase the number of high-line stores in our portfolio. With that I will turn the call over to Chris, our CFO, to discuss our financial position.

Thank you, Bryan. I would like to start by discussing our liquidity and debt levels. At the end of the quarter we had approximately $103 million in available liquidity, including $13 million in cash, $38 million available on our revolving credit facility and $52 million in unfinanced new vehicle inventory.

With the recently announced Rasmussen acquisition we invested approximately $53 million. We anticipate recovering approximately $16 million through post-acquisition financing bringing our total invested capital to approximately $37 million for this acquisition. As a result, we have approximately $50 million in liquidity with this amount increasing later this year once related financing is complete. Additionally, free cash flow generated this year will increase the total.

Finally we have increased our estimated capital expenditures $2 million to $28 million for the full year related to facility improvements in our recent acquisition. In the first quarter we paid off approximately $12 million in mortgage financing. As we assessed our liquidity position and evaluated future needs, we determined we could deploy some of our capital to retire higher rate debt obligations. We anticipate this retirement will add approximately $0.01 to EPS this year.

Our long-term debt to total capitalization is approximately 43%, mainly related to our mortgage debt. We have no sub debt, converts or bonds outstanding. Our current ratio was 1.4 to 1 at March 31, 2011 and we are comfortably in compliance with all debt covenants at the end of the quarter.

In the quarter, SG&A was 76 percentage gross profit on an adjusted basis. The lowest first quarter result since 2005. Incremental through put, or the percentage of each additional gross profit dollar over the prior-year quarter we retained after selling costs was 55%. This is in the range of 50% to 55% retention we provided as a guide in February.

Now a few comments on inventory and the impact of events in Japan on our outlook. As of March 31, new vehicle inventories were 338 million, or a day supply of 61 days. This is eight days lower than our day supply level a year ago. Used vehicle inventories were at 96 million, or a day supply of 47 days, the same level as a year ago. Since the end of the quarter our day supply for new vehicles has increased to 63 days, and our day supply on used vehicle has remained unchanged at 47 days. We are monitoring the situation with supply interruptions due to the Japanese tragedy, and are working with our store personnel to appropriately respond to the coming supply shortage. We also expect to see an improving new vehicle margin, and the potential for reduced SG&A expenses in certain stores if they're impacted by a longer-term disruption in supply.

As we think about our outlook for 2011 there are four inputs we considered. First we exceeded our expectations for the first quarter of 2011 by a wide margin and our outlook before events in Japan was improving. Second, we added a significant acquisition that we estimate will add approximately $0.08 in 2011, during the rampup period. Third, we have a supply disruption in the import brands with some impact on domestics as well that may defer sales to later in 2011 or even 2012. Finally there is volatility due to potentially disruptive fuel prices.

Based on an analysis of all of these factors we are establishing a second quarter EPS estimate in the range of $0.32 to $0.34. 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 for questions. Operator?

Thank you. (Operator instructions). Our first question comes from Simeon Gutman of Credit Suisse. Caller, please proceed with your question.

Thanks. First, Sid, can you talk to April? I don't know if any of the comments were in the prepared remarks. But we're hearing a couple of different things maybe in the East that things have quieted because consumers are hesitant knowing that deals have been pulled back both from the manufacturers and maybe from the dealers, but it seems like the West Coast we have heard a little different story where things are quite strong. So curious if you can just talk to April to date trends? Maybe SAAR?

Looking at the quarter and seeing right now where we are, April is above our forecast for what should take place in April, so we are seeing no softening. I saw the JD Power stuff yesterday. Where retail SAAR rate was 11.1% versus 10.7% in March. So there's no trend that we see yet we're slowing down.

But the impact of the Japanese issues with inventories is going to be mostly for this quarter will be in June. So I think we're real comfortable with what we forecasted here. It's surprising really the resiliency. The economy is getting better and the fact that we can finance automobiles that we weren't able to a year ago is a big deal.

