Lithia Motors Inc (LAD) 2011 Q4 法說會逐字稿

Greetings and welcome to the Lithia Motors' Q4 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John North. Thank you Mr. North. You may begin.

Thanks and good morning. Welcome to Lithia Motors' fourth-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 risks factors which are outlined on the Company's filings with the SEC. We expressly disclaim any responsibility to update forward-looking statements.

During this call we may discuss a certain non-GAAP items including adjusted gross margin; adjusted selling, general and administrative expense; adjusted operating income; adjusted income from continuing operations; adjusted earnings per share from continuing operations; and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period, and is useful in understanding our financial performance.

These presentations are not intended to be provided in accordance with GAAP and should not be considered an alternative to GAAP measures. A full reconciliation of 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, Lithia.com, highlighting our fourth-quarter results.

Presenting on the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and COO; and Chris Holzshu, Chief Financial Officer. Also on the call today is our Vice Chairman, Dick Heimann. At the end of our prepared remarks we will open the call to questions. I'm available in my office after the call for any follow-up questions you may have.

It is now my pleasure to turn the call over to Sid DeBoer.

Good morning. Today we reported a record fourth quarter adjusted income from continuing operations of $13 million compared to $5.4 million a year ago. We earned $0.49 per share on an adjusted basis in the fourth quarter compared to $0.20 per share in the fourth quarter of 2010.

For the full year 2011 we reported adjusted income from continuing operations of $52.6 million or $1.97 per share, compared to $24.2 million or $0.93 per share in 2010. We grew our annual revenue over 30% and more than doubled our earnings per share for both the fourth quarter and full year 2011 over the prior year.

Today we also announced changes in our executive management group. On May 1 of this year, I will assume the role of Executive Chairman. Bryan DeBoer, our President and COO, will be appointed CEO.

Over the past three years, Bryan's team has worked diligently to elevate our objectives and increase our performance. To his credit, the financial results we have produced over that time have exceeded all expectations.

The Board of Directors and management have determined that the time to affect this transition is now. We are proud of Bryan's contributions to the Company and I look forward to working with him in the years to come. Congratulations, Bryan, on a well-deserved new role.

In addition, Bryan will continue to be our executive in charge of operations. In my role as Lithia's Founder and Executive Chairman, I will remain involved in strategic oversight, manufacture and governmental relations and business development. I will continue to provide my expertise, given nearly 50 years of experience in automotive retail.

In short, I will still be an integral part of Lithia and am now fully transitioning the day-to-day responsibilities of the CEO role to Bryan. As Lithia has continued to mature and evolve, we're executing a well-developed strategy for succession in the leadership of our Company. I, along with Dick Heimann and Brad Gray, have all found roles that fit the needs of the organization going forward and are pleased with the progress in our transition.

Bryan's team is poised to continue to execute and expand Lithia's vision, and we are confident in their abilities and excited about the organizational changes taking place.

A multiyear expansion in the number of new cars sold in the United States is ahead of us. We believe that 2012's SAR will be 13.5 million to 14 million units.

Expanding credit markets, advanced safety features and improved fuel efficiency and lots of new technology and styling are driving consumer demand. Coupled with an aging fleet of vehicles on the road, we are confident that volumes will continue to improve and the future is promising. Lithia is prepared as never before to capture more than its share of growth.

In closing, I would like to thank our team again for delivering a very strong performance in 2011. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Good morning everyone. Before I begin, I would like to thank Sid for the kind words and acknowledge the opportunity I have been afforded. I look forward to serving as CEO and would not be where I am today without the guidance and mentoring I received from Sid, Dick and Brad.

I would also like to offer my sincere appreciation to the rest of the team. I appreciate your hard work and unwavering support, and I'm excited about our future. With that said, I would like to discuss the fourth-quarter same-store results.

Total same-store sales were up 23% in the quarter, reflecting increases over the prior period in all business lines. New vehicle sales increased 29%, well above the national average.

On a unit basis we sold approximately 10,800 new vehicles, an increase of 2100 units or 25%. This increase was on top of a 33% increase in new vehicle sales in 2010.

Our stores continue to drive new vehicle sales and increase our market share. We have worked closely with our stores as they improve our performance in this area and it shows in their results.

Our team still believes we have a significant opportunity to improve our performance in new vehicle sales. Individual market share is the most important metric to gauge our new vehicle opportunity. In 2011 we increased our market share 5%, and have targeted a 3% to 5% growth in 2012 on top of an underlying market recovery as SAR increases.

Used vehicle retail sales increased 21% in the quarter. We sold approximately 9700 retail used vehicles, resulting in a used to new ratio of 0.9 to 1. We sold a monthly average of 40 used vehicles per store in the fourth quarter of 2011, up from 30 used vehicles per store in 2010. Our objective over the near term is to sell an average of 60 used vehicles per site.

In the quarter value autos, or vehicles over 80,000 miles, performed well. This segment grew 46% year-over-year and had a gross margin of 20%. Although these vehicles have lower selling prices, overall the average selling price on our retail used vehicle increased 2% due to underlying market strength.

We still have tremendous opportunity in used cars, particularly in core vehicles, or cars that are between three and seven years old. We believe that concentrating on each of the three segments of used vehicles -- certified pre-owned, core vehicles and value autos -- allows us to grow market share and attract a broader spectrum of customers.

In the quarter our F&I per vehicle was over $1000 per unit. On a GAAP basis we arranged financing on 73% of the vehicles we sold, and our finance reserve increased $45 to $406 per vehicle on a year-over-year comparison.

