Lithia Motors Inc (LAD) 2011 Q2 法說會逐字稿

Greetings and welcome to the Lithia Motors, Inc. second quarter 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).

It is now my pleasure to introduce your host, John North, VP of Finance with Lithia Motors. Thank you, Mr. North. You may now begin.

Thanks, and good morning. Welcome to Lithia Motors' second 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 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, including adjusted selling general 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 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, www.lithia.com , highlighting our second quarter results Presenting 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 will open the call to questions. I'm also available in my office after the call for any follow-up questions. It is now our pleasure to turn the call over to Sid

Good morning everyone. Today we reported adjusted second quarter income from continuing operations of $14.6 million compared to $7 million a year ago. We earned $0.54 per share in the second quarter.

This is the largest second quarter earnings-per-share since 2006. The second quarter results were better than we expected as a result of stronger new vehicle sales than forecasted,less impact from inventory disruptions in our import brands than anticipated, and increased operating leverage as we retain incremental through-put on additional gross profit dollars.

In our markets, underlying consumer demand appears to be remain healthy, and credit markets continue to improve. As gas prices moderated from the second quarter, we saw consumer preference return to pick-up trucks and SUVs, reversing some of the trends in April when we last updated you.

In this increasingly volatile world, maintaining used vehicle inventory discipline, focusing on older, lower priced inventory, and moving used vehicles within our network of stores to better match regional demand are all parts of our success. We believe our efforts are being rewarded in this area, but we still have work to do. Bryan will discuss some of our opportunities in a few minutes.

As more time passes from the turmoil that gripped the industry in 2008 and 2009, we believe many of the cultural changes our organization underwent are proving to be successful. We are focusing our store personnel on servicing customers. We are motivating our employee base, and we are delivering results through customer satisfaction in our sales and service process.

The same time, our corporate staff continues to increase efficiencies in most of the administrative functions. As a case in point, we have completed seven acquisitions since 2009. As a result, we have reduced store-level administrative headcount with no incremental increase in corporate support positions.

We remain focused on the concept of incremental through-put, or the percentage of gross profit retained, after subtracting SG&A cost. The public auto retailers have all proven the ability to cut costs through the recession. Preserving our cost reductions is a key measure of success, as sales volumes recover. Our goal in this area is to retain 50% incremental through-put for the full year 2011. We are cautious about our outlook for the remainder of 2011.

The impact of events in Japan are still affecting sales. Certainly, the effort put forth by our manufacturer partners is nothing short of amazing, and they are to be commended for standing tall in the face of adversity. However, we believe the inventory issues affecting the Japanese brands will continue through the rest of 2011. We don't anticipate inventory levels returning to normal until the first quarter of 2012.

Our guidance, which Chris will comment on in a few minutes, includes the impact of these supply constraints. In closing, we would like to thank all of our employees for their continued hard work and dedication. We are improving customer satisfaction in both purchasing vehicle and in servicing cars. This remains critical to our long-term goal of earning customers for life. With that I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Thank you, Sid. Good morning everyone. As Sid just mentioned, I want to reiterate my appreciation to our store personnel and support staff. Our team continues to deliver strong performance, and we couldn't do it without their exceptional efforts. Thank you all for your hard work.

Now to discuss our operational results. Total same-store sales were up 20% in the quarter, reflecting increases over the prior period in all business lines. New vehicle same-store sales increased 24%. On a same-store unit basis, we sold approximately 10,400 new vehicles, an increase of 1,750 units, or 20%, meaning the majority of sales growth came from unit volume.

Used retail vehicle same-store sales increased 16% in the quarter. We sold approximately 9,800 retail used vehicles, resulting in a used-to-new ratio of 0.9to one. Our objective is to maintain a one-to-one used-to-new ratio, even as new vehicle sales recover.

In the second quarter, we had good results in our zero- to three-year-old used vehicle segment, and in our value auto over 80,000-mile segment. For example, value autos grew84% year-over-year and had gross margin of 21%. Although these vehicles have lower selling prices, overall we still were able to increase the average selling price on our used retail vehicles 2% due to underlying market strength.

However, we do believe we still have room to improve in three- to seven-year-old vehicle segments. These vehicles are typically a different brand from the new vehicle franchise sold by the store, and are an opportunity to reach a customer base not normally captured by new vehicle dealers. As we improve our performance in this area, we should be able to counteract the slight dip in our used-to-new ratio, and continue to improve retail used vehicle sales results.

