Lithia Motors Inc (LAD) 2011 Q3 法說會逐字稿

(Operator Instructions). It is now my pleasure to introduce Mr. John North Vice President of Finance for Lithia. Thank you, Mr. North, you may begin.

Thanks, and good morning. Welcome to Lithia Motors third 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 that are outlined in the Company's filing 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 expenses , adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operation 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 of GAAP and should not be consider 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 today on our website Lithia.com highlighting our third quarter results.

Presenting the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and Chief Operating Officer and Chris Holzshu Senior Vice President and Chief Financial Officer. At the end of their remarks, we will open the call to your questions. I am also available in my office after the call for any followup. It is now my pleasure to turn the call over to Sid

Good morning. Today we reported third quarter income from continuing operations to be $16.3 million compared to $9.6 million a year ago. We earned $0.61 per share in the third quarter. This is the largest third quarter earning per share since 2005 when SAR was about $17 million. The third quarter results were better than we expected primarily a result of stronger new vehicle sales than we had forecasted including less impact from inventory disruptions in our import brands.

On a year over year basis we increased quarterly revenue 29% and grew diluted earnings per share 69%. As we remain disciplined on controlling cost, incremental operating leverage demonstrates the earnings power of our Company in a growing market. We continue to monitor incremental through-put or the percentage of additional gross profit we retain after subtracting incremental SG&A expense. Our target remains above 50% on a full-year basis. We remain focused on increasing the performance of our stores and driving incremental revenue through our model.

As we increase the revenue on a per-store basis, our leverage metrics improve. For example, our operating margin was 4.3% in the third quarter. The second best quarterly result in our history. SG&A as a percentage of gross profit was 70.8%. The lowest percentage among our public peers.

Throughout the third quarter, volatility in the financial markets and concerns regarding the outlook for the economy worsened. However, we have not seen any disruption in our customer traffic or underlying consumer demand. The decline in the number of new vehicles purchased over the last few years, exciting new product offerings with enhanced safety and technology features and increased consumer credit availability are all of the drivers of vehicle demand going forward and we are seeing that currently. These factors point to considerable pent up demand for new vehicle sales over the next few years and reinforce our thesis that vehicle sales level will increase in the coming years.

While this year's sales rate is a far cry from the levels we saw in the mid-2000s, the current SAR is sufficient for Lithia to generate earnings in the range of a $1.86 to a $1.88 per share in 2011. Our outlook for 2012 assumes a slight increase in the SAR to approximately 13.25 million units. We believe the biggest driver to maintain this SAR level, even in the face of weaker economic prospects is the availability of consumer credit. We continue to see competition among banks, credit unions and other lenders for retail auto paper. And as long as this trend continues, we don't see a significant risk to our SAR projections in 2012.

In closing, we would like to thank our team for delivering a good quarter. There is still work to be done, and we remain focused in improving our market share and increasing customer satisfaction at all of our stores. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Thanks, Sid. Good morning, everyone. Total same-store sales were up 21% in the quarter reflecting increases over the prior period in all business lines. All metrics from this point, forward, will be presented on a same-store basis unless otherwise noted. New vehicle sales increased 28%, well above the national average. On a unit basis, we sold approximately 11,200 new vehicles, an increase of 2200 units or 24%.

Despite the disruption in supply caused by the Japanese disaster, import unit sales were up 2%. Our stores continue to drive new vehicle sales and increase our market share. Used retail vehicle sales increased 14% in the quarter. We sold approximately 10,400 retail used vehicles resulting in a used to new ratio of 0.9 to 1. Our objective is to maintain a one to one used to new ratio.

In the past two quarters, we have seen more growth in our new vehicle sales than in used sales, which has lowered our used to new ratio. However, we continue to work with our stores to increase their performance in used vehicles, which is a critical area for our long-term success. In the third quarter, we had good results in our value auto over 80,000 mile segment which grew 40% year-over-year and had a gross margin of 21%. Although these vehicles have lower selling prices, over all, we still were able to increase the average selling price on our retail used vehicles 4% due to underlying market strength. However, we still have room to improve in the three to seven-year-old vehicle segment.

We also have targeted each of our stores to be one of the top three used vehicle retailers in each of our markets. Many of our stores sell significantly lower than one to one used to new. On a consolidated basis we want to average 60 used vehicle sales per month at each of our stores. Currently, we are selling 40 used vehicles per month. Our culture of continuous improvement will be the key to increasing unit sales counts at our stores and delivering on these objectives we have established.

In the quarter, our F&I per vehicle was approximately a $1000 per unit. On a GAAP basis, we arranged financing on 74% of the vehicles we sold. We sold 40% of our customers a service contract and 36% of our customers a lifetime oil product. As Sid mentioned, banks and other lenders continue to increase competition for retail auto loans. As a result , we are making more on each loan and helping more of our non-prime and subprime customers obtain credit.

