Lithia Motors Inc (LAD) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Lithia Motors second quarter 2012 earnings conference call. (Operator Instructions).

It is now my pleasure to introduce your host, John North, Vice President of Finance and Corporate Controller. Thank you, Mr. North, you may begin.

Thanks, and good morning. Welcome to Lithia Motors second quarter 2012 earnings conference call.

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

During this call we may discuss certain non-GAAP items, including adjusted selling general to 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 tables for today's press release. We have also posted an updated investor presentation on our website Lithia.com highlighting our second quarter results.

Present on the call today are Sid DeBoer, Founder and Executive Chairman; Bryan DeBoer, President and CEO and Chris Holzshu, Senior Vice President and Chief Financial Officer. At the end of our prepared remarks we will open the call to your questions. I am also 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 Bryan DeBoer.

Good morning. Today we reported record second quarter adjusted income from continuing operations of $19.9 million compared to $14.4 million a year ago.

We earned $0.76 cents per share on an adjusted basis in the second quarter compared to $0.54 cents per share in the second quarter of 2011, an increase of over 40%.

We grew revenue 26% compared to the prior period. Total same store sales were up 25% in the quarter reflecting increases in all business lines. All comparisons from this point forward will be presented on a same store basis unless otherwise noted.

New vehicle sales increased 34%. This increase was on top of a 22% increase in new vehicle sales in 2011. On a unit basis, we sold approximately 13,900 new vehicles, an increase of 3500 units or 33%, well above national average of 16%.

Our stores are focused on driving new vehicle sales and increasing market share. In the quarter our domestic sales increased 35% while import and luxury were up 33%. Our team is out performing national results and market share growth.

We are targeting a 3% to 5% growth in market share during 2012 on top of the underlying market recovery. Many of the markets we operate in still have not seen a meaningful recovery in new vehicle sales from the levels experienced in 2006. For example, Reno, Nevada registered 21,000 new vehicles in 2006 and only 9,000 new vehicles in 2011. Boise, Idaho registered 26,000 new vehicles in 2006 compared to only 13,000 last year.

Similarly, Fresno, California is down approximately 50%. Eugene, Oregon is down 38 %, and Spokane, Washington is down 39% from 2006 levels. The National Star projections in the market place are approximately 14 million to 14.5 million from 2012, 13% lower than the 16.6 millionSAR experienced in 2006.

This demonstrates the additional opportunity for sales recovery that many of our markets have yet to be experiencing. To be fair, some of our markets such as Texas and Iowa have returned to normal. But on the balance, we believe significant sales increases remain to be seen in the west.

Used vehicle retail sales increased 20% in the quarter. We sold approximately 11,500 retail used vehicles, resulting in a used to new ratio of .8 to 1.

We sold a monthly average of 47 used vehicles per store in the second quarter of 2012, up from 39 used vehicles per store in 2011. Our current goal is to sell an average of 60 used vehicles per store. We are concentrating on capturing as many trade ins as possible .

The new vehicle dealer remains on top of the food chain when it comes to procuring used vehicle inventory. This is a key competitive advantage as we maximize our used vehicle retail opportunities.

We focus our store leaders on a significant opportunities to retail more core product or used vehicles between three to seven years old. Our performance in this segment has been improving. But it still remains the best avenue to increase our used vehicle sales per store to 60 units per month.

In the quarter our value autos or vehicles over 80,000 miles performed well. This segment grew 30% year-over-year, with a gross margin of 21%. Although these vehicles have lower selling prices, overall the average selling price on our retail used vehicles increased 2% due to underlying market strength.

In the quarter our F&I per vehicle was $1063 per unit. On a GAAP basis, we arranged financing on 76% of the vehicles we sold. We sold 40% of our customers a service contract and 36% of our customers a lifetime all product.

Our Service, Body and Part sales increased almost 7% in the second quarter. Wholesale Parts and Body Shop showed significant increases of 11% and 15%. Customer pay work increased 8%, which is the 12 consecutive quarter of same store sales improvement.

Warranty still faces a head wind, as it declines 7%. We anticipate lower warranty revenues for to the remainder of 2012 and into 2013, but we can more than offset this head wind by concentrating on selling more vehicles , retaining more customers in our service departments and offering a broader spectrum of products and services.

Regarding regional performance, all states posted double-digit increases. Our gross profit per new vehicle retailed was 23.94%compared to 24.39%in the first quarter of 2012.

Our new vehicle gross profit per vehicle declined $45 per unit from the first quarter of 2012, primarily due to the termination of the Chrysler Standard Incentive Program earlier this year. Gross profit per used vehicle retailed was $2666 compared to $2525 in the first quarter of 2012, for an increase of $141 per unit.