In the quarter, our F&I per vehicle was approximately $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 $48 to $377 per vehicle on a year-over-year comparison. Of the vehicles we financed, approximately 13% were to sub-prime customers compared to 10% in 2010. In addition, the number of vehicles sold to customers visiting our dealerships with credit scores of 620 or lower improved 26% year-over-year. Over our entire customer base, the average credit score in the second quarter was 699.

We are pleased with our results in service, body and parts, as same-store sales increased 4.7% in the second quarter. Wholesale parts and body shops showed significant increases of 11.1% and 21.1%. Customer pay work increased 2.2%,which is the eighth consecutive quarter of same-store sales improvements. Warranty work declined 1.1% as repair opportunities are reduced, as our manufacture partners' initial vehicle quality and reliability continued to improve.

Regarding regional performance, all states posted increases with Nevada, North Dakota, and Texas all producing double-digit growth. In the quarter, overall gross margin was approximately 17% compared to 18% in the same period last year. This is primarily a result of shift in mix, as new vehicle sales increased more than the other business lines. Our overall gross margin remains industry-leading.

Our gross profit per new vehicle retailed was $2,575 compared to $2,546 a year ago. Gross profit per used vehicle retailed increased to $2,669 compared to $2,456 last year. Our average wholesale gross profit was $70 per vehicle.

To recap our strategy, we seek exclusive domestic and import franchises in mid-sized rural markets, and luxury franchises in larger markets. In the second quarter, we sold a Chrysler Fiat store in a metropolitan market in California. We also added a Ford store in Klamath Falls, Oregon. This store compliments our existing Chrysler and Toyota stores in this community, which is located about 70 miles east of the Medford market, where our home base is.

Our 2011 guidance includes the impact of the divestiture and this addition. With that, I'llturn 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 $61 million in available liquidity, including $12 million in cash, $8 million available on our revolving credit facility, and $41 million in unfinanced new vehicle inventory.

In the second quarter, we paid off approximately $8 million in mortgage financing related to the sale of non-operating property. We anticipate this retirement will add approximately $0.01 to EPS in 2011.

While our primary preference for allocation of capital remains the fund acquisitions and internal investment, we are willing to strategically target debt and equity retirements as appropriate. Our long-term debt-to-total capitalization is approximately 44%, mainly related to our mortgage debt. We have no sub-debt, converts, or bonds outstanding, and we were comfortably in compliance with all our debt covenants at the end of the quarter.

Our first half 2011 results combined with our outlook for the remainder of 2011, should generate approximately $39 million in free cash flow. This figure is calculated after projected dividends and capital expenditures. Our capital expenditure estimate remains at $28 million for the full year, unchanged from last quarter.

Based on these factors, we have sufficient liquidity to fund internal growth and acquisition opportunities. We remain focused on extending mortgages with maturities in 2013 and 2014 to ensure our balance sheet is well positioned for the future.

Now to discuss cost control. In the quarter, SG&A was 71% of gross profit on an adjusted basis, the lowest second quarter result in Company history. Incremental through-put, or the percentage of each additional gross profit dollar over the prior year quarter we retained after selling cost, was 50%.

We would also point out that acquisitions reduced the through-put calculation, as the gross-profit is contributed on a first-dollar basis. Adjusted for the same store comparison, incremental through-put was actually 61%.

Regarding inventory and the impact of events in Japan on our outlook. As of June 30, new vehicle inventories were at $358 million, or a day-supply of 68 days,the same day-supply as a year ago. Used vehicle inventories were at $115 million, or a day's supply of 56 days. This is three days higher than our day-supply level a year ago.

However the supply disruptions as a result of the Japanese tragedy are still impacting inventory availability. Day-supply skews this, as it calculated on trailing 30 days cost of sales, which has been reduced due to the lack of vehicle availability.

A more accurate measure is the absolute dollars of inventory on-hand for import brands. For example, our Toyota inventory is currently $20 million, compared to $27 million at March 31, and our Honda inventory is currently $10 million, as compared to $18 million at March 31st.

Finally, a few comments on our guidance for the rest of 2011. Similar to the first quarter of this year, our second-quarter results exceeded our guidance by a wide margin. Our objective was providing guidances to establish a target that is achievable based on current market conditions and Company operations.

