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Edited Transcript of LAD earnings conference call or presentation 19-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Lithia Motors Inc Earnings Call

Medford Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Lithia Motors Inc earnings conference call or presentation Wednesday, April 19, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan B. DeBoer

Lithia Motors, Inc. - CEO, President and Director

* Christopher S. Holzshu

Lithia Motors, Inc. - Chief HR Officer and EVP

* John F. North

Lithia Motors, Inc. - CFO and SVP

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Conference Call Participants

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* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Brian C. Sponheimer

G. Research, LLC - Research Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* David Whiston

Morningstar Inc., Research Division - Strategist

* Derek J. Glynn

Consumer Edge Research, LLC - Research Analyst

* Irina Hodakovsky

KeyBanc Capital Markets Inc., Research Division - Associate

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Michael David Montani

Evercore ISI, Research Division - MD and Fundamental Research Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Steven Lee Dyer

Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department

* William Richard Armstrong

CL King & Associates, Inc., Research Division - SVP and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Lithia Motors First Quarter 2017 Conference Call. Management may make statements about future events, including financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. The company discloses material risks and uncertainties in its filings with the Securities and Exchange Commission. The company urges you to carefully consider these disclosures and not to place undue reliance on forward-looking statements.

Management undertakes no duty to update any forward-looking statements, which are made as of the date of this release. Management may also discuss non-GAAP financial measures. Please refer to the text of the earnings release for a reconciliation to comparable GAAP measures. Management will provide prepared remarks, and then open the call for questions.

I will now introduce Bryan DeBoer, President and CEO. Mr. DeBoer, you may begin.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [2]

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Good morning, and thank you, for joining us today.

On the call with me are Chris Holzshu, our Executive Vice President; and John North, Senior Vice President and CFO. Earlier today, we reported adjusted earnings of $1.78 per share or $45 million for the first quarter. Through a disciplined acquisition strategy and strong operational execution, we're pleased to report our 26th consecutive quarter of record earnings per share. We grew revenues 13%, and adjusted earnings 12% over last year, while considerable room for improvement remains.

On a same-store basis, total sales grew 3%. New vehicle sales were flat. Retail used vehicles sales and F&I both increased 6%, and service, body and parts sales were up 8%. Our ability to drive substantial increases in earnings from our base business coupled with a robust acquisition market, positions us to win in either a growing or contracting new vehicle market. To ensure that we thrive, now and in the future, innovation is generated at all levels of the organization and executed with an experienced, profit-focused and aligned management team.

Since 2010, we have grown our revenue fourfold and our EPS sevenfold, all while currently maintaining a leverage ratio of less than 2. The rapid expansion we have undertaken has propelled us to the fourth largest auto retailer in the U.S., with aspirations to continue this growth.

The ability to flex our balance sheet, coupled with our free cash flow, provides capacity to continue acquisitions at a similar or accelerated cadence in 2017 and beyond. As one of the fastest-growing companies in the Fortune 500, we are committed to continue expansion. We are at the nexus of 2 industries, retail and transportation, that faced continued evolution, which will bring considerable opportunity. Our growth provides us with the scale, the capital and the partnerships to lead the change affecting our industry, as we focus on helping customers with a range of personalized transportation solutions.

We see a path to grow our company another four to sevenfold, while leveraging our existing operational strength, and creating new ways to serve our customers. Our entrepreneurial culture remains a competitive advantage for attracting and retaining talent, creating innovation and generating exceptional profitability. Each store, and every team member, is empowered and challenged, to exceed our customers' expectations. As a result, we have many diverse models being deployed throughout the company with exceptional support at the store level. This results in more engaged employees, a favorable customer experience, strong manufacturer relationships and improved financial results.

We're also eager to continue to apply our expertise to other complimentary businesses to diversify and capture ancillary revenue streams. We remain driven to constantly improve our customer experiences, our team members' lives and to enrich the communities that we are part of. With that said, the opportunity to consolidate dealerships has never been greater, and we'll continue to grow through strategic acquisitions, as we seek dominant franchises with significant upside potential. This allows us to purchase at attractive forward multiples and generate compelling returns on investment as we integrate each location. These acquisitions provide the internal dry powder to continue to grow the organic earnings of our base business as they are rebuilt, integrated and improved. Over time, our local entrepreneurial leaders can realize improvement through strengthening their teams and improving experiences with our customers.

Operationally, we continue to focus on the blocking and tackling that have been behind our 26 quarters of record performance. Our manufacturer partners can count on us to further increase market share in new vehicle sales, which currently stand at 112% of expectations, with our sight set on the levels of some of our higher performing stores that are achieving nearly 200%.

We sold 66 used vehicles per store per month, up from 64 units in the comparable period last year. We continue to make incremental progress to our goal of 75 used units. Most importantly, we look forward to increasing this goal in the near future, driven by an increasing supply of vehicles entering the marketplace. The past half decade of results have been stunted by the lack of vehicle supply, a trend which is finally reversing.

We continue to improve customer retention in our service departments and benefit from an increasing number of units in operation to provide the bedrock of our profitability. Our fixed operations make up the largest portion of our gross profit, at north of 30%.

Despite the noise in the marketplace around credit, plateauing SAAR and used vehicle valuations, our fundamentals remain sound, the retail environment is healthy and the outlook for our future remains bright.

With that, I'll turn the call over to John.

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John F. North, Lithia Motors, Inc. - CFO and SVP [3]

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Thanks, Bryan. All numbers from this point forward will be on a same-store basis.

In the quarter, new vehicle revenue was flat. Our unit sales decreased 1.4%, slightly lagging national results, which decreased 1.2% from the prior year, resulting in a quarterly SAAR of 17.3 million units. Our average selling price increased 2% compared to the first quarter of 2016.