Our stores are focused on total gross profit dollars generated in each department, while increasing market share for new and used vehicle sales. Over time this may result in some margin percentage contraction. However, increasing units and operations, attaching more insurance products, taking in more trade in vehicles and leveraging our fixed cost structure are all critical to our continued success.

In the quarter, our overall gross margin was 16.3% compared to 17.4% in the same period last year. Increases in new and retail used vehicle sales out paced our other business lines and explains the majority of the decline in overall margin. Despite a lower margin percentage, overall gross profit dollars increased 18% over the second quarter of 2011.

Now to update you on our Corporate Development activities. We seek exclusive domestic and import franchises in mid sized world markets and exclusive luxury franchises in metropolitan markets.

In April we acquired a Chevrolet Cadillac store in Bellingham, Washington with an estimated revenues annually of $40 million. In June, we purchased the GMC and Buick franchises in Fairbanks, Alaska to combine into our existing Chevrolet facility. Additionally, we were awarded a Dodge and RAM franchises in Las Cruces, New Mexico. The Las Cruces and Fairbanks franchises add annual revenues of $35 million. Our guidance includes the impacts of these additions. With that, I will turn the call over to Chris, our CFO. Chris?

Alright, thank you, Bryan. As it relates to operations, we are seeing a steady recovery in the availability of credit for our customers. New banks are entering the retail automotive finance sector, and competition for retail contracts remains healthy.

Credit trends are positive as trade in values increase and borrowing rates decline. Of the vehicles we financed in the second quarter , 14% were to subprime customers up slightly from 13.7% in 2011. However, the absolute number of contracts originated for subprime customers increased 31% year-over-year. The expansion of sales to this segment represents the next leg of recovery and new vehicle sales. Over our entire customer base the average credit score in the first quarter was 711.

At the end of the quarter we had $16 million in cash and $76 million available on our credit facilities, bringing our liquidity to $92 million. At June 30th, excluding floor plan, we had $232 million in total debt, of which $175 million is mortgage financing. In the quarter we refinanced approximately $70 million of mortgages, extending the maturities and fixing the interest rates. We also retired approximately $23 million in higher rate mortgage debt. As a result of these actions 52% of our mortgages are now fixed and we have no more mortgages maturing until 2015.

Our non floor plan interest expense was $2.5 million in the second quarter, compared to $2.7 million in the first quarter of 2012, a reduction of $200,000.

These savings are a result of the new credit facility we put in place in the second quarter, coupled with strategic mortgage retirements and refinancings to reduce our interest burden. As these transactions were completed throughout the quarter, most of the reduction was to the back end of the quarter. We still anticipate approximately $430,000 per quarter, in interest rate reductions going forward.

As a result of the new credit facility we signed in April of this year, we have fully floored all of our new vehicles and use the proceeds to pay down the balance on our higher rate revolving credit facility. The movement of this floor plan financing has an impact on our Statement of Cash Flows, which I want to point out.

Floor plan financing from a manufacture control lender is classified as an operational cash flow. While floor plan financing from a bank is classified as financing cash flow. Our new facility transitioned almost all of our manufacture controlled floor plan financing to a bank syndicate. As a result, negative operating cash flows associated with the retirement were offset by positive financing cash flows from the reborrowing, even though total floor plan outstanding was unchanged.

As detailed in today's press release, on an adjusted basis our operation will a cash flow was an increase of an almost $100 million year to date. Finally, we were in compliance with all debt covenants at the end of the quarter. In terms of overall debt levels, and our current leverage, we did not have any high yield debt outstanding and have approximately $93 million of real estate that is unfinanced. Although we have no current plans to increase our leverage from current levels, we have the ability to strategically borrow as opportunities arise.

Our free cash flow , as outlined in our Investor Presentation, was $26 million for the first six months of 2012. We estimate this number to be approximately $45 million for the full year of 2012. Our capital expenditure estimate is $48 million for 2012 , and this budget is based on new facilities, facility improvements and remodels, the consolidation of our Headquarters facilities into a single location, strategic acquisitions of lease facilities and other business development opportunities that are currently in progress.

We focus on the prudent allocation of capital and believe a balanced strategy of acquisitions, internal investment, dividends and share repurchases is appropriate. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid long-term investments in Lithia's future.

In the second quarter we repurchased approximately 741,000 shares at an average of price of $2423 per share or 3% of our outstanding float. Today we announce the Board has increased our repurchase authorization by 1 million shares, bringing the overall repurchase authorization to 1.9 million shares. We will continue to evaluate strategic share repurchases based on our internal hurdle rates.

In the quarter adjusted SG&A was a record low of 69.6% of gross profit. Incremental throughput or the percentage of each gross profit dollar over the prior year we retained after selling costs adjusted to reflect same store comps, was 43%. Our throughput in the second quarter of 2012 was reduced by insurance items totaling $1.7 million. Excluding these items our same store throughput would have been approximately 52%. We believe that incremental throughput is a way to measure our cost control efforts and that our target of 50% incremental throughput remains attainable for the remainder of 2012 and beyond.