Okay. And I guess a follow onto the whole Japan situation. We heard the other dealers and then you today all comment about margins going up, and I think that's the intuition, it's logical, supply and demand. Just taking the other side of that. Let's say the supply of the vehicles that people are really demanding runs out soon, and I think in some cases there are some vehicles that are low in supply. Then you get a situation where you are going to have to push consumers maybe to other brands. Not a bad second choice, but a second choice nonetheless. Could that be a situation where the dealers end up competing harder to get those sales, and margins end up not going up? Just thinking hypothetically.

Simeon, Hi. This is Bryan. We don't see that occurring. We're pretty confident that our guys in our stores -- that we can manage the supply to be able to at least have vehicles, and take, really, the transactions that have the margins in them. What we don't want to be in is a situation where we don't have cars left, and we're paying guarantees to salespeople, we're still advertising, so on and so on. So what we're really focused on is balancing out our supplies, making sure that we model when we'll become short on cars, and we hold margins, really, throughout that process. And most importantly, manage our cost through the process.

So now on a domestic side, however, we believe there's a great opportunity to take market share. Now whether all customers will eventually convert to a domestic car, we're not sure about that. We don't think so. Okay?But we do believe that there is an opportunity to take some market share within our domestic manufacturers.

Okay. Thanks.

You bet.

Our next question comes from Himanshu Patel of JPMorgan. Caller, please proceed with your question.

Hey, guys. This is Mike Kimlat in for Himanshu. How is it going?

Hi, Mike.

Good morning.

Hi, Mike.

Just two quick questions on Japan and a follow-up on your guidance. In your view, what impact do you guys expect to see on the used and new pricing in the summer? And what level of shortfalls on allocations are you currently hearing from Japanese OEMs for May, June, and July, possibly?

So this is Bryan, again, Mike. I think what we're seeing currently in terms of shortfalls, most of the import manufacturers are saying that it's somewhere in the 30% to 50% declines in actual cars that are produced which means that we'll be hit in June, July, and August probably somewhat. Additionally, -- what was your first question again, Mike?

What impact on pricing are you seeing across used and new, or rather what impact do you expect on used and new pricing in the summer?

Okay. We're pretty confident that on new that because of the shortages pricing should remain very stable. On the used-vehicle side, it's going to be difficult to get cars. I mean, we receive about 50% of our cars that we sell used on trade-ins which typically come from new vehicles, so we're going to be pushing market share and pushing our volumes where we can, where we have supply of vehicles, to make sure that we're able to attract those trade-ins, plus we've developed pretty aggressive purchasing plans.

We currently sit at about $95 million in used vehicles, a little over 45-day supply of used vehicles and we believe that pricing will stabilize, it will continue to increase. Supplies are going to be difficult, but we believe that we have the mining tools in place to find the cars and hold our 14.5%, 14.7% margins in our used cars.

Thanks, that's useful. And just one follow-up. Despite your strong Q1, it doesn't appear that you guys raised your full-year guidance by much more than the amount you beat in Q1, and the $0.08 accretion from your new acquisitions. Just wondering why this is so given the brood-based strength that you guys saw in Q1?

Yes, this is Chris. Yes, I think that's fair to say. Given the uncertainties right now related to the supply issues, and fuel prices you can follow our guidance that we originally gave for full year of $1.20 to $1.28. We raised that to $1.42 to $1.50. and that is directly impacted by our performance that we had in Q1. The Rasmussen acquisition and a few other things. But trying to predict the impact that we're going to have on the supply issue is very difficult, and as we get more clarity in to that we'll discuss our full year guidance again at the end of Q2.

Great. Thank you very much.

Thanks, Mike.

Our next question comes from John Murphy, Bank of America Merrill Lynch. Caller, please proceed with your question.

Good morning, guys.

Hi, John.

I just wanted to ask a question on the guidance range. If we look at the change here, and I understand a lot of it has to do with the factors that you mention. Your total revenue up about 7.5%, and it looks like you are assuming that the loss sales from new vehicles are transferred to used vehicles. Because you are taking your new vehicle same-store sales down a little bit relative to where you were before and your used up a lot. Is that a correct characterization, or I mean do you -- it just seems like there is a lot of transference going there from the new to the used. Is that correct?