If market conditions improve, our incremental through-put of operating leverage is significant and results in earnings upside. For Lithia, $270,000 of additional income adds a [penny] to earnings-per-share, so a few million dollars of incremental gross profit can be very meaningful to our results.

We have raised our outlook for the remainder of 2011 based on our results in the first six months of this year, but remain cautious on our outlook for import sales due to new vehicle inventory disruptions. We are establishing a third-quarter EPS estimate in the range of $0.45 to $0.47, and a full-year EPS estimate of $1.67 to $1.73.

For specific assumptions related to these earnings numbers, I'd refer you today's press release at www.lithia.com.

This concludes our prepared remarks. We would now like to open the call for questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions). Our first question is coming from the line of Simeon Gutman with Credit Suisse. Please state your question.

Thanks. Good morning and congratulations, Sid, on this exceptional performance. Just a question on the used-to-new. I think Bryan had mentioned some comments on it. Is it fair or realistic to hold yourself to that one-to-one at this stage of the recovery?

I think pricing has moved a lot higher on used, the supply is low, and there's probably a lot of pent-up for new, and I think new at this stage is probably going to grow quicker than used. So holding it up at this stage, especially if new vehicle sales starts to increase at a faster rate, is that necessarily a fair critique of the business?

Good morning, Simeon. This is Bryan. Yes. We do believe it is , and I think the primary reason -- we're pretty confident that the market is going to continue to be tight on used cars, values are going to be pretty strong until the new import inventories regain to normal, which is probably going to be obviously the start of next year probably. But we believe that in our core inventory product, which is three- to seven-year-old vehicles, there is such a wide open market there, and we have such great ability to go mine for vehicles that we can still counteract that increase in new vehicles with greater used vehicle sales. And that's -- when we go out to the stores, that's our biggest focal area, and our used car teams are also really driving from a corporate level and from a in-store level to find those cars.

So that's where our growth is going to come. If you recall, we talk about 80-some% growth in the value auto. Once you find those core vehicles as well, then you take trade-ins that are value auto, so that engine starts to turn and I really believe there's still a lot of opportunity within our stores to keep that one-to-one

Okay. The short-term question related to that, then I have one more follow-up. I saw that ASP, I think in the wholesale business, was down quarter-to-quarter and that cause me by surprise, just given the inflation that I thought we should have seen throughout the supply chain this quarter.

So we're about a year, Simeon, into our value auto sales. Our stores are finally taking hold, and figuring out how to recondition even lower-priced cars, which then pushes the remainder of the cars down even lower in price, and that's really the main reason for lower wholesale prices.

And then the second one is, just on the through-put that you talked about maintaining that 50% flow through, Lithia has pretty much had a great track record there in showing it. How do you think about becoming more and more efficient? In what ways, besides the ones we've talked about, maybe just enhancements to them, but can you talk about the ways that you're trying to still drive efficiencies the business?

Yes, Simeon. This is Chris. When you look at the through-put calculation, and I'd like to say that we have a bunch of new ideas that we're going to implement that's going to help this number, but our focal point continues to be on the majority of your control SG&A, which is your personnel costs and advertising.

So personnel cost makes about 66% of our SG&A, and advertising makes about 8%, and so what we do and what we spend our times with our stores talking about is the metrics and the tools that they have in order to drive that number down, and make sure that the decisions that we make on our expenses are logical. And so we focus on productivity by position, so all of our positions in our stores have a productivity metric that we report on and share it with our general managers.

We talk about pay plan performance, that we want to make sure that their pay plan results in the performance that we're trying to achieve. And then on the advertising side, which we feel like there's still a lot of opportunities, is to really identify when we're spending money in different means -- or modes of advertising, are we getting any incremental traffic from that?

So if 20% of your spend is in the Internet, you want to make sure that you're hopefully getting 20% of your traffic from the Internet. And this is a new area for us that we're going to continue to work on, provide additional metrics on, and really help our stores make good decisions in that area.

Okay, thanks.

Our next question is coming from Rick Nelson with Stevens. Please state your question.

My congrats as well on a terrific quarter. I have a question about inventory levels. Most of the other dealers are talking about inventories normalizing here in the fourth quarter. Your release is indicating normal inventory levels by the first quarter of 2012. I'm wondering what the difference might be, and if inventories do normalize quicker and than you anticipate, could we see upside to the current guidance?