As of June 30th new vehicle inventories were $457 million or a day supply of 74 days, an increase of 6 days from a year ago, which was lower than normal due to the impact of the disasters in Japan. Used vehicle inventories were at $133 million or a day supply of 52 days. This is four days lower than our day supply levels a year ago. Import inventories are back to normalized levels at the current time, although acquiring late model used vehicles remains challenging.

We have increased our guidance for 2012. Our EPS estimate for the third quarter is in the range of $0.74 to $0.76 cents per share. With our full year expectations $2.69 to $2.75.

For additional assumptions related to our 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?

Thank you. (Operator Instructions). Our first question comes from Steve DyerPlease proceed with your question.

Congratulations on another good quarter.

(multiple speakers) Hi, Steve, thanks.

Just, to get a step back, big picture, how do you guys think about the rest of the year? Your guidance is obviously impressive and speaks to some of that, but Mike Jackson spoke a little about worries around the election or the fiscal cliff. I know you don't have a crystal ball, but generally how are you feeling about the cadence of sales going into the back half?

This is Sid, Steve. Thanks for being on the call and following us. Basically, we gave those examples of specific markets where we have a huge improvement that should be taking place as we speak; regardless of all of this noise going on in the national scene between Spain being in trouble and the Euro and all these issues. The U.S. economy is chugging along and improving. But more than that, many of the markets we are in are improving. So that's why we haven't blinked on our guidance.

Steve, maybe to add to that on our guidance specifically, the most difficult thing is that the recovery in our eyes is not linear. It does not just happen consistently month-over-month. It makes it very difficult to layout clear and concise guidance for the full year, which is something we are going to continue to do. But when you look at the guidance that we started with at the beginning of the year, we have raised it to over 40% already since Q1. We are going to continue to monitor each of our markets, continue to look at each of our stores and continue to give guidance that's based on the current trends we see.

Okay. And then within your markets, do you feel as though you're gaining share in your markets, that you are obviously exposed to some very good ones and some not so good ones, but Texas for example , doing very well, are you gaining share within the markets that you are in ?

Steve, this is Bryan. Good question. That is 100% what we focus on each and every day, and our guys in the field. It is not as important to us that the market recovers. It is more important to us that when it recovers, we get a bigger portion of that market.

So we measure what is called MSR or Manufacture Sales Responsibility. Our guys in the stores and on the desk that are working with customers directly know what their market shares are, and they are pushing that. We actually achieved in the second quarter our highest individual performance in a quarter for market share that our company has ever experienced, at a little over 108% which is a move in the right direction. We still believe there is lots of opportunity in the future.

Great. How are you feeling about inventory levels right now? You have enough used, late model used? How are you feeling just overall?

Yes, we are in good shape on used cars. We are ready for that third quarter which is typically the largest unit sales. Additionally, on new cars we look really good in the domestic's. We got plenty of vehicles on the lots. Most of the mainstream imports we are pretty good with. Some of the lesser imports such as Subaru and Hyundai still have some pretty serious shortages, but we are doing what we can to really track those vehicles down in markets where they are not quite as attractive.

Okay. Last question, and I will hop back in the queue. Used pricing and margins combine, I think used is coming back a little bit . Pricing, maybe not quite as aggressive or I should say, high as it was for awhile. You see the ability, Sir, to maintain margins there going forward, even given this dynamic?

Yes. We are not seeing any anomalies. It is pretty typical out there. We did see that used car pricings peaked a couple months ago, so we were able to actually purchase cars, and I think that differential between late model used and new is starting to come back into a reality, where there is a larger gap, which will help sustain margins. Because that is really your lowest margin business that can drag it down.

Now, obviously our core product is our big push, which is the three to seven year old vehicles. And it makes obviously, good solid margins as well. And then our Value Autos just continue to grow and new car sales, those certified sales and even core sales really drive those trade-ins into value, which is the mid 20% margin which brings everything up. And we think the stability there, being at the top of the food chain gives us a great advantage to be able to keep the margins strong.

Okay. Perfect. Congrats again, guys.

Thanks, Steve. (multiple speakers).

Thank you. (Operator Instructions). Our next question is coming from Simeon Gutman from Credit Suisse. Please proceed with your question.

Thanks, good morning and nice quarter. First on the incentive picture, absent that the Chrysler incentive that Bryan mentioned that went away, can you characterize the gross profit environment and how it should move? Should it just flex with the mix of business, maybe some imports? And then thinking a little bit down the line, given the protection you have on your markets, should we start to see the dollars on a per unit basis stabilize or even move higher over time?

Thanks, Simeon. This is Bryan again. If we look at incentives there real no anomalies other than that facility incentive or that standard incentive that really went away in the first quarter. Other than that we are seeing typical moves. It appears that there is some aggressive marketing out there.

There's new creative ideas by General Motors that are coming through, more of a fixed pricing model, and the ability to bring vehicles back. That could affect margins a little bit, but right now it is looking like they are staying pretty stable. We are able to take in trade-ins. We are able to make it up in F&I. It seems to be in pretty good form.

If we look forward at the rest of the year, we believe inventories look pretty good. There are some shortages coming in a few of the manufacturers truck productions . It sounds like General Motors may have a little bit of a shortage that we will have to work through, which should keep margins strong. And I think we will have enough trucks to maintain our same store sales growth, as we have been predicting.

Outside of that, we focus each and every day in our markets and make sure we are competitive against our surrounding dealers. Now, it is imperative to remember though that we don't -- we typically have two or three guys that are dominant players that we are competing against, not the 20 or 30 that you typically have in a metropolitan area. So yes, there is more control of our margins than in the typical instance of most car dealers within the country that are competing with a greater amount of a much greater amount of unknowns.

Yes, and just to follow up on that, the essence of the question was -- and in your prepared remarks, I think you mentioned there is innovation, good innovation happening, and I think that is also pushing inflation a little bit. And so, in that environment, you would hope maybe some of that flow through or the gross profit stays sticky or helps especially in -- with your model which is more protected. I think, we are hearing from some of the other dealers that there may have been some slightly more competition. Some of it is mixed, because of imports. But, in your case when you hear that there is innovation happening and prices are moving higher, it sounds like gross profits could actually move higher at some point.

It is funny because 10 years ago we would have sat here and said the Lithia model of controlling things in the stores and making decisions from Corporate, now that we have become a, I would say, a centralized decentralized Company, which means we found the benefits and the economy and scales within our model. We have many centralized functions.

Our guys in the stores are very empowered to get the job done within their own individual market. And I think more than anything, gross margin will be driven because of their understanding of their marketplace and their customers desires, and knowing where the opportunities are to expand their business. And when we look at margin, I think it is crucial always, and we commented on this in the prepared remarks, was specifically total gross dollars is what we focus on. We don't focus necessarily just on deal average or margin, as a car dealer.

Now obviously, as a large Company we look at margin pressures and we look at the implications of that. But, we focus on how many gross dollars can we push through that individual business within that individual market and finding the leverages on those fixed costs within those stores. And I think that's where we are starting to see our sweet spot start to really take hold and not approach any situation the same. And I think our guys in the stores and our gals in the stores are doing a nice job finding those opportunities , and we are there to really help support and foster that knowledge and that innovation that you are speaking to.

Okay and then following up to an earlier question, can you say -- I think you mentioned market share growth expectation. Can you say what the expectation or what is built in from a SAR perspective, and then connected to that, the markets you mentioned that are depressed, are you seeing more rapid rates of recovery there, or are they still just sitting along the bottom?

Simeon, we have the basic assumption that we believe the second half is going to be similar to the first half. It is going to be in the $14 million SAR to $14.5 million SAR. We are pretty confident with those numbers. Outside of that, we are going to keep our head down and continue to do what we know how to do. And that is operate stores and grow people that can expand our business and expand our understanding of our customers.

And then how about the markets? Can you speak to the markets in which you mentioned where there is a depressed selling rate? Are you seeing signs of recovery there? Are they growing more rapidly than others?

You know, actually our fastest growing markets in the quarter, I believe were Texas, Montana and Alaska?

North Dakota.

North Dakota and Alaska. Okay, so our western markets are recovering, they are just still -- they are not recovering at the same speed. So they were lower double digits rather than the higher double digits and the 25 to 30% range, those markets I mentioned. The west is still not recognizing the growth that they have the potential to accomplish. And I think that's where we wake up every morning and get excited at what the potential is and look back at that 2005 and 2006 time period. We were doing pretty good, but we are at a lot lower overall markets within those areas . We are still performing profit levels because we are able to keep that money. And our people in the stores are I believe are really better and more prepared to approach our customers and our competition.

And then the last question, the throughput on an adjusted basis was strong . I guess it was consistent with where we saw-- close to last quarter. But, if you look back in the prior year, you were more in between the 50% to 60%. I think you even pushed past that 60% number once. Was that-- last year, more of a function just because the gross profit on a per vehicle basis were elevated, and that provided the overall leverage, or is there something that could still be improved upon as we get higher volumes on a system that you can still get back to those levels?

Hey, Simeon, this is Chris. When I look back on the prior year and when you are just doing this comparability for the throughput calculation on a quarter over quarter basis, you are going to have some variability in things that come in and come out, when you are doing that comparison. In the prior year our throughput calc, I think was 62%. And what you saw there was there was some adjustments that we made to our insurance reserves that came in the quarter.

Because the expense of those reserves is taking on a quarterly basis, we don't pro form with those out. So that was the anomaly that you saw the prior year. The recurring expenses or benefits, but they come in inconsistently over time. So, going forward our goal is to continue to maintain a 50% incremental throughput target. We think that is very attainable.

When you look at our SG&A as a percentage of growth at 69.6%, that is a record for the Company, a full year basis we are still going to drive that number down to the low 70s. That's our target. Yes, on an annual basis. But we do think that over time we can improve that number as well. But let's take the first step and get to the low 70%, and then work on another target after that.

Alright, thank you.

Simeon, this is Bryan again. One quick addition on when we look at opportunities. I think it is imperative you always look at as well, even though you are getting 50%, 60% throughput within your stores, you also have to look at your base of other expenses. So, and I will say this, that part of that throughput comes through improving your current base as well.

So, as you improve that other base, and I will say this, our productivity in many of our stores is still not wonderful. Changing compensation plans, which is our single biggest expense within our stores, is a difficult , long-term fix. And I think the only way to change those is over time. So you don't lose your people to the competition.

And then you are able to gain and extract some of those benefits and lower your cost structure. And I think a lot of those things are in place, and I think that's what helps us maintain the 50% plus throughput, and I think we are going to be able to maintain that in the future. Many of our stores obviously can do much better than that. However, like we always talk about, we have many opportunities and I think it is going to be exciting to see how we approach those in the future.

Okay, thank you.

You bet, Simeon

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

Thank you. Good morning. Wondering if you can comment on acquisition pricing and the pipeline and if it is a step up in the stock buyback authorization at all is a reflection of a lessening acquisition opportunity?

Rick, this is Bryan. Hope all is well out in Chicago.

Thanks.

Acquisitions are, believe it or not, probably the most active we have seen in a number of years. It has really occurred over the last number of months, because of a couple different things. I think it is fair to say that the -- our dealer body is still aging at the same rate , and many of the dealer body had hunkered down for the last three or four years and weren't willing to sell their lifetime investment in the lowest market we have seen in the last number of decades. So that, compounded with the fact that there is this uncertainty about tax rates and long-term capital gains, so on and so on. It is creating the activity we haven't seen before.

Now, I will say this, just because there is activity doesn't mean Lithia is changing our discipline. We still are only going to purchase stores if they meet that 75 % for the key imports in luxury and 100% for the key domestic's and the other imports and 125 % ROE and this is on a five year basis, for some of the domestic's that we are pretty heavy in. Okay and I think that's how we look at things.

I think that there is going to be opportunities, but I think there is also an additional pressure, that when we as a Company trade at less than 10 times earnings, it behooves us to protect our shareholders and not invest in new opportunities, but invest in ourselves. And I think, at these low multiples it makes it even more difficult to really find attractive acquisitions that are better use of our capital than buying our own stock backs. So, it is an interesting quandary, but we are built for growth. We want to grow. We have people sitting on the bench, and I think that will ultimately drive and fulfill these opportunities in the coming months and quarters.

Makes sense. Some parts the same store growth really accelerated this quarter. I'm wondering what is behind that strength, and do you think that is sustainable?

Rick, we talk a lot about commodity sales, which is really the one-stop shopping experience. I believe that is taking hold. I believe that our people are interacting with our customer on the front lines get that. And they understand that when you are a one stop shopping experience, you have to be multiple things to multiple customers.

Meaning, some come in because of speed. Some come in because of a value pricing, some come in because we are the only of that brand within the market place and they want that part. And I think helping your people on the front lines understand what the drivers are for that customer and then responding specifically to those needs, are what is creating a better action. And I think we are going to see even more of that in the future, and I know that our teams out there have their ears wide open to be able to grow their market share.

Finally, if I could ask you what you what you might be seeing in July from a traffic and sales standpoint?

This is Bryan again. Actually the second quarter , was-- it started out in April very, very strong. It still finished strong in June, but it wasn't quite as robust as the first part of the quarter. And I think July is looking similar. It is on forecast, but it is not robust like it was in the start of the year.

I think we are used to these jumps from 13 million SAR to 14 million SAR, and now that it has kind of flattened again at this 14 to 14.2, we have to look back at disciplines and make sure that we can extract more out of what opportunities of their attack market share and continue to grow. So, I would say that it is tracking as we expected.

Thanks a lot, and good luck.

Thanks, Rick.

Your next question is coming from James Albertine from Stifel Nicolaus. Please proceed with your question.

Thanks for taking my question and good morning and congratulations on a great quarter. If we could just isolate for a minute some of the drivers or potential drivers of consumer demand, a lot of conversation around replacement whether it is fuel efficiency or quite frankly just simply market stabilization , in particular the home market and some of your bigger exposed markets. But, I wanted to give an idea from you guys if you could rank, based on what you're seeing, those different facets of demand?

