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Edited Transcript of LAD earnings conference call or presentation 12-Feb-20 3:00pm GMT

Q4 2019 Lithia Motors Inc Earnings Call

Medford Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Lithia Motors Inc earnings conference call or presentation Wednesday, February 12, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan B. DeBoer

Lithia Motors, Inc. - CEO, President & Director

* Christopher S. Holzshu

Lithia Motors, Inc. - COO & Secretary

* Eric Pitt

Lithia Motors, Inc. - VP of IR & Treasurer

* Tina Miller

Lithia Motors, Inc. - Senior VP & CFO

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Bret David Jordan

Jefferies LLC, Research Division - MD & Equity Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* David Whiston

Morningstar Inc., Research Division - Strategist

* Derek J. Glynn

Consumer Edge Research, LLC - Senior Research Analyst, Vice President

* John Joseph Murphy

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

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - 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 Fourth Quarter 2019 Conference Call. (Operator Instructions)

I would now like to turn the call over to Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

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Eric Pitt, Lithia Motors, Inc. - VP of IR & Treasurer [2]

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Thank you, and welcome to the Lithia Motors Fourth Quarter 2019 Earnings Call. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.

Today's discussions may include 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. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website with the investor lithiainvestorrelations.com, highlighting our fourth quarter results.

With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

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

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Thank you, Eric, and welcome, everyone. Earlier today, we reported the highest adjusted fourth quarter earnings in company history at $2.95 per share, a 15% increase over last year. Full year adjusted EPS was $11.76, an 18% increase over last year. Our annual revenues neared $13 billion, driving strong growth and net profit improvements.

As a growth company powered by people and innovation, our teams remain focused on incrementally and profitably modernizing our industry by elevating the consumer experience through affordability, transparency and convenience. Our Omni-channel strategy led us to another record earnings and revenue year and one large step closer to our $15 EPS milestone.

With that, I want to congratulate our 35 Lithia Partners group or LPG winners for their exceptional performance in 2019. Recognition as an LPG member is highly coveted at Lithia and represents the pinnacle of our mission, growth powered by people. Though high-performance resides throughout Lithia, these stores demonstrate a relentless and elevated focus on culture, customer experience and continuous improvement to create impressive profitability. With the addition of this year's winners, our LPG membership now totaled 77. We aspire that all of our locations can rise to a partner level. Thank you to our entire team and well done in 2019.

We continue to purchase and build strong businesses that expand our network, accelerate our core businesses and deploy our digital strategies. This unique combination results in increased market share, strong profits and significant cash flows, all while maintaining low leverage. The realignment of our operational teams and corporate leadership, culminating with the promotion of Chris Holzshu to Chief Operating Officer, positions our team to further accelerate Lithia's growth and capture potential in our existing store base faster. In just a few minutes, Chris will provide more details on how our core business will achieve their potential through their 2020 annual operating plans. Our operational results from this point forward will be on a same-store basis.

During the quarter, total revenue grew 7%, and total gross profit was up 10%. We saw new vehicle revenue grow 4%, fueling our higher-margin business lines to grow even faster, used vehicle revenues in F&I were up 17%. Service and parts were up 6%, excluding the onetime reclassification and our collision centers were up 8%. Our digital modernization investments are only beginning to reveal how our experienced workforce coupled with our owned inventory and physical network can be leveraged to improve our organic growth. For the year, I would like to highlight our double digit revenue growth in used vehicles and F&I which were both up over 13% with service parts and collision centers up 7%. For the year we also achieved double digit profit growth across our used vehicles, F&I and service parts and collision centers. The diversification in our 6 core business lines creates resiliency in our revenue and profit streams, while considerable new adjacency opportunities remain in finance, insurance, real estate, new distribution channels and more.

As consumer behavior evolves, we invest in modernization that supports and expands our core business by further activating our existing network and allowing our stores to best serve consumers wherever, whenever and however they desire. This pragmatic and incremental approach to modernization continues to take hold in the Pittsburgh market, where we are currently growing our Sell and Buy-From-Home technologies and other customer offerings. Our proprietary Sell-From-Home technology utilizing machine learning and real-time feedback has allowed us to be agile and adapt to consumer preferences and market-specific conditions. These scalable solutions are ready to be activated in additional markets throughout 2020 as demand from consumers and our operational leaders increases.

