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LITHIA Motors, Inc

Q1 2010 Earning Call

April 27, 2010 5:00 pm ET

Executives

John North - Corporate Controller

Sid DeBoer - Chairman and CEO

Dick Heimann - Vice Chairman

Bryan DeBoer - President and COO

Jeff DeBoer - SVP and CFO

Analysts

Rick Nelson - Stephens Inc

John Murphy - Banc of America/Merrill Lynch

Operator

At this time, I would like to welcome everyone to the Lithia Motors First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Mr. John North, Corporate Controller. Mr. North, you may begin your conference.

John North

Good afternoon to everyone. Welcome to Lithia Motors first quarter 2010 earnings conference call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty, actual results could differ materially due to certain risk factors that are outlined in the company’s filing with the SEC.

During this call, we may discuss certain non-GAAP items including adjusted income from continuing operations, adjusted earnings per share continuing operation and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. The full reconciliation of these non-GAAP items is provided in the financial tables of today’s press release. We have also posted an updated investor presentation today on our website that incorporates our first quarter results.

Presenting the call today are Sid DeBoer, Chairman of the Board and CEO; Dick Heimann, Vice Chairman, Bryan DeBoer, President and Chief Operating Officer and Jeff DeBoer, our Chief Financial Officer. At the end of their remarks, we will open the call to questions.

It's now my pleasure to turn the call over to Lithia's CEO, Sid DeBoer.

Sid DeBoer

Good afternoon, everyone. Today, we're pleased to report our first quarter adjusted income from continuing operations of $0.09 per share compared to an adjusted loss of $0.01 per share a year, an improvement of $0.10 and $0.03 above the high end of the guidance we provided in February. Thanks to a great March.

After a somewhat sluggish start to the quarter, March results were way above our expectations as consumers who had been on the sidelines returned to the market. we attribute this to the significant incentives offered in the month as well as a general improvement in consumer sentiment and a continued execution of our plan.

While unemployment remains high, we believe that consumers have started to return to the new vehicle market and that credit constraints, which accounted for some of the low sales volume in '09 have been reduced.

Even as we work to improve our diversification, issues with Fiat and Chrysler have continued to improve. As many of you have seen, Chrysler updated its five-year plan and released better than expected financial results earlier this month.

In this plan, Fiat expanded division for its global auto manufacturing and leveraging itself with new infrastructure and dealership networks that existed previously under Chrysler. We are strong supporters of this plan and believe that Fiat had taken strong initial steps to improve their situation.

As we discussed on our last call, for the first half of 2010, year-over-year sales comparisons won't paint an accurate picture of the success of the Chrysler. The old company had some unnatural actions in the first half of last year that artificially inflated sales is to avoid and actually ultimately that even though they want you bankruptcy they were unable to avoided even using those artificially inflated sales incentives. The current vehicle sales levels although down when compared to the prior year have shown sequential improvement month-over-month.

Looking ahead we are eagerly anticipating the launch of their all new Grand Cherokee in May. With this introduction Chrysler is well on it's away towards the objective of refreshing 75% of its product line of this year. Sixteen vehicles in 2010 will be all new or substantially refreshed. Looking to the future Chrysler will continue to emphasis new models and improve fuel efficiency expecting to achieve a 25% improvement by 2014 on its fleet.

Moving on to the Toyota recall. We saw small increase in our Service, Body and Parts Warranty work as a result of the recall. However, the biggest impact came through the impressive sales incentives Toyota responded with in March. Our Toyota unit sales were up 42% in March and 11% for the quarter. New vehicle sales also benefited from other manufacturers competing with us they're offering higher incentives to keep pace.

Another way we are focused on is property held for future development or currently vacant. That’s an area we need to continue to work on. As a bit of background we purchased bare land in certain markets prior to the recession in anticipation of expansion and have facilities that we elected to close or were selected for termination through the domestic manufacturer restructuring in '09. We believe that the actually carrying cost of these properties and affiliated cost related to them is in the range of $0.12 to $0.15 a year in lost earnings.