Hey Jamie, this is Chris. First, let me just touch on credit. We believe that the credit markets recovering is a big driver and returning SARs to pre recession levels. And going along with that is job creation which we monitor, but don't have as close of a feel for.

So when we continue to monitor and watch in each of our markets, it is what is happening with the non prime and subprime customer. And we talk about as a percentage of our portfolio, things haven't changed much year-over-year. Our subprime customer is made up of 14% of our finance portfolio, which is consistent with the prior year. However, with the increase in sales, you see those numbers get skewed a little bit better and in favor of those non prime, subprime customers. For example, our subprime customer sales on a unit basis were up 31%. On a near prime basis up 44%,when our overall sales were up 25 %.

So , there is definitely a bigger weight of the sale recovery coming in that non prime and subprime segment. And we think that is going to continue. When you look, again pre recession, that subprime customer made up 25% of the overall sales mix. And while we don't expect to get back to 25%, we think 20% or so will be the normalized level in the future.

Jamie, this is Sid. Jamie, if you look at those reasons people trade, obviously the aging car they currently have, and its reliability and both its safety and that's a big one, is all of those air bags. You picture your kids riding around and not having a modern car. If you actually had an accident, you are better off in a modern car. And the fuel efficiency is huge. And then seeking the new technologies that are in these cars.

All those things with Blue Tooths and all of these things people think they have to have. They will buy a new car to get it, rather than buy a new iPad. But, it is wonderful. Those are drivers that are out there.

That's very helpful. I appreciate that additional color. Looking at your brand and your sort of vehicle mix historically, you tended to do more in the truck and SUV segment arguably. And as fuel efficiency becomes, one of the key drivers as you mentioned , cars obviously are going to become a growing part of that mix. Looking at results obviously, you are doing a lot of great things in cars. How do you see that mix shifting over time, and your ability to shift with it, if you will?

Jaime, this is Bryan. I think we talk a lot about our strategies and our individual markets, where we are more in rural agricultural markets that are truck and SUV dependent. We are seeing a shift, which is wonderful and I think a lot our domestic manufacturers as well as the import manufacturers, have shifted into this newer world. But I think it is always imperative to remember that SUVs and trucks still get a better gas mileage in today's generation of car, than they did in the old generation of car. I think Chris was speaking to the fact that, there is this deferred pent up demand that has occurred. And I think it has been pushed out now, rather than a four-year trade cycle.

A lot of people haven't been out in the market place. So I think now we are looking at people that are six or seven years old on cars. They are talking two generations of cars. So there is alot of opportunity over the next three to five yearson being able to pick up this fuel efficiency or this safety, that Sid spoke to. And I think our brand mix of what we hold, at about 55% domestic now really fits our market places and fortunately, some of our manufacturers now have also moved into that car segment, and our stores are learning how to really respond to customers within that car segment and compete in that environment. Whereas before, they really were really good at selling SUVs and trucks.

It is a new anomaly to us, and I think it is exciting in many of our markets to see how we are going to be able to respond to that. But I think, the key is to remember those SUVs and the trucks, that are now one and two generations old, still have huge gas mile improvements in their new models.

Very helpful, as always. Congratulations again and good luck.

Thanks, Jamie. (multiple speakers).

Thank you. Our next question is coming from John Murphy from Bank of America/Merrill Lynch. Please proceed with your question.

Good morning guysThis is Liz Lane, on for John. Your new guidance reflects improvements in nearly every area of business. In the one area where your outlook is lower is in the new vehicle margins. Can you just explain what has changed between last quarter and now to lower that four year margin guidance on new vehicles by 30 basis points or so?

You bet, Liz. This is Bryan again. I think there is a conscious effort within our teams in the stores that they are going to get market share . We have set very lofty goals in most of our market places. And if it means that we have to sacrifice a little bit of margin, I think you are going to see and like what the results are, because that leverage on that expense structure and that total gross package that we talk about, is going to bring it to the bottom line and we believe that is the single best way to be able to expand your market presence and expand your market share.

Okay, so that is more of a Lithia specific strategy than a market driven issue?

Yes.

Okay, great. And it also sounds like the acquisition environment has alot of opportunities . Are the franchises mostly small, independent owned, or are there any opportunities for a larger groups or potential geographic expansion?

This is Bryan again, Liz. There is no question the market's improved. There's opportunities out there. Typically Lithia is purchasing one or two stores from individual sellers. They are usually in smaller medium sized markets like we were talking about. However, we are actively pursuing some larger groups, especially when we look east of the Mississippi. Because we believe that if we have the ability to find a talented management team, that is really like Lithia was in the mid 90's, that was bursting at the seams ready to grow and ready to take on that next challenge; we are going to look at those opportunities as well. And I think that our innovative approach to our customers and to our competition, I think we can make a big difference in that venue as well.