Gross profit per new vehicle retail was $1,981 compared to $2,042 in the first quarter of 2016, a decrease of $61 per unit. Retail used vehicle revenues increased 6% of which 4% was due to greater unit sales and 2% from increased selling price. Our used-to-new ratio was 0.88 to 1.

In the quarter certified units increased 1%, core units increased 6% and value auto units increased 5%. Gross profit per unit was $2,278 compared to $2,346 last year, a decrease of $68. Our F&I per vehicle was a record $1,353 compared to $1,291 last year, or an increase of $62. Our penetration rate increased through service contract and lifetime oils. Of the vehicles we sold in the quarter, we arranged financing on 73%, sold a service contract in 46% and total lifetime oil product in 27%.

In the first quarter, the blended overall gross profit per unit was essentially flat at $3,496 compared to $3,502 last year. Our service, body and parts revenue increased 8% over the first quarter of 2016. Customer pay work increased 7%, warranty increased 9%, wholesale parts increased 6% and our body shops were up 11%.

Our total gross margin was 15.5%, unchanged from the same period last year. As of March 31, consolidated new vehicle inventories, where the day supply is 76, a decrease of 2 days from a year ago. Used vehicle inventories were at a days supply of 50, a decrease of 3 days.

At March 31, 2017, we had $286 million in cash and available credit, as well as unfinanced real estate that can provide another $164 million in 60 to 90 days, for an estimated total liquidity of approximately $450 million. At the end of the first quarter, we were in compliance with all of our debt covenants.

We've taken advantage of the volatility in our stock for some opportunistic share repurchases. Since March 31, 2017, we've repurchased approximately 136,000 shares at a weighted average price of $81.60. Year-to-date, we have repurchased approximately 198,000 shares at a weighted average price of $86.41 per share. Under our existing $250 million share repurchase authorization, approximately $176 million remains available.

Our free cash flow, as outlined in our investor presentation, was $62 million for the first quarter of 2017, capital expenditures, which reduced this free cash flow figure, were $16 million in the quarter. We predict free cash flow, after capital expenditures, of nearly $200 million in 2017. This cash flow, coupled with the significant availability on our credit facility and through unfinanced real estate aims to remain in good shape to accommodate incremental investments in both our own shares and in additional acquisitions as opportunities arise.

Currently, our net debt-to-EBITDA is under 2x, which remains among the lowest in our sector. Based on our results from the first quarter, we are increasing our 2017 earnings to a range of $8.05 to $8.35 per share. For the assumptions related to our earnings guidance, please refer to today's press release at lithiainvestorrelations.com.

And with that, I'll turn the call over to Chris.

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [4]

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Thank you, John. We continue to emphasize attracting and retaining the top talent in the industry and creating a high-performance culture that could execute our strategy. Our people-powered organization requires talent at all levels, and employees make the difference in our performance.

To continue to improve earnings in our store base, and to support the significant acquisition cadence we have established, we continue to elevate and grow our most important assets, our employees. The distribution of performance in our store base is significant, and improving results for our organization requires mentoring, developing and recruiting the best talent in the industry. Much of our focus in the coming months and quarters will continue this effort to allow us to be agile and adaptable to our customers' needs in an evolving industry.

Our first quarter adjusted SG&A as a percentage of gross growth profit on a same-store basis, was an estimated 70.9%, unchanged from the first quarter of last year. On a consolidated basis, including the effect of recent acquisitions, our adjusted SG&A as a percentage of gross profit was 71.1%. As easily identified by our measurement systems, the distribution of performance with our store base on an SG&A as a percentage of gross profit is immense. Approximately 13% of our stores have SG&A to gross of under 60%, while 28% of our stores have SG&A to gross over 80%. With $1.5 billion in gross profit, small changes can have an exponential impact on our bottom line. Our largest line item in SG&A is personnel expense, where we invested nearly $164 million in the first quarter of 2017, and we'll annualize to a number greater than $650 million. As our stores improve productivity and leaders unlock ways to increase efficiency, we can manage this cost down, using our transparent best-in-class measurement systems. This allows our stores to quickly manage trends and inspire all levels of the organization to improve.

We continue to emphasize a culture of high-performance entrepreneurial leadership in every store, with employees who live our core values and power our growth. This concludes our prepared remarks. We'd now like to open the call to questions.

Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Christopher Bottiglieri with Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [2]

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Just wanted to dig in on your -- just wanted to dig on your rural strategy. Is there any way you could maybe quantify us how your rural stores are performing relative to your larger metros? Just wondering with the inflated inventory levels, if there's any differences there?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [3]

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You bet, Chris. This is Bryan. Our rural strategies, which is primarily the Lithia division, is still operating at about 66% SG&A to gross. Their operating margins are a little north of 5%. And we continue to grow on those sized markets. In terms of inventories relative to those numbers, we're down a couple of days on both new and used vehicles, which is what we like to see at this time of the year. It helps to build and retain gross margin and keep the attrition and the [ hot-rod ] as we call it, out of our gross profit. So, all things are looking pretty good. That relative to the metropolitan areas, which are growing, which is primarily DCH and the LA market and the New York City suburbs, are just over about 2% operating margins and about 84% SG&A. So lots of room for upside there. They've come a long ways, but we'll continue to be able to grow that business in not only our rural markets but in our metropolitan areas.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [4]

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Okay. That's really helpful. And then just digging in on SG&A a little bit. I think last quarter you quantified, it wasn't -- not quite sure it happened, but you're quantifying some kind of accrual that you were facing in Q4. Did that repeat in Q1? And then this separately, it's up facility cost could have bumped up a little bit this quarter. Any kind of one-offs we should think about?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [5]

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Yes, Chris. This is Chris. I don't think anything really to call out differently in the current year. I mean, we had some adjustments in the prior year. If you're looking at it on a comparison basis on the facility side. But I think, ultimately, we had a pretty clean quarter. And our goal is to continue to maximize the opportunity of those stores that we mentioned that are over that 80% SG&A to gross. And really what it comes back to in that case is people and productivity. So we're going to continue to focus on that area and continue to push that number down.