These technologies will also be the engines for our future business and marketplace solutions. The U.S. automotive retail industry remains strong with the number of licensed drivers in the U.S. hitting an all-time high of over 227 million. Over the last 5 years, the U.S. has added more than 15 million drivers, the largest increase of any 5-year period since the 1970s. In addition, the percentage of licensed drivers relative to the population has increased every year over the same period. 2019 also represented the fifth year in a row that new vehicle SAAR equipped 17 million units, and we expect to see similar strength in both measures moving forward.

With record licensed drivers on the road, stable vehicle sales, low interest rates and widely available consumer credit significant opportunity remains to capture additional earnings within our existing store base as we also accelerate their acquisition growth. Our industry remains fragmented with the top 10 companies controlling less than 8% of the total U.S. market and no single company controlling more than 2%. This highly fragmented market has allowed us to consistently invest in increasing the reach and density of our physical network by acquiring strong assets. For more than a decade, we have successfully purchased and integrated acquisitions that has yielded an after-tax return of over 25% annually. With our most recent fundraising costing below 5% interest, that's a massive return and unrealized impact to earnings.

With more than $1 billion in available liquidity, almost $300 million in annual free cash flows and an adjusted leverage ratio below 2x, we are well positioned for continued growth. Assuming an average equity investment of approximately 20% of revenues, our available liquidity and annual free cash flows could add up to $6.5 billion in revenues or 50% growth. In November, we acquired the Williams Automotive Group in Florida, which consisted of 3 high-performing stores in the southeast, entering the desirable greater Tampa market, expanded our network coverage from 82%, to 92% of the U.S. and establish teams to springboard from in the southeast. Though 2019 was a light year, we added 9 locations, totaling over $825 million in revenue or about 6% more volume to our network. We continue to seek acquisitions to improve our reach, more conveniently serve our customers and grow our highest margin business lines. Our customers' proximity to our physical network is a key element of our growth strategy as it enables us to supply convenient touch points throughout the ownership life cycle.

Lithia now has the broadest coast-to-coast network of any auto retailer in the United States, and it is yet to be fully activated. With over $1 billion of liquidity, leadership expertise accessible to all 50 states and an active market, we expect 2020 to be a banner year of growth for our company. Despite another successful year of earnings and revenue growth in 2019, we're just getting started. Our company and its 15,000 team members live our mission of growth powered by people and the corresponding value to constantly improve. As such, we remain humble and never quite satisfied and are tenaciously committed to improve, grow and find new opportunities.

In closing, our diversified high-growth business strategy is complex, making it difficult, if not impossible, to replicate. An entrepreneurial culture that attracts and retains the best talent, world-class proprietary performance management systems, a proven growth strategy and the capital discipline with we're generating cash flows adds to the uniqueness of Lithia Motors. Our industry remains ripe for considerable consolidation in its first thing for modernization. Our team's multi-decade track record of executing in both operations and acquisitions have positioned us to continue to lead in both. Our milestone of $15 EPS is imminent, and now we look towards our longer-term goal of 5% national market share as our inspiration.

With that, I'd like to turn the call over to Chris.

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [4]

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Thank you, Bryan. As we enter 2020, our culture of high-performance continues to create the engagement from each of our entrepreneurial team members that find ways to exceed customer expectations, increase market share and improve profitability. Our store leaders challenge their teams to maximize the performance by setting individual departmental goals that are supported by each store's annual operating plan or AOP. These AOPs focus on the specific actions necessary to drive higher levels of performance and continuously improve. Combined with our proprietary performance management systems, each store leader is able to identify the necessary levers to pull that enhance the consumer experience and drive profitable growth.

I'd now like to expand on our same-store results. In the quarter, total sales increased 7% and gross profit grew 10%, and pretax income improved 16%. Following is additional color on each of our 6 business lines. The new vehicle business line, which is top-of-funnel for consumers in automotive retail grew 4%. Our average selling price increased 5% and unit sales decreased 1%, slightly better than national average. Gross profit per unit increased to 20 -- $2,267 compared to $2,127 last year, an increase of $140. While our team balances volume and gross profit and evolving regional market conditions. They continue to find new ways to leverage our 40,000 new vehicles in inventory and our massive selection of OEM branded products and services to reach the entire country. Our used vehicle business line was up 17%, comprised of a 16% increase in unit sales and a 1% increase in average selling prices. Used retail gross profit per unit was $2,088, similar to last year.