We sold 41% of our customers a service contract and 35% of our customers a lifetime oil product. Of the vehicles we financed in the fourth quarter, approximately 12% were to sub-prime customers compared to only 10% in 2010.

In addition, the number of vehicles sold to customers visiting our dealerships with credit scores of 620 or lower improved 64% year-over-year. Over the entire customer base, the average credit score in the fourth quarter was 724. In short, credit trends have been positive throughout 2011 and this continued in the fourth quarter.

Our service, body and parts sales increased 3% in the fourth quarter. Wholesale parts and body shop showed significant increases of 8% and 11%. Customer pay work increased 4%, which is the 10th consecutive quarter of same-store sales improvement.

Warranty still faces a headwind as it declined 11%. Warranty repair opportunities have also declined as initial vehicle quality and reliability continue to improve. Also, we still face difficult comparisons from the declining number of units in operation under warranty. We expect these trends will continue in 2012 and potentially beyond.

Regarding regional performance, all states posted double-digit increases with three of our largest states, Oregon, Montana, and Texas, performing the best. Our gross profit per new vehicle retailed was $2509 compared to $2519 a year ago. Gross profit per used vehicle retail increased to $2310 compared to $2282 last year.

Our stores remain focus on deal average where the gross profit dollars per vehicle sold rather than a margin percentage. As sales price increase, a decline in vehicle margin is possible despite gross profit dollars per transaction being unchanged or higher than the prior year. We are comfortable with our performance here and do not view margin erosion as a significant challenge in 2012.

In the quarter, our adjusted overall gross margin was approximately 16.4% compared to approximately 17.3% in the same period last year. A 29% increase in new vehicle sales and 21% increase in used vehicle sales, which outpaced our other business lines, accounts for the majority of the decline. Overall adjusted gross profit dollars increased 27% over our fourth-quarter 2010 results.

Now to discuss corporate development. We seek exclusive domestic and import franchises in midsized rural markets, and luxury franchises in larger markets. Also, we want to reiterate that we remain disciplined on our acquisition strategy to ensure ROE targets that meet or exceed our internal hurdle rates.

So far in 2012 we have been awarded a Scion franchise to add to our Toyota store in Billings, Montana. We also have opened a stand-alone Mini store in Portland, Oregon and a standalone Subaru store in Spokane, Washington. Both of these stores have been separated from other franchises, which we will offer a better customer experience, increase new vehicle sales, additional used vehicle traffic and provide organic revenue growth for Lithia.

I look forward to leading our team through many new opportunities that lie ahead. With that said, I will turn the call over to Chris, our CFO, to discuss our financial position and increased guidance for 2012.

Thank you, Bryan. At the end of the quarter we had $21 million in cash, $10 million available on our revolver and $66 million in unfinanced new vehicle inventory. Therefore, our liquidity totaled approximately $97 million.

Our free cash flow, as outlined in our investor presentation, was $30 million for the full year 2011. We estimate this number will be approximately $30 million again in 2012, driven by increased earnings and offset by an increase in planned CapEx as we continue to invest in projects that grow our business.

Our capital expenditure estimate is $44 million for the full year 2012, an increase of $12 million over 2011. This budget is based on new facilities, facility improvements and re-models, the consolidation of our headquarters facilities into a single location, and other business development opportunities that are currently in progress. We continue to focus on the prudent allocation of capital and believe a balanced strategy of acquisitions, internal investments, dividends and share repurchases is appropriate.

Our first choice for capital deployment remains to grow through acquisitions. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid investments in Lithia's future.

Our balance sheet remains in good shape. We have no mortgages maturing in 2012 and have been successful in extending the maturities of several loans during the fourth quarter. At December 31 we had approximately $287 million in total debt, of which $194 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 adjusted SG&A was 74.6% of gross profit. For the year, incremental throughput, or the percentage of each additional gross profit dollar over the prior year were retained after selling costs, adjusted to reflect same-store comparisons, was estimated to be 58%. On an adjusted basis incremental throughput was 48%.

At least 90% of our controllable SG&A is driven through personnel costs and advertising spend. We continue to partner with our store leaders on a plan established in 2008 to increase the productivity of our team and ensure our pay plans promote exceptional pay for exceptional performance, while increasing store customer visits.

As of December 31 new vehicle inventories were at $373 million or a days supply of 62 days, a decrease of 12 days from a year ago. Used vehicle inventories were at $107 million or a days supply of 52 days. This is one day lower than our days supply level a year ago.

As we expected, import inventory levels are continuing to recover into the first quarter of 2012 and were not at normalized levels at year-end.

I would like to provide a few comments on our guidance for 2012. We have increased our EPS estimate in the first quarter and the range of $0.41 to $0.43, with a full year expectation of $2.06 to $2.16.

We anticipate growing new vehicle same-store sales 10.8% and used retail same-store sales at 10.5%. These increases are in line with our expectations of increased market improvement and additional share gains in our stores, as Bryan outlined previously.

At approximately halfway through the quarter our results are on track. For additional assumptions related to earnings guidance, I would refer you to today's press release at Lithia.com.

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

(Operator instructions) John Murphy, BofA Merrill Lynch.

Good morning guys, and congratulations, Sid and Bryan, on the new roles. Just a first question for you, Bryan. As you take full control of the reins here as the CEO, is there anything that you think you would change in the strategy? Or is it going to be purely execution?