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Operator [6]

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Our next question comes from the line of John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [7]

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Just the first question on F&I, which was reasonably strong in the quarter, and it seems to be the one factor that is leading to your sort of your slightly higher guidance. I'm just curious, what is driving that? If you see any risk as interest rates ramp up? And obviously, it feels like you're probably not, I mean as you're seeing more opportunity there. So what's giving you that confidence to raise that range about $15?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [8]

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Yes, John. Good morning. This is Chris. I mean, it all goes back again to performance. I mean over the last 3 years, we've integrated about $4 billion in strategic acquisitions or over 60 stores. And one of the things that we see in most acquisitions is a lot of F&I opportunity. And so the disparity that we have between really our seasoned stores that are running F&I PVR consistent with what our peer group is doing. And some of the more recent groups that we have, it's still significant. And so, our goal is not to continue to raise the top, but really focus in on maximizing the opportunities that we have on our more recent acquisitions over the last few years. And we see a steady increase each quarter. And we keep focusing on making sure we have the right products, the right people at the right price. And we feel like that upside should continue.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [9]

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And if -- you've given us great ranges on other stuff as far as underperformers. Is there sort of a percentage of new stores that you think are underperformers on F&I? And can you give us a range of sort of the best F&I and PVR store and maybe the worst in sort of the high end of the range and the low end of the range?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [10]

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Yes, probably the best F&I stores we have are 2,000, 2,200, 2,300 and for copying. And then on the low end, some of the recent acquisitions that we have are just north of $500. So a pretty large disparity between them. And it's our job to go in and make sure that we can provide and identify the opportunities that improve that performance. But there's a lot there, and we're confident we can execute that.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [11]

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That's incredibly helpful. And then just a second question. There's a lot of incentive activity that's picking up out there. You guys are helping out a little bit by taking lower gross profit per unit on the new vehicle same-store sales side. I'm just curious, how the environment feels? If you think it's going to get more promotional as we get into the spring selling season? And really, how the automakers are dealing with this? I mean your inventory looks like it's very much in check, but aggregate inventory in the industry seems a little bit on the high side. So just wondering if you're seeing more push from the automakers to take inventory, to cut price, to drive volumes? Just curious what you're seeing there?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [12]

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John, this is Bryan. Thanks for your question. I think, we're not seeing large changes or any type of scenarios that we believe in the next coming quarters are going to change dramatically. We typically see pretty stable incentives throughout the summer months. And as we begin to move into the fall is when incentives start to accelerate. I think as we start to look at the build of vehicles, we're obviously still overproducing for what the current SAAR run rates are, which does lead to those incentives. But fortunately, we'll be able to be rewarded for those, if our inventories are in a controllable position. Whereas each individual market can respond separately, based off the value proposition that each of those individual stores has created for their individual markets and their consumers.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [13]

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Okay, that's helpful. And then lastly, on parts and service, which was particularly strong. It looks like all buckets, customer pay warranty and wholesale and body shop were all very strong in the quarter. I'm just curious, is there anything going on in the market that is driving this? I mean, obviously it sounds like supply is increasing of available cars to service. From the market perspective, what you're doing to drive that, and how sustainable these very high same-store sales comps are in parts and service?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [14]

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John, Bryan again. I think that's a good realization that what's neat is all 4 of the buckets that drive fixed operations we're pretty balanced. We're coming off a numerous years of what mid-teens to even into the 20-percentile range on warranty, same-store sales growth. Now that that's subsiding slightly, we were up 9%. It appears that we've been able to attract a new customer base through that warranty work and those recalls that are now sticking with us.

You obviously nailed it with units in operation increasing is the driving fundamental principle that will continue for years to come. But I think the idea that winning consumers back with lower price value-type of commodity selling, that's a one-stop shopping experience, combined with a quick experience, and those capital expenditures that we've spent over the last 5 years in our facilities, to put those departments front and center are making a difference. And we'll continue to make a difference in the quarters and years to come.

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Operator [15]

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Our next question is coming from the line of Mike Montani with Evercore ISI.

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Michael David Montani, Evercore ISI, Research Division - MD and Fundamental Research Analyst [16]

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Just wanted to ask if I could, on the new vehicle side for a moment. The decrease there was a little bit below the flattish run rate we had seen from the industry. And I can't really remember the last time that had been the case for you all. On the other hand, gross profit dollars per unit were down a little bit less than we thought, down 3. I guess the question is, how are you all thinking about the need to continue to take volume in the stores to be able to do better acquisitions? Is there any shift, strategically? And how you're thinking about balancing GPU versus units? And also, can you just talk about regionality, Texas versus, say, the Northeast, et cetera?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [17]

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Mike, Bryan. Great question. And I think, as we reflect back on the quarter and then look forward to what's occurring in many of our marketplaces. I think the way that we look at deleverage is primarily different than how many look at it. We're a growth company, that's building relationships and growing relationships with our manufacturers. In fact, we have a positive relationships with each manufacturer, in approvable scenarios with all but one or two, with those we have strong enough foundations, that the ideas that we will have their support for growth, are pretty well cemented. The volume proposition comes that we really believe that volume is what creates the life cycle of the consumer, and it starts with that new car sale.