One of the first priorities then for our capital earmarks is for acquisitions to convert these assets into operations. We are actively managing this challenge and believe we will continue to make progress on this area throughout 2010 either through the sale of assets or the addition of new car franchises in those stores.

As you know, we continue to seek out accretive acquisitions to achieve our diversification of brand strategy. Stated simply, we believe it is a buyers market currently and we are taking our time to make sure we make the best investments for our shareholders at this time.

In closing, I want to share with you how excited I am about our management team. The last two years have been trial by fire for everyone and I am so pleased by our team's response to the crisis that was not created by us.

I am more encouraged than ever that our next generation of leadership is now fully in place, well-trained and is poised for continued success in the coming years.

With that, I will turn the call over to Bryan our president to provide you with some more operational details.

Bryan DeBoer

Thank you, Sid. Good afternoon everyone. I want to spend a few minutes talking about retail operations. New vehicle sales were a bright spot in the quarter. We sold approximately 7000 new vehicles and our same store new vehicle sales increased 11.5% in the quarter.

In the first quarter, total US industry new vehicle sales increased 15% and this is based on CMW research data. Excluding Chrysler, our same store new vehicle sales in the quarter increased 25.3% over the prior year. We are pleased with the progress we are making in this area considering our exposure Chrysler.

Since we last updated you we have continued our focus on retail used vehicle sales. We sold 8,300 retail used units in the first quarter. Our used to new ratio was 1.2 to 1 compared to a ratio of 1.1 to 1 in the fourth quarter of last year.

Same-stores used vehicle retail sales were up 22.4% over the same quarter of 2009. We continue to focus on selling lower priced retail vehicles, attracting consumer seeking less expensive cars. Retail used vehicles sales remain an important area focus for us with the goal to continue to improve this ratio even as the new vehicle market continues to recover.

In the first quarter, we arranged for financing on approximately 70% of the vehicles we sold. We sold 42% of our customers a service contract and 35% of our customers a lifetime oil product.

Our F&I in the first quarter was $968 per vehicle. We self-insure our lifetime oil product and defer the related profits. Assuming we did not self insure these contracts, our F&I per unit would increase $80 per vehicle for the quarter. This difference anniversaries in the first quarter, so going forward our F&I per vehicle will be on a comparable basis to the prior year.

The average FICO score for our customers in the first quarter was 718. This is down from highest score of 732 in the third quarter of 2009 and indicates that lenders are relaxing their credit risk profile on financing deals.

We believe that there are still customers who want to purchase vehicles, but are unable to obtain credit. As this credit trend continues, more customers will be able to return to the market for a vehicle, increasing vehicle sales levels beyond the incremental gains associated with economic recovery.

We also pleased to report that GMAC our number two buyer of retail contracts in the first quarter. They have returned to the market and are providing attractive financing options to our customers while supporting the GM and Chrysler brand.

GMAC is a critical partner to Lithia. This retail support is a welcome improvement from late 2008, when the captive finance companies were essentially on the sidelines. Despite this trend no one lender comprises more than 15% of our business.

Now, let's move on to Service, Body and Parts, which continues to be an area of focus for us. Lithia's Service, Body and Parts business was 6% on a same-store basis in the first quarter. The biggest driver of this decline is fewer units in operations for all manufacturers.

We believe this will continue through 2011, due to the low new vehicle sales levels in 2008 and 2009. The other major factors in this decline is due to our higher concentration of domestic franchises, which experienced historical sales decline in excess of the overall market.

For the quarter, same-store domestic brand warranty work decreased by 23.9%, and import luxury warranty work increased by 1% in the quarter.

Excluding Toyota, overall warranty work was 18% in the quarter and we estimate that our same-store sales numbers would have been down 7% instead of 6%, excluding the boost in Toyota warranty work.

We continue to offer additional products and services to our customers in an effort to counteract some of these trends.

We emphasize our lifetime oil change product to extend the length of time, customers return to our stores. There also is a mature base of domestic units in operations that we are actively pursuing.