I'm just trying to understand if there is any new direction or thoughts that you might have as you take the reins.

Good question, John. I think most importantly, we have a pretty good strategy in place with exclusive franchises, our centralization in common systems. Our entrepreneurial culture is what we really spent most of our time on out in the field.

And then obviously, continue to grow organically as well as externally is a big focus of mine. And I think the pathway that Dick, Sid and Brad have set is a good pathway for the organization, and I think we have executed on it over the last number of years. And we don't see dramatic changes in that.

Okay, thank you. And then a second question, as I look at the results for the fourth quarter and then what you're looking for, for full year 2012, it seems like you guys keep surprising to the upside. And to be perfectly honest, the roughly 5% to 10% earnings growth you're looking at for 2012 looks a little bit conservative.

I'm just curious as to what you think has driven sort of your surprises in the short term and really what might happen in 2012 to the upside. Does a lot of this have to do with Chrysler strength? Or is it internal initiative? I'm just trying to understand what has been driving the upside, at least in your opinion, according to your plan, or relative to your plan.

Hi, John. This is Chris. First off, our guidance is really based on the current performance trends that we're seeing in each one of our stores. And what we look at is an expected retail recovery in each market, which varies a little bit from overall SAR.

With that said, we use this bottoms-up forecast to predict our performance, and there's lots of factors that can impact the individual performance in the stores. Things like our store leadership, the competition in the market, inventory availability, financing, product availability and so on. So our goal is to put out realistic guidance that we can achieve, and we feel like the beats that we've seen have really been based on exceeding our own internal expectations.

So, for example in the fourth quarter, our guidance beat -- we put out the guidance $0.37 to $0.39; our adjusted earnings was $0.49. That was really based on a number of factors, one being that the impact from our import inventories wasn't as severe as we expected. Then we continue to focus on leverage, which is coming through to the bottom line and improving our overall EPS.

Okay. And then on acquisitions, as we look at the landscape out there, obviously it made a -- it sounds like there was more hubbub around the potential for acquisitions coming available. It sounds like you guys are probably generally in the real sweet spot of what is coming to market.

I'm just curious if you are seeing any real ramp up in the available properties and what we might expect on acquisitions, because it sounds like there's about to be a pretty good surge over the next year to two years in acquisitions, just in the industry at large.

John, this is Bryan again. Obviously with acquisitions, at any given time certain sellers are in the market place. We continue to see lots of opportunities. I think the most important thing is that we remain disciplined.

So, for us to give any type of guidance that we're trying to achieve four or ten or however many a year, that's not really what we're looking for. We're looking for those models and those stores that really fit that exclusive market again. Now we'll go into larger markets with luxury franchises, obviously.

But I think the horizon looks positive. There's no question. And there is that plentiful amount of acquisitions out there at any given time.

Okay. And then just lastly for you both, Bryan and Sid, because you've both been in the business for a while. Do you think you could sell Peugeots in the United States?

(laughter) I don't know, John. If they bring Peugeot, we'll watch for a while before we worry about selling them.

Great. Thank you very much guys. Keep it up.

Simeon Gutman, Credit Suisse.

Thanks, good morning and congratulations on the year, and to you, Bryan and Sid. On 2011, this is maybe another way of asking the previous questions.

So, last year was a great year and the performance is probably explained as much by some of the top line momentum as it was by driving efficiencies in the business. So how do you think those two pieces play out next year? Maybe can you talk about what low hanging fruit from an efficiency standpoint is left, and then talk about the momentum of some of the brands continuing?

This is Bryan. Thanks for the question, too. In 2011 despite pretty good performance, at least what we viewed as solid performance, we still have plenty of stores that don't operate at their prime level.

We have something, and I think we've talked to you about this before, called managing by thirds, which is basically a different approach depending on how the performance in the store is. And we still have a good one-third of our stores that we believe that we need to continue to grow our teams. The top line is still dramatic amounts below where our real potentials are. And I think in 2012 we will be able to extract those benefits as those teams become stronger and stronger.

So, additionally, on the used vehicle side I spoke to this in the conference script. But it is pretty clear that at 39 units in used per site, that is an okay job in my mind. Now, I'm pretty hard on ourselves and I think our team are pretty hard on each other. But we're pretty confident.

And when we were a younger Company, we were always able to sell in the 60 units per site. And that is where we spend a lot of our time, when we go visiting with our stores, in teaching them how to procure inventory at a more rapid rate and how to get rid of the cars they take in on trade that are the improper cars. And I think the combination of those two things topline, those underperforming stores as well as a global focus on used cars will translate into that 50%, 60% throughput that I think we all want to see.

Simeon, this is Chris. As it relates specifically to leverage, we don't anticipate having any real new initiatives that we're going to introduce in 2012. What we're going to do is continue to focus on those tools that we put in place throughout the recession that really focus our teams on maximizing productivity in our stores, enhancing pay plans that drive performance, and spending the marketing dollars that are necessary to drive as much traffic as humanly possible into every one of our locations.

So, nothing real new, but continue to stay focused and disciplined on the strategy that we feel like has really been a win for us the last couple years.

So, following onto that, it sounds like there is opportunity both as the top line improves to drive the productivity, but also more internal efficiency. I guess if the top lines weren't as giving next year as what the SAR implies, there are still opportunities to become more efficient in some of those operations?