Now, we will talk about it, at 6% margin in new cars, it contributes only 1/5 of our gross profit in our company. So it's a small amount. But that contribution is what generates the trade-ins, that generate the service and parts business in both new and used, that creates that future opportunity to sell that next vehicle. And as we look forward, I think the ideas of margins are not really part of our formula. It's more that it's creating stability for our future. So we really focused on that in terms of market share and penetrating the market to capture as much customer base as we possibly can.

If we look at the state question that you had given us, we are starting to see, that in our energy-based states, they're stabilizing, which is great. More importantly than that, in March, and I'll give you some quarterly numbers, but in March, we saw in Texas, finally, that they're starting to sell used vehicles, which is a consorted effort on our management team, to go back in with that store leadership and help them understand that critical cog in the life cycle of a customer, and the total model of auto retail of where it generates profit. So we had a pretty good month in March in Texas, which is our first good used car month in probably 40 months, 35, 40 months. So it's been a bit. But in Alaska, sales were down about 2%, but earnings were flat. In Montana, sales were up 3%, which was great to see, and earnings were up 9%. In Texas, we were down 4% in sales, and earnings were down 12%. However, in March, we were flat in earnings, which was a good indication that we may be peaking out. And all signs in Texas are that the confidence in not only our team, but the consumers coming into the stores, feel stronger, and they're talking about being back to close to full production in the oilfields. They're obviously probably doing it more efficiently than they did 3 to 5 years ago, but people are back to work and starting to generate disposable incomes, which they can then use to buy their initial car or second cars.

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Michael David Montani, Evercore ISI, Research Division - MD and Fundamental Research Analyst [18]

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Great. Thank you for that color. If I could just follow up? Can you just discuss a little bit what you're seeing in terms of the acquisition pipeline out there? How willing are the sellers coming to market, and also with multiples, what you're seeing?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [19]

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Sure. Mike. This is Bryan, again. You somehow know where my love is, don't you? I think when we think about acquisitions at Lithia Motors, this is something that perpetuates in each and every leader in the organization, here in Medford or in the stores, and it's a day-to-day process that each of us are looking for growth opportunities. If we look at the physical market, it is the most robust market that we've probably ever seen. We believe that pricing is starting to equalize, where sellers are asking relative prices to what buyers can be expected or willing to pay. And I believe that the coming quarters and years, will be a good acquisition climate. More importantly than that, I think Lithia is uniquely positioned, because of the couple of hundred million, somewhere between $200 million and $300 million of cash that we generate annually, that could be deployed to purchase somewhere between $1 billion and $3 billion of revenue annually, which is unlevered, which is 10% to 30% of our current base. That's driven through people, and I think we're also uniquely positioned to be able to grow and attract people at a faster and higher rate than much of retail. Not only auto retail, but retail. Because of our ability to allow people to run, to some extent, their own model, with great foundations of centralization and common measurement systems to be able to generate that.

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Michael David Montani, Evercore ISI, Research Division - MD and Fundamental Research Analyst [20]

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Great. Just the last one I had. I don't know if this one will be as lucky, Bryan, but just on synergies. If there's anything you can share about the latest progress from both DCH and Carbone, as well as just some of the other large deals you guys have been doing?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [21]

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Absolutely. What we've learned is that these larger deals seem to take a little less manpower. And it also seems that the culture in those sized organizations are a little bit higher level than the typical 1 and 2 acquisitions ma-and-pa kind of stores that we used to buy 5 to 10 years ago, and it's still part of our staple diet. But these larger acquisitions, it's easier to communicate and to try to build culture at a high level, to instill our values of customers for life, creating continuous improvement, taking personal ownership and having fun, and then let their professional management teams go drive it. So these synergies that are being realized. With DCH, we have realized almost all the corporate synergies in about 6 months. We thought it was going to take us 2 years. With Carbone, we still have some work to do, but we'll probably be able to accomplish that in the next 6 to 12 months. And then once you have that foundation of cost management from a corporate level, that begins to propagate into the individual stores and the people in those stores, to really get it into their blood that SG&A is a direct reflection of our people's abilities that are selling and servicing vehicles to do it in a cost-effective manner. And I think, sometimes it's easy to jump and say, we have an acquisition and it performs at 1.5% or 2% pretax, and we can get it to 4% overnight. It's not that way. We want to build market share. We want to build stability and we want to build those margin improvements and those revenue growth over a period of time. And to be fair, it can take 2, 3, 4, 5 years to be able to build upon that foundation, which is what creates that organic dry powder, which allows us to continue to grow our same-store sales to reach potential within those new acquisitions. It just takes some time.

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Michael David Montani, Evercore ISI, Research Division - MD and Fundamental Research Analyst [22]

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Is there any way to quantify, perhaps some numbers around the synergy benefits you could have realized in the quarter? Or is that difficult?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [23]

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Chris, do we have any thoughts on that?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [24]

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Yes, Michael. I think when we talked about it that we generated about $1.5 billion in gross profit per year on an annualized basis. And if we could get the entire group down to what we feel like our core group at 65% SG&A to gross is, I mean that's 5% on the $1.4 billion. I mean, those are the numbers that we're looking at and that's what we're working to execute on. But as Bryan said, it's not something that we can do in a quarter or even in a year. It takes time and energy and people, but it's there and we see it, we're making progress toward it. But as fast as we're making that progress, we're also bringing in more acquisitions. So our goal isn't to fix our SG&A to gross by slowing down the acquisition growth, it's to do everything. And...

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [25]

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Chris, is it fair to say that we'd rather be sitting here today with 40% to 50% of our stores with tons of potential than having them all operated at peak performance, where there's not that opportunity?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [26]

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Definitely

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [27]

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Okay. And I think that's the model that we've built, is the idea of continuous improvement, while still pumping the whole system full of new acquisitions. And I think that's what we've built. And I believe that our management team is here to execute on that.