Rick, this is Bryan, again. I'm not really sure what the others reported, but what we're seeing in the import brands, Toyota has already discussed that they'll be back to full production in Japan in September, which means they'll be pumping out normal inventories in approximately November, okay?

If you recall, then in USA they're about a month behind that which means normal inventory is coming into the dealerships is December. Well, we have such a thirst right now and are obviously -- Chris talked about our day supply being down, that it's going to take at least a quarter or so to catch up. So maybe what they're referring to is we're going to get normal supplies coming into the dealerships,however, there's still that backlog of orders, and that lack of inventory right now, and then we're going to be selling through that. We really believe it's a Q1 event with Toyota and Honda to get back to normal.

Now, if we go into Nissan, they really have pretty strong inventory at the current time. I mean there's only small models within the Center and Juke lines that we're having slight problems with, but other than that, they're full steam ahead.

So I think in terms of our guidance, I think there's no question that Q3 we felt the pressures, I believe, of the import inventories about 50% in Q2. We're going to feel 100% of those pressures, or about double the pressures that we felt in Q2 in Q3.

The good news is, is once we hit Q4, and if they can produce those vehicles -- I mean, Toyota is talking another 350,000 units that are going to start being produced in October time-frame. If we can get some of those, there could be some benefits in Q4, but for the time being, we're managing things in margins, assuming that it's going to be a Q1 recovery.

Okay. Thank you for that. And can you tell us about Honda? How far behind Toyota they are in terms of replenishment?

It appears, at least what we have on the ground and what we're hearing from our representatives there is, we have less Hondas on the ground than Toyota, so we're feeling a lot more pain in that arena. And from what we're hearing, their ramp-ups are similar, but unfortunately, we still got months until we get to that stage. So I would say they're in a little bit worse shape than Toyota when it comes inventories and supplies.

And can you talk about the acquisition pipeline, and what's out there? Is it domestic or import dealerships, and sort of multiples that you're seeing?

Rick, it's Bryan again. The funny thing is you go through economic downturns, there's financial struggles with dealers, there's elimination of dealers, and then reinstatement of dealers, there's all these things that are occurring. The funny thing is, for some reason the acquisition pipeline, I think, is driven more by aging dealer populations than anything else, so it's fairly stable.

We're seeing a good mix of import stores and domestic stores. Obviously, we're very strict in terms of our expectations for payback on those stores and, again, we tend to look at about ten to fifteen stores before we end up pulling the trigger on even one. So -- but we do expect to have some other things occur by the end of the year.

Okay,thanks for that. Also, I would like to follow up on the SG&A. We're at record lows as a percent of gross, 71%. Do you think that sort of level is achievable as Japan's production starts to recover? Maybe we'll see some moderation in the grosses on the Japan name plates?

Yes. Hey Rick, Chris again. Our long-term strategy is to get our SG&A as a percentage of gross down into the low 70s, and I think we're really happy with the performance that we had in Q2, but it's not an easy number to control and so we're going to continue to work on every initiative that we can to bring the SG&A cost structure down.

Now, with the incremental volume that we get from Japan, when it recovers, yes that's probably going to benefit us, as long as we don't have other costs creep in in the mean time. So we have a lot of initiatives under way to make sure that we continue to work on that low 70% figure, and we're optimistic we can maintain that over time.

Great. Thanks a lot and good luck.

Our next question is coming from John Murphy with Bank of America Merrill Lynch. Please state your question.

Good morning guys. Just a first question on guidance. As we look at the second half, you're basically indicating that EPS would be in a range of $0.78 to $0.84, versus $0.89 in the first half. And so you're indicating there's some weakening, and if we look back to when times were somewhat normal, which has been awhile, the first half has been about 45% of your earnings, and the second half 55%.

Sort just curious as to why you think the second half is going to be weaker than the first half. Is this purely the Japanese issue, or are there any other factors that would lead you to believe the second half would be weaker?

Yes,I think the number one reason, John, is the Japanese issue, obviously. But coupled with that is what we do on guidance on margins. We're not guiding for the full year and maintaining the margins that we had in the second quarter.

If we do achieve those margins, obviously it's going to incrementally impact our performance. But what our job is, is to give guidance that we feel comfortable that we can maintain for the year, and we laid it out we feel pretty confident that $1.67 to $1.73 is something that we can attain.