Simeon, this is Chris again. Yes, we believe that we can continue to drive our SG&A as a percentage of gross down to the low 70% range. And we're going to do that by focusing on the throughput, which is just for every incremental gross profit dollar that we grow, we want to bring at least 50% to 55% of that to net.

And when you look at the amount of focus that we have on our personnel costs and advertising, we really believe that that is attainable.

And then the last thing I would say is on acquisitions. We don't guide acquisitions into our overall guidance. But we really believe that with our corporate structure, we have a lot of leverage here that we continue to use as we add stores. And what I mean by that is adding two to three stores a year isn't going to incrementally grow our corporate staffs at all.

This is Sid. Having lived through these recoveries many times in the last many years that I've been doing this, the upside on earnings is a lot bigger than people expect, because you can keep most of that gross profit to net. And it's an opportunity that is honed by a recession that we've just had, and the education that this group of leaders has been through in terms of holding costs down as increases in sales and gross happen.

So we've not only got maybe a 10% increase in volume next year as an aggregate, and it may vary some in the markets we're in, so our guidance reflects that. But that increase in gross profit that happens from that, our goal is going to be to keep that as it has in the past. It's a great time to be in auto retailing when things are turning up.

Okay, and then one more for Bryan. Realizing that you're partially the architect here of the Company that we're looking at, and you mentioned sticking to that strategy of exclusive markets. And then also you mentioned maybe pursuing larger markets if they are luxury brands.

Do you have, not necessarily a different view, but some things to add as far as geographic or brand footprint? Are there any big mandates in your head as far as pushing the Company and the footprint to different places?

Right now we're in about 25 markets or so west of the Mississippi. We've obviously looked at expanding our footprint into the East. There is also another 50 markets or so that are west of the Mississippi. So we have lots of opportunities still west.

I think our biggest driver of whether we expand that footprint past the Mississippi is really -- we'll look at a small platform that has some good people that we can leverage. Hopefully not have to pay too exorbitant amounts, and keep that platform small so the multiples don't get too exorbitant when we go past the Mississippi.

But, you know, that's a matter of fit. They have to fit with our management team and the philosophies that we believe in. I think to push that isn't something that we're really looking to do. We're just looking for, again, those opportunities, that ROE and make sense personnel-wise.

Okay, thanks and good luck.

Brett Hoselton, KeyBanc Capital Markets.

Good morning. It is Matt Mishan in for Brett. Congratulations, Bryan and Sid. First question I had was used vehicle sales guidance has increased; I just wanted to get a sense of what is driving that.

This is Bryan. In terms of used vehicle sales, we finished off the year pretty well. We believe that we are gaining momentum when it comes to being able to find the right cars to put on our lots to meet our consumers' needs. And we believe that that 10% and outlook for 2012 is very doable, okay, and a lot of that, like I said, is driven by procurement.

Now obviously as you procure vehicles, there's a lot of other alignments that need to occur, and you need to build your staff and you need to convince consumers that you have certain product lines, and so on and so on. And I think our teams have got that.

They understand the basic three principles of used cars which is obviously certified vehicles, core vehicles which are those 3 to 8-year-old vehicles, and then those value auto vehicles which is really a new segment that we got into a couple years ago, which are the older, as-is type of vehicles. But they get it. They understand the key driver to each of those three areas and we believe that 10% is a very realistic number in our view.

Alright. And in addition, can you walk through some of those -- you made some slight changes, downward revisions to your segment margin guidance in new, used, and parts and service. Can you just briefly walk through those?

Hi, this is Chris. Our guidance was laid out in our press release and in our presentation. When we run our business, we don't really focus our business on overall gross margin percentages. We look at gross profit dollars.

So, when we start seeing current trend changes in the overall price of new vehicles and the prices of used vehicles, they may impact our margin slightly, but nothing we're alarmed with and nothing that we are too concerned with.

And you raised your CapEx guidance to $44 million. What are the primary drivers of that?

Hi, this is Chris again. First off, let me just reiterate that all of our capital projects that we undertake have to meet our strict hurdle rates that Bryan touched on earlier. What we found now is that all of our general managers and all of our store leaders are accustomed to business plans that have to show there is incremental profit on the projects that they undertake.

And so, I guess what is driving that is a number of things. We have our headquarters project, first off, which is about $10 million and that additional spend in 2012. But we're confident, by moving out of nine different buildings we're in today, that not only is it going to bring synergies to our overall management team, but it is also going to be accretive to earnings.

And then the remaining projects that we have entail facility upgrades, improvements that manufacturers are dictating but they're also paying for, and the split out of a few of our facilities where we are moving franchises that are dual to single points, which we think is going to overall increase their new vehicle sales, but more importantly give us additional used vehicle points that we can focus on.

Got it. Just a follow-up to one of John's earlier questions on the acquisition activity; without giving guidance, are you seeing more opportunities come across your desk?

Matt, this is Bryan again. The surprising thing is -- I've been in acquisitions now for about 13 years. It seems like it's pretty static, typically, and there is not big swings in acquisitions.

We always have our oars in the water in all 70 of those West Coast markets. And it really depends mostly on whether or not the primary owner is aging, or whether or not he has a succession plan. And I think that's the biggest driver.

Now, during the recession there was definitely some additional drivers that came from financial pressures. But other than that, we just know that if we keep our oars in the water, we will pick up the acquisitions when the time is right. And they will meet our fairly stringent ROE guidelines of about 20% return a year. We get our money payback in five years.

And I think with that criteria you've got to be out there. And you really just sit and wait until something changes within that succession planning.