John, this is Bryan DeBoer, again. I think you are right there. What we're seeing is that we believe that the typical seasonality in new is going to be flattened a little bit, and we believe that we'll have normal seasonality in used and we're going to continue to see the trends that we have been seeing over the last number of quarters. Our focus is really focused on used, because we know there is going to be shortages, and that's where our focus has really been the last year or so.

Now despite that, we are still pushing new vehicles, our market share on a year-over-year basis is up about 5%. We have seen a little bit of impact in margins in that arena. We don't believe there will be further degradation in new-vehicle margins, but most importantly, we're going to continue to focus on those value-auto cars, those three to seven-year old vehicles and we don't think that we have tapped our potential in that arena still.

Okay, and then a second question on the guidance as well. The SG&A of 76% of gross in the first quarter was certainly much better than we were expecting, and I think better than most thought you guys were going to do in the first quarter. Could we see better performance on this SG&A continue through the rest of the year? And could that be a lever potentially to the upside, to your expectations as you really constrain cost and leverage SG&A?

Yes. Hey, John. This is Chris. Yes, we definitely feel that the 76% that we did in Q1 was a good job and we're continuing to push additional initiatives to drive our SG&A down. There's a number of things that we have implemented over the last several years that our stores are using to really monitor the performance of productivity metrics, related to personnel, advertising and other controllable costs. We really feel those are taking hold at this point and we hope to continue to see the success of those into the rest of the year.

John, this is Sid. In addition to that, the improvements in the growth in gross profit. If we can hold that 50%, 55% pass-through to keep that, then that's going to lower that 76%, and obviously it will be determined by how much growth we can get.

And then just lastly on acquisitions. Thanks for that. Have you seen anything change in the environment out there more recently based on some of the stress that we have seen because of the disasters in Japan recently? Or maybe even just more broadly in general in the acquisition market, have you seen more opportunities at better prices come up in the past, or recently in going forward that might really re-accelerate that acquisitions for you?

John, this is Bryan, again. There's no question that we hope that the impact to Japan may free up some import opportunities. It could stabilize pricing a little bit on luxury franchises as well as some of the domestics. But I think our focal areas are really the import and luxuries, so we'll be focused on the imports and look for opportunities.

I think everyone saw the impacts at Rasmussen. We believe that was a very attractive acquisition for us. It actually put us over that 50% import luxury mix which we have been striving for a few years now. It took a large portion of our cash, but it's controllable. It's within striking distance of all of us, so we can manage it well and we're really excited about the opportunities in our home state in our biggest city.

Great. Thank you very much.

Thanks, John.

Thanks, John.

Our next question comes from Rick Nelson of Stephens. Caller, please proceed with your question.

Thank you. Good morning.

Hi, Rick.

Could you talk about truck sales and the cadence of truck sales during the quarter? Maybe what you are seeing in April with the gas price rise.

That's a good question, Rick. This is Bryan. Because we too are a little bit concerned about it. However, so far what we're really seeing is that truck sales are really about static of where we expect it. We're still gaining some seasonality. They were up 47%, I believe. Chris, right? --

Yes.

Over last year which is a large number. But on the opposite side, our car sales, we're seeing better results than what we expected. So they are trending even better than what we were. But trucks still, for the time being in our markets, and remember we're regional, small to medium-sided markets, usually agricultural based, that those industries are doing fairly well. Construction is coming back in some of our areas. We really believe that our typical seasonality will occur in our truck sales and we'll continue to see that further impact in regards to car sales.

And can you speak to new car margins? What you are seeing of late as supplies in the industry get tighter. I realize you have plenty of inventory, but are you seeing better growth in new cars?

I don't have the specific numbers, Rick, but I do know that our supplies are worse in the car arena. Obviously, because of our greater than expected sales and the impacts of gas prices. However, I do believe that our market share is improving in that arena as well, and I -- anyway, Chris, do you have something also to add on that?

