Lithia Motors, Inc. (LAD) Q4 2011 Earnings Report, Transcript and Summary

Greetings and welcome to the Lithia Motors Q4 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John North. Thank you, Mr. North, you may begin.

Thanks and good morning. Welcome to Lithia Motors Fourth Quarter 2011 Earnings Conference Call. Before we begin, the company wants you to know that this conference call includes forward-looking statements. These statements are necessarily subject to risks and uncertainty. Actual results could differ materially due to certain risks 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 gross margin, adjusted selling, general and administrative expense, adjusted operating income, adjusted income from continuing operations, adjusted earnings per share from continuing operations, and adjusted cash flows from operations. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. These presentations are not intended to be provided in accordance with GAAP and should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We have also posted an updated investor presentation on our website, lithia.com, highlighting our fourth quarter results. Presenting the call today are Sid DeBoer, Chairman and CEO; Bryan DeBoer, President and Chief Operating Officer; and Chris Holzshu, Chief Financial Officer. Also on the call today is our Vice Chairman, Dick Heimann. At the end of our prepared remarks, we will open the call to questions. I'm available in my office after the call for any follow-up questions you may have. It is now my pleasure to turn the call over to Sid DeBoer.

Good morning. Today, we reported a record fourth quarter adjusted income from continuing operations of $13 million, compared to $5.4 million a year ago. We earned $0.49 per share on an adjusted basis in the fourth quarter compared to $0.20 per share in the fourth quarter of 2010. For the full year 2011, we reported adjusted income from continuing operations of $52.6 million or $1.97 per share compared to $24.2 million or $0.93 per share in 2010. We grew our annual revenue over 30% and more than doubled our earnings per share for both the fourth quarter and full year 2011 over the prior year. Today, we also announced changes in our executive management group. On May 1 of this year, I will assume the role of Executive Chairman. Bryan DeBoer, our President and COO, will be appointed CEO. Over the past 3 years, Bryan's team has worked diligently to elevate our objectives and increase our performance. To his credit, the financial results we have produced over that time have exceeded all expectations. The Board of Directors and management have determined that the time to effect this transition is now. We are proud of Bryan's contributions to the company and I look forward to working with him in the years to come. Congratulations, Bryan, on a well-deserved new role. In addition, Bryan will continue to be our executive in charge of operations. In my role as Lithia's founder and Executive Chairman, I will remain involved in strategic oversight, manufacturing governmental relations and business development. I will continue to provide my expertise given nearly 50 years of experience in automotive retail. In short, I will still be an integral part of Lithia and I'm now fully transitioning the day-to-day responsibilities of the CEO role to Bryan. As Lithia has continued to mature and evolve, we are executing a well-developed strategy for succession in the leadership of our company. I, along with Dick Heimann and Brad Gray, have all found roles that fit the needs of the organization going forward and are pleased with the progress in our transition. Bryan's team is poised to continue to execute and expand Lithia's vision and we are confident in their abilities and excited about the organizational changes taking place. A multi-year expansion in the number of new cars sold in the United States is ahead of us. We believe that 2012 SAAR will be 13.5 million to 14 million units. Expanding credit markets, advanced safety features and improved fuel efficiency and lots of new technology and styling are driving consumer demand. Coupled with an aging fleet of vehicles on the road, we are confident that volumes will continue to improve and the future is promising. Lithia is prepared as never before to capture more than its share of this growth. In closing, I'd like to thank our team, again, for delivering a very strong performance in 2011. With that, I would like to turn the call over to Bryan to discuss our operational results. Bryan?