This is Sid. In the acquisition framework of the world, and I get a lot of input from that and it's going to continue to be a role for me, because it is who you know and your reputation of how you go about buying a guy's business that really dictates who gets to buy a store. In many cases, families choose who they sell to.

And we're the prime candidate now in almost every market we are currently in, certainly, but even then all of those other markets we've identified. And every broker knows exactly what Lithia will be able to do, and knows that we will be able to execute with the cash and with the follow-through the manufacturer, that we won't enter into a deal and hesitate at any point. If we're willing to do it, we'll do it. And I think that really weighs in our favor.

And we're turning down, obviously, a lot more than we're going forward with. And it's largely driven by the price, in many cases. So it's always a matter of finding the right value and finding the right families that can operate with us. I think you will see plenty of these in the future.

As you know, we started with six stores and we bought. We were up over 110, so this is a very experienced acquisition group. It's a way of life for us.

There is no major change in the market today that there wasn't five years ago. We did go through a downturn where there were a few more sellers, but we weren't sure how many domestic stores we wanted to buy at that time. We were looking at a mix issue, which we still are.

So we're going to keep trying to keep improving on luxury, improving on import, getting our mix and balance so no more than 20% is represented by one brand. Strategically, this Company will execute acquisitions as well as anyone.

Thank you very much and great quarter.

Steve Dyer, Craig Hallum.

Good morning guys. I would add my congratulations. A couple things, one, do you have a sense of kind of the mix between cars and trucks at the end of the quarter, or sort of typically what you would carry?

On an inventory basis?

Yes.

It matches sales pretty well, so.

Yes, I think we said our inventory days supply is about 12 days down year-over-year. But I think we're very comfortable with most of our brands in the inventory levels that we have, and that's both in car and truck. So we feel really good that we are well-positioned to take on the first quarter and get ready for our summer selling season at this point in time, based on what is on our order bank.

Okay. You don't have the split, though, in front of you?

Somewhere around 65/35.

Cars versus trucks?

Trucks versus cars.

Trucks versus cars, okay.

Remember we're in agricultural rural markets, so we're heavy truck guys.

Yes, do you have -- or how much ability do you have to flex that? And I guess where I'm going with this is, if gas becomes an issue, as it seems like it might over the summer, do you have the ability to flex that to maybe a more favorable mix?

This is Bryan again, Steve. Absolutely, I mean our inventories at any given time are out about 60, 90 days, depending on whether it is an import or domestic franchise. So we can move things pretty quickly.

Fortunately, all of the domestic franchises now are pretty heavy into the car game as well, which has made it a lot easier to change product line. But also remember the trucks over the last three years have increased their fuel efficiencies in dramatic ways. So the fact that we may see $4.00 or $5.00 gas prices in the coming quarters, I don't think is going to have the same impact as it did when it spiked into the $4.00 range two or three years ago, when we're seeing trucks that still get 22 to 24 miles per gallon.

Yes, there is an impact. But a lot of that market has already been taken out and I think people are now adjusting to it. So if anything, what it does is it allows people to be able to now trade up to a car that gets 24 miles to the gallon rather than one that gets 16, 18 miles to a gallon.

Okay, that's helpful. And in your new sales, as new starts to tick up as a percentage, are you having -- or maybe you could describe a little bit. I know this time around there's been a focus on a lot of the service plans and things like that to keep people coming back. Anything you could share sort of as to the lifetime oil or those types of things that are going to keep those people captive?

So, we as an organization, we sell about 35% of our customers a lifetime oil product. There's now multiple manufacturers, and not just the luxury franchises, that are offering service plans much like Hyundai. Toyota is starting to look at those things as well.

This is -- it's going that way, and fortunately you can see our customer pay business. I think we had 10 quarters is it, now, of positive customer pay comps. And that's off units and operations that are somewhat depressed still from '07, '08 time frames.

So we're starting to see that the consumer is spending more time in our dealerships. And our commodities availability, which is basically selling them wipers and tires and batteries and all the other things that their cars need, they are getting used to it.

And our manufactures are really helping us with that, and we believe that our ability to saturate our units and operations is even greater than what it used to be. And I think our awareness of those customers and our ability to get them in and out of our shops quickly is attractive to them. And I think we'll see those trends continue and our manufacturers are supporting it as well.

Steve, this is Chris. The only thing I would add to that is that in addition to focusing on training and the sale of those products, the continued accessibility to credit is also helping our overall sales and allowing us to sell, I guess, more extensive service contracts than we had in the prior year.

And what I mean by that is the advances we're allowed to do on some of our back-end finance products is loosening up, so we can actually sell bigger products or customers, which keep them in our dealerships longer. So that's been a positive tailwind for us as well.

Great, that's very helpful. One last question from me; as you think about your used vehicle same-store sales growth, how do think about maybe the different buckets that are going to contribute to that in terms of -- is late-model, new or value -- I'm sorry, late model used or value used, how do you see growth playing out in the used market this year?

Steve, this is Bryan again. Obviously when it comes to used, I'm the guy, okay. That's my forte over my career, trained well by Sid and Dick and Brad.

When we look at used vehicles, we keep it pretty simple. We look at certified used vehicles as really -- that's the brand of new car that we sell, and it is a one- to two-year old model vehicle. We pretty much -- we teach our stores to get rid of all other one- to two-year old vehicles because it is hard to sell the benefits of that product line.