Our used vehicle mix was 24% certified, 55% core or -- vehicles 3 to 7 years old, and 21% value auto or vehicles older than 8 years. We ended the year with a used to new ratio of almost 1:1, up from 0.8:1 in 2018, which, as a reminder, is less than half of the national average of 2.3:1. Our experienced used car managers remain focused on leveraging innovation to expand procurement of more used vehicles which is the primary path to improving volumes. In addition, we are looking closely at the 50,000 used vehicles we wholesale annually to ensure we capitalize on every opportunity we have to retail those vehicles. Given the confidence we are gaining in the digital solutions that enable us to buy and sell more used vehicles, we have increased our target to sell at least 100 used units per location per month, an 18% increase over our previous target of 85 units. In the quarter, we reached 77 used units per store per month, an increase of 12% over the prior year.

New and used vehicle sales are supported by our experienced financing specialists that help match consumer needs with the lending options at over 200 financial institutions, with over 70% of consumers having average disequity in their trade in vehicle of $5,100, financing experts capture the additional earnings potential by providing transparent product offerings and purchase options at all levels of the credit spectrum. Our France and insurance business line continued the incremental improvement we have seen in the last several quarters, averaging $1,526 per unit retail compared to $1,388, an increase of $138 per unit over the prior year. This growth was due to higher penetration rates and per unit profitability in nearly all of our product offerings.

Overall, new and used vehicle sales create incremental profit opportunities through the resale of additional trade in vehicles, greater manufacturer incentives, F&I sales and future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $3,705 this quarter or an increase of $185 per unit over last year. We remain focused on highest margin business lines, our service parts and collision centers.

In 2019, the U.S. recorded the oldest [lead] on record with the average age of a vehicle at nearly 12 years. Our stores continue to offer a full spectrum of service and product offerings that are convenient and affordable, creating a one-stop shopping experience for all consumers. Our state of the art facilities create a wonderful atmosphere for quick service needs. Including our oil changes, tire replacement, wiper blades and more. We expect continued growth in the competitive express service offerings, which increased almost 20% in 2019. Overall, our service parts and collision center revenue increased 6% over the prior year. Customer pay work, which represents over half of our fixed operations revenue stream increased 6%, warranty increased 5% and wholesale parts grew 4% and our collision centers increased 8%. Same-store adjusted SG&A to gross profit was 70.4% in the quarter, which was similar to last year, bringing our improvement for the year to 70 basis points. Our highest-performing stores maintained an SG&A to gross profit metric of approximately 60%, significantly lower than acquired stores that are typically 90% or higher. Obviously, this adversely impacts our overall SG&A performance until those stores are seasoned.

In summary, our team delivered solid increases in revenue and gross profit in 2019 while delivering SG&A at an industry leading level. However, significant opportunity remains to improve the consumer experience through incremental steps that will expand the reach of our products and services throughout the nationwide footprint of U.S. consumers we now touch. This focus will support the plans our stores have to drive additional profits and eventually attain each store's potential.

With that, I'd like to turn the call over to Tina.

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Tina Miller, Lithia Motors, Inc. - Senior VP & CFO [5]

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Thank you, Chris. For the quarter, we generated free cash flows of $63 million, bringing our total to $286 million for the year. We define free cash flow as adjusted EBITDA plus stock-based compensation, less the following items paid in cash, interest, income taxes, dividends and capital expenditures. In December, we took action to strengthen our balance sheet to support the company's future growth plans. We amended the terms of our syndicated credit facility, increasing the size to $2.8 billion, extending the maturity to 2025, increasing maximum allowable leverage by nearly one full turn and reducing the interest rates on the new vehicle, used vehicle and working capital lines of credit. Additionally, we raised approximately $400 million through issuing 4.625% senior notes due in 2027.

As a result, we ended the year with over $1 billion in available liquidity in the forms of cash available credit and unfinanced real estate, with additional liquidity available through accessing the debt and equity markets. We target 65% investment in acquisitions, 25% investment in capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases.