We have increased our marketing budgets and are attracting new customers. Despite these efforts, we still believe that this area of the will be affected in 2010. As a

As a result we have lowered our same store sales expectations from 1% to 3% in our full year outlook, which Jeff will touch on in over greater detail a little bit later.

Regarding regional performance; North Dakota, Washington, Iowa performed the best with New Mexico, Montana and Oregon being the weakest although almost flat. In the quarter overall gross margin was approximately 19% compared to approximately 20% in the same period of last year. This is primarily a result of a shift in sales mix.

Our gross profit per new vehicle retail was $2668 compared to $2608 a year ago. Gross profit per used vehicle improved from $2258 compared to $1913 a year ago an increase of over $300 per unit. Our average wholesale gross margin was $112 per vehicle, essentially flat compared to a year ago.

I also wanted to update you on the effects of variable costs as sales volumes increase. As we experienced in the third quarter of last year, our leverage on cost really shows through as revenues increase. To that end our adjusted SG&A as a percentage of growth was 83.4% in the first quarter. However, in March the strongest month in the quarter it fell to 74.3%. We believe that in the higher volume quarters SG&A could be as low as the low 70s. To achieve these levels we have continued to focus on efficiently using our SG&A dollars.

We are continually evaluating employee productivity and believe our efforts in this area continue to show. Making each of our dealership personnel more effective and efficient means employee headcounts can stay flat even as sales volumes increase. We also believe that aggressive marketing is crucial as the economy begins to recover. When customers who have been on the sidelines return to the market we want Lithia stores to be top of the mind.

We have increased our digital marketing spend significantly in 2010 in anticipation of a market rebound. We believe that in most cases, our sales kept pace or outperformed our local markets. We are constantly evaluating the ROI on our marketing spend and we'll make adjustments in areas that do not perform as expected.

With that I will turn the call over to Jeff, our CFO to discuss our financial position.

Jeff DeBoer

All right. Thanks, Bryan and good afternoon everyone. I'd like to start with an update on the balance sheet and our liquidity position. Our balance sheet remains very strong as we continue to generate operational cash flows and we maintain our prudent approach to liquidity.

At the end of the quarter, we had approximately $90 million in available liquidity, including $11 million in cash, $47 million available on our revolving credit facility and $32 million in unfinanced new vehicle inventory.

With these funds we continue to temporarily pay down our higher rate debt to minimize shareholder dilution until we can strategically deploy our capital for higher return investments.

Regarding inventory, new vehicle inventories were at $261 million or a days supply which is two days lower than our five-year historical average for this time of year. Used vehicle inventories are at $75 million, a days supply seven days lower than our five-year historical average for the same time of year.

Our inventories remain clean as you can see and we are in good shape for the summer selling season. Our current ratio was 1.3 to 1 at the end of March and our book value was $11.92 per share. We were comfortably in compliance with all debt covenants at the end of the quarter and expect to remain so in the future.

Our credit facility with US Banks, which was undrawn at the end of the quarter matures in October 2010. We expect US Banks to extend this maturity. However, until the amendment is obtained, we intend to leave the line undrawn.

We remain in good shape on our mortgage maturities as well. We recently extended a number of mortgages with Toyota Financial pushing their maturities out to 2015. Our financing partners continue to impress us with their flexibility and willingness to stand with us through these uncertain times.

Looking forward, we have no more mortgages maturing in 2010 and have approximately $12.5 million maturing in 2011. We are currently working with our partners to extend these mortgages and believe these efforts will continue to be successful. Our operational cash flows are more than sufficient to retire these mortgages if necessary.

In summary, we continue to proactively manage debt maturities in our overall balance sheet. I would also like to note that excluding real estate debt, our long-term debt to total capitalization is only 1%. We have no sub-debt converts or bonds outstanding.

Now a few words on the P&L. As we announced earlier today, we have reclassified the last two operating stores from discontinued operation. The rightsizing we announced in June 2008 is nearly complete. As a result, our financial results have been reinstated on a comparable basis for all periods presented.

If you would like more information, the investor presentation published today at lithia.com provides a historical summary of adjusted quarterly results.