Now we move into the three- to eight-year-old vehicle, which is core product. Core product there's one thing that matters. Can I get that vehicle? Now you obviously get some of those on trade, but the most important way to get those is procurement.

Now whether you are buying those from customers on the street, whether you're getting those at auctions, whether you are buying them from other dealers, that mining of a used car that is three to eight years old is the key to growing that business. And core product is about 60% of our mix in used vehicle sales. So that is where our real driver is.

That is also where we take in most of our trade-ins that become value auto product, which is those eight-year-old and older vehicles. Now we can obviously take those in on new vehicles if people are jumping big amounts or on certified product as well. So really that value auto, the key driver is sell more of your upper end new and used vehicles and you take more value.

So, it's a real cycle. And I think if you save your dollars by getting rid of the late-model conquest vehicles and putting those dollars into going and buying the great core product, the engine starts to turn. And that is where we're really at now. So we're looking at a lot of our increases really coming from that core product.

However, our certified last year we're actually down a little bit. But that was a lot supply-based. We're starting to see now a lot of the manufacturers start to turn their fleet sales up, which means that those off-lease cars now are coming back in.

So we don't really foresee big declines again in certified. We're looking at up about the 10% as well. But like I said, our big driver is in the core product and that is all about proactively going out and finding product. Did that cover what you were looking for, Steve?

Yes, that was great. And that's all I have. Well done guys.

Rick Nelson, Stephens.

Thank you and good morning. And my congratulations as well. I would like to ask you about the SG&A below 70%. I went back, it's the lowest on record; a seasonally small quarter. I guess do you think these levels are sustainable, particularly as we move into the seasonally bigger quarters, Q2, Q3?

Rick, this is Chris. Yes, we believe that the levels we're seeing in our SG&A right now are sustainable. We're going to have additional headcount in some of our productive positions as the markets continue to improve. And when I say productive positions, I am talking about our sales people and our technicians.

But we are confident that we can continue to increase our volume in each of our stores without really the impact of our management staff. And if you think about our stores individually, each store sells about 80 units per store per month. And so, even a 20% improvement in sales in a month is only about 16 units. And while that might translate to two salespeople, which are really 100% variable, it doesn't entail that we would add additional management staff to cover those increase in sales.

Hey, Rick, just one clarification; this is John. Our SG&A as a percentage of gross in the fourth quarter was 74.6% on an adjusted basis, so I just want to make sure when you look at the 69% number, that included a real estate gain that was fairly significant that you probably should ex-out. But for the full year, on an adjusted basis, we still did under 73% which I think is second lowest in the peer group relative.

Rick, we don't anticipate we will go backwards in that either in 2012.

I got you. Thank you for that. Also, as you look at your guidance for 2012, the 10% to 11% new vehicle sales growth on a same-store basis. As you look at the major buckets -- domestic, midline imports and luxury -- how would you rank those three segments in terms of sales growth expectations?

Rick, this is Bryan. When we look at the different buckets, we look at domestic being a little bit lower than that average. We look at import being slightly higher because we believe their comps are fairly poor from last year. And then on luxury we as well look at as being a little bit weaker than that 10% to 11%.

Got you. And do you have a SAR assumption? I think if I backed into it, you're looking for 5% to 8% industry growth.

That's about right.

Put the SAR around $13.5 million.

That's correct.

I did want to reiterate, though, when we do actually set our guidance it is based on a store by store forecast. And what you will find is that even a domestic brand right now can have opportunity based on what their overall sales efficiency has been. So a store that might be at 70% sales efficiency has more upside than we see in 2012 than a store that might be at 150% sales efficiency.

So if you're at the high end of your efficiency on sales, you are probably going to follow the market. We believe that, if you are below your sales efficiency levels, that you not only have a general market share gain to get but you're also going to increase with the overall improvement in the markets that we have.

Okay. Got you. And finally, if I could ask about the truck business, are you seeing any recent resistance to truck sales with the increase in gas prices?

This is Bryan. No, we have not seen impacts because of gas prices thus far. We obviously -- I mean, I have to say that I believe there's enough trucks on the road out there that are getting the 12 and 13 miles per gallon that there's still some opportunity. And I think with change becomes opportunities for us to be able to convince that that 30% sales fuel efficiency number is a reason to trade, not so much that I have to get rid of my truck. It's really that they can improve things.

In fact, I just got a new Wrangler. My old Wrangler got 17 miles to the gallon on the freeway. My new one gets 23 miles per gallon and has 30% more horsepower than the original model. And that is a difference between an '11 product and a '12 product. Well, shoot, the difference between a typical customer's car at an '08 or '07 is even bigger than that.

So I think that it's going to create it, and I think it is going to substantiate that $13.5 million to $14 million SAR. And I don't think the pressure is going to come in either car or truck. I think it's going to be pretty balanced.

This is Sid. Looking at that $13.5 million $14 million SAR, I mean there is a regional mix that impacts our estimates, and then fleet versus retail also has a big impact on that number. So that's why we gave that range.

If you look at gas prices historically, it's the sudden jumps that hurt us. It is not the creeping, because we have plenty of time to shift inventories as we go, and as Bryan has alluded to, the improvement in mileage.

And then you look at the markets we're in. If oil does really well, look how well Texas and Alaska, Montana and Billings, North Dakota -- I mean we're in some markets that are really going to improve because of higher gas prices. So I mean it's not like it's all negative.