In the quarter, on a GAAP basis, our finance reserve increased $55 to $395 per vehicle in a year-over-year comparison. Of the vehicles we financed approximately 12% were to sub-prime customers compared to 11% in 2010. In addition, the number of vehicles sold to customers visiting our dealerships with credit scores of 620 or lower improved 25% year-over-year. Over our entire customer base, the average credit score in the third quarter was 715. Our service, body and parts sales increased 3% in the third quarter despite one less selling day.

Wholesale parts and body shops showed significant increases of 9.5% and 10.3%. Customer pay work increased 2.5%, which is the 9th consecutive quarter of same store sale improvements.

Warranty work provided a significant headwind as it declined 5.3%. Warranty repair opportunities have been reduced as initial vehicle quality and reliability both improve. We still face difficult comparisons from the declining number of units in operations under warranty, a trend that will continue through 2012.

Regarding regional performance, all states posted double digit increases with Oregon, Montana and Nevada performing the best. Our gross profit per new vehicle retailed was 2491 compared to 2634 a year ago. Gross profit perused vehicle retail increased 2527 compared to 2402 last year. Our average wholesale gross loss was $29 per vehicle.

In the quarter, on a GAAP basis, overall gross margin was approximately 16.8% compared to approximately 18% in the same period last year. A 28% increase in new vehicle sales, which outpaced our other business lines accounts for most of the decline. Our stores continue to focus on increasing their market share and unit sales volume as it represents additional profit opportunities.

For example, a new vehicle sale often results in a trade-in of an attractive used car, which can be sold to another customer. Each vehicle sale gives our F&I department a chance to attach a lifetime oil change or extended service contract. Finally, providing more routine maintenance in our Service Department keeps customers loyal as they associate Lithia with a one-stop shop for all of their maintenance and repair needs. In summary, these businesses are all interlinked in capturing additional sales in one area often benefits other areas as the customers move through the vehicle life cycle.

Now, to discuss corporate development; We seek exclusive domestic and import franchises in mid size rural markets and luxury franchises in larger markets. In October, we added a Subaru and Mitsubishi store in Fresno, California with estimated annual revenues of $25 million. These franchises are exclusive in the market and compliment our existing Ford, Nissan and Hyundai stores. We also sold a VW store in the Denver, Colorado market. The stores results have been retrospectively reclassified into discontinued operations for all periods presented at the end of the third quarter.

Our guidance includes the impact of divestitures and additions. Finally, October marks the month that we finalize our strategic plan for the next year. As a result, we have refreshed and refined our strategy and objectives for the next 12 to 36 months. We completed a comprehensive review of our mission statement and simply, it is stated as follows; Driven by our employees and preferred by our customers, Lithia will be the leading automotive retailer in each of our markets. We remain true to our original mission recognizing that our customers and our employees are the foundation for our success. With that, I will turn the call over to Chris, our CFO, to discuss our financial

Thank you, Bryan. On September 30th, we executed a new 3-year credit agreement with US bank and JPMorgan Chase which provided $100 million in new vehicle floor plan financing and increased our revolving line of credit from $75 million to $100 million. With this increase availability on our revolving credit facility was $29 million. At the end of the quarter, we had $16 million in cash and $49 million in unfinanced new vehicle inventory. Therefore, our total liquidity including cash, a revolver and unfinanced inventory totalled approximately $94 million.

We would like to thank U.S. Bankfor being a valuable partner over 40 years and are pleased to increase our partnership with JPMorgan Chase to include commercial credit. As a result of the new facility and the renegotiated floor plan rates with other partners, we anticipate approximately $0.06 per share increase in our earning over the next 12 months. We estimate generating $30 million in free cash flow for the full year 2011 including projected dividends and planned capital expenditures.

The current commercial real estate market has provided opportunities to improve store locations. We recently purchased three properties in the quarter for future development but replaced existing lease facilities. As a result, our capital expenditure estimate has increased to $35 million for the full year, up approximately $7 million from last quarter. We repurchased approximately 651,000 shares of common stock at an average price of $17.35 over the past 90 days.

The primary preference for allocation of capital remains to fund acquisitions and internal investment, we will strategically target debt retirements and share repurchases as appropriate. We continue to extend mortgage maturities. We have $3 million in mortgage financing due in 2011 and no other maturities due until 2013. As of September 30th, we had approximately $298 million in total debt, of which $223 million is mortgage financing. We were in compliance with all debt covenants at the end of the quarter.

Now to discuss cost control; In the quarter, SG&A was 70.8% of gross profit. Incremental through-put of the percentage of each additional gross profit dollar over the prior year quarter we retain after selling cost adjusted to reflect same store comparison with estimated to be 58%. On a GAAP basis, incremental through-put was 44%, due to the impact of this year's acquisitions that come in on a first-dollar basis.