Okay. And then, second question, just on SG&A to follow-up on a lot of the other questions. Was there anything that went on that was unique in the quarter where you were cutting costs more aggressively that may not be maintainable or is it -- was it just a good blocking and tackling quarter?

Yes,this is Chris again, John. It was really blocking and tackling. I mean the things that we're doing really to control our costs in our stores is we're getting incremental improvement in new vehicle sales and used vehicle sales, are coming through to the bottom line. And Sid and I talked about this yesterday and the fact that what we want to do is pay above average pay for above average performance. And so as we get the recovery, we want to get more incremental sales going to our sales people, so we pay them a better wage, but in turn, we also leverage that cost structure a little bit better to bring more to the bottom line.

Okay.

John, this is Sid. Just weighing in on that. It's a huge focus, internally, and the culture of an auto store in a recovery. You definitely can keep 50% of gross profit because those are the expenses that are related to the direct selling, and the expenses related to the advertising and marketing, and as sales increase, you can add that 50% and get tremendous lift out of it, and you don't have to add fixed cost.

Rents don't change and all the rest of it doesn't go anywhere, and many of the pay plans we have are capped, or they have limits, and we just manage to keep that fixed cost so that SG&A shrinks in these recoveries. And I want to be tested by it. I'm challenging our people to be tested by it. This is not a -- something we should not do. This is something you have to do.

Then just a question on used vehicles,on the value auto program. As we look at that, what kind of gross dollars do you think you can get on those vehicles? Are you getting something in the average range of $2,500.00 on those vehicles? They're just -- they have lower price points, but are you still able to get the $2,500.00 gross spread off those vehicles.

John, this is Bryan again. Absolutely. It's the amazing part of the business. It doesn't take a lot of capital. Our average sale price about $10,000.00, and we make about 21% margin.

Okay,that's great. Then just lastly, on the Japanese. Do you get the sense that in your Honda and Toyota stores, that you're able to hold onto the consumer, and there's this backlog of orders that are building, that as you gets the cars you'll just be able to deliver them and there'll be this release of this short-term, pent-up demand?

John,Bryan, again. We originally, going into this, we thought that there could be some attrition. It's been amazing how glued to the Toyota and Honda products and other imports the consumers are. We really believe that there isn't a lot of attrition.

A lot of what we're seeing in the domestic improvements is coming because the market is there. The rest is pent-up in the imports, and I really believe there hasn't been that defection that we thought would occur. And I think now that the production is back, most consumers can see the end of the tunnel, and know that their cars are getting closer, and I think they're willing to wait now.

Great,thank you very much.

Our next question is coming from Himanshu Patel with JP Morgan. Please state your question.

Yes, hi, this is Vivek Aalok for Himanshu Patel sitting in this morning. Congratulations on a great quarter. I just wanted to get a sense on the new vehicle margin outlook in the second half. I believe the margin in the new vehicle segment this quarter was partly related to the tight new vehicle supply in the quarter.

Can you please comment what happens to the new vehicle margins as you move into second half, because now we are expecting that to be fully normalized by November or December. Will it continue to benefit your margins in the second half?

This is Bryan, and then Sid has a little bit of something to say as well. We've looked at a little bit of impact in margins in the second half, with a 7.7% on new vehicles, and that's primarily just coming from that we're going to finally have some product to be able to sell. Okay, Sid.

Just want you to always remember that it's total gross dollars we're after, not that margin by itself. It's such an important focus, because once we get past our cost base, all the additional gross that comes in just flows straight to profits. And we are less concerned about the margin as a percentage than we are the total dollars generated. So if we can get a lift at 20%, 30% in volume in those import stores, and the margin slips down to 7%, it's still a whole lot more dollars coming in.

Okay, that's helpful. And secondly, on the parts and service business, I think your guidance still implies a 2% revenue growth for the full year 2011, and you have given your YTD trend thus far. Do you think it's really light or are you expecting some kind of headwind in the second half?

This is Bryan again. In fixed operations, if you counts your active days available in the service and parts department, we have three less days in the second half of 2011 than we did in the second half of 2010, which is equivalent to about 2%. So despite our 2% guidance, it's really up about 4% for the second half, which is really close to in-line with what we've been doing over the last few quarters.