So we're pretty well prepared to adjust. That 60 to 90 day inventory of new cars is the only risk we ever have of a shift. And as long as it is creeping, it is fine. We make these shifts automatically based on demand that we're seeing in each store.

Got you. Thanks a lot and good luck.

James Albertine, Stifel Nicolaus.

Great. Thank you for taking my question. Good morning and let me add my congratulations as well on a great quarter, and again to Bryan and Sid.

I wanted to focus more on the consumer or the customer patterns that you've noticed throughout the fourth quarter and coming into the new year here. You mentioned on the call, your presentation alludes to it -- shift in penetration rates from prime to non-prime and subprime. Really what I'm trying to get to here is the consumer who is waiting for their current car to break down versus the discretionary purchaser.

And if the subprime and non-prime penetration rates are increasing, is that a consumer that previously may have been self-selecting out of the new car or used car purchase process before, but now because of availability of F&I products, and so the advertising of that availability they have decided to reengage in the process?

I don't think that what we're seeing in credit is impacting the purchase of new versus used vehicles. I think there's a couple of things.

Bryan alluded to our as-is cars, that we got into that market in really 2010 and pushed it further in 2011. That is helping us find additional customers that we may not have been focused on historically, and those customers that are just looking for basic transportation but don't need a vehicle with all the bells and whistles or late model vehicles.

But as far as what we are seeing in overall traffic and how credit is helping us, let me take a different approach to that. Our overall vehicle volumes were up about 22%, 23% in the quarter. But what we're finding is that our traffic is only up 15% to 17%.

So what is happening is our ability to get those customers financed, especially in that non-prime and subprime segment, is getting much better. And what I mean by that is those customers, for example in our subprime segment or those with credit scores less than 620, is up about 34% year over year. So definitely credit is helping us. And we think as far as SAR recovering, credit is going to be a big component of seeing that SAR improve. Does that help?

Very helpful and thank you for that clarification. And then sort of a housekeeping follow-up. You have alluded to ad spend as a major component with respect your SG&A. I wanted to get a sense for what the year-over-year trend was on ad spend per unit, if you have that information.

Yes, this is John. I will get you the exact number. I think it was up just -- or down just a little bit, because advertising spend was relatively flat on an absolute dollar basis 2010 to 2011. So the per unit would obviously come down just a touch, but I will get that to you off-line.

Let me just add to that. When we think about our advertising initiatives, though, our focus is really to identify the market spend that we have in each of our stores. And what we're seeing is that some of our stores actually aren't spending enough advertising, meaning that we may have cut costs back too far.

And as we improve the advertising spend, we are seeing more customer traffic come into our stores and increasing sales. So our gauge isn't to try and cut advertising back, but trying to maximize the -- every ad dollar that we spend. And it is different on a store by store basis.

Understood. Thanks so much.

David Whiston, MorningStar.

I'll start with a question on CSI. Sergio Marchionne was quoted as being critical of some Chrysler dealers as not holding up their end of an agreement made at the Orlando convention a few years ago. Sid, you are on the Dealer Council. Can you comment on -- from amongst your peers do you think those comments are at least partially justified? And can you also comment on Lithia's CSI scores? How have they trended since 2010?

David, this is Sid. You know, Marchionne is a very impatient person. And they had put a lot of money into a program that incentivized us to do more customer-friendly things and improve our facilities. Obviously we went along with all of them and we saw a lift in our CSI scores at all of our Chrysler stores, and certainly we made progress.

I think there's a lot of patience. It takes a long time for a brand to get good CSI scores. It's a lot more than driven just by their recent experience. It is the reputation of the car, it's all those things that you live with for five, ten years, and they're working their way through that.

And I think ultimately Chrysler will not be on the bottom of CSI scores in America, and that is what obviously really exasperated Mr. Marchionne.

I'm on the committee to help establish a new program and we will be meeting in the middle of March at Detroit on that issue. And they're really listening, asking for ideas that might help motivate us to continue to improve. And I'm going to be mainly preaching patience.

Keep building great products. Get people that don't have repair problems. Take care of owners at the service drive, and don't be telling them that you can't fix something under warranty when you should be. I think those are all the core issues that will ultimately drive good CSI.

David, this is Bryan. Just a little additional color. In terms of what do we focus on, our understanding of our customers is a lot of what we spend our time with in all of our processes and in our discussions when we go into the store, and make sure that our front-line people understand what the customer's needs are. And everyone's are different.

So we really focus not so much on a score. We focus on whether our customers are going to come back and see us again, and whether they're going to tell their friends about how great an experience they had with us.

In terms of our specific Chrysler scores, we have exceptional scores in aggregate as a Company. It is one of our best manufacturers. Obviously, as one of the larger dealerships in the country, we get it. And Sid's influence on the board has brought that back to us and our scores are dramatically above average in our Chrysler product stores.

Okay, that's helpful. Thank you. And Bryan, two questions for you; long-term do you expect to remain operations head?

Absolutely.

Okay (multiple speakers) and on used vehicles, this would be a follow-up I guess to Steve's question, is the typical Lithia customer who buys either a new car or a one- or two-year-old used, is their trade-in generally below eight years old or above eight years old?

So when we actually take in a used car, we take in about 30% of the vehicles are older than that eight years old. Now that eight years old is not a bright line. It is more of a soft number. It's really an 80,000 mile vehicle, and that 80,000 mile vehicle could also be a five-year-old product, right.

