Lithia Motors, Inc. (LAD)

LAD 
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Industry: Consumer Durables
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Lithia Motors, Inc. (LAD)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Sid DeBoer – Chairman, Chief Executive Officer

Jeff DeBoer - Chief Financial Officer

Analysts

Rexford Henderson – Raymond James

Richard Kwas – Wachovia

Matt Nemer – Thomas Wiesel Partners

Unidentified Analyst – Sidoti & Co.

Presentation

Operator

Welcome to the Lithia Motors second quarter 2008 earnings call. (Operator Instructions) It is now my pleasure to turn the call over to your host [Dan Westhauser Kent].

[Dan Westhauser Kent]

Welcome to Lithia Motors second quarter 2008 conference call. Before we begin, the company wants you to know this conference call includes some forward-looking statements. These statements are necessarily subject to risks and uncertainty and actual results could differ materially due to certain risk factors. These risk factors are included in our second quarter and year end earnings press releases, and in the company's filings with the SEC. Now I'd like to thank you for joining us for our second quarter 2008 earnings conference call.

Presenting the call today are Sid DeBoer, Chairman and CEO of Lithia and Jeff DeBoer, our Chief Financial Officer. At the end of their remarks, we'll open the call to questions. We also have with us today for Q&A Brian DeBoer, our President and Chief Operating Officer and Dick Heimann, our Vice Chairman.

Now it is my pleasure to turn the call over to Lithia's Chairman and CEO, Sid DeBoer.

Sid DeBoer

Our second quarter non-GAAP net income from continuing operations was $1.8 million or $0.10 per share. These results show steady, sequential improvement from the fourth quarter '07 loss of $0.16 and a first quarter loss of $0.03, and all the while economic conditions have been worsening. As you probably read in the press release, accounting requirements dictated that we record a significant charge related to asset impairments that we will talk more about later on in the call. The non cash charge explains the large loss based on the GAAP financial result.

As expected, the second quarter provided a difficult environment in the economy. Continued housing declines, credit market concerns, and high gas prices have weighed on just about every sector of our economy and auto retail certainly has been no exception. You might remember on our third quarter conference call last year, just when the credit markets were beginning to show distress, and oil had risen to $80 a barrel, we announced cost cuts and strategy shifts to prepare for a prolonged downturn.

Although we were ahead of many forecasters in anticipating a slowdown in vehicle demand in '08, no one could have envisioned the combination of events that took place in the second quarter of this year. As we move into the equally difficult second half of the year, I want you to know that we are preparing for continued slow vehicle demand into 2009 by bringing our expenses into balance with our conservative view of vehicle demand.

In the 40 plus years that I've been in the auto retailing, I've never experienced this sudden upheaval in the car market that we have just seen since May. Our previous steady efforts to cut costs required a more dramatic response because of what happened beginning in May for those market conditions.

On June 2, we announced a comprehensive restructuring plan that focused on right sizing this company to a new operating environment. We told you how we expected $18 million in annualized savings with head count reductions, consolidation of duties, corporate overhead reductions, and office centralization. We expect to have these efforts completed by the end of August.

We're more than pleased to announce that all of that $18 million in annualized cost reductions have been found and have been completed through July. And also, in the process of making these cuts, we've identified another $4 million in the annualized costs that are earmarked for reduction by the end of the year.

The other elements of the restructuring plan were to reduce our debt domestic exposure within our business units by divesting of 10 to 15 underperforming stores, deferring all of our uncommitted capital expenditures, selling unnecessary property and assets including some aircraft, financing all unfinanced real estate, postponing acquisitions until prices drop further, significantly adjusting vehicle pricing to match current demand, adjusting our inventory mix to meet consumer shift in preference for smaller, more fuel efficient, new and used vehicles, and deferring the investment in our new L2 auto stores.

The breakdown of the revised total of $22 million in annualized cost reductions is as follows: store level personnel have been reduced by $8.1 million since January. Support service personnel have been reduced by almost $10 million - $9.8 million. Benefits and corporate overhead have been or will be reduced by $2.6 million. Service, body and parts expenses will be reduced by $1.4 million. All of these costs come right off the SG&A line and 90% of them have already occurred just since January.

In addition to these SG&A reductions, we have in place an ambitious but realistic plan to reduce our current inventory by the end of the this September to levels that will allow us to realize almost $8 million more in annualized interest expense reductions. These numbers are not included in the $22 million just mentioned, but are part of our broader restructuring plan. About 25% of those inventory reductions already occurred in July.

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