Okay, that helps. And finally, on your new vehicle sales growth expectation, I think you are expecting to grow your new vehicle sales above market growth. Is it related to acquisitions, or your (inaudible), or some internal [affairs] that you're making?

Bryan, again. It's coming from market share increases, and it's back to that same point that Sid talked about. And I think if you really look closely at the second quarter, what we really did is sold a lot more units. Our margins went up a little bit, but not enough to make that much difference. What really makes the difference is attacking market share, selling a greater percentage, and bringing it to the bottom line through the 61% through-put that Chris spoke to.

Okay. Thanks a lot. Congratulations on a great quarter.

Our next question is coming from Steve Dyer with Craig Hallum. Please state your question.

Good morning and I'll add my congratulations for the good quarter. A couple quick questions,several have been answered. What is your sense -- we've talked a lot about the Japan three inventory. What's your sense as to the domestic inventory, particularly GM, who, looks like it's gotten a little bit heavy lately? What is your sense as to what's on the ground there?

Steve, this is Bryan. We're pretty pleased with what we have on the ground. I mean, there's pockets of a little too heavy of inventory in General Motors. But in general, we're glad to be positioned here for the last couple months of summer, and that really core selling season leading into fall.

Okay. And then, any idea, or any sense as to what the incentive environment could be like as we get towards Labor Day here, and how you view that? What impact it may have?

Yes,this is Sid, Steve. Thanks, again, for your coverage. We thought you did a good job on looking and seeing the benefits of our Company relative to everyone at this point. We've got a great little engine and, as you know, these issues with inventory and the pricing issues going forward are not that critical for us to worry about in terms of that immediate impact, because we're right on target on what we wanted for inventories, and the incentive environment is always a benefit for us.

We're looking for manufacturers to enhance incentives because it just increases customer traffic, and increases our ability to make a little more gross on each deal, or to get more people financed because we can use the money for down payments. We're real high on incentives increasing, and as this supply from Japan increases again, we're going to see a heated war coming from all those who slipped in share, and are trying to get it back, and the domestics fighting to keep the share levels they've been able to increase.

I mean it's a really nimble team at Chrysler, and a nimble team at Ford, and General Motors is getting better, and it's less bureaucratic, there's a lot more focus on the day-to-day, and they're turning dealers loose with marketing dollars a lot more and doing a lot less spend on their second-tier advertising, which is really critical. Chrysler has a great co-op program right now where, basically, they support most of our local advertising with the dollars that are packed into the invoice. So -- and they used to spend all that on lukewarm advertising.

So, those are the kind of dynamics that, we think, enhance our ability to take share, be in a better dealer-[neighborhood] market we're in -- because Bryan talked a little bit about that, how we can take share and these incentives that they come up with -- will only support that, that growth and volume that we're looking for.

Yes, okay. And then lastly, the used market has been extremely strong for quite a while now. How long do you think that lasts? How do you see that playing out over the next 12 months?

Steve, Bryan, again. You know, we think that their market is going to remain strong. Typically, in October and November we really see that there's some weakness in the used car market, especially when it comes to certified vehicles. We don't see that happening quite as extreme as it typically does,primarily because of the shortage of new import cars, right?

So we really believe that once cars start to normalize on the new vehicle side, it will help adjust pricing, so we should see pricing come back into line in Q1. But then you have your summer rush again, so I think we're going to see this, and we're in for a little bit of tightness through the next nine to 12 months.

Key focus, internally, is keep the day supply current on an on-the-ground basis. Some of those older cars, a little day-supply creep is fine, because they never depreciate, and you're alright on, but that current model stuff, you got to turn it, turn it, buy it, sell it, buy it, sell it, and just keep that momentum up, and we can improve in that.

Okay. Very good guys, thank you.

The next question is coming from the line of Mark Mandel with ThinkEquity Partners. Please state your question.

Thanks, good morning everyone. Just a couple of follow-up questions. First on the gross margin. I guess I'm still a little surprised. I appreciate the comments you made in terms of your strategy. I guess I was a little surprised at the gross margin in new vehicles, for example, did not show some increase year-over-year.

We the got the great volume lift and those deals are done one at a time. Nobody sits out there with a pencil and says, "Hey, we need to make 8%." So we're really proud of the volume increases, and that's a substantial increase for us, and market share take, and each car is priced one at a time to individual customers, and the margin we end up with is what we end up with. The domestic have a big impact. Bryan, why don't you take that, on the domestic.