Yes. I think when we look at that too, Rick, we focus on new car margin. But you also have got to take a look at the offset on that on used car margin, because the trade volume sometimes dictates what your overall margin ends up being between the two. You might shift a little bit from new car margin to used car margin just based on the prices that we put on the used cars as they come in on trade.

And maybe as a follow onto that. What are you seeing in the used car business? I would think with more sourcing at auction with tight supplies, we could see margin compression, but perhaps offset on the sales line?

Remember, our real focus is these three to seven-year old vehicles which are the drivers of taking in trades on value-auto, right? We're not seeing compression in those areas, and even as pricing strengthens, we're able to still maintain our margins, and we don't really see that changing. Okay?

And we're going to continue to drive and reach those new consumers that are struggling and have a little bit less disposable income than they typically have. And because of that I think we are going to be fine. And as long as the banks continue to strengthen, we're able to get those over finance amounts, those additional over allowances completed. I don't see that changing a lot, okay?

And I do believe that it's opportunity, and there is a fight to get cars. There's no question about it. But our guys, and what we have done, really, over the last year and a half is spent a lot of time in our stores, training our people of how to find and open up the five highways to finding used vehicles. We teach that day in and day out when we go into the stores and help them learn how to get those vehicles. So to us, I don't think we're going to see impacts on our margins.

Rick, one other comment to make. This is Chris. Is just the segment of the business that we really started pursuing this year on the value auto side which is about 20% of our used vehicle sales, has a margin close to 22%. So that's definitely helping improve the margins on used, and we continue to expect to see that throughout the rest of this year.

Rick, this is Sid. One other piece too on that issue is that our stores have -- all of the stores, they even market it, have initiatives to buy cars off of the streets directly from consumers, used cars. And we're getting more and more aggressive in that area and getting better and better at it, because I still think it's a great source for our Company to find used cars.

Thanks a lot for the color. Also would like to ask you about the Japan issue that to date all of the discussion has been around the Japanese name plates. What are you hearing from the domestic OEMs, and why do you think they are not stepping up production to fill the void of the Japanese?

Well, it will vary by manufacturer. I don't know that Ford can up much because they are maxed. But Chrysler can and certainly General Motors has a plan already in place to expand it, so. We haven't been able to find out directly from them yet what impact they having in terms of part shortages because of the Japanese supply issues, and they are not public with those numbers. There is some limit obviously to the varied capacity issues, but we think they could build at a much higher rate. And the other piece, Rick, that no one is talking about is they've cut fleets off everywhere they can. So the retail SAAR number is the one we're concerned with, not that overall SAAR. I mean the overall SAAR is there, but they could transfer 500,000 units out of fleet to retail and help fill that void and pick up market share that's more permanent for them. So there is going to be a lot of that going on in the next two or three months. We'll be watching.

That's a great point. Finally, I would like to ask you about the service and parts business. You put up very strong, same-store growth. Customer pay up 7.2%. What is driving that?

Rick, this is Bryan, again. Maybe we jump back a year. If you recall, even though we're up 8.4% on a year-over-year basis, the previous quarter of last year, first quarter of last year, we were down about 6%. We put some pretty strong initiatives in place because we believed our units and operations were going to be impacted, primarily in 2011.

We started to work on what we call commodity type of pricing as well as wider offerings within our service lanes to be able to attract customers, and then probably the single biggest thing that we're focused on is our customer's time. So how do we speed up this time, so they actually want to complete those other offerings, right?

Now there is also a secondary component that is occurring. Our new vehicle same-store sales are up dramatic amounts over the last four or five quarters, right? That obviously puts units back into operation which helps that number. So we are bucking the trend more than what we expected. We hope that continues, and we believe that our focus on that time of customers in our shops and that wider range of offerings will continue to yield strong results.

All right. Thank you very much. Good luck.

You bet, Rick. Thanks.

Our next question comes from David Whiston Of Morningstar. Caller, please proceed with your question.

Hi. Good morning, guys.

Morning, David.

Several questions for you. Back to the SG&A for a minute. The leverage of both year-over-year and sequentially was just tremendous. Is this really purely just from the revenue increase year-over-year, or are there some significant operational changes that started in Q1 that really drove that improvement so quickly.