But we really believe that about one out of three of our trade-ins can move into that value auto type of product. So if we are able to increase, obviously 10% our core and our certified cars, well, that adds -- for every 10 we add three to the value auto, so that is where that engine starts to drive itself.

You said one in three?

Yes. Three vehicles for every 10 vehicles that we take in trade, we can turn into a value auto car.

Okay, and last question for Chris. Were there any buybacks in Q4 and what are your buyback expectations in 2012?

Yes, we had some minimal buybacks in the quarter. I think we picked up about 30,000 shares. And when you look at our overall capital deployment strategy, we're focused on acquisitions and internal investment. We will continue to pay our dividend.

And then as far as share buybacks, I think we'll look for opportunistic opportunities to pick up shares. But I wouldn't expect something huge in 2012.

Okay, great. Thank you.

(Operator instructions) Adam France, 1492 Capital.

Good morning guys. Thank you for squeezing me in here. I was just curious if you would offer any color on January and February sales so far?

This is Bryan. We're right on track. When you look at a $13.5 million to $14 million SAR, it's fun to see the impacted because it feels like the environment is loosening up as well.

But through the first half of February and through January, things are looking real solid. It is more the same of what we saw through 2011 and look forward to continuing growth in 2012.

If I could ask one more question, just based on all of Sid's years of experience I always find this argument amusing that, Sid, if you are a truck owner for 20 years buying trucks, out of 100 guys buying trucks for 20 years, how many do you think will actually move to a midsize or small sedan because of gas prices?

Not very many. (laughter)

Common sense is a dangerous thing, isn't it?

We have thankfully a market focus on truck markets. And they're a way of life. They are safer. They do multiple duties. They represent (technical difficulty) unnecessary to have a smaller car. You can have the truck do everything for you.

But they -- people may add an additional car to gain that gas mileage, but they're never going to get rid of their truck.

That's what I figured.

They'll park in the driveway and have their friends seeing it than they would get rid of it. (technical difficulty) (multiple speakers) (laughter)

Very good guys. Thank you very much.

[Julie Bryant], MKG Financial.

Good morning you all, and my congratulations as well on a great quarter. Could you -- given your state of financial requirements of acquisitions, could you talk about further changes going forward you'd like to make in the brand balance? In the past you have talked to us about adding premium brands and you've done some of that. But as you look out to 2012 and beyond, how would you like to tweak the brand balance within your portfolio?

Right now we're sitting just a little over 50% domestic, with the difference being import and luxury. We're not that uncomfortable where we sit today. We were able to tweak the brand balance.

At a high, we were pushing 73% domestic. So we brought it down almost 50% in its aggregate numbers from where we were. And we're pretty comfortable with where we sit today.

However, our focus is still in the import and the luxury segments. So when we look at transactions, I mentioned earlier that we look for a five-year payback. So on an after-tax basis we want a 20% return on an annual basis, right, and that gets us our money back in five years.

Now if there are some other formulas that we look at, and that is a 2 to 4 times EBITDA as, well as we look at some revenue numbers to be able to look at do these revenue numbers seem to make sense, and we look at a 10% to 20% of revenue is our purchase price or our investment. And I think most importantly, what we spend our time on is, is this a Lithia type of market? And is it a dominant franchise within those certain market areas?

So, when we're out looking, we're not looking for secondary brands. Almost all Lithia's stores are primary brands within their markets, meaning that it's a Honda, Toyota, Nissan, Chrysler Jeep Dodge in its aggregate, right; Chevrolet, Ford or BMW, Mercedes, or Lexus. So we don't play a lot in those small areas.

Now, if we get into those smaller franchises like a Hyundai, a Kia, a Subaru, which are actually all three nicely growing, we really want exclusivity. But we want it in a bigger market place, so really about 250,000 people up to 1 million people. You can actually find this type of stores in that size market and be the exclusive representative of that franchise.

In fact, in Fresno a few months ago we purchased the only Subaru and the only Mitsubishi franchise in a 1.1 million person market. Those are where those kind of franchises really start to make sense for Lithia.

This is Sid. Just in our approach, we've cut the number of stores way back on Chrysler over the last four or five years. But their sales have increased it faster than anyone else's. So as a percent of our sales, they still represent more.

So if they'd quit doing so good, they would come down. But I'm just joking on that. (laughter) We're very pleased with their improvement.

And so -- but I think it is the store count number that we kind of want to balance more than it is what percentage of sales, because I can't stop the growth of those companies. They really are charging ahead. And they could surprise us next year on the upside. I think Chrysler has a good plan.

Julie, the other thing to keep in mind is because of Lithia's footprint in smaller and medium-sized markets, and we're in rural markets, our matching of the franchises within those markets, it is more domestic-centric. It is more truck-based. And when you get into those areas, we lean towards that.

So I think it's important not just to look at either, one, what our peer group is, or two, what the world market is, but what is the Lithia footprint. And our model really is those exclusive franchises, which means we're an agricultural rural type of communities that have a higher concentration of truck sales.

Perfect. That is very helpful. Thank you so much. One quick housekeeping question, do you have a depreciation and amortization estimate for 2012?

Yes, it is probably $18 million to $20 million, and we don't guide on that. But if you want more detail John can provide that for you, Julie.

It won't be dissimilar to what this year was.

Terrific. Thanks so much y'all.

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.

Well, thank you all for listening again. And we'll look forward to talking to you at the end of the first quarter, if not sooner. And hopefully everything will continue on plan and you all will be supporting us, as you have. Thanks again to both our team members and our investors.

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.