Now for an update on our second quarter and full year guidance. Our second quarter earnings guidance will be in the range of $0.19 to $0.21 per share and we are also increasing the full year guidance to the range of $0.63 to $0.69. Both projections are based on the following updated assumptions, which are provided in the press release as well, but I'll go over the trends here.

We are increasing our revenue guidance to $1.9 billion to $1.95 billion. We're raising our new vehicle same-store sales assumption to an increase of 5.9%. We are raising new vehicle gross margin assumptions to a range of 8.3% to 8.5%. We are raising our used vehicle same-store sales to an increase of 11.2%.

Used vehicle gross margins are unchanged at 14.2 to 14.5, we're lowering the service, body and parts same-store sales to a decrease of 3% as Bryan indicated earlier, we're raising our service, body and parts margin as well, to a range of 47.8% to 48.1%.

Finance and insurance gross profit remains unchanged at 9.55 per unit, we're lowering the tax rate to 38.5% as we make more money. Estimated average diluted shares outstanding unchanged at 26.2 million shares, unfinanceable CapEx is also unchanged at approximately $20.7 million. Chrysler market share assumption is also unchanged. We're saying it's consistent full year 2009 levels. So no improvement.

This guidance excludes the impacts of future acquisitions, dispositions and any potential non-core items. We are pleased to be able to increase our guidance for the full year based on better than expected first quarter results and an expectation of a slightly stronger new vehicle market in 2010.

That concludes my prepared remarks. We’d now like to open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Rick Nelson.

Rick Nelson - Stephens, Inc

I’d like to ask you about some details in service and parts. Same store that you reported minus six, if you could provide with customer pay and warranty and internal and other components of that measure?

Jeff DeBoer

Yes, we gave the breakdown for a lot of the warranty and other parts, John do you have the customer pay.

John North

Customer pay was about 80%.

Rick Nelson - Stephens, Inc

The same store sales increase?

Jeff DeBoer

The same store increase was up 4% excluding Toyota customer was pay, sorry, was down 4% and excluding Toyota was down 4.1%.

Rick Nelson - Stephens, Inc

Okay. Then the internal component?

Jeff DeBoer

The internal component we put in to use vehicles so we done reclassify the margin on the reconditioning in to our service work.

Sid DeBoer

Or the sales, or the sales.

Jeff DeBoer

It’s a huge difference it was almost 4 to 5% difference in our same-store sales if we would classify it that way.

Rick Nelson - Stephens, Inc

Then just you and AutoNation treated somewhat that way?

Sid DeBoer

I am not sure how they do it. We can't seem to find consensus on how everyone does it, but we believe our method is the correct one obviously.

Rick Nelson - Stephens, Inc

A safe one. What are doing to combat such units in operation challenge or headwind for the service operation?

Sid DeBoer

Its not solely that Rick, there is also this recession we are dealing with and people are postponing lot of service work and we are finding that particularly in the older car base where people have a lot in the mind, no jobs and so there are some of that, but obviously when you've General Motor stores that had 60% of the market share 10 years ago and now have 20% and Chrysler that had maybe 15%, 20% is now 10%.

Those things that have impacted us and you see those drops and then the general trend of sales being a $10 million, you got rid of all that short-term service work that was related to the prep of the new car and the warranty work related to that, so yes there is definitely an impact. I think we have given you guidance as much as we can about it. We don’t think it accelerates by any means.

Bryan DeBoer

Rick I think looking forward, obviously depending what the new car sales levels do, the steeper the increase as we grow into this new economy, the more it will offset that, so really it’s a late 2010, mid 2011 depending on how steep the upturn is on the new units coming in.

Rick Nelson - Stephens, Inc

Now one of the other dealers this morning was talking about a pick-up in domestic store customer pay picks of that some of the differed maintenance was starting to show up now in the stores. You are not seeing that?

Jeff DeBoer

No, our comp in March was actually strong. So we closed with the good trend and the comp was actually slightly positive in March for service and parts same store sales.

Rick Nelson - Stephens, Inc

On customer labor or the whole thing?

Jeff DeBoer

Customer.

Sid DeBoer

Customer pay and labor.

Jeff DeBoer

Customer was actually pretty strong 10% of service. So, in March there was very sensitive definitely what we saw Rick.

Sid DeBoer

We were 4% in March on everything in service and parts [volume].

Rick Nelson - Stephens Inc

Then what you think of accounting for the impairment in March more of store traffic and earlier.

Jeff DeBoer

What we are seeing is when we look a cross section of our states, it appears that the northwest and western states are coming out of things a little bit slower, but it appeared that in March they started to come back a little bit.

Sid DeBoer

Maybe some seasonality there Rick,

Jeff DeBoer

It could be.

Rick Nelson - Stephens Inc

I guess my next question is the guidance, is it assuming a pickup in the overall industry in the back half of the year?

Sid DeBoer

No.

Rick Nelson - Stephens Inc

As I look at the EPS, just using the midpoints $0.29 for the first half, $0.37 then implied for the second half, is there seasonality that is driving that stronger second half, but its not.

Bryan DeBoer

As always Rick, the third quarter is always very large for Lithia we've explained in the past.

Rick Nelson - Stephens Inc

Much bigger than the second quarter.

Sid DeBoer

Yes, it normally is.

Rick Nelson - Stephens Inc

Okay. Then on the acquisition front, is there anything percolating? Are the valuations too big out there?

Sid DeBoer

Bryan answer because he is leading that now pretty much. So which I’m delighted.

Bryan DeBoer

Rick, we touched base on some of these facilities that still remain. I am trying to use our first dollars to help fill some of those facilities in bare land. So, we have been very discerning in terms of what we do, but we have a good amount of acquisitions in the pipeline as long as they ring that. We're looking at 100% ROI over a five-year average. So a five-year period, and we have about two or three good import type of stores that will really add to our diversification and we'll be real pleased with, once we get those completed.

Rick Nelson - Stephens Inc

Those had exclusively imports that you're looking at now, or are you also contemplating?

Bryan DeBoer

No, primarily, we'd like to diversify some of the dollars of that, but if it means that we're going to mitigate a facility that's sitting empty, we'd be willing to look at a domestic store or in instances where there is an import store that has a domestic store attached. You typically got to buy all of it right? So that's really how we're approaching that, but we're not actively going after standalone domestic stores unless it's a backfill facility.

Sid DeBoer

Rick, also if we had a Dodge standalone and we could pick up the Chrysler Jeep in the in the same market, we would do that.

Rick Nelson - Stephens Inc

Yeah. that's a great point.

Operator

(Operator Instructions) Your next question comes from the line of John Murphy.

John Murphy - Banc of America/Merrill Lynch

I was just wondering if you could talk about sort of slowing traffic in general through the course of the quarter and what you are seeing in April, and how much did actually picked up from January, February to March and April?

Sid DeBoer

It was pretty typical in terms of normal seasonality. We expect January and February to be about equal and then to get about a 15% bump when it comes to March. The area though that we saw an extraordinary change was in our internet business, in our leads and our hits on our websites. I don’t have the specifics but it was somewhere around the 30% increase in e-business in March which we only expected 15% increase.

John Murphy - Banc of America/Merrill Lynch

Then is that a precursor to actual ups in the stores or is that actually converted to sales and then folks coming to their stores, in to your store just to pick up the car?

Sid DeBoer

Well the e-business is definitely, the figures are up in the stores which is our ultimate measurement and that appeared to be on track in the store, which means I’m not sure what that really means. I think we were finally tracking it and may be we’re capturing a bigger amount initially and early in the process. So it’s a difficult read to be able to tell those things.

John Murphy - Banc of America/Merrill Lynch

Okay.

Jeff DeBoer

John our closing ratio has been improving to with increased focus on process and what we are trying to do is, to be sure we sell everybody a car and then also being able to finance more people as the closing ratio improves.

John Murphy - Banc of America/Merrill Lynch

So, you think the increase in sales to be looked at as an increase in store traffic but may be more of an increase in the closing rate or the financing availabilities, that’s why you think sales were up, just trying to gage what could be the factors?

Bryan DeBoer

I think a better level of customer buy, by our marketing strategies being more directly to current buyers through the city internet and their direct leads were getting seemed to be more valid.

John Murphy - Banc of America/Merrill Lynch

Then on Chrysler specifically because you talked about it and alluded to a number of times. In the past few months its been rumored and actually the numbers bare out, that Chrysler has been pushing more and more of its sales in to [interfleet] as much as 50% of its sales. I was just wondering how that impacts you either positively or negatively as they push more [interfleet] in the near-term.

Sid DeBoer

I did see the automotive news cast today that talked about Chrysler's fleet, it might have been yesterday and they are going focus less on retail, I mean on rental car fleet, which I think ultimately impact us some because that ultimately hurts your resale, when they have too many that was pumped in there. So, but if they focus on government, police cars and large fleet users that keep the car three, four years, then that only helps us to build service work, it does all those kinds of things that we really interested in. So, overall the trend for them is to shrink fleet again and I think they may have needed in January and February, but I think March retail was much better for them. I know our retail on Chrysler was up huge in March over what we were doing in January and February.

John Murphy - Banc of America/Merrill Lynch

Would you let me to share those numbers?

Sid DeBoer

Yes.

Bryan DeBoer

John, in January-February we were at about 525 to 550 new Chrysler products. In March, we sold 850-860, something like that which was like 56% or 60% increase sequentially. That's a huge boom. The things are finally meshing it appears. Their marketing is finally coming together. They are getting a little bit more aggressive in incentives on the backend and on the frontend with the consumers. They are starting to buy like we talked about with GMAC. So, it’s starting to come together and it appears that it’s trending that way as well into April.

Jeff DeBoer

Product availability is also better.

Bryan DeBoer

Excellent point.

Sid DeBoer

If you look at our slide too, John as aggregate for our company, I think we’re down around 26% Chrysler down was 36% last year. So, we markedly improved on adding others and increasing sales there and then the drop off that they have had is impacted that as well, but overall I mean our mix is improved. So, we try to mitigate some of that and we'd love to get it, so no one was more than 20%. It just so that we don’t have bet on, who is going to be successful 10 years from now, I mean I think that's one of the things you try to do is call, who that is going to be and if you can figure that out, let me know.

John Murphy - Banc of America/Merrill Lynch

It’s a tough game to call.

Sid DeBoer

It is.

John Murphy - Banc of America/Merrill Lynch

You also mentioned that you had a lot of property that was held for development and that if developed could generate as much as $0.12 to $0.15 in earnings. I was just wondering really what the property was for? Is that for the used car superstores or is that for open point you think you might be awarded? What was really the impetus for that real estate and how fast could that possibly be developed?

Jeff DeBoer

John, let me clarify real quickly. The $0.12 to $0.15 is what it costs us today to carry those empty facilities of bare lands and so on, okay. Just for clarification.

John Murphy - Banc of America/Merrill Lynch

That’s a cost of carry.

Bryan DeBoer

That’s a cost of carry today, right interest rates so on and so on, okay. Where do they come from some of it was speculative land. We have probably 4 to 6 parcels that are speculative land a couple of million dollars each something like that. We have been writing down some of those obviously over the past number of quarters. A few of those three are close franchises by manufactures and there is another 6 to 8 that are sold or closed facilities that we initiated.

Jeff DeBoer

Bryan is just speculative he doesn’t mean speculative in that sense, its more development property for future retail locations.

Bryan DeBoer

Right.

Sid DeBoer

We had specific plans for them, when we bought them, but those plans changed based on our need to change our diversification in our mix and then we sold some stores that we would have moved in to these new sites. For instance in Colorado we had a big piece of land, we are moving in Fort Collins. We were moving the Chrysler Dodge Jeep store out to [Hunke] lands. We bought the [Hunke] land and then we ended up selling it so.