Now to update you on our current inventory. As of September 30th, new vehicle inventories were at 348 million or a days supply of 66 days, a decrease of seven days from a year ago, used vehicle inventories were 116 million for a day supply of 53 days. This is four days higher than our day supply level a year ago. Consistent with our comments in the last quarterly conference call, we don't anticipate reaching precrisis inventory levels in our Japanese brands until the first quarter of 2012.

Now, on our guidance for the rest of 2011 and for 2012, we are establishing an EPS estimate in the fourth quarter in the range of $0.37 to $0.39 with the full year at a $1.86 to a $1.88. For 2012, the first quarter estimate is in the range of $0.37 to $0.39, with a full year at a $1.95 to $2.05. For specific assumptions relating to these earnings numbers, I 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.

(Operator Instructions). Our first question is from Simeon Gutman of Credit Suisse. Please proceed with your question.

Thanks it is Simeon. Guys, can you, maybe, Chris, can you just talk to the rational, I guess, providing guidance at this point what you're seeing? I mean clearly trends are strong. But how confident are you, I guess, at this early stage, an especially there may be some changes. Just in terms of brand mix that may run through next year and what kind of confidence you have and some of the continued momentum, some of the brands that you have right now.

Good morning, Simeon. First off, when we base our guidance, we look at really what our current operations are doing, and look at each of our markets to really identify the trends that were seeing to set, our guidance not just for the quarter but for the full year. And we don't really go out of our way to over project what next year's going to look like. So as far as confidence, I think we feel pretty good the $1.95 to $2.05 for 2012is well within reach and Bryan, I don't know if you want to talk about brands specifically but I think we are pretty happy with our portfolio, pretty happy with the performance that we are seeing, not just related to our individual markets but how they are comparing to national sales levels.

Maybe just a follow-up, just big-picture question on some of the volume growth we are seeing, especially on the new side. The momentum is pretty impressive. Some of it, we can see in the brand strength. Maybe can you talk about geographic strength as well, some of the data that, I guess it's harder to see and then, your take on whether it's a little bit of geographic, a little bit of brand, how long will some of that momentum last?

If you recall, over the last number of quarters, Oregon, Montana, and Nevada -- actually Oregon and Nevada were some of the areas we were struggling with. We have seen strengths in those markets and we don't see any reason why that shouldn't continue. I would again reiterate Texas seems to be strong. Alaska's feeling a little bit of pressure, but still, fairly stable and most of the Midwest has been pretty stable as well. So I would say those trends are going to continue in that same manner.

Simeon, this is Chris. The only thing I would add to that is that we have seen double-digit increases in the quarter in all of our markets. I think nine out of the 12 regions were over 20%. So..

Simeon, this is Sid. The brand mix , too, has a big impact. I think Chrysler was up 23% nationally and we were up over

Sid, you may have a more interesting prospective on this. Chrysler has the wind to its back. There are some models in there that are just on fire. I mean, looking back at prior spikes like this, how long do these types of things go for? And I guess at some point, competition catches up there is some saturation. But how long do you think this lasts? And do you see a pipeline that keeps this going?

Internally, their projections are to get to 12% share on a retail basis. And they are coming up every quarter against that target. And that's not historically out of the line at all even when the imports had a much bigger percentage than what we have experienced this summer. So we don't think that headwind is that -- they were way down. So improvement is really helping both our Company and themselves. And the pipeline of product is really quite a bit of the same vehicle lines that they've got. The Fiat piece coming in, I don't see as materially needed. It's all in that small-car segment and I think for their international and the Company as a whole particularly Fiat, they need a big presence in that small and medium-sized car that they don't have a real successful models in.

So they will continue to improve there. But that doesn't impacts Lithia. We are going to keep picking up share with trucks, jeeps, minivans. I don't know if you have driven the new Dodge Journey. It's awesome a wonderful car. And is in a segment that is really growing and when they compare to the other models in that bracket it is a great car, andwe are picking up share there. Across the line, they have done a hell of a job.

Thank you. Congrats on the quarter.

Our next question is from Rick Nelson with Stephens. Please proceed with your question.

Good morning, Sid. Congrats as well on a terrific kind of quarter.

Hi, Rick.

To ask you, Bryan, about the used-car business. With new-car supplies starting to normalize, how do you think that's going to affect used-car demand? And where do you see margins here with lower sourcing, time index starting to tick down the last few months?

Rick, this is Bryan. We saw last quarter, we increased used vehicles by about 14%. A lot of it came from the value auto segment. And we noted that it was up 40%. We are feeling some pressure in the late model used cars. We were actually down a little bit on certified vehicles, and it was mainly due to supply.

So not only does supply of new cars affect new car sales. It affects the used cars as well. So we think as the inventories start to come back into balance, that will help things some. Now, we also saw our core product go up a substantial amount as well. In looking forward, I believe it's still a fight, just like it's been for the last year, to get that product, and that's really what we are training on, on a daily and weekly basis is how do you find those cars? And how do you open up the five channels to acquiring vehicles? Whether it's on the street, whether it's at auctions, other dealers, or whether it's through the Internet. We have to open up all of those channels and keep those pipelines full. And that's really our biggest challenge and we spend a considerable amount of time on that.