I think it's two things. I mean, obviously, the improvement that we have in gross dollars is significant for us, but holding the line on our cost structure and making sure that the incremental cost that we add bring value is something that we're focused on. And we believe that we have the measurements in place to look for opportunities, and we'll continue to focus on that throughout the year.

Did you have any big SG&A ramp ups in things like advertising?

I'm sorry the first part of your question cut out?

I was just wondering were there any line items in SG&A that increased a lot, such as advertising?

Yes, I mean, advertising on a year-over-year basis was flat, but part of that is a percentage of gross. But one of the things we talk about is spending the dollars to make sure we get our market share, and the market share improvements that are coming are partly a resolve to increase customer traffic. So we are focused on different line items and not just cutting back expenses, but also pushing expenses in areas that are actually bringing incremental growth.

Hey, David. This is this Bryan, again. We did have one line item which was sales compensation that was up a little bit, and we're in the process of working on making sure that stays within our bounds. But overall, we're pretty pleased with what we have controlled, and I think maybe we were a little bit tight in terms of where we have been paying in compensation in those arenas.

Okay. Thanks. And on gas prices. Back in 2008, the tipping point, at least nationally for consumers to panic, was about $3.50 a gallon, and do you guys have an opinion on where that is today?

David this is Sid. We get a weekly tracking. We have asked for it from our people that are keeping track of this, and we're tracking truck sales, truck inventory versus prior years, versus the price of gas and oil. And so far there's no trend that shows a shocking change, certainly not like it was in 2008 yet. And I don't know if it goes to $6.00, obviously, that's going to impact us, but we're much more aggressively pursuing inventory management in a way that we should be fine even if that happens because that will really heighten this whole need for lower-fuel cars, and we have got a much broader spectrum of vehicles both in General Motors, Chrysler and Ford for fuel economy, so we're watching it.

The crossovers are still really strong and that's a truck. And the CR-Vs, the RAV4s, even the Chrysler models that are in that segment now, and some of the General Motors stuff, there's a lot of demand there yet. And people have a lot of reasons to trade for safety and for -- not just fuel economy, but the technologies that have improved the automobiles are huge. You've got an out of date car if you got a four year old one anymore.

That's very true. Okay, and then shifting over to the financials. You burned cash in Q1, but you are guiding in your presentation to $30 million of free cash flow this year, and I'm just wondering does that mean you are expecting minimal working capital increases for the rest of the year?

Yes, I think that's probably a fair statement. Yes, this is Chris. When we looked at our guidance as far as CapEx. I think our CapEx number was close to $28 million which is right in line with what our free cash flow is for the year, and that all comes from our operations performance.

Okay. And finally, a longer term question. You have got a lot of debt maturing in 2013, so at what point do you begin to budget and save more for paying off those maturities versus making more acquisitions.

Yes, David. This is John. Chris and I are spending a lot of time reworking our mortgage maturities. That's what all of that stuff is and it's on an individual loan basis. So we don't have a big bullet coming due. I mean it's going to be dealership by dealership, and we're working pretty hard to pursue that.

I think it's about $30 million, $35 million all in that is maturing, and there is one mortgage in there specifically that's about $10 million of it that we're working on right now. So we have been able to do all of the maturities that were in 2012 over the last year, I don't see any issue with the banks. Certainly the outlook for Lithia and the domestics is more positive. I think banks are feeling better about that. So I think it's very manageable and we don't anticipate using a lot of cash to do that. But if we need to, I mean to Chris's point, we should free cash flow $30 million this year, including CapEx and our dividend, so we have money left over to service those loans or a few of them if need be, but I don't anticipate that at this point in time.

Okay. Great. Thanks. That's all I had.

Thanks, David.

Thanks, David.

Our next question comes from Brian Sponheimer of Gabelli & Co. Caller, please proceed with your question.

Hi. Good morning. Thank you for taking my call.

Sure. Good morning.

Can you hear me?

Yes, we can.