I think-- remember, we have a little bit over 50% domestic so -- and domestics, we're trying to take share from the imports, now. Sorry, Toyota and Honda, but that is how it is. So when you have that heavy domestic, and there's shortage in the imports, you go for the market a little bit, and we really believe that ultimately, what Sid talked about is exactly right.

It's not about each individual unit. It's about how much you can bring to the bottom line, and I think, despite a 24% increase in new vehicle sales, the through-put and the 108% increase in earnings over the year, it shows that market share can make a difference without huge margin increases.

We're judging every store on their improvement on sales being higher than the manufacturers that they sell, so that we're gaining share in every market. That's a critical element for Lithia's future success.

Okay. And in the used side, the increase there, was that a large function of the value-added program and the strength, overall, in the used?

Mark, this is Bryan, again. You're right. It was pushing 70%, 80% in value auto increases, so, yes, big part of it comes from that. And those, obviously, come from trade-ins on core used vehicle sales, it comes from certified sales, and it comes from new vehicle sales.

So it means we have a lot of opportunity to grow used in that middle segment. That's -- Bryan's whole team is really focused on finding those three- to seven-year-old vehicles, because we could improve sales there at every store.

Okay, and then in the fleet and wholesale area, anything you can call out there, $17.2 million versus $4.7 million a year ago?

Yes,the main difference there is the acquisition of the Rasmussen Group in Portland, Oregon. We had a lot of fleet business going through our Mercedes stores there.

Okay, got it. And then, finally, just a follow-up to Rick's question on the acquisition strategy. Do you have a long-term goal, in terms of brand mix? How do you view your -- the acquisition strategy in that regard?

Mark, this is Bryan. Our long-term strategy is really, we don't want more than 20% of any one make, so as we balance things out, that's what our goals really are. Other than that, we don't have quotas for how many stores we buy. It's all based off return on investment, and what our payback periods can be, and if that's a better investment than internal investment.

Okay. Great job and good luck in the second half.

Our next question is coming from David Whiston with Morningstar. Please state your question.

Good morning, guys. I just wanted to follow up on Sid's comments earlier on higher incentives driving store traffic. Is it fair to say you would welcome higher traffic and possibly some lower dollars, just to get a lot more profitable parts and service business down the road?

Certainly, David. You understand this pretty well, I've read your research. The real goal is to get every customer we can because there is a whole bunch of service business that comes with each customer, and most of them give us a trade-in, so we don't have to go buy a car.

It all feeds the chain, and it starts at the top of the chain with that new car sale, so it's critical that we get all the volume we can possibly get out of every store. And it's music to manufacturers' ears, obviously, that we're so focused on that, and not just on that gross profit per unit. Incentives help. It's a big deal. It does create traffic and, more than that, it creates the ability to get people financed, because it gives them a down payment.

Makes sense. And on the value strategy are you -- within your various cities, do you have a lot of competition in those vehicle segments, or do you that similar competitive advantage that you do with new vehicle sales in places like Odessa and Midland?

David, this is Bryan. There's always competition. Fortunately, that so-called pot lot, or that independent used car dealer, when we compete against them in the value auto line, they're having -- they are impacted by their ability to get credit lines and, obviously, banks are a little tighter, they're less capitalized, so we're able to attack them to some extent.

On a positive note, we're also, like Sid said, the top of the food chain, so the only way they typically get their cars is from us, if we choose not to sell those. And the better our shops get at reconditioning, the less cars they get, which makes it more difficult for them to compete.

And I think it can continue to grow. It really, though, comes back to that, how many of the other cars can we sell to be able to get these trade-ins? Because that is really the primary source for getting value auto vehicles.

That natural chain -- this is Sid. That natural chain of vehicles coming in because of us selling more new cars, more of that three- to seven-year-olds, gives us an advantage over the competition in terms of acquisition of inventory in those value autos.

Yes, that makes a lot of sense. Shifting gears over to the F-series pick-up. Ford, the past couple of months, has had the six-cylinder out-selling the eight-cylinder. I was just curious, in your markets, are you seeing a similar mix relative to Ford's overall national number?

I'd have to check specifically with the Ford stores to find that out. I'm not day-to-day on that. They're managing their inventories, and we're putting in stock whatever the consumers want. And there, obviously, is a shift to focus on getting more mileage out of every vehicle we sell, that the consumers are a part of.