Okay, great. And just one more, which is on the used vehicle market. Some of the other dealers mentioned they are seeing consumers opting for new vehicles rather than late model used, because the pricing differential is getting smaller. I know late model is not really your big focus, but are you seeing any kind of trade up in your markets?

You know, we are actually not seeing that. Our certified used vehicles is up 26%. If you recall our overall used vehicles was up around 20%. It is tracking at a higher rate than our normal used vehicles. And it would seem that now that the late model used cars have started to subside on pricing so the gap between a new and used is a little larger, that that would accelerate some of that.

It could just be our markets. I don't know what the differences would be, but so far we are not seeing that drive back to the new vehicles. We are seeing that the certifieds now are more attractive, because they are more of a value in relationship to a new car.

Okay, great. That's very helpful. Thanks very much.

Thank you, Liz.

Thank you. Our next question is coming from Scott Stember from Sidoti & Company. Please proceed with your question.

Good morning.

Hi, Scott.

Just focusing back on the mix shift to cars from pick up trucks and SUVs, related to Chrysler, can you talk about how some of their newer brands like the 300, the 200 and maybe even the Dart are doing?

Yes. Hi, Scott this is Sid. Nice to have you back following us. Lots of memories.

Cars for Chrysler are not going to be their strongest suit. The 300 is doing well and the 200 is doing especially well. The Chrysler brand itself has done a ton.

But, the biggest change is, people are buying a crossover vehicle instead of an SUV. It is not so much a car. And they are still counted as trucks, so you are not seeing a huge shift. They want a little smaller and a little more fuel economy, but they still need the space and the safety. So, I don't think we have a trend there that is irreversible.

It is too early to tell on the Dart. Obviously, some of our stores don't even have one yet. There were a few drive outs and they didn't offer automatics to start with. It is a slow ramp up. It is too early to tell. But we have a lot of confidence in that car.

It is entering a competitive segment. There's all kinds of vehicles. But it is definitely cutting edge in that segment It will definitely take some share.

Sid used to talk about the PT Cruiser, that it was Chrysler's car that they could actually go after the marketplace in because it was a value oriented, small car that had a little bit of personality different than the others. I think the Dart, our stores are looking at it as such. And I believe they are going to be able to take market share with that product, which in the past we really haven't had a competitor in that space. The opportunity is good and it is really what we do with it.

I think Jeep will do a lot with crossover. They obviously have the brand anyway, that people really have a high regard for. Chrysler is not at risk in terms of changeover of truck to car and going to lose share. Those guys are running the company better than anybody that runs a company, and probably in the world, right now, as far as using strategy. using marketing, using what they have; selling it well, dressing it up, making it attractive, putting features in it, putting better interiors in it. It is all of those things that make it happen.

Great. And as far as Chrysler's plan to roll out the six-cylinder engine to more of their SUVs and pick up trucks and with this HB transmission, have you seen any traction from that?

Yes, definitely. HB will add a ton for their volume, and that V6, they can make a million of those engines a year. That was a truck plant -- that was an engine plant that was underway when the Marchionne and the group took over. He initially said, gee whiz too bad that was not a four cylinder plant, but now that it is working out, that thing is a highly efficient, wonderfully modern V6. It fits definitely into the truck and the crossover and all of those heavier rigs. You will see it even in the three-quarter ton.

Excellent and last question on the F&I. You had a sharp jump in your penetration rates for financing. Was there anything specifically related to that?

Scott, this is Chris. Yes. Two things that drove that number, one, we talked already about what is happening in the finance markets with credit availability. It allows us to do a little bit more penetration on arranging financing. So our finance penetration is up to 76% for retail customers. So there is some benefit to that, as far as your F&I per unit. The other half of that is an increase due to our service contract offerings. We have been challenging ourselves with making sure that we have the best products available in our storage at the right prices. We have been benefiting from changing some deductible and lowering prices in certain segments and raising some prices in others to make sure we have the right mix at the right price offering. That has benefited us, and we hope to continue to see that benefit through the rest of the year.

Great. That's all I have. Thank you so much.

Thanks, Scott.

Thank you. Our next question is coming from Adam France from 1492 Capital. Please proceed with your question.

Hey, good morning, guys. Just two quick questions here. With respect to the I believe it was a $1.7 million insurance item, is that a -- something we should expect to recur going forward here? And then what is your rule of thumb in terms of when you build a new store, how long does it take to become profitable?

I will take the first question on the $1.7 million. This is Chris. I can't say it is not a recurring item. It is going to happen on a year-over-year basis possibly, depending on what happens with our insurance risk. And, when we have recoveries that come in we are going to take them in the quarter we take them.

But we also pay out the premiums on a quarterly basis, as well. When you are comparing quarters there are anomalies that create some variability. But again, back to our target, our 50% incremental throughput is the way we measure our gross to net retention, and we believe it is sustainable for the long-term.