Okay. Thanks for that. I would like to ask you about the inventory with (Inaudible). supply on the new-car side at 66. If you could tell us where you are, Honda, Toyota, Subaru as well and how you see that ramping as the quarter progresses.

Rick it's Chris. First off, you have to commend the job our stores are doing in turning the units faster than they have done in a very long time. And so the easy way for us to look at that is to say when you think about March 31st pre-quake, inventory levels were down about 40% with Toyota and 50% with Honda and Subaru. And when you look at our turn rates, we are about 50% higher in both Toyota, Honda, Subaru all of them, all running at turn rates in excess of 50%. So we feel pretty good about what we are doing to actually execute with less inventory. As far as recovery as we said in the prepared remarks, we don't anticipate inventories coming back to normalized levels until really the first quarter of 2012.

This is Bryan again, Rick. What we saw is during the end of the second quarter and the start of the third quarter, some of the import manufacturers had some turn and earn freezes which basically said they were going to give you a hiatus because we all had such shortages of cars, and what we did during the quarter was when those freezes came off, we made sure we turned our vehicles as quick as possible. And as Chris said that sale through rate we have in our stores are guys are getting it and they know the implications of that are they are going to get replenished in more cars. We are hoping in Q1, Q2, we have the cars we possibly need to be able to continue to grow market share.

Thanks. The acquisition environment, if you would address that, what you are seeing in terms of pricing maybe the brands that you are looking at your revenue growth targets via acquisition.

Rick, this is Bryan again. we get this question a lot, and it seems like the marketplace isn't really driven by economic conditions. It's always driven by the age level of the dealer body. They continue to age. We continue to find stores. We remain disciplined in terms of what ROE and what break-even we expect on those stores and what we expect to pay. The pipeline seems like it's still very attractive. There are things out there. And really, we are focused on some of those import brands obviously, actually looking at some of the Korean brands like Kia and Hyundai and those larger exclusive markets of 250,000 to 500,000 people. We will look at opportune domestic opportunities as long as the real estate exposures are within the realms of reality.

Acquisitions are not in the guidance for 2012. Is that correct?

That's correct.

Great. Thanks a lot. And good luck.

Thanks, Rick.

Thanks, Rick.

Our next question is from John Murphy with Bank of America. Please proceed with your question.

Good morning, guys. Sid, just a specific question on Chrysler and the success they are having here. They did a lot of mid cycle major enhancements which are pretty good and that seems to be helping out sales quite a bit. Just curious if they are doing anything else as far as dealer incentive programs or anything else in their marketing that you think is unique that's really kind of bumping up this market share really significant. They are having some tremendous success. I think it's helping you guys quite a bit as well.

Be sure to read the "automotive news" MondayBrad Worley worked me over on that issue the other day. Good recap on why Chrysler is succeeding. the incentive piece, let me speak to that to start with. Everything for Reid, Bigland, the new guy who is in charge of sales for Chrysler in the US and Canada is based on doing better than you did the prior month a year ago. All of the incentives so if you blow by the number, that money pours in. If you don't make the number, you don't get anything. So it's all about increasing, and that's a really good philosophy.

If you are already at high market share, he expects you to improve. And that's a little bit of a fight for some of the big guys but it's really helping us because we have got stores in smaller markets and you can add 20 units and hit the number, it really makes a big difference. So the mid cycle as far as vehicle availability and they are grinding away on production. I mean we are having trouble getting the new Chrysler 300 and the new 8-speed automatic and that V6. V6 was a home run for most people.

That was a big investment they made. I think they can make a million of those engines and there is only one V6, a great Echo engine. It has a lot of customer appeal. It runs well. It's world-class. It's every bit as much as anybody's engine and they are going to be able to put that in their truck and they haven't begun to expand. It went in the Wrangler.

All of those things give people reasons to come in that currently have a vehicle plus it begins to appeal to people who haven't looked at Chrysler products before. The incentive part, they also have a standards program where you can earn money if you do the things well with customers. They mystery shop us. The dealer body as a whole is markedly improving. That was a huge issue for Chrysler. They had a lot of run downtown stores and dealers who were just hunkered in. A lot going on. If you were running the Company, if I had a chance to, I would love to, but I am not going to do that. I am too old now. But they are doing the right thing.

All right. I disagree with that, Sid. I think you are plenty young enough to do that. On the industry consolidation, obviously, Chrysler, GM and Ford have been the most aggressive in closing dealerships over the course of the last three to five years. And it doesn't seem like that's really helped the remaining dealers that much just because sales have been down so much in the industry. But now that sales are recovering, it seems like we are getting some kind of benefit in leverage there. I was just wondering sort of what your take was on that currently, how much benefit you are getting from that from these closed dealers and how much you were taking that into account for your guidance and your strategy going forward.