That Dodge Ram with the variable cylinder deactivation, has a 20 highway with a Ram engine with 394 horsepower, or something. So there's a lot of stuff still going on within the V8 cycle, and most truck owners want V8, so I don't know how many are selling that six cylinder right now. We'll have to find out if you want to know. We can get it offline.

Okay. And, finally, in the slides there was a mention of some vacant facilities and [landfill], and I was just wondering, when do you expects all those to be sold and have that cash come in the door?

David, this is Bryan again. We really believe that by the end of 2012 we can have those pushed through. It's still about $0.05 to $0.07. A couple quarters ago we announced that it was somewhere between $0.12 and $0.15, so we've got rid of way more than half of those, and we're on track to continue with that. The good thing is, it's carrying costs right now, so as we get rid of those it sure helps.

Okay. Thank you very much.

Our next question is coming from Garrett King with Truffle Hound Capital. Please state your question.

Hi, guys. Given the after-effects of the Japanese disaster, and the decline in the [SAR] during the quarter, I was pretty surprised to see a lot of auto retailers reporting really outstanding results for the quarter, with Lithia leading the pack. Do you have any opinion as to why the retailer results have been so strong given the environment in Q2?

We're only 18% Honda and Toyota, and we have a large domestic mix of over 50%, and it's increasing right now because we have availability there, and there is market demand. The biggest single driver of market demand is the ability to get financing, and an improvement on used car values gives people a bigger equity to trade with. Those two factors lift the sales volume.

That's what drove it down, was a lack of credit and a lack of pricing of equity in trade-ins, and that's been immensely improved. There's a built-in cycle improvement going on in the auto retail industry. We will, we think, see that lift gradually grow, and we're going to get back to 15- or 16-million units, and this retail sector is going to make a lot of money when that happens, including us.

This is Bryan again, as well. The automobile industry is -- it's pretty pliable. It's amazing that you can quickly move because your inventories are typically 30 to 90 days old, you can change your product mixes, you can respond to the market if there's no new product, you can move to used product. There's a lot of real benefits.

Believe it or not, our import same-store sales were up 13% in the quarter. That's still pretty good, and we didn't -- we have inventory problems just like the rest of the world has. So there's a lot of ways as an automotive retailer, to be able to adjust, and I think the last three years, and all of us have shown the ability to be able to flex to market conditions.

Okay. Thank you.

Our last question is coming from the line of Efraim Levy with Standard & Poors. Please state your question.

Hi. The flexibility really has helped offset some of the impact of the Japan crisis and the shortage, but if you could quantify the impact for the second quarter, and what you think would be the 12, and the third quarter, what would you think would be from the lost business because of the shortages, I would appreciate that.

Yes, hi. This is Chris Holzshu. Our guidance reflects what the impact is that we anticipate having in the third quarter primarily, maybe a little carryover into the fourth quarter. As far as unit volume is concerned, I think we're looking at double the impact that we had in Q2, but I don't think we're giving direct guidance as far as what that impact is at this time.

Our guidance would have been higher if we didn't have the Japanese thing, because the momentum is there in the market.

Right. Well, how much of it do you think you'll get back once it's normal, especially since you said they've been very loyal?

This is Bryan. We actually -- we believe that in Q4 you're going to start to get some of that back because that backlog of orders are sitting there. We will start getting cars pretty heavy in November and December. However, that normality still won't come [until] Q1. To us, we think it's just a matter of time before it recovers back to where we need to be.

Okay. And just one question, as far as your same-store sales basis, what percentage of the dealerships are in that comp basis?

All except for four.

All except for four?

Yes. So we had four acquisitions over the 12 months that are not in that number. We have a Toyota store in Billings, a Honda store and a Chevy store in Bend, Oregon, and the Rasmussen group that we purchased, more recently.

Okay. Thank you very much.

We have no further questions at this time. I'll now turn the floor back over to management for the any closing remarks.

Thanks, everyone, for joining us today, and look forward to updating you again on our results in late October, November. And as we said, we are well focused and moving forward on all cylinders. It's nice to be hitting on all eight. We're not using that variable cylinder deactivation system that gets better gas mileage. We're all wired to do this thing at this time. It's a fun time in the car business because things are improving.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.