Adam, this is Bryan. Your comment on -- your question on building a new store, so we actually just entered the Las Cruces market place. And maybe that's what you are referring to. That was an open point that we received from Chrysler. We actually didn't have to build a store. We purchased, we actually leased- excuse me, the old Saturn store.

We are in the process of giving it a face lift in the front for a couple hundred thousand. That's our total investment. Our rent is very low, we have short term rent in that store. And it typically takes in the four to six-month period to ramp up the sales to an adequate level. Now, there hasn't been a dealer in that market place for over a year. And we saw a great thirst within the marketplace, where consumers were coming in immediately and they had a decent first 25 to 30 days of business. We are excited to see what happens there.

Now traditionally, if you are looking at building a new store it is typically a 12 to 15-month process from start to finish, and then again when there is not a manufacture like that within that market place, it can take longer to build your sales rates or get to a break even or stability standpoint within that store. Now, acquisitions, we expect acquisitions to be right out of the chute, accretive, and that we are making higher profits than what our previous sellers were. Does that cover what you were looking for?

Absolutely. Thank you very much, Bryan.

You bet, buddy.

Thank you. (Operator Instructions). Our next question is coming from Jordan from Philadelphia financial. Please proceed with your question.

Hi, guys, thanks for taking my question. I have two questions. One is the gross margin that people have asked and that isfor a longtime when sales were falling and gross margins were falling, everyone said when sales come back gross margins will come back again. And that hasn't been the case across the industry. Do you think instead maybe it is just a continuation of gross margins that have continued down for the past 15 years or so? I mean, do you really think there will be industry bounce back in gross margins in the next year or two?

Jordan, I think it's always-- this is Bryan again. It is imperative to remember that your mix of vehicle sales to fixed department sales is the primary driver of margins. And I think we saw the margin expansion where we went to 18%, 19% overall margins during the recessionary period, because our mix of new and used vehicles was down. Now that we are seeing our mix of new and used vehicle sales grow at a faster rate in 20% to 30% range rather than the 6% to 7% in service and parts, you are starting to see that-- what appears to be margin pressures.

No, Bryan, I'm sorry, I apologize. I am strictly referring to new vehicles.

Okay. So on new vehicles it has appeared to be continuing to decline. I think that may continue, but you still extract the other benefits in service and parts with that longer term customer and getting units and operation. We may still see some margin pressures. I think from my standpoint, what we care about is growing bottom line net. That's what we care about.

If it means we have to reduce our margins in certain instances to be able to accomplish that to improve our net we are going to do that. Because ultimately we know that services parts is going to pick up that slack over the three to six years that the customer owns that car. And then most likely we will get them back again and the efficiencies start to take hold within the model, and you are able to then generate business with lower advertising costs, with lower personnel costs and a more efficient stream line model.

Would it be fair to say you see a gradually continuing trend towards lower new vehicle gross margins and a greater percentage of business coming from service and parts?

You know, I don't think it is going to be down. If there are margin pressures, I think we will sacrifice margin to be able to expand our net, okay? And I think that's how we look at it. And I think, it is a conscious effort, but there are no macro issues right now that are forcing margins down. I don't believe that is happening, and I don't believe that will happen in the future.

And my second question is , the Manheim started to roll over a little bit the past couple of months after being incredibly high. You guys have done a much better job than almost -- in fact than any other dealer on the wholesale side. If the Manheim starts to or continues to roll over towards the 110 number, what is your target for wholesale profit, or does it break even per used car on just the wholesale used side?

Well when we manage our individual stores each of them manage things differently. What we care about is if they are new and used vehicle margins stay strong. There is no question, but they are gaining their sales volume. So wholesale is just -- it is really the end result of all of that happening. We don't manage whether or not you should make a profit or whether you should lose money in wholesale. What we manage is the overall business.

As long as they are keeping their inventories clean, they are moving their inventories and they are expanding their market share on the top end. That's what we look at. I don't know the wholesale pricing at Manheim is really a driver of future profit or losses within wholesale. I believe that the driver on that is how quickly you turn your cars on the retail side, and what the end result of that is.

Got it. And have you continued to see weakness in wholesale in the month of June?

No.

It has been stabilized?

Yes. Pricing is coming down, but remember a wholesale car is taken in on trade and its sold five days later. So, it is not like we are holding on to these cars and feeling the pressure of that, when the market adjusts, we adjust. So if there are big changes we are going to adjust quicker. And if we are seeing that trend grow at a steeper rate or decline at a steeper rate, we are going to be more conservative. I think that's the beauty of our model.

Okay, thank you.

You bet, Jordan. Nice to hear from you.

Thank you. We have reached the end of our question-and-answer session. I would like to turn it the floor back over to Management for closing comments.

Thank you, everyone for joining us today. I look forward to updating you on the results in October. Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.