Well, this is Sid again. Chrysler had the most closures probably as a percent of the whole and most of those were stores in bigger, major Metros where they were over dealered, not in the kind of markets we are in. So as Lithia goes, we are picking up some like in Billings we have the Jeep in Missoula and a couple of other places Eureka, California, we picked up a couple of brands and franchises and that did help.

As far as another dealer that was selling something and us taking his business in the same brand, that isn't really happening for us but it is nationally happened. I don't think either of them are going any further with dealer cuts. I think Ford is the only one that's still working on that. And we are trying to work with them in a couple of markets we are in where we could combine two or three guys and have one store, maybe two, where there is four. I think that will go on. I mean that's in perpetuity. That's not going on with Chrysler. If anything, they are going to add more Fiat. I think that's a summary of that, John.

Okay. Then on F&I, you mentioned that the banks were, I think, buying deeper and getting more aggressive on fees. I was curious as you look at F&I and the improve. how much of that is banks increasing their fees for origination. Or is that is that not part of the equation? Just that you are getting better penetration and selling more service contracts and lifetime oil changes and that kind of stuff?

Hey, John. It's Chris. Kind of two questions there, I think. So the first question has to do with credit availability, what's happening with credit. We are definitely seeing more opportunities for us to finance our sub-prime customers. We look at that segment of the business which is about 25% of our sales. We are able to close or actually find banks that will lend to sub-prime customers of 8% year-over-year. So I think as far as credit availability, there is still a lot of opportunity there for our non-prime and sub-prime segments but we are definitely seeing it get better. As far as F&I and the growth we are seeing a piece of it is from our finance reserves we get for arranging financing for customers. We are moving away from credit unions and back to traditional lenders which pay us more transaction fees for the loans that we actually find for them.

Okay. Lastly, obviously, used cars are a big focus here, you said you wanted to get your average store to 60 used cars per store. But you also mentioned that there were some far below that, which implies there are some that are far above that. What is a best-in-class dealership within Lithia selling in total for used cars and what's the ratio of their used cars to new cars? I am just trying to gauge how far this could potentially go as you continually focus on used cars.

You bet, John. This is Bryan. This is my wheelhouse sale. Obviously we believe that 60 units is doable in this type of market. It will obviously take us a number of quarters or possibly even a couple of years to get to those numbers. But our best stores do upwards of 3 to 1 used to new ratios. In fact, the store that I ran for seven years did those kind of numbers.

We have stores in the Company. Our biggest stores sell about 175 used vehicles, and they sell about 75 to 80 new vehicles. Now, when you get into those 3 to 1 used to new ratios, that's typically in a smaller store that sells 40 or 50 new vehicles. So that's really where we believe that the locations that we have and the new car franchises that we have within virtually every one of our stores. Our prime locations and prime franchises and command more than 40 units per store. Now, we, like you asked, I mean we have stores that sell 25 or 30 used vehicles. And they really it's a matter of finding the right people and retraining the teams and retraining your customers that you are the place to be able to buy any type of used vehicle whether it's within the line or whether it's a conquest vehicle.

I promise this is the last question. When you look at a store that's doing 3 to 1 used to new, if you look at the real estate and the capital employed for each of those businesses, would you say the capital and real estate employed in one of those stores that's that far the high I need of the spectrum is relatively equal, or is there slightly more capital deployed to be used? It seems like it would be about 50/50.

That's a good question, John. I mean really, the only cost is inventory turns and it seems to be that the better we get at used vehicles and the higher the used to new ratio, the more efficient they are with their inventory. Despite the fact that you are selling more cars and you are turning more dollars, the speed of turns are so much higher in those kind of stores and they are typically at 20, 30 day supplies rather than at 45 to 60 day supply. So the actually capital out the door in terms of inventory costs isn't much difference to be able to spend that.

Okay. Great. Thank you very much.

You bet, John.

Thanks, John.

Our next question comes from Himanshu Patel with JPMorgan Please proceed with your question.

This is (Inaudible). Himanshu Patel. I had a very quick question on your 2012 new vehicle same store sales guidance. I think you were expecting to (Inaudible). percentage point. Maybe you give us some road map on how you are trying to achieve that and it may be proportionate impact on your new (Inaudible).

Okay. This is Chris, our guidance for next year on both new and used is 8%, 9% for the full year. And we are going to get part of that through increasing market share and, obviously, anticipation of 4% to 5% improvement in the market. So the initiatives that we are doing I guess we are doing on the new vehicle side is to continue to push our stores to obtain market share and exceed market share in these locations. So --

I would add this one point. When we looked at our strategies for the going years, the coming years, we spent a lot of time with focusing on our customers looking at individual markets, and really empowering our people within the stores to take control and get the actions that they need. We are seeing a lot of our improvements and we can talk about margins and we can talk about revenues and through-put but when you empower people and give them the authority to do the things they need to, which is really satisfy their customers, amazing things are starting to happen. And I think that's where the people that we are attracting and growing within our Company are really taking the ball and running with it that's creating a lot of impact there.