Good morning, everyone. Before I begin, I'd like to thank Sid for the kind words and acknowledge the opportunity I've been afforded. I look forward to serving as CEO and would not be where I am today without the guidance and mentoring I received from Sid, Dick and Brad. I'd also like to offer my sincere appreciation to the rest of the team. I appreciate your hard work and unwavering support and I'm excited about our future. With that said, I'd like to discuss the fourth quarter same-store results. Total same-store sales were up 23% in the quarter, reflecting increases over the prior period in all business lines. New vehicle sales increased 29%, well above the national average. On a unit basis, we sold approximately 10,800 new vehicles, an increase of 2,100 units or 25%. This increase was on top of a 33% increase in new vehicle sales in 2010. Our stores continue to drive new vehicle sales and increase our market share. We have worked closely with our stores as they improve our performance in this area and it shows in their results. Our team still believes we have a significant opportunity to improve our performance in new vehicle sales. Individual market share is the most important metric to gauge our new vehicle opportunity. In 2011, we increased our market share 5% and have targeted a 3% to 5% growth in 2012 on top of an underlying market recovery as SAAR increases. Used vehicle retail sales increased 21% in the quarter. We sold approximately 9,700 retail used vehicles, resulting in a used-to-new ratio of 0.9:1. We sold a monthly average of 40 used vehicles per store in the fourth quarter of 2011, up from 30 used vehicles per store in 2010. Our objective over the near term is to sell an average of 60 used vehicles per site. In the quarter, value autos or vehicles over 80,000 miles, performed well. This segment grew 46% year-over-year and had a gross margin of 20%. Although these vehicles have lower selling prices, overall, the average selling price on our retail used vehicles increased 2% due to underlying market strength. We still have tremendous opportunity in used cars, particularly in core vehicles or cars that are between 3 and 7 years old. We believe that concentrating on each of the 3 segments of used vehicles, certified pre-owned, core vehicles and value autos, allows us to grow market share and attract a broader spectrum of customers. In the quarter, our F&I per vehicle was over $1,000 per unit. On a GAAP basis, we arranged financing on 73% of the vehicles we sold and our finance reserve increased $45 to $406 per vehicle on a year-over-year comparison. We sold 41% of our customers a service contract, and 35% of our customers a lifetime oil product. Of the vehicles we financed in the fourth quarter, approximately 12% were to subprime customers compared to only 10% in 2010. In addition, the number of vehicles sold to customers visiting our dealerships with credit scores of 620 or lower improved 64% year-over-year. Over the entire customer base, the average credit score in the fourth quarter was 724. In short, credit trends have been positive throughout 2011 and this continued in the fourth quarter. Our service, body and part sales increased 3% in the fourth quarter. Wholesale parts and body shops showed significant increases of 8% and 11%. Customer pay work increased 4%, which is the 10th consecutive quarter of same-store sales improvement. Warranty still faces a headwind as it declined 11%. Warranty repair opportunities have also declined as initial vehicle quality and reliability continue to improve. Also, we still face difficult comparisons from the declining number of units in operation under warranty. We expect these trends will continue in 2012 and potentially beyond. Regarding regional performance, all states posted double-digit increases with 3 of our largest states, Oregon, Montana and Texas, performing the best. Our gross profit for new vehicle retailed was $2,509 compared to $2,519 a year ago. Gross profit per used vehicle retailed increased to $2,310 compared to $2,282 last year. Our stores remain focused on deal average, where the gross profit dollars per vehicle sold rather than a margin percentage. As sales price increase, a decline in vehicle margin is possible despite gross profit dollars per transaction being unchanged or higher than the prior year. We're comfortable with our performance here and do not view margin erosion as a significant challenge in 2012. In the quarter, our adjusted overall gross margin was approximately 16.4% compared to approximately 17.3% in the same period last year. A 29% increase in new vehicle sales and 21% increase in used vehicle sales, which outpaced our other business lines, accounts for the majority of the decline. Overall, adjusted gross profit dollars increased 27% over our fourth quarter 2010 results. Now to discuss corporate development. We seek exclusive, domestic and import franchises in midsized rural markets and luxury franchises in larger markets. Also, we want to reiterate that we remain disciplined on our acquisition strategy to ensure ROE targets that meet or exceed our internal hurdle rates. So far, in 2012, we have been awarded a Scion franchise to add to our Toyota store in Billings, Montana. We also have opened a standalone Mini store in Portland, Oregon, and a standalone Subaru store in Spokane, Washington. Both of these stores have been separated from other franchises which we will offer a better customer experience, increase new vehicle sales, additional used vehicle traffic and provide organic revenue growth for Lithia. I look forward to leading our team through many new opportunities that lie ahead. With that said, I will turn the call over to Chris, our CFO, to discuss our financial position and increased guidance for 2012.

Thank you, Bryan. At the end of the quarter, we had $21 million in cash, $10 million available on our revolver and $66 million in unfinanced new vehicle inventory. Therefore, our liquidity totaled approximately $97 million. Our free cash flow, as outlined in our investor presentation, was $30 million for the full year of 2011. We estimate this number will be approximately $30 million again in 2012, driven by increased earnings and offset by an increase in planned CapEx as we continue to invest in projects that grow our business. Our capital expenditure estimate is $44 million for the full year 2012, an increase of $12 million over 2011. This budget is based on new facilities, facility improvements and remodels, the consolidation of our headquarters facilities into a single location and other business development opportunities that are currently in progress. We continue to focus on the prudent allocation of capital and believe a balanced strategy of acquisitions, internal investments, dividends and share repurchases is appropriate. Our first choice for capital deployment remains to grow through acquisitions. Regardless of category, all investment decisions are measured against strict ROE metrics and will be solid investments in Lithia's future. Our balance sheet remains in good shape. We have no mortgages maturing in 2012 and have been successful on extending the maturities of several loans during the fourth quarter. At December 31, we had approximately $287 million in total debt, of which $194 million is mortgage financing. We were in compliance with all debt covenants at the end of the quarter. Now to discuss cost control. In the quarter, adjusted SG&A was 74.6% of gross profit. For the year, incremental throughput, or the percentage of each additional gross profit dollar over the prior year were retained after selling cost, adjusted to reflect same-store comparisons was estimated to be 58%. On an adjusted basis, incremental throughput was 48%. At least 90% of our controllable SG&A is driven through personnel costs and advertising spend. We continue to partner with our store leaders on the plan established in 2008 to increase the productivity of our team and ensure our pay plans promote exceptional pay for exceptional performance while increasing store customer visits. As of December 31, new vehicle inventories were at $373 million or a days supply of 62 days, a decrease of 12 days from a year ago. Used vehicle inventories were at $107 million or a days supply of 52 days, this is 1 day lower than our days supply level a year ago. As we expected, import inventory levels are continuing to recover into the first quarter of 2012 and were not at normalized levels at year-end. I'd like to provide a few comments on our guidance for 2012. We have increased our EPS estimate in the first quarter in the range of $0.41 to $0.43, with the full year expectation of $2.06 to $2.16. We anticipate growing new vehicle same-store sales 10.8% and used retail same-store sales at 10.5%. These increases are in line with our expectations of increased market improvement and additional share gains in our stores as Bryan outlined previously. At approximately halfway through the quarter, our results are on track. For additional assumptions related to 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?