Jeff DeBoer

John to put in to perspective for you to, last year we probably mitigated about $0.06 to $0.07. So, would have been higher. So, we're making pretty good headway in this arena, and now that we have cash available to go backfill with franchises or new acquisitions. We think that will move quickly as well and we'll be able to get that $0.12 to $0.15 down further.

Sid DeBoer

If they turn into something good, John, they will be accretive too. I mean, they could add to our earnings more than $0.12 to $0.15, if we could find franchises formal.

Jeff DeBoer

What was that, John?

John Murphy - Banc of America/Merrill Lynch

So, you think it is the best use of this land is ultimately to buy franchises and build and put the franchises on this land as opposed to the land that they are currently on. I mean, that's the game plan for these parcels?

Jeff DeBoer

No, its more finding franchise is to be able to fill these, not our existing franchises. Like Sid alluded to, we'll also sell these properties. They are obviously marketed at competitive prices and we're actively looking to sell those. Now, there's probably about half of them that it would be much better to be able to find import franchise or domestic franchise and fill those facilities with.

Sid DeBoer

It's a combination. It's not easy just to put them all in one bucket. I mean it's a group of stores and each has a different purpose, and I think we've defined all of them for you and it's all over the board. Some of them were terminated. Some we planned on moving. [Bryan] Texas, we bought a bunch of acres to move the Chrysler stores and we don't feel is prudent to build a brand new Chrysler store today until we have a clear view of their success. So, those are kind of things you clear on hold them, but hold that land.

Bryan DeBoer

We thought it was appropriate to share that with you, just so you could see what normalized earnings would be under fully mitigating or getting rid of those facilities, okay?

John Murphy - Banc of America/Merrill Lynch

Then lastly just on the outlook. It looks like your used margins are particularly strong in your outlook at 14.2% to 14.5%, which does look like something that's reasonably achievable. I was just wondering that's the high end of the range of where your used margins have been, the used market has been a very good one for you or the used segment, but a good segment of your business for you. Is that something that you believe is structural and getting to those higher margins over time or would it be better to drive higher volume and lower margins and greater returns if I try to understand what that 14.2% to 14.5% really means?

Bryan DeBoer

John, historically we’ve been as high as 15% to 16% in used vehicles. What we have seen that’s occurred and its actually still occurring, is we are selling a higher priced vehicle, but you still make the same per transaction. So, as we drive our average cost down, we will see that our margins will go up. Now obviously that impacts the same-store sales right, we have to sell more units to be able to do that and that’s why when you look at our same-store sale guidance of what was 13%....

Jeff DeBoer

11%.

John Murphy - Banc of America/Merrill Lynch

11.2 yes.

Bryan DeBoer

11% something like that, yes, when we just did 24, why is that, why wouldn’t we continue with 24, right? Well, we obviously have a little bit more difficult comps, but also as we drive the average price down, which will increase our margins, will have to sell more units to keep pace with that.

John Murphy - Banc of America/Merrill Lynch

The margin is of course a mix up or down in the price points?

Jeff DeBoer

Yes, it also has a lot to do returns. If you are able to keep you inventories and you are able to predict, what you are going to sell better, which we gained a lot of experience that in our used car initiatives the couple of years ago. We now what sells and we are getting very good of being able to put those cars on the frontline. So, we believe that’s been a big impact especially quarter-over-quarter.

Sid DeBoer

We don’t set a percentage goal target at the store level and to answer your question could it mean that we are making too much money and not selling enough cars John. I mean we will not compromise volume for gross. We are going to go for total dollars produced.

John Murphy - Banc of America/Merrill Lynch

Yeah.

Sid DeBoer

I mean that’s the goal and if its end up 11% and we make a lot more money, that's okay.

Operator

(Operator instructions). There are no additional questions at this time.

Sid DeBoer

Okay. I'd like to close the meeting then and thanks again for your participation. We look forward to talking to you again as we discover things about ourselves and as we move forward. Thanks for your participation.

Operator

This concludes today's Lithia Motors' first quarter earnings call. You may now disconnect.

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Source: LITHIA Motors, Inc Q1 2010 Earning Call Transcript
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