Okay. Are there auto retailers when they talk about their new -- they expect to grow their new retail sales above market, they generally expect to see some margin pressure. But do you expect to maintain your margins? So I am trying to understand what is what is keeping you to maintain your margin at the current level and the retailers, keep pressure on their margins.

Just as John asked about how do you increase your used vehicle sales -- this is Bryan, again, by the way -- when you are increasing margins on new vehicles, you have to gain market share, which means price is an element. Okay. Once you gain the market share, which can take six months. It can take 12 months. It can take any amount of time depending upon what the competition is, depending upon your location, so on and so on. Right? But once you gain the market share, you are able to recapture your margins because then you have a natural attraction to that dealership, and you are selling value, which customers see value.

So once the volume picks up and you are able to accomplish that, you can regain that margin. Now, we've been pretty fortunate and I think one of the real strengths to the Lithia model is exclusive markets and franchises. About 80% of our stores, we don't really have another competitor for 50 to 100 miles. So you are able to really now develop a relationship with the consumer, maintain margins and maintain the life cycle of that customer throughout service parts and then back into the sales process. So I think there is a lot of nuances that occur but I think margin stability in our model is exemplified because of that exclusivity.

Lastly, on your used car profit, gross margin next year, what is your assumption on underlying used car prices? Are you expect prices to remain flat or do you expect it to go down to current levels?

Maybe slightly up.

Yeah, this is Chris. We see some slight increase in overall pricing next year, but nothing that we can think is going to have a significant impact on our margins.

This is Sid. The result of a 45-day supply is your inventory always has to match the current price and you are always a little behind that. So when prices are improving, margins go up a little bit. When places are sliding, they shrink a little bit. So I think we saw a little of that this quarter. You look at our historic margins on used cars, we have always hit this 14% to 16% range. And it's really a tailing factor on what's happening to the used car prices on a day-to-day basis. But we only have a 45 day commitment normally to the inventory. So we always adjust.

Okay. Thank you.

You bet. Thank you.

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

Thank you. Good morning, guys. Most of mine by now have been answered. A couple of things on the incentive spending front. What are you guys seeing currently and what do you expect from the OEMs going through the end of the year?

Steve, there is a lot of incentive on 2011s with domestic to clear them out because they want us to keep ordering, and there is not an oversupply by any means, but the other day I happened to get involved in a car dealer and incentive to the dealer part and the customer cash totalled to about $3,000 on a 2012 Journey and it was only a $1,000 on a 2012. There is an example of that. So the incentives are there. They are pretty consistent. I think there will be a ramping. I don't think Toyota and Honda will need it to get share back.

December will probably be the fight-out month because everybody is going to look at what the hell on my year to date. Do I want to outsell Camry, Do I want to outsell Focus? All of that fight will happen. Everybody fights for share in that last month. We should see an enhancement of incentives. They help us, incentives do obviously.

We love incentives that are dealer cash and not consumer oriented because it enables us to increase our gross margins. We don't have to give that away. Customer cash is right up front. It's on the hood. It helps make deals. It helps get people financed. You can make arguments for either one but generally there is a floating mix of that. Chrysler has done a great job of balancing those.

Okay. On the new side as we go into the end of the year, it sounds like October is tracking again north of 13, which is pretty encouraging actually given the consumer confidence readings we are getting. Mike Jackson is talking about maybe a 14 by December. How do you guys sort of see the end of the year playing out and what would you say is driving that? I mean is that sort of people on balance, moving from used to new because used pricing has been so high? Is it just generally age of the fleet and things are wearing out and people are much more sort of equipped to handle a $400 a month car payment than they are a $4,000 repair bill? Or how do you see that kind of going forward?

Steve, this is Bryan. I think the big thing is inventory shortages. I am sure our peers have talked about the same things. Really the domestic have been playing in this realm of 13 million, 13.5 million SAR within their segment and the real declines have been in the imports that haven't had supply. Now, the supply is coming back in.

Sid talked of incentives. There is going to be only a limited number of product but it's enough to get into that mid 13 range in certain months if obviously the demand holds. It appears like it should hold. I think that really those inventory on the ground within the imports it's going to take until Q1 and early Q2 if the demand holds. If it doesn't, then obviously we will have normal inventories on the ground in the next quarter. In October it's really looking like it's tracking on pace.

Steve, this is Sid. Michael mentioned, Jackson mentioned 14 million in December. December traditionally, that's a seasonally adjusted selling rate. It would take a great big month to have a 14 million SAR, we are not predicting that at all. Our guidance relative to the fourth quarter isbased on the prior productions we have seen and those, the 13 million, 12.75 million, that whole range, so anything above that tends to help us.

Okay. On the used side, I am wondering if you are seeing demand weakness or if it's purely supply constraint. It seems as though anecdotally you are talking to people and they are saying, okay, the used prices are so high and supply is so tight I might as well just buy a new one. It's not that much more expensive. Are you seeing softening in demand or is it purely sort of apply thing?

Steve, this is Bryan. It is primarily a supply thingBut I would say that your comment in relationship to the balance between the price of a new and used car. Yes, absolutely there are customers that look at that. I will is a this: Until terms of that area of the business, it only makes up a small part of our used car business. It's less than 15% and the reason is because it pirates your new vehicles sales you have to be very cautious in regards of how much you get into that business. Even if there is some of that sharing of sales, the implications on the new car businesses are pretty minimal.

Sid, again. When you look at the supply of used vehicles in the late model, the ones we are missing is the 3-year-old return on the lease because there was fewer cars leased but the rental car fleets are turning again. We are going to have a lot of 2011 and 2010 models coming out of rental service that will be available and continue to hold prices down probably and make new more attractive.

Okay. Good. Two more quick things, just financially related to either Chris or John, floor plan was quite a bit lower this month. The math would suggest that's probably not the new run rate. It's probably somewhere between where it used to be and where it is now or where it was in Q3. Was there anything sort of special that drove that sort of 2 million type number? Or what should we kind of look at that number going forward?

Hey, Steve. This is John. It's a couple of things. First, the rate on a revolver was actually lower than our floor plan providers so we carried a higher balance on it to pick up the interest rate (Inaudible).. That's the part of it. We actually got some reductions in floor plan in July as we reworked our credit facility. And that's probably a $0.01 to a penny and a half, pick-up in savings there. So I would say some of its a trade between floor plan interests and other interests between the revolver versus flooring and some of the actual absolute savings and we did talk about a $0.06 annual savings on the new renegotiated floor plan facility that you should see some of it this year and about three-quarters of it next year.

Okay. That's helpful. Then the other question, just on fleet and other, that was a little bit of a higher number relative to the historicals. I think you had said one of the dealerships or several of the dealerships you had bought in Portland have a big sort of fleet program. Is that what drove that again? And is that going to be sort of a 10 millionish type number going forward? Or should that -- is that lumpy? How should we think about that line, I guess?

Steve, this is Bryan. You have a good memory. That's specifically the Portland Highline stores. We really believe that's going to, to remain about those levels. We are still looking for additional clients there. But that's really the number and it's driven through Portland.

Steve, this is Sid. That Freightliner business is in Portland and the Mercedes people own that and all of those employees have a special pricing thing. We are basically the supplier for that. So we are going to see it probably is pretty constant. They are going to add 590 jobs in Portland in that plant. They are expanding it. They should be good for our Mercedes business in Portland.

Great. Nice quarter. Thanks, guys.

Thanks, Steve.

Our next question comes from David Whiston with Morningstar. Please proceed with your question.

Good morning, guys.

Good morning, David.

Hi, David.

First on capital allocation, wanted to know if you guys intend to use all of the remaining repurchase authorization regardless of where they trade over the next year.

David, this is Chris. Obviously our first priority with cash is to reinvest in our current stores and look for acquisitions that are creative. And we will continue to pay a dividend that's sustainable for the long-term. And if you opportunistically we can find times to buy shares back we will continue to do that , but we have some pretty steep metrics we look at when we buy shares back and we feel like that's just going to depend upon the

Okay. Great. Next question, GM has talked repeatedly on the monthly sales calls how they are looking for a big uptick in pick-up truck sales towards the end of the year. Do you think across the country most Lithia customers are looking to buy a pick-up in the fourth quarter?

This is Bryan, David. Yeah, we would concur with what General Motors is saying. Obviously, we are in markets that are even more pick-up truck centric than the rest of the country. We should see the implications and we have assumed that in our forecast.

David, this is Sid. The incentives on trucks will accelerate.

Okay. Finally, can you give any guidance on, as a SAR goes up overtime, at what rate would you need to add back sales associates and increase your cost structure?

As far as that, this is Chris, David. As far as adding back sales associates, we have some pretty detailed metrics that we use to identify in our stores when we add every position back, not just sales associates, and obviously, the first people that are going to come back are your productive positions, and each of our sales associates is expected to sell between 8 units and 10 units a month. And so as the store is selling, additionally, 8 units to 10 units a month they would add back an incremental salesperson, but we feel like there is a lot of capacity in a lot of our stores to take another 20% increase in share without adding any staff. And we are going to continue to monitor that on a store by store location into the future.

David, this is Sid. That sales commissions and sales salaries are in the variable piece. So they tend to grow and go up and down with sales, but they trail it. So we don't have to add them right away, but ultimately, you end up when markets are a lot better, you have to have enough personnel to take care of the customers.

Okay. The 8 units to 10 units, is that used and new combined or just new.

That is used and new combined.

Okay. Great. Thanks very much

Thanks, David.

(Operator Instructions). Our next question is from Jordan Hymowitz with Philadelphia Financial please proceed with your question

Hey, guys. I want to congratulate you guys on a successful turnaround and some of the best couple of quarters since I have been following you guys in like '97. So congratulations.

Thanks, Jordan.

My question is on the used vehicle side. You guys have always been very successful used vehicle retailers. And that's tried to be expanded in different times over the years with L2 and things of that nature. Are you seeing an increasing amount of shares taken from CarMax specifically? Because your used vehicle sales continue to trend up and their ratio of new to used sales, the market, what they are doing continues to struggle a little bit.

Jordan, this is Bryan. Good to hear from you, too. We actually only compete head to head with CarMax in two of our markets. So we haven't seen where they've been taking market share from us. So I mean really --

Is it the opposite are you taking it from them in those markets?

In one of the markets, we sell about the same amount of units as they do. In one of our stores and a little bit less than they sell in the other store. And it's actually two of our better used car stores. So I think the market's always big enough, even if CarMax is playing in that market. But no one has greater than a 10% market share, so the implications of that is really back to those basics of can I find the vehicles and have the right vehicles and do the customers believe that they have a wide selection at a good value in either of those, in our competitors or our sales.

Let me ask the question a different way because I didn't ask it intelligently. The used to new price differential is the narrowest it's been in a decade. As a result, more and more people are buying new car versus used cars.

Uh-huh.

Do you think that that is also augmenting your competitive advantage to not only CarMax but the used vehicles retails in general? In other words, are you selling more used vehicles or new vehicles consequently and you have more models that people want a this? Is that an increasing advantage because the gap between new and used is closed so much?

I think that's accurate and I mentioned before that that car that competes with the new vehicle, that one to two, three--year-old vehicle is only a small portion of where we focus our time and many of our competitors, new car dealers or CarMax for that matter, they spend a lot of time in the one-to-5-year-old vehicles.

That's the logic.

Yeah, our focus is in the three to 7-year-old vehicles. We know if we drive the three-to- seven-year-old vehicles and we are able to find those cars whether it's trade-ins or whatever else? Right? What happens is we start the engine turning and we are able to then get a lot more value auto cars. We are able to be more competitive when we are taking vehicles in on trade, and everything kind of just starts to turn. So our real key in about 60%, 70% of our volume comes from that three to seven--year-old vehicle, so that implications of that type gap between new and used, we try to avoid, and there is some basic logic that either we can talk after or I can get in to now and talk to you about why is it difficult to sell a one to three-year-old vehicle when it's not the product you sell new.

Jordan, this is Sid. Jordan you know we've always focused on that, that the franchise allows us to get trade-ins that other people never see, particularly independent car dealers. We have had a lot of independent car dealers close in the markets we are in. And that's an opportunity to take share and keep it. And CarMax only face off with a couple of places and they opened after we were there. So when Bryan said that, gee whiz, they didn't really hurt our business that doesn't mean that we have taken share from them. They came in the markets like Fresno and opened up and we were already there.

So that's a trend, but they're on the unique thing in the used car world. Most independent used car dealers are struggling to get product, big time. And having a trade-in available for us is a huge thing. And what Bryan mentioned on that value auto, getting that three to seven-year-old car sold and traded in for that car that's got 90,000, 100,000 miles on it and being able to sell that again is a big advantage for us. We have got a good strategy in the used car thing and CarMax is doing great. I cannot pick on them. I have no idea how they make that gross margin on wholesale.

Neither do I. But that's a different topic. Finally, can you say specifically what percent of your vehicles you are sourcing at auction today versus a few years ago because you, like everybody else, seems to be sourcing more internally or through trade-ins.

This is Bryan, Jordan. In terms of where we get our cars, we receive about half of our product that we sell retail on the used vehicle side as trade-ins. When we break out that other half of the vehicles it's not just auctions. I mean that's one source, and it's kind of the last resort source because obviously, that's the most competitive area. It can be cars that are re-treads to some extent or other people's problems. We really look to the street many times, whether it's through Craigslist, whether it's through eBay whether it is through advertising what we call our appraisal lane or other dealers as a big source. We also have our internal auction that moves cars to prime locations within our own Company, and now that's obviously in the trade-in number of 50% as well. So in terms of the auction it's probably about 25% of the vehicles. That we sell in total.

Okay.

Now, if you get into certified vehicles it's a much higher percentage. Right. In those one to three-year-old vehicles. Does that answer your question, Jordan?

Yes. Thank you.

You bet, Buddy.

Mr. DeBoer,we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you all again for listening, and following us and we will continue to execute. I have every bit of confidence this is probably the best team this Company has ever seen. As I said last quarter, we are hitting on all 8 cylinders. Thanks, again, for participating, and itonly takes 6 now.

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