Just one quick one. Most of my questions have been answered. Despite the rise in used vehicle prices, you had a slight down tick on price per retail used vehicle in the quarter. Can you speak to that? Was that a mix issue or just simply trying to churn?

This is Bryan, again. Hi, Brian.

How are you?

I took your call because of your name, you know? We figured it was a good match. Anyway, what we're seeing is when we're able to buy these three to seven-year old vehicles which is actually our average cost, maybe a little bit higher at times; it creates a trade-in which is a value auto car which really drives our cost down which is a $7,000 to $8,000 vehicle. That's why I think you're seeing that despite strong margins, despite strong valuations on used vehicles, we're still able to maintain margins as well as maintain our average cost because we're driving our ultimate prices down by taking in more value auto trades.

Okay. I guess my question is more just on the top-line there. It's $16,574 last year, $16,371 this year, on 1,400 more vehicles. Is it an older vehicle that you are selling do you think? Or is there a mix for more cars there that would naturally take that price down?

Yes. The mix is older vehicles which is value auto which is an 80,000 mile vehicle --

Okay. So the value is in there, okay. I'm sorry. Thank you.

A bigger percentage than it was last year.

Okay. All right. Thanks.

Brian this is John. Our value auto segment was up about 100% year-over-year. I think we sold 2,200 value autos compared to about 1,200 last year. I mean it's 98% increase, so. I mean, yes, maybe there's some car preference that's driving ASPs down, but I think the majority of our number change is just a function of older vehicles.

Okay. Great. Thanks for helping me understand.

No problem.

Sure.

Our next question comes Adam France of 1492 Capital. Caller, please proceed with your question.

Yes. Good morning, guys. Thank you for taking my question here. Sid, I was just trying to get a better feel for -- in terms of the important models that are coming off of a ship from Japan, either Honda or Toyota, what is the most important in your sales mix, and what is the most logical thing to offer as a replacement, if that unit is no longer available?

That's a wide-ranging question. This is Sid. Because it's kind of all across the board. And they build so many of their cars here, that there's only a few that actually come straight -- I mean the Leaf for instance, I guess it's still in Japan, so we're not going to get as many of those as we thought. And we finally retailed one at the local store here, but there is really none available, and that is going to slower than it would have been, and there's no replacement for that. And the Prius will be in short supply, and the new Corrolla. I don't think they delayed it, but there is a new Corrolla and they were fazing down the old one, so that could be an issue. We've got plenty of those currently,but there will be lower flow on all of those type of models. But we're short of Focus and Fusions, and we're short of some of the small Chrysler stuff now. And that's going to be good because they can ramp production in those and we have ordered heavily. And I think we anticipated that growth there anyway, so there is a lot of that in the backlog.

We're kind of a 90-day customer for car orders. I mean we have got to know about 90 days out what we need. A lot of what we did 90 days ago is what is showing up on the ground right now and what we're selling. So that's the extent of how we need to manage our inventories is 90 days out. So it's a constant focus week by week. What's turning, what isn't and what our customers are asking for that we don't have and how we might be able to meet that in the future. There is a lot of statistics being developed and we're followings that on a weekly basis both at corporate, but more at the store. Does that help you?

Yes, sir. Could you maybe run through two or three on the Honda side that aren't made here as well?

I don't think there's a whole lot.

Okay.

There we have a concern with that they are selling in volume.

Okay.

I mean, but these plants here are impacted just as much as the ones in Japan.

Okay. Very good. Thank you, Sid.

You bet.

Gentlemen, it appears there are no further questions at this time. I would now like to turn the floor back over to management for comments.

Thank you all for listening. Again, we want to be sure that we are respectful of that issue in Japan. That is one of the worst tragedies this whole world has seen in the last 100 years. It is certainly a terrible thing that has happened, and we are not making light of that at all in anyway. But we just have to respond to it and find ways to try to make a living while they get their problems fixed and cured, but there's still 12,000 people missing over there. I mean it's a huge tragedy that we all share the grief of and certainly have them in our minds and hearts. But thank you all for being a part of our Company and we look forward to continuing these kind of successes. I know that we're hitting on all cylinders like we never have. Thank you.

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