As of December 31, we have $3.5 billion outstanding in debt, of which $2.2 billion was floor plan, used vehicle and service loaner financing, a unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt. This financing is integral to our operations and collateralized by these assets. The industry treats the associated interest expense as an operating expense and EBITDA and excludes this debt from the balance sheet leverage calculation. Unadjusted, our total debt-to-EBITDA is overstated at 6x. Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.9x. Earlier this morning, we announced a dividend of $0.30 per share related to our fourth quarter results. Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization. Our adjusted tax rate was 28.2% in the quarter and 27.6% for the full year. Changes in certain state tax laws negatively impacted our rate during the quarter. We anticipate our tax rate to be approximately 29% for the next year due to state law changes enacted in 2020.

As Bryan and Chris mentioned earlier, we are well positioned for growth in 2020. We have $1 billion in available liquidity to deploy in acquisitions that meet our hurdle rates. Additionally, in the upcoming year, we plan to pragmatically invest in modernizing the consumer experience through digital solutions and building the teams needed to support new opportunities for growth. Through aligning our core values with the key metrics that drive success and having an efficient support structure, we have the talent and discipline to achieve our aspirational goal of 5% market share. This concludes our prepared remarks.

We would 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 Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [2]

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I'd like to (inaudible) service and parts through the 9 months, same-store sales were tracking 8.7%. And in the fourth quarter, that slowed to 3.7%. And if you could speak to the drivers there - warranty? Did warm weather impact? And how you're thinking about 2020?

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

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Sure, Rick. I think -- let me -- this is Bryan. I think to start, as a reminder, we were actually up 6%. So it's not quite as big a contrast as what it was from the year-to-date number at 8%. And that was because of a reclassification of our tire sales. I think in the quarter, we're still seeing good growth in most areas, specifically in regards to service, customer pay work. Let me just give you that information. We were up, and these are unadjusted as well, so you can add about 3% to each of these numbers, I would assume. Customer pay was up 3% or relatively 6%, about the same as what the company was. Warranty was up 5% or about 8%. Parts wholesale was up 4% or relatively 7%. And as we mentioned, body was up 8%, and tires don't really affect that.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [4]

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Okay. Also, the acquisition environment, you point to it being very robust. You acquired $825 million of revenue last year. What you're seeing that there? What you -- if you could reasonably accomplish in 2020 and the multiples, Tampa, sounds like it's a well-run operation. What -- how multiple was?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [5]

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Rick.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [6]

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Yes.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [7]

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Sure. Let me talk about a couple of different things here. I think most importantly, our pipeline is pretty packed, okay. We're excited about that, and I think you could get the tone from our remarks. I think it's important always to remember what our long-term goal is of achieving 5% market share within the United States, which means we have the ability to grow about 3x our current size. Obviously, if you then extrapolate what that means to acquisitions, it's important to remember that we do produce a considerable amount of money. We just did a debt offering, and we had a fair amount of money in the Piggybank, which will allow us to grow almost $6.5 billion in revenues. If we were to utilize all of that capital, that would increase our leverage about 2x. If you notice, we talked specifically about that our leverage ratio went up in our new bank deal, about one full turn. So some pretty exciting stuff as you begin to think about how do we put our balance sheet to work.

We also restructured our teams 6 months ago to be able to accelerate growth. Most importantly, I think it's important to pay attention to Page 8, which is how we buy acquisitions and what opportunities come to be from those acquisitions in each of those departments. And I think at any given time, you can also extrapolate on Page 16, which is a sum of parts analysis that really talk about each of the different departments and where value is created. So I think when we think about acquisitions, it's clear to us that it's something that we're good at, that we're experienced at and that we can accelerate and we even readjusted things to be able to do just that.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [8]

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That's helpful. Also, finally, I'd like to ask you early learnings in Pittsburgh. What you're picking, how GP is and costs and attachment, F&I and how that's working? And any update on Shift, also would be helpful?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [9]

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Great. Rick, this is Bryan again. And I'm going to spin it to Chris after I'm done with some fun facts on the Pittsburgh market. I think most importantly, what we're seeing is pretty good demand from our consumers and maybe a new segment of consumers that we really haven't attracted in the past, which is exciting for us. I think that the technologies we continue to perfect, whether it's pricing or valuations or experience with our consumers. Those technologies as well as experiences. Stay tuned on because we'll be deploying those into new channels that are not typically through our existing footprint. So we can then touch a broader reach of consumers across the country as well as have higher density than what we currently have to be able to really leverage our inventory, our experienced personnel of 15,000 people and ultimately, that network. Chris, do you want to give us some fun facts on Pittsburgh, too?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [10]