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Operator [28]

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Our next questions comes from the line of Irina Hodakovsky with KeyBanc.

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Irina Hodakovsky, KeyBanc Capital Markets Inc., Research Division - Associate [29]

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I had a couple of questions for you in terms of your guidance revisions. The EPS is up and the revenue is maintained, reaffirmed. So it appears that you're a little more confident on execution. Can you discuss which segments -- we talked about F&I a little bit -- or which area of the operations are driving your confidence? Is there the improvement in Texas, perhaps with the cost? I know last year, cost in Texas were a little bit high. Put a little bit more detail on exactly which areas are driving your confidence?

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John F. North, Lithia Motors, Inc. - CFO and SVP [30]

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Irina, this is John. Thanks for the question. I mean, I think as we look at our guidance we'll go back to the same philosophy we've had from the beginning, which is we take current market conditions and current store performance, looking for a high probability of success. There is obviously a range given in the guidance. We've gotten away from the quarterly guidance. We're looking more annually. And I think we're making tweaks to it. One of the earlier analyst asked a question around volumes being down a little bit more but gross being down a little bit less, I mean we're looking at those kind of variables all the time. And then, Chris talked a little bit earlier about some F&I improvement. So when you put that all in the mix, take a look at our day supply in inventory, and kind of run that through the model that gives us some confidence that we can bump the range up, and we remain pretty confident for our outlook in 2017.

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Irina Hodakovsky, KeyBanc Capital Markets Inc., Research Division - Associate [31]

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And then a question on acquisitions. It's a driver of growth for you going forward, we've discussed this quite a bit this call and in the past. A couple of questions in terms of your excess cash allocation. In the past, things were targeted for acquisitions, but you've added recently a share repurchase program, and then increased your dividend today. Wondering if there is, perhaps, maybe a change in the pace of acquisitions and what you're seeing? Or are you just making too much money and just giving it back to your investors?

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John F. North, Lithia Motors, Inc. - CFO and SVP [32]

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Irina, this is John. I don't know that you can ever make too much money in our minds, but we're trying to do the best we can. I mean, I think we have a balance. And obviously, our top priority is acquisitions and we see a very robust pipeline. I'd point out, we added $1.1 billion in acquisition revenues last year, it actually lowered our leverage ratio. So as -- I think people that look at this business understand the cash flow characteristics are one of the best parts of it. And I don't know many places you can get a 10% plus free cash flow yield with the company growing at a 27% CAGR. So we feel like it's a pretty good business for that reason, among many others. And we're definitely excited for the acquisition pipeline. I feel like we can have a balance of paying out a dividend and opportunistically buying back shares, when the market has the volatility we've seen over the last 60 to 90 days on frankly very little news. So that's how we look at it, but our first priority remains acquisitions.

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Irina Hodakovsky, KeyBanc Capital Markets Inc., Research Division - Associate [33]

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That's good to hear. And the last question on that -- on the acquisitions as a priority. You've -- in your previous presentations, showed us that you estimate the accretion comes -- boils down to about $0.90 per $100 million in revenue. Certainly, through that integration process, as you discussed early on the call, there would be some inefficiencies. And it appears that $1 billion you added last year, you're factoring some inefficiencies since of this year. And how should we think about your integration process going forward? In the past, we talked about 6 to 12 months. What are you thinking today, for the length of the integration? And how should we think in terms of the headwind? Is it -- instead of $0.90, are we directionally looking at $0.50, $0.65, $0.70? Can you give us a little bit of an idea of how to think about the aggressive pace of acquisitions and how they would impact earnings in the first year, let's say?

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John F. North, Lithia Motors, Inc. - CFO and SVP [34]

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Sure. Well, I mean this is John. I think there's not really a rule of thumb that I think we're going to be able to give you, because every acquisition's different. We've obviously given some color around both DCH and Carbone, which were larger acquisitions where we directly stated an increasing guidance based on the contributions they were bringing in day 1. So I mean, I think those would be a good case study, if you wanted to go look at them. But if you look at the core business, which is doing north of a 5% OP margin, our objective is to get our stores to that range and beyond. And as we talked about I think, a couple of questions ago, I mean, that can take 24 months or 36 months in some cases. But that's part of the dry powder that remains available to us, [ rest ] we'll be able to grow organic earnings into the future is because a large majority of our stores in the $9.5 billion revenue base are still not optimized to the way we see them.

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Irina Hodakovsky, KeyBanc Capital Markets Inc., Research Division - Associate [35]

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Congratulations on an excellent quarter.

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Operator [36]

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

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Nels Richard Nelson, Stephens Inc., Research Division - MD [37]

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I'd like to follow up on those strategies to grow market share. Same-store unit sales were down 1.4%. John mentioned the industry was down 1.2%. Do you in fact think that you captured share within your regional markets, and those national numbers are not indicative of what actually happened?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [38]

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Rick, this is Bryan. I think you are right on track there. Our market share continues to grow with virtually all of our manufacturers. We gained, I believe, 2.5% for this time relative to last year, which is a pretty good market share gain. We also believe though that there's more to come, and that those new acquisitions that have been with us for 1, 2 or 3 years are starting to gain momentum and season, which is where we get a lot of those gains from. So anytime we're comping those, you're still bringing your base down, because you're bringing in a lower performance that maybe hasn't fully seasoned. So that relative number of 2.5% is probably something a little higher than that, because of that contribution from younger, less mature stores.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [39]

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Got it. And when you first acquired Carbone, you had talked about kind of $0.25 accretion. How do you feel about that number now? And how is that tracking relative to that $0.25?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [40]

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We're pleased with the combination with the Carbone Auto Group. That $0.25 target, we're right on pace for. It's a little bit different than the DCH experience, but it's been a good experience, that is a little bit fundamentally not quite as tech-savvy as the DCH, where they're in more rural markets like we are, so the ideas and the sharing of best practices were more fundamental to what Lithia used to be. So it was a lot of fun trying to reevaluate each other, so the best practices sharing weren't quite as dynamic as it was with DCH. So there wasn't a lot of other tools we're pulling out of the tool chest, it would've given us more revenues. But the neat thing is that, that $0.25 target, we really believe that there's even more untapped potential, because what we're realizing is their ability to conquest market share is substantial. More than what we expected, and their ability to sell used vehicles is also more than expected. That combined with the fact that they had 5 franchises that were dueled scenarios, we believe that underperformance in those stores and we'll be spending some capital on that, that we have previously disclosed, to deduel all 5 of those primary franchises, dominant franchises, BMWs, Subarus, Toyotas, so on, are going to be dedueled, and with that comes that unleashing of the power of that life cycle and that ability to take market share. And to sell used cars at 2 or 3 fold. So we're excited about the Carbone combination and really believe that, that type of model can be done again and again fairly easily and integrated because of the ability for their personalities to really remain and foster continued growth.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [41]

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Great. Thanks for that color. Finally, if I could ask you about the financing environment. If you're seeing any changes at all and availability at the prime and near prime or subprime level, if you think these declines in residual values are a risk on the financing side of the business?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [42]

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Yes, good morning, Rick, this is Chris. So, not seeing a lot of changes overall in the portfolio. The gauge that we continue to monitor is really the subprime financing on our lower tier credit customers. And that continues to be around 13% of our business, which in the bottom of the recession was barely low single digit. So we feel like we're steady in the credit availability for our customers. I think what you may be seeing with residuals is just a mix in the products that they are acquiring. Making sure that we have a lot of that value auto product and a lot of core product on our lots is important for that. And so, not seeing a lot of shift there. We are seeing some changes in what some of our core lenders are doing. Some of our top lenders seem to be shifting in market share a little bit as far as their buying patterns, but overall, as far as the number of lenders that are out there, we still have a lots of credit available for consumers.

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Operator [43]

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

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department [44]

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We haven't talked much about used on this call yet. And then obviously, there was a lot of hand wringing kind of inter-quarter on residual of the pricing and margins and inventory. And you guys seem to sort of keep all of that relatively tight. Just wondering if you could give us a little bit more color on what you're seeing in used? Are you just being exceptionally disciplined in the trays you're taking, et cetera? Any color there would be great.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [45]

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Steve, I think you're right. Mid-quarter there is a lot of noise around the idea of pricing being devalued, and LEVs being reduced and those type of things. And I think, from a retailer with a less than 2 month supply, and many of our stores have less than 1 month supply, that's not the relative story. The relative story is that supply is increasing, which allows strong used car retailers to procure and find vehicles at a quicker and more expansive amount than what we could in the past. So we've been excited to see that we're now having some looseness in the used car market, which creates the disconnect to be able to go buy the right product, and begin that life cycle that creates our additional business. So we were up in a value auto, which is great. If you remember a few quarters ago, we saw that flattened. We're back up 5% in units and value auto, which is where we create about 18% margin, based off a base of 12%. That's great to see. That's going to continue to loosen as those 10 8 SAARs and 12 million SAARs begin to fill that pipeline again. The core product was up 6% and certified, which we only make about 9% on, was up 1%. So we're pleased to see that, that supply chain is getting a little loser. And with those people out there, now understanding what vehicles to procure and which ones build demand from our consumer base, we're going to continue to build upon that positive impact of supply increase.

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Steven Lee Dyer, Craig-Hallum Capital Group LLC, Research Division - Partner and Senior Research Analyst in the Equity Research Department [46]

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Great. That's helpful, Bryan. And just as you look at service, we've talked about that a little bit. Interested to see body shops has really performed extremely strong this quarter then coming off a very good year last year. Anything different about your strategy there? Or the customer you're getting there? Or has it just been unusual weather? Any color around sort of a mix of the 4 buckets you're seeing within SP&P?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [47]

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Good question, Steve. I think if you go back and look at our case from the last few years, you'll see about 3 years ago that we were flat and even had a few quarters where we were down. Those were functions of personnel. And I think, this last 18 months or so, we've put new people into about 30% of those body shops. And they've done a wonderful job rebuilding their business and rebuilding their insurance providers, to be able to build a base of business, and we're starting to see the early signs of double-digit same-store sales increases, which we're starting to become a little bit more seen even last quarter or the quarter before that.

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Operator [48]

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Our next questions comes from the line of Bill Armstrong with CL King & Associates.

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William Richard Armstrong, CL King & Associates, Inc., Research Division - SVP and Senior Research Analyst [49]

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On the luxury side, your unit sales were down about 11%. I was wondering if that was mostly concentrated in Lexus, which has reported a pretty big decline for the quarter. Or was it more broad-based? Any color you can give on the luxury side.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [50]

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All right. Good question, Bill. This is Bryan again. I think, when we look at our individual markets, the luxury segments are performing much differently in our markets, than they are as a whole in the nation. Because our market share in luxury is increasing still. We're approvable with all of the 3 majors in luxury, and continue to grow our market share. So I think it's more of a function of rural markets versus metro, that is about 80% of the country. And we don't have a big presence in metro markets in luxury yet. But I believe we would respond more similar to what National was, at a what, plus 9 or something relative to that.

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William Richard Armstrong, CL King & Associates, Inc., Research Division - SVP and Senior Research Analyst [51]

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Okay. And then on the domestic side, looks like you had pretty decent unit numbers there. We saw Ford and FCA reporting some sharp negatives. Do you think you took -- you outperformed those OEMs relative to their national performance?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [52]

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So on a less positive note in luxury, we're actually only up about 1 percentage point in domestic despite being at, what, a 7-point delta between domestic down nationally 3 and we were up -- we were flat on units. So we didn't gain as much as we had thought, but that's also a function of a lot of domestic stores in more rural markets, where they were probably stronger than the national market, which is more dependent upon metro base.

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Operator [53]

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Our next questions comes from the line of Bret Jordan with Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [54]

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On the M&A outlook, you were talking about it being pretty robust. Is there much difference between the rural M&A prospects versus metro?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [55]

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They're both at about the same cadence, which is very high.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [56]

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Okay. And then a follow-up on the financing question. I think you're saying there's not a lot of shift in the lending standard or maybe focus. But as far as the lease focus going forward, do you see any of the OEs pulling back given some of the declining used vehicle values and maybe some residual assumption spread there? Or are there as focused on leasing as ever?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [57]

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Yes, we haven't seen a big shift in that. And in fact, we continue to try and get our working division to continue to push up their leasing, which is at around 15% when our DCH division is somewhere north of 40%. So we still see lots of opportunity for leasing. And I think keeping that customer in a shorter life cycle is great for future sales, it's great for service, it's great for used vehicles. And we see real opportunities for us to continue to push on leasing and aren't seeing pull back from OEMs.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [58]

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Okay. And then one last question. In the prepared remarks, you mentioned sort of diversification in complimentary businesses. Is that anything that's actually -- is that a strategic change at all? Or are we sort of talking about focus in collision and other sort of extensions of the dealership business?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [59]

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Brett, this is Bryan. I think that's more of a horizontal integration, that we would be in reciprocal businesses. If you remember, we started Southern Cascades 5, 6 years ago. That's starting to gain momentum. We still believe that there's expansion or possibly even acquisition opportunities in that space. We also believe that other ancillary businesses, such as buying services or fleet management or other types of businesses that are similar to us would be possible targets. We really believe that if the businesses are retail oriented and are people driven, that we can make a difference in those ancillary businesses. So I don't think you're going to see big deviations from where we know, but we'll be able to grow from our base and our knowledge to be able to make strategic acquisitions or strategic investments in innovations to be able to continue to stay at pace with where the market changes end up.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [60]

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Has that strategic focus changed more recently? Or is that -- is this nothing different than the way you thought about things a year ago?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [61]

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I would say this, it's slightly different. And I think, because we innovated all levels of the organization, we really believe that our ability to create business models that are different and unique, that may be able to meet demands of consumers down the road, are created in our stores most of the time. We believe that that's creating different types of opportunities and we're going to be able to fuel those, and create exponential growth within those realms. When we see that. We've -- I mean not only Southern Cascades, we have a partnership with an organization based out at China, where we're starting to sell vehicles directly to Chinese students that come to universities in America. We're going to be working on that with other countries as well. Which is the -- it's the genesis of what we believe is a more lucrative, lower-cost delivery model. In our stores, we have more transparent living room to showroom type of models, or may even be living room to living room type of models in many of our stores now, where we're home delivering. And there are things that we don't share, but have been going on for a decade. And I think, we're going to be doing a better job trying to spark that growth and generate additional greenfield opportunities from that synergistic type of business.

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Operator [62]

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Next questions come from the line of James Albertine with the Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Research Analyst [63]

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This is Derek Glynn on for Jamie. I just want to get your take on the broader demand environment. This is sort of a follow-up to the used commentary. But there's been quite a number of new vehicle sales over the past 7 or 8 years, as we've come out of the recession. And it seems pretty clear that used supply is going to increase over the next couple of years. So what sort of impact on demand for used do you see going forward? And should we be concerned there's not enough demand to meet this forthcoming rise in new supply?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [64]

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Great question, Derek. This is Bryan, again. I think the relative size of the used car market to the new car market, which is 2.5x on a national basis, what our 17 million SAAR is, which is a pretty darn big number. And dealers only control about 1/6 or 1/5 of that total amount, because they sell about 0.5 to 1 as a whole. We really believe that the upside opportunity in used cars is endless. And when we talk about our individual stores opportunity at 75 units per store, we really believe that the best stores within our organization that are now upwards of 200, and we have numerous stores at those levels, can continue to grow. And remember, we're bringing in stores that may sell 20 or 30 cars into that base, which is making it more difficult to get to the 75. But if you were static and you weren't growing, we should be able to get to the 75 in a matter of a couple of quarters at 6%, 7% unit sales growth, right? And I think that's the nuance of used vehicles, that the demand is there. It's whether or not we as new car dealers can create the experience for consumers from the lowest end of the market, at $3,000 to $5,000 vehicles, to the highest end of the market, at $50,000 to $100,000 vehicles. And I think Lithia Motors is uniquely positioned, as well as its partners with Carbone and DCH, that really haven't played in that space, are ready to take on that other 2.5x larger market than new in the future. And I think you're going to continue to see the growth in that segment for us.

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Operator [65]

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

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David Whiston, Morningstar Inc., Research Division - Strategist [66]

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Just continuing on the used pricing dynamic. How much -- my question, I guess, is there really -- is the fear of used pricing hurting new? Do you think that's a bit overdone in your mind? At least amongst your store base? Or is it a -- it just hasn't...

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [67]

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Great question, David. I think there's no question that the sensitivity of the world press and maybe even analysts to some extent, regarding SAAR rates or margins or incentives are not what this business is about, or is not what retail in general is about. I think, because we're in an industry that is so measurement-focused, it becomes the focus point of many of us, rather than the fundamentals of what our business is, as a capital engine for growth. And the idea that there's internal dry powder within our organization that can grow gets lost somehow in the clouds and the fog of price disconnects and incentives or used vehicle pricing been down 0.3%, but those new nuances, even if you go back 8, 10 years ago in the recession, that's not what created the differences in the model. People created the differences in that model. And I think, when you look at who Lithia Motors is, whatever those sensitivities are, what we've built is an organization that people closest to our customers in individual markets are able to respond to those differences in a very rapid and nimble way. That creates a more recession-proof model. And the ability to grow through that power curve when the opportunity arises. And either way, I believe, we're positioned to win.

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David Whiston, Morningstar Inc., Research Division - Strategist [68]

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Okay. That's helpful. And I guess, my other question is probably bit of an unfair one, but I just want to think of this more from a shareholder perspective, even though, I personally I'm not allowed to own your stock. You guys are always very good at executing and delivering tremendous numbers, but at the same time, there's always this huge chunk of your store base, or at least a significant chunk of your store base that does drastically underperform. And I guess my question is, do you think you'll ever really hit your true potential? Or is it just something you're always going to be working on, because there's always going to be a bottom tier to the store base?

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Christopher S. Holzshu, Lithia Motors, Inc. - Chief HR Officer and EVP [69]

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Yes, David. Chris. I mean, I guess, I tried to allude to that earlier. I mean we could definitely hit our potential if we stop growing and leveraging the strategic acquisitions, which are a big part of our company. But from a shareholder perspective, I think, if we can continue to integrate the acquisitions and at the proven rates that we have and continue to see success in those year-over-year, it would be silly to try and fix the leverage number with using SG&A as a metric versus purely trying to move all of our stores and improve the profitability and the op margins that they produce. And so, yes, we could get there on a pure SG&A to gross number, but that's not our goal. Our goal is to continue to integrate acquisitions and continue to improve those stores.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [70]

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David, I think you've been around Lithia Motors long enough to know that I think, when we think about our future and we think about how we built our people within our organization, you have a team of people that are pretty humble. They're pretty realistic. And they're built to always continuously improve, and the idea of maximum potential, when we look at a store like a Subaru store in Reno, that's a top 5 Subaru store in the country, and a 160th biggest market in the country. And the store produces upwards of 6.5% operating margin, and sells 400 used cars a month, and it's 300% sales effective, you look at the potentials of what people can do over time. So I don't think the goal is to get there immediately. It's to continue to build on a base to be able to create a engine that can grow and compound itself and grow exponentially through people and the expansion of people. And I think, whether we're looking and comparing ourselves to a Cabela or some other type of retailer, I think everyone is built around the idea of people. And whether or not they talk about the opportunities or the dry powder that's there, it's there. They just may not be putting physical dollars to it. And I think, what we know is that great people are coming to our organization and are growing within our organization. And over time, those trends will create a less percentage of nonperformance in stores. But to us, that's a positive characteristic. And I know, that as investors, sometimes that's looked as, well why can't you get it in the next 12 to 18 months? And I think, when you look at a 4 to 7x growth rate of what we went through, and what we will continue to grow through in our future, I think when you balance the two, it's a win-win model to be able to have that dry powder, and be able to expand at the rates that we have and will expand at.

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Operator [71]

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And our next question comes from the line of Brian Sponheimer with Gabelli.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [72]

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Just a question on the opportunity in used. And you talked about the life cycle for getting the used buyer in. Can you maybe talk about the difference between a -- difference for your parts and service business between a used vehicle purchaser versus that of the new buyer?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [73]

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Sure, Brian. Our retention rate on used vehicles is about half of what it is on new vehicles or around 25%, 30%. Which means that over the life of a 5 to 7 year period, the customers that will come back are about 30% of that base. At least one time a year. Okay. On a new vehicle, if you remember it's around 60%, in our best stores around 80% of that customer base will come back at least one time a year. So not quite the adhesion. However, the repeat and referral business that come from that are still high. And we still believe that it's part of the generation engine that creates that life cycle.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [74]

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Do you see a higher average ticket for a used car coming back out? I would imagine that'd be something that will be an offset?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [75]

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Yes. On a customer pay basis. Okay, but on -- when you include warranty, it's about a push.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [76]

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Okay.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [77]

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Which is on the new car primarily, right, or on certified.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [78]

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Right. I appreciate that. And then just more longer-term thought, we're seeing a good company come to market this week, that is end-to-end online solution for buying a used car. What are your thoughts on the potential for your business to evolve to offer that sort of potential down the road? And is that something that you see as where the industry may be headed?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [79]

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Brian, to be fair, Lithia Motors is already there. We probably sell 40% of our used cars as an end-to-end solution. I really believe that auto retailers have built a model that's an end-to-end solution, where it's a living room to living room model. We have applications, we have websites, we have the inventory to do that. And we do it at a profitable level, an extremely profitable level. And I think, when you start to think about sector killers, or people that could modify what the used car model is, I think, you need to go back and look at what's occurred in those segments and understand that auto retailers, and especially Lithia Motors, that is very adept at selling used vehicles, that's built into who we are and it's been built in for the last decade or so. So if you'd like to talk more on that too, we can get into how our applications work and how we reach out to those customers, how our OE -- how our SEO marketing works, and how that relationship is generated through our ISCs, which is our Internet Sales Centers, and how we've leveraged our, what, $175 million in used car inventory to be able to create that. And I think, most importantly, remember the top of the food chain is the new car trade-in, okay. And that's something that used car retailers aren't at liberty to have, which is what creates that waterfall effect.

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Brian C. Sponheimer, G. Research, LLC - Research Analyst [80]

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I agree. And I think it's a tremendous competitive work for you.

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Operator [81]

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Thank you. This concludes our question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President and Director [82]

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Thank you, everyone, for joining us today. We look forward to updating you again in July. Bye-bye.

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Operator [83]

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Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.