[Operator Instructions] Our first question is from John Murphy with Bank of America.

Congratulations, Sid and Bryan, on the new roles. Just -- a first question for you, Bryan. As you take the full control of the reins here as the CEO, is there anything that you think that you would change in the strategy or is it going to be purely execution? I'm just trying understand if there's any new direction or thought that you might have as you take the reins.

A good question, John. I think most importantly, we have a pretty good strategy in place with exclusive franchises, our centralization and common systems. Our entrepreneurial culture is what we really spend most of our time on out in the field, and then obviously, continue to grow organically, as well as externally, is a big focus of mine. And I think the pathway that Dick, Sid and Brad have set is a good pathway for the organization and I think we've executed on it over the last number of years and we don't see dramatic changes in that.

Okay. And then a second question. I mean, as we -- I look at the results from the fourth quarter and then what you're looking for full year 2012, it seems like you guys keep surprising to the upside and to be perfectly honest, the roughly 5% to 10% earnings growth you're looking at for 2012 looks a little bit conservative. I'm just curious as to what you think has driven sort of your surprises in the short term and really what might happen in 2012 to the upside? Has a lot of this have to do with Chrysler's strength or is it internal initiatives? I'm just trying to understand what's been driving the upside, at least in your opinion, according to your plan or relative to your plan.

Yes, John, this is Chris. First off, our guidance is really based on the current performance trends that we're seeing in each one of our stores. And what we look at is an expected retail recovery in each market which varies a little bit from overall SAAR. With that said, we use this bottoms up forecast to predict our performance and there's lots of factors that can impact the individual performance in the stores, things like our store leadership, the competition in the market, inventory availability, financing, product availability and so on. And so our goal is to put out realistic guidance that we can achieve and we feel like the beats that we've seen have really been based on exceeding our own internal expectations. So for example, on the fourth quarter, our guidance beat -- we put out a guidance $0.37 to $0.39, our adjusted earnings was $0.49. That was really based on a number of factors. One being that the impact from our import inventories wasn't as severe as we expected, and then we continue to focus on leverage which is coming through to the bottom line and improving our overall EPS.

Okay. And then on acquisition, as we look at the landscape out there, obviously, it sounds like there was a lot of more hubbub around the potential for acquisitions coming available. It sounds like you guys are probably, generally in the real sweet spot of what's coming to market. I'm just curious if you're seeing any real ramp up in the available properties and what we might expect on acquisitions because it sounds like there's about to be a pretty good surge over the next year to 2 years in acquisitions, just in the industry at large.

John, this is Bryan again. Obviously, with acquisitions, at any given time, certain sellers are in the marketplace. We continue to see lots of opportunities. I think the most important thing is that we remain disciplined. So for us to give any type of guidance that we are trying to achieve, 4, 10, or however many a year, that's not really what we're looking for. We're looking for those models and those stores that really fit that exclusive market again. Now we'll go into larger markets with luxury franchises obviously. But I think the horizon looks positive. There's no question, and there's that plentiful amount of acquisitions out there at any given time.

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

I don't know, John. I tell you, if they bring Peugeot, we'll watch for a while before we worry about selling them.

Our next question comes from the line of Simeon Gutman with Crédit Suisse.

Congratulations on the year and to you, Bryan and Sid. On 2011 -- and this is maybe another way of asking the previous questions. So last year was a great year and the performance is probably explained as much by some of the top line momentum as it was by driving efficiencies in the business. So how do you think those 2 pieces play out next year? Maybe can you talk about what low hanging fruit from an efficiency standpoint is left and then talk about the momentum of some of the brands continuing?

Simeon, this is Bryan. In 2011, despite pretty good performance, at least what we viewed as solid performance, we still have plenty of stores that don't operate at their prime level. We have something, and I think we've talked to you about this before, called managing by thirds, which is basically a different approach depending on how the performance in the store is and we still have a good third of our stores that we believe that we need to continue to grow our teams, the top line is still dramatic amounts below where our real potentials are. And I think in 2012, we'll be able to extract those benefits as those teams become stronger and stronger. So additionally, on the used vehicle side, I spoke to this in the conference script but it's pretty clear that at 39 units in used per site, that's not -- that's an okay job in my mind. Now I'm pretty hard on ourselves and I think our team are pretty hard on each other. But we're pretty confident and when we were a younger company, we were always able to sell in the 60 units per site. And that's where we spend a lot of our time when we go visiting with our stores and teaching them how to procure inventory at a more rapid rate and how to get rid of the cars that they take in on trade that are the improper cars. And I think the combination of those 2 things, top line, those underperforming stores, as well as a global focus on used cars, will translate into that 50%, 60% throughput that I think we all want to see.

Simeon, this is Chris. I mean, as it relates specifically to leverage, we don't anticipate having any real new initiatives that we're going to introduce in 2012. What we're going to do is continue to focus on those tools that we put in place throughout the recession that really focused our teams on maximizing productivity in our stores, enhancing pay plans that drive performance and spending the marketing dollars that are necessary to drive as much traffic as humanly possible into every one of our locations. So nothing real new, but continue to stay focused and disciplined on the strategy that we feel like has really been a win for us the last couple of years.

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

Simeon, this is Chris again. Yes, we believe that we can continue to drive our SG&A as a percentage of growth down to the low 70% range. And we're going to do that by focusing on the throughput, which is just for every incremental gross profit dollar that we grow, we want to bring at least 50% to 55% of that to net. And when you look at the amount of focus that we have on our personnel cost and advertising, we really believe that that's attainable. And then, the last thing I'd say is on acquisitions, we don't guide acquisitions into our overall guidance. But we really believe that with our corporate structure, we have a lot of leverage here that we continue to use as we add stores and what I mean by that is adding 2 to 3 stores a year isn't going to incrementally grow our corporate staffs at all.

Simeon, this is Sid. Having lived through these recoveries many times in the last many years that I've been doing this, the upside on earnings is a lot bigger than people expect because you can keep most of that gross profit to net and it's an opportunity that is honed by a recession like we've just had, and the education that this group of leaders has been through in terms of holding cost down as increases in sales and gross happen. So we've not only got maybe a 10% increase in volume next year as an aggregate and it may vary some in the markets we're in, so our guidance reflects that. But that increase in gross profit, that happens from that. I mean, our goal is going to be to keep that as it has in the past. It's a great time to be in auto retailing when things are turning up.

Okay. And then one more for Bryan. Realizing that you're part of -- partially the architect here of the company that we're looking at. And you mentioned sticking to that strategy of exclusive markets and then also you mentioned maybe pursuing larger markets if they're luxury brands. Can -- do you have, not necessarily a different view, but some things to add as far as geographic or brand footprint? Are there any big mandates in your head as far as pushing the company and the footprint to different places?

Simeon, right now, we're in about 25 markets or so west of Mississippi. We've obviously looked at expanding our footprint into the East. There is also another 50 markets or so that are west of the Mississippi. So we have lots of opportunities still West. I think our best driver of whether we expand that footprint past the Mississippi is really -- we'll look at a small platform that has some good people that we can leverage. Hopefully, not have to pay too exorbitant an amount and keep that platforms small so the multiples don't get too exorbitant when we go past the Mississippi. But that's a matter of fit. I mean, they have to fit with our management team and the philosophies that we believe in. And I think to push that isn't something that we're really looking to do. We're really just looking for, again, those opportunities, that ROE and makes sense personnel-wise.

Our next question comes from the line of Brett Hoselton with KeyBanc Capital Markets.

It's Matt Mishan in for Brett. Congratulations, Bryan and Sid. I think the first question I had was -- used vehicle sales guidance was increased. I just wanted to get a sense of what's driving that.

Matt, this is Bryan. In terms of used vehicle sales, we finished off the year pretty well. We believe that we are gaining momentum when it comes to being able to find the right cars to put on our lots to meet our consumers' needs. And we believe that, that 10% outlook for 2012 is very doable, okay? And a lot of that, like I said, is driven by procurement. Now obviously, as you procure vehicles, there's a not -- a lot of other alignments that need to occur and you need to build your staff and you need to convince consumers that you have certain product lines and so on and so on. And I think our teams have got that. They understand the basic 3 principles of used cars, which is obviously certified vehicles; core vehicles, which are those 3 to 8-year-old vehicles; and then those value auto vehicles, which is really a new segment that we got into a couple of years ago, which are the older, as-is type of vehicles. But they get it. They understand the key driver to each of those 3 areas and we believe that 10% is a very realistic number in our view.

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

Yes, this is Chris. Our guidance is laid out in our press release and our presentation. And when we run our business, we don't really focus our business on overall gross margin percentages. We look at gross profit dollars. So when we start seeing current trend changes in the overall price of new vehicles and the prices of used vehicles, they may impact our margin slightly, but nothing that we're alarmed with and nothing that we're too concerned with.

Okay. And you raised your CapEx guidance to $44 million. I just -- what are the primary drivers of that?

Yes, this is Chris again. Well, first off, let me just reiterate that all of our capital projects that we undertake have to meet our strict hurdle rates that Bryan touched on earlier. And what we found now is that all of our general managers and all of our store leaders are accustomed to business plans that have to show that there's incremental profit on the projects that they undertake. And so I guess what's driving that is a number of things. We have our headquarters project, first off, which is about $10 million in that improvement, or that additional spend in 2012. But we're confident by moving out of 9 different buildings that we're in today, then not only is it going to bring synergies to our overall management team, but it's also going to be accretive to earnings. And then the remaining projects that we have entail facility upgrades, improvements that manufacturers are dictating but they're also paying for, and the split out of a few of our facilities. We're moving franchises that are dual to single points which we think is going to overall increase their new vehicle sales, but more importantly, give us additional used vehicle points that we can focus on.

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

Matt, this is Bryan again. The surprising thing is I've been in acquisitions now for about 13 years. It seems like it's pretty static typically and there's not big swings in acquisitions. We always have our oars in the water, in all 70 of those West Coast markets, and it really depends mostly on whether or not the primary owner is aging or whether or not he has a succession plan. And I think that's the biggest driver. Now during the recession, there was definitely some additional drivers that came from financial pressures. But other than that, we just know that if we keep our oars in the water, we'll pick up the acquisitions when the time is right and they'll meet our fairly stringent ROE guidelines of about 20% return a year. We get our money paid back in 5 years. And when I think with that criteria, you got to be out there and you really just sit and wait until something changes within that succession planning.

This is Sid. In the acquisition framework of the world and I get a lot of input from that and that's going to continue to be a role for me because it's who you know and your reputation or how you go about buying a guy's business, that really dictates who gets to buy a store in many cases. Families choose who they sell to. And we're the prime candidate now in almost every market we're currently in certainly. But even in all of those other markets, we've identified and every broker knows exactly what Lithia will be able to do and knows that we will be able to execute with the cash and with the follow-through with the manufacturer, that we won't enter into a deal and hesitate at any point. If we're willing to do it, we'll do it. And I think that really weighs in our favor. And we're turning down obviously a lot more than we're going forward with. And it's largely driven by the price in many cases. So it's always a matter of finding the right value and finding the right families that can operate with us. I think you'll see plenty of these in the future. I mean, when you -- as you know we, we started with 6 stores and we bought -- we were up over 110, so this is a very experienced acquisition group. It's a way of life for us and there is no major change in the market today that there wasn't 5 years ago. We did go through a downturn where there were a few more sellers, but we weren't sure how many domestic stores we wanted to buy at that time. We were looking at a mix bit issue in which we still are. So we're going to try to keep improving on luxury, improving on import, getting our mix in balance so no more than 20% is represented by one brand. Strategically, this company will execute acquisitions as well as anyone.

Our next question comes from the line of Steve Dyer with Craig-Hallum.

Congratulations. A couple of things. One, do you have a sense as to kind of the mix between cars and trucks at the end of the quarter or sort of typically what you'd carry?

On an inventory basis?

Yes.

It matches sales pretty well so...

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

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

Somewhere around 65, 35, Craig or Steve.

Cars versus trucks?

Trucks versus cars. We're an agricultural, rural market so we're heavy truck guys.

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

This is Bryan again, Steve. Absolutely. I mean, our inventories at any given time are out about 60, 90 days depending on whether it's an import or domestic franchise. So we can move things pretty quickly. Fortunately, all of the domestic franchises now -- are pretty heavy into the car game as well, which has made it a lot easier to change product line. But also remember that the trucks, over the last 3 years, have increased their fuel efficiencies in dramatic ways. So the fact that we may see $4 or $5 gas prices in the coming quarters, I don't think is going to have the same impact as it did when it spiked into the $4 range 2 or 3 years ago. When we're seeing trucks that still get 22 to 24 miles per gallon, yes, there's an impact, but a lot of that market has already been taken out. And I think people now are adjusting to it, so if anything, what it does is it allows people to be able to now trade up to a car that gets 24 miles a gallon rather than one that gets 16, 18 miles to a gallon.

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

So we, as an organization, we sell about 35% of our customers a lifetime oil product. There's now multiple manufacturers and not just the luxury franchises that are offering service plans, much like Hyundai. Toyota's starting to look at those things as well. This is -- it's going that way and fortunately, you can see our customer pay business. I think we had 10 quarters, is it, now of positive customer pay comps? And that's off units in operations that are somewhat depressed still from '07, '08 timeframes. So we're starting to see that the consumer is spending more time in our dealerships and our commodities' availability which is basically selling them wipers and tires and batteries and all the other things that their cars need, they're getting used to it and our manufacturers are really helping us with that and we believe that our ability to saturate our units in operations is even greater than what it used to be. And I think our awareness of those customers and our ability to get them in and out of our shops quickly is attractive to them and I think we'll see those trends continue and our manufacturers are supporting it as well.

Steve, this is Chris. The only thing I'd add to that is that in addition to focusing on training and the sale of those products, the continued accessibility to credit is also helping our overall sales and allowing us to sell, I guess, more extensive service contracts than we had in the prior year. And what I mean by that is the advances that we're allowed to do on some of our back end finance products is loosening up so we can actually sell bigger products to our customers, which keep them at our dealerships longer. And so that's been a positive tailwind for us as well.

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

Steve, this Bryan again. Obviously, when it comes to used, I'm the guy, okay? That's my forte over my career, trained well by Sid and Dick and Brad. Anyway, when we look at used vehicles, we keep it pretty simple. We look at certified used vehicles as really -- that's the brand of new car that we sell and it's a 1 to 2-year-old model vehicle. We pretty much -- we teach our stores to get rid of all other 1 to 2-year-old vehicles because it's hard to sell the benefits of that product line. Now we move into the 3 to 8-year-old vehicle which is core product. Core product, there's one thing that matters. Can I get that vehicle? Now you obviously get some of those on trade, but the most important way to get those is procurement. Now whether you're buying those from customers on the street, whether you're getting those at auctions, whether you're buying them from other dealers, that mining of a used car that's 3 to 8-year-old is the key to growing that business. And core product is about 60% of our mix in used vehicle sales. So that's where our real driver is, okay? That's also where we take in most of our trade-ins that become value auto product, which is those 8-year-old and older vehicles. Now we can obviously take those in on new vehicles if people are jumping big amounts or uncertified product as well. So really that value auto, the key driver is, sell more of your upper end, new and used vehicles and you take more value, so it's a real cycle, and I think if you save your dollars by getting rid of the late-model conquest vehicles, and putting those dollars into going and buying the great core product, the engines starts to turn and that's where we're really at now. So we're looking at a lot of our increases really coming from that core product. However, our certified last year were actually down a little bit, but that was a lot supply based. We're starting to see now a lot of manufacturers start to turn their fleet sales up, which means that those off lease cars now are coming back in. So we don't really foresee big declines again in certified. We're looking at up about to 10% as well. But like I said, our big driver is in that core product and that's all about proactively going out and finding product. Did that cover what you were looking for, Steve?

Your next question comes from the line of Rick Nelson with Stephens.

I'd like to ask you about the SG&A. Below 70%, I went back, it's the lowest on record, seasonally small quarter. I guess, do you think these levels are sustainable, particularly as we move into the seasonally bigger quarters Q2, Q3?

Yes, Rick, this is Chris. Yes, we believe that the levels that we're seeing in our SG&A right now are sustainable and we're going to have additional headcount in some of our productive positions as the markets continue to improve. And when I say productive positions, I'm talking about our salespeople and our technicians. But we're confident that we can continue to increase our volume in each of our stores without really the impact of our management staff. And if you think about our stores individually, each store sells about 80 units per store per month. And so even a 20% improvement in sales in a month, is only about 16 units. And while that might translate to 2 salespeople, which really are 100% variable, it doesn't entail that we would add additional management staff to cover those increase in sales.

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

Yes, Rick. We don't anticipate we'll go backwards in that either in 2012.

Got you. Also, as you look at your guidance for 2012, the 10% to 11% new vehicle sales growth on a same-store basis, if you look at the major buckets, domestic, midline import and luxury, how would you rank those 3 segments in terms of sales growth expectation?

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

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

That's about right.

Put the SAAR around $13.5 million?

That's correct.

Rick, I did want to reiterate though, when we do actually set our guidance, it's based on a store-by-store forecast, and what you'll find is that even a domestic brand right now can have opportunity based on what their overall sales efficiency has been, so a store that might be at 70% sales efficiency has more upside that we see in 2012 than a store that might be at 150% sales efficiency. So if you're at the high-end of your efficiency on sales, you're probably going to follow the market. We believe that if you're below your sales efficiency levels that you not only have a general market share gain to get but you're also going to increase with the overall improvement in the markets that we have.

Okay, got you. Finally, if I could ask about the truck business. Are you seeing any recent resistance to truck sales with the increase in gas prices?

Rick, this is Bryan. No, we have not seen impacts because of gas prices, thus far. We obviously -- I mean, I have to say that I believe there's enough trucks on the road out there that are getting the 12 and 13 miles per gallon that there's still some opportunity and I think with change becomes opportunities, for us to be able to convince that, that 30% sales -- fuel efficiency number is a reason to trade, not so much that I have to get rid of my truck. I mean, it's really that they can improve things, in fact, I just got a new Wrangler. I mean, my old Wrangler got 17 miles to the gallon on the freeway. My new one gets 23 miles per gallon and it has 30% more horsepower than the original model and that's a difference between an '11 product and a '12 product. Well shoot, the difference between a typical customer's car at an '08 or '07 is even bigger than that. So I think that it's going to create it, and I think it's going to substantiate that 13.5 million to 14 million SAAR and I don't think the pressure is going to come in either car or truck. I think it's going to be pretty balanced.

Rick, this is Sid. looking at that 13.5 million to 14 million SAAR, I mean there is a regional mix that impacts our estimates, and then fleet versus retail also has a big impact on that number. So that's why we gave that range. If you look at gas prices, historically, it's the sudden jumps that hurt us. It's not the creeping, because we have plenty of time to shift inventories as we go. And as Bryan has alluded to, the improvement in mileage, and then you look at the markets we're in, if oil does really well, I mean, look how well Texas and Alaska, Montana, Billings, North Dakota. I mean, we're in some markets that are going to really improve because of higher gas prices. So I mean, it's not like it's all negative, so we're pretty well prepared to adjust that 60 to 90-day inventory of new cars is the only risk we ever have of a shift. And as long as it's creeping, it's fine. We make these shifts automatically based on demand that we're seeing in each store.

Our next question comes from the line of James Albertine with Stifel, Nicolaus.

Let me add my congratulations, as well, on a great quarter and again, to Brian and Sid. I wanted to focus more on the consumer, the customer patterns that you've noticed coming throughout the fourth quarter and coming into the new year here. You mentioned on the call, your presentation alludes to it, shift in penetration rates from prime to non-prime and subprime. Really what I'm trying to get to here is the consumer who is waiting for their current car to break down versus the discretionary purchaser. And if the subprime and non-prime penetration rates are increasing, is that a consumer that previously may have been self-selecting out of the new car or used car purchase process before, but now because of availability of F&I products, and so the advertising of that availability, they've decided to reengage in the process?

Yes, this is Chris. I don't think that what we're seeing in credit is impacting the purchase of new versus used vehicles. I think there's a couple of things. Bryan alluded to our as-is cars that we got into that market in really 2010 and then pushed it further in 2011. That's helping us find additional customers that we may not have been focused on historically and those customers that are just looking for basic transportation but don't need a vehicle with all the bells and whistles or late-model vehicles. But as far as what we're seeing in overall traffic and how credit is helping us, let me take a different approach to that. Our overall vehicle volumes were up about 22%, 23% in the quarter. But what we're finding is our traffic is only up about 15% to 17%. So what's happening is our ability to get those customers financed, especially in that non-prime and subprime segment, is getting much better and what I mean by that is those customers, for example, in our subprime segment, are those with credit scores less than 620, is up about 34% year-over-year, so definitely credit is helping us. And we think as far as SAAR recovering, credit's going to be a big component of seeing that SAAR improve. Does that help?

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

Yes. This is John. I'll get you the exact number. I think it was up just -- or down just a little bit because advertising spend was relatively flat on an absolute dollar basis, 2010 to 2011, and so the per unit would obviously to come down just a touch, but I'll get that to you offline, Jamie.

Jamie, let me just add to that. When we think about our advertising initiatives though, our focus is really to identify the market spend that we have in each of our stores. And what we're seeing is that some of our stores actually aren't spending enough in advertising, meaning that we may have cut cost back too far. And as we improve the advertising spend, we're seeing more customer traffic come into our stores and increasing sales. So our gauge isn't to try and cut advertising back, but trying to maximize the every ad dollars that we spend and it's different on a store-by-store basis.

Our next question comes from the line of David Whiston with Morningstar.

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

David, this is Sid. Yes, Marchionne is a very impatient person and they had put a lot of money into a program that incentivized us to do more customer friendly things and improve our facilities and obviously we went along with all of them and we saw a lift in our CSI scores at all of our Chrysler stores and certainly we made progress. I think that there's a lot of patience. It takes a long time for a brand to get good CSI scores. It's a lot more than driven just by their recent experience. It's the reputation of the car, all those things that you live with for 5, 10 years. And they're working their way through that. And I think that those -- ultimately, Chrysler won't be on the bottom of CSI scores in America and that's what obviously really exasperated Mr. Marchionne. I'm on the committee to help establish a new program and then we'll be meeting in the middle of March in Detroit on that issue and they're really listening, asking for ideas that might help motivate us to and continue to improve and I'm going to be mainly preaching patience, keep building great products, get people that don't have repair problems, take care of owners at the service drive, and don't be telling them that you can't fix something under warranty when you should be. And I think those are all the core issues that will ultimately drive good CSI.

David, this Bryan, just a little additional color, in terms of what do we focus on, our understanding of our customers is a lot of what we spend our time with in all of our processes and in our discussions when we go into the store and make sure that our front-line people understand what the customer's needs are and everyone's are different. So we really focus not so much on a score. We focus on whether our customers are going to come back and see us again and whether they're going to tell their friends about how great of an experience they had with us. In terms of our specific Chrysler scores, we have exceptional scores in aggregate as a company. It's one of our best manufacturers obviously. As one of the larger Chrysler dealers in the country, we get it, okay? And Sid's influence on the board has brought that back to us and our scores are dramatically above average in our Chrysler product stores.

Okay, that's helpful. And Bryan, 2 questions for you. Long-term, do you expect to remain operations head?

Absolutely.

Okay. On used vehicles, just be a follow-up I guess to Steve's question. Is the typical Lithia customer who buys either a new car, or 1 to 2-year-old used, is there a trade-in generally below 8 years old or above 8 years old?

Okay. So when we actually take in a used car, we take in about 30% of the vehicles are older than that 8 years old. Now that 8 years old is not a bright line, it's more of a soft number. It's really an 80,000-mile vehicle and that 80,000-mile vehicle could also be a 5-year-old product, right? But we really believe that about 1 out of 3 of our trade-ins can move into that value auto type of product. So if we're able to increase obviously 10% our core and our certified cars, well, that adds for every 10, we add 3 to the value auto so that's where that engine starts to drive itself, right?

You said 1 in 3?

Yes, 3 vehicles for every 10 vehicles that we take in trade, we can turn into a value auto car.

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

Yes. We had some minimal buybacks in the quarter. I think we've picked up about 30,000 shares. And when you look at our overall capital deployment strategy, we're focused on acquisitions and internal investment. We'll continue to pay our dividend and then as far as share buybacks, I think we'll look for opportunistic opportunities to pick up shares, but I wouldn't expect something huge in 2012.

[Operator Instructions] Our next question comes from the line of Adam France with 1492 Capital.

I was just curious if you'd offer any color on January and February sales so far?

Adam, this is Bryan, we're right on track. When you look at a 13.5 million to 14 million SAAR, it's fun to see the impacts because it feels like the environment is loosening up as well. But through the first half of February and through January, things are looking real solid. I mean, it's more the same of what we saw through 2011 and look forward to continuing growth in 2012.

One more question. Just based on all of Sid's years of experience, I always find this argument amusing that -- Sid, if you were a truck owner for 20 years, buying trucks, out of 100 guys buying trucks for 20 years, how many you think will actually move to a midsize or small sedan because of gas prices?

Not very many.

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

Yes, and we have, thankfully, a market focus on truck markets, and they're a way of life. They're safer. They do multiple duties. They represent -- unnecessary to have a smaller car. I mean, you can have the truck do everything for you. But they make people mad, an additional car to gain that gas mileage, but they're never going to get rid of their truck.

That's what I figured.

Park it in their driveway and have their friends see it, than they would get rid of it. They'll drive it [indiscernible].

Our next question comes from the line of Julie Bryant [ph] with MKG Financial.

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

Right now, we're sitting just a little over 50% domestic with the difference being import and luxury. We're not that uncomfortable where we sit today. We were able to tweak the brand balance. I mean, at a high, we were pushing 73% domestic, right? So we brought it down almost 50% at -- in its aggregate numbers from where we were, and we're pretty comfortable with where we sit today. However, our focus is still in the import and the luxury segments. So when we look at transactions, I mentioned earlier that we look for a 5-year payback. So on an after-tax basis, we want a 20% return on an annual basis, right? And that gets us our money back in 5 years. Now there's some other formulas that we look at and that's the 2x to 4x EBITDA, as well as we look at some revenue numbers to be able to look at -- do these revenue numbers seem to make sense? And we look at a 10% to 20% of revenue is our purchase price or our investment. And I think most importantly, what we spend our time on is this a Lithia's type of market and is it a dominant franchise within those certain market areas. So when we're out looking, we're not looking for secondary brands, almost all Lithia stores are primary brands within their markets, meaning that it's a Honda, Toyota, Nissan, Chrysler, Jeep, Dodge in its aggregate, right? Chevrolet, Ford or BMW, Mercedes or Lexus. I mean, so we don't play a lot in those small areas. Now if we get into those smaller, those smaller franchises like a Hyundai, a Kia, a Subaru, which are actually all 3 nicely growing, we really want exclusivity but we want it in a bigger marketplace. So really, about 250,000 people to up to 1 million people, you can actually find those type of stores in that sized market and be the exclusive representative of that franchise. In fact, in Fresno, a few months ago, we purchased the only Subaru and the only Mitsubishi franchise in a 1.1 million person market, okay? I mean, those are where those kinds of franchises really start to make sense for Lithia.

Julie, this is Sid. Just in our approach, we've cut the number of stores way back on Chrysler over the last 4 or 5 years. But their sales have increased faster than anyone else's, so as a percent of our sales, they still represent more. So if they quit doing so good, they would come down, but I'm just joking on that. We're very pleased with their improvement. And so -- but I think it's the store count number that we kind want of to balance more than it is what percentage of sales because I can't stop the growth of those companies. They really are charging ahead and they could surprise us next year on the upside. I think Chrysler has a good plan.

Julie, the other thing to keep in mind is because of Lithia's footprint in smaller and medium-sized markets, and we're in rural markets, our matching of the franchises within those markets, it is more domestic-centric. It is more truck-based and when you get into those areas, we lean towards that. So I think it's important not just to look either, one, what our peer group is; or two, what the world market is, but what is the Lithia footprint. And our model is really that exclusive franchises, which means that we're in agricultural, rural type of communities that have a higher concentration of truck sales.

Okay, that is very helpful. One quick housekeeping question. Do you have a depreciation, amortization estimate for 2012?

Yes. It's probably $18 million to $20 million. And we don't guide on that, but if you want more detail, John can provide that for you.

It will be dissimilar to what this year was.

Mr. DeBoer, we have no further questions at this time, I would now like to turn the floor back over to you for closing comments.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.