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You bet. I think when we look at some of the digital solutions that we're offering and being able to see how consumers respond to those, here are some kind of cool things that we're learning real quickly is. One, over 90% of all the traffic coming from mobile devices. So this is from phone and tablets, so not from a PC, it's coming from phones and tablets. Second is when customers actually book appointments at home, they're keeping our appointments 92% of the time versus 53% of the time when they book those in the dealership. And then when appointments take place at home, on the acquisition side, we're acquiring the vehicle, 83% of the time or 15 percentage points higher than we do when they come into the store. And lastly, when customers only book home appointments is about 30% of the time, with the remaining 70% choosing to come into our facilities, which is a real testament to continuing to think about the bricks to click model that we're focused on and giving consumers the choice of either doing business in their home or at the dealership.

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Operator [11]

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Our next question comes from Rajat Gupta with JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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I just wanted to follow-up on the acquisition commentary. You've closed a number of deals in 2019, including the one in Florida or late in the year, which I believe is immediately accretive, like a little unlike some of the other deals that you have done in the past? Could you give us a sense of how we should think about the accretion from all these acquisitions from a year-over-year perspective in 2020? And we -- including the Florida one and the others that you've done? And I have a follow-up.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [13]

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Sure. Rajat. This is Bryan again. I think if you think about the Williams' deal, it's probably [$0.25] or so accretive to EPS. I do think that as we think about acquisitions, we're going to have both Williams type acquisitions as well as what we would call our traditional value-based investing, where there's -- where they're usually still accretive, but usually, they ramp up over time, and that's back to the Slide 8. I think if we think about longer-term in 2020 and 2021, right now, the acquisitions leads have increased about 2x over where they were last year this time, and it's mostly driven in the southeast. We were shocked to find that there was many acquisitions available. They are definitely priced on the upper end of our return expectations. But we seem to be able to find those opportunities that are still highly accretive, given that our cost of funds are only 4.625% as of a few months ago. That we believe that there's going to be good opportunities for growth going into 2020. Understood.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [14]

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Just to clarify on the accretion, you said a quarter EPS, you mean like $0.25?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [15]

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Yeah, $0.25.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [16]

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Got it. Got it. And just on F&I, again, continued solid execution here. You -- in the past, you've talked about some potential on the captive side, could you provide an update on that? And how should we think about any contribution to earnings in the near to medium term?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [17]

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Yes, this is Chris. So I mean, as far as our own in-house finance portfolio, we have about $70 million of assets under management, but we do continue to look at the opportunities to expand that business, go further upstream right now, that is probably a deep sub-prime portfolio. And we're figuring out ways to have adjacent businesses in addition to the auto retail and parts and service business and collision centers that we have that can bring incremental profit. And so we do expect to continue to pursue those opportunities and are investigating that at this time.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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Got it. Just lastly for me on SG&A to gross profit, it was down pretty nicely here in 2019 overall. What should -- is there like a range you could provide us for 2020? Or like what kind of decline expectations should we have? That will be all from my side.

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [19]

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Yes, this is Chris again. We're not going to give guidance really on the 2020 year. But I will tell you, as we mentioned a bit ago that we've [done] over $7 billion in acquisitions, and those acquisitions under the traditional model that Lithia have acquired have been in that 90% range. And so we're still incorporating a lot of those stores in. And while we saw a 70 basis point reduction year-over-year, we are going to continue to stay focused on the 3 core line items that make that up, which really come down to our personnel costs, advertising and facility costs. And so as we mentioned in the prepared remarks, our stores have AOPs and their AOPs are about generating top line growth as well as leveraging cost and getting back to that 50% throughput number that we're focused on, where we bring $0.50 in every dollar of growth to the bottom line. So we'll continue to see, I hope, our efforts on that and continued progress.

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Operator [20]

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The next question is from Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [21]

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You mentioned the digital rollout here. How should we be thinking about that for the course of 2020?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [22]

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This is Bryan, again, Armintas. I think that it is incremental improvements. So I think today, when we look at the Pittsburgh market and a few adjacent markets. It's really a -- what we would call light sales to consumers. Currently that will get a lot heavier and more robust, where it's full transparency and full interaction and full choice for the consumer, whether they'd like to do business at home or in the dealerships. I think as well. Right now, it's also full capacity buying of vehicles from consumers, and that can be done in multiple ways, and that's being well accepted, which is helping accelerate not only the Pittsburgh market, but other markets that are starting now to dip their foot into this arena.

