Lithia Motors, Inc. (LAD)

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Lithia Motors, Inc. (LAD)

Q3 2008 Earnings Call Transcript

October 28, 2008, 5:00 pm ET

Executives

Dan Werthaiser-Kent –IR Manager

Sid DeBoer – Chairman and CEO

Bryan DeBoer – President and COO

Jeff DeBoer – SVP and CFO

Brad Gray – EVP

Analysts

Rick Nelson – Stephens, Inc.

Rex Henderson – Raymond James

John Murphy – Merrill Lynch

Art Weiss – Group G Capital Partners

Matt Nemer – Thomas Weisel Partners

Peter Siris – Guerilla Capital Management

Presentation

Operator

Good evening. My name is Tashawna and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lithia Motors third quarter 2008 earnings conference call. (Operator instructions)

I would like to turn today's call over to Mr. Dan Werthaiser-Kent. Thank you. You may begin your conference.

Dan Werthaiser-Kent

Thank you, Tashawna. Good afternoon to everyone. Welcome to Lithia Motors' third quarter 2008 earnings conference call.

Before we begin, the company wants to let you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risk and uncertainty and actual results could differ materially due to certain risk factors. These risk factors are included in the company's filings with the SEC.

Now, I'd like to thank you for joining us on our third quarter 2008 earnings conference call. Presenting the call today are Sid DeBoer, the Chairman and CEO of Lithia, Bryan DeBoer, our President and Chief Operating Officer, and Jeff DeBoer, our Chief Financial Officer; and Brad Gray, our Executive Vice President is with us as well today.

At the end of the call, we'll be open to questions, and our Vice Chairman, Dick Heimann, is unable to be with us as he usually is, on our Q&A today as he's down in Abilene, Texas at the grand opening for our new Honda store there.

With that, it's my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer. Sid?

Sid DeBoer

Thank you, Dan. Good afternoon, everyone. Thank you for joining us today.

Our third quarter net income from continuing operations was $2.7 million or $0.13 per share. Again, Lithia has shown sequential earnings growth since the fourth quarter '07 loss of $0.16 per share, a first quarter loss of $0.03 and a profit of $0.10 per share in the second quarter.

We have accomplished this all while economic conditions have been worsening. Despite the third quarter being the worst economic quarter of '08, it is our best quarter so far this year.

On a consolidated basis, excluding impairments, net income was still $0.09 per share. This number reflects all of our operations, continuing and the discontinued. Since our last earnings conference call, we have see additional macroeconomic headwinds, as most of your know and the Fed is finally recognizing the recession that our sector has been feeling – feeling really, since March of '07.

With that said, it is important to dispel some fears that seem to be in the marketplace today.

First, the credit markets have indeed tightened, but Lithia and all other retailers have felt the pinch, to be sure and credit unions, small local banks, which have always been our stable business partners, are picking up much of the business that some of the larger financial institutions and some of our manufacturer partners have cut back on.

Lithia has a company-wide base of over 80 different lenders that we regularly work with and we continue to work on growing that list throughout this credit environment. To imply that the credit market is frozen is simply inaccurate. Though some of our captive finance companies have tightened their lending requirements, we still are able to arrange financing on over 70% of our vehicles that we sell.

The troubles experienced by the auto manufactures have been significant. Although declining demand does impact our business, it is different for us as retailers. Our business model has some important differences from the manufactures. First and foremost, our core businesses are retail vehicle sales and retail service and part sales.

Throughout the years, we have seen our share of market shocks and economic slowdowns. But as retailers, we have the ability to reduce many costs, adjust our inventory quickly, and continue to operate profitably in most environments.

Many of our variable costs are personnel and can be adjusted with market conditions. We even have manufacture incentives to help clear out older inventory and keep our margins fairly stable. Not many other retailers can offer what our sector has available in this stability component.

Second, and probably as important as any, is our service and parts business. It has always historically performed dependably even in tough times. We develop relationships with our customers in order to sustain that steady business in both good times and bad.

As you can see in our press release, despite the 15% to 25% declines in our vehicle sales in the third quarter, our service and parts business remained relatively stable, with only a 1.2% decline. Additionally, this overall relative mix shift to one of our highest-margin businesses during economic slowdowns lends stability to overall gross margin.

The used vehicle part of our business is also an easily overlooked component of auto retail. It provides over 20% of our revenue and over 15%, and as much as 20% sometimes, of our gross profit and the gross profit margin on used vehicles has historically been almost twice as high as that of new vehicles. So, again, this also helps us to stabilize our potential earnings.

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