We're very fortunate that we're purchasing of the vehicles we purchase, about 60% of them are core product and the other 40%, which is almost the entire tranche is value auto, which are very difficult cars to find. So as we think about furthering our digital efforts. I think what you're going to see as Pittsburgh will put on more content and more options for consumers as many other lithium markets start with those light solutions and then begin to fulfill the promise to the consumers. To be able to go to them wherever, whenever and however they may choose.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [23]

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But do you have any sense on you're in Pittsburgh as you launch other markets, do you think you'll get to half of your footprint with the other markets or a quarter, just -- I get the sense it might be a bit more measured but maybe you can help me...

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [24]

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Yes, I hear you. I hear you. I think -- I don't think we look at it that way because I think as Chris spoke to, I think we think about annual operating plans. And today, in 2020, I think we think about how do we get incremental improvement in our existing store and how do we start to change behaviors in our consumers as well as those that deliver experiences to the consumers, our employees, and I think we're at that stage throughout most of the year. I think you'll see us leverage our technologies and begin to step into different consumer demographics or bases where we're going to attract a less traditional consumer, but that will be later in the year in Q3, Q4 type of things.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [25]

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Okay. And then just last one, SG&A here in the fourth quarter was sequentially higher? Did it have to do with the acquisitions sort of phasing in? Or was there something else that we should be mindful of?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [26]

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Armintas, this is Bryan, again. I think the biggest thing to think about with SG&A that we train our leaders today to be top-of-funnel sensitive, meaning that we expect that they grow their used car business, their new car business, which ultimately will push the higher-margin businesses of service and parts. So if you see slowing SG&A, like we did in Q4, where we were only saving 30 basis points relative to the 80 basis points staying throughout the year. It's because there is a conscious effort to be able to provide offerings to consumers that may be more affordable and may not be as lean as they will be in the future. Now as Chris said, there's ultimately that value-based investing that comes into the fold as well that helps offset some of that. And I think as we were talking about the Williams acquisition, those acquisitions since they'll help us balance things to be able to redeploy capital in not only our stores but on global initiatives to be able to further our modernization efforts.

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Operator [27]

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

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [28]

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Just a first question on the new used targets of 100 vehicles per store. I'm just curious, I mean, what is the age bucket that you think you can expand into? Or is that really sort of the wrong way to think about it, and it's just a gross increase? I'm just trying to understand if you guys are going a little bit older in the age spectrum. I think there's more opportunity there. Just how you're going to drive that growth?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [29]

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Yes, John, this is Chris. I mean, obviously, we do remain focused on expanding that used car business. And our target now when you think about the national used to new ratio of 2.3:1, even at 1:1, we really see there's a huge opportunity. But as you're mentioning, I think that opportunity is going to come from that core and value auto line and it's going to come down to procurement. And Bryan talked a lot about the digital solutions that are going to help us with procurement. But right now, while we're fortunate enough to have 63% of our current used vehicles coming in on trade, in order to push that envelope further, we're going to have to go out and procure cars. And I think it's getting away also from the branded products. So we now -- our average stores are selling 60% branded products. So the same make is what's on their shingle outside and 40% off brand, but our top used car store in the company that are well above that 2.3:1 ratio about 20% brand and 80% off brand. So we're trying to balance that mix out a little bit more and focus on the procurement side.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [30]

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John, this is Bryan. Just one other piece of incremental information. I think when we think about our used vehicle sales, we always think it a bit in conjunction with our financing, okay? And I think when we build our inventories, we think our value is typically about 50% finance and about 50% cash. As we get into core, it's like 80% financed. It's a massive amount. And that's where there's lots of profit opportunities. I really believe that. And it's where scarcity matters a bunch in terms of the vehicles because if you can track consumers with scarce product, they -- it typically builds margin. An example of that would be in value auto for the quarter, we were actually up $148 per unit or $2,203. We averaged $2,088 a unit, whereas in certified and core, we were actually down about $50. But we're trying to build value, and it comes from the ability to buy vehicles that are more scarce than what's typically found at auctions or available to businesses that are further downstream, as Chris mentioned, than we are.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [31]

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And then just a follow-up to that, I mean, sort of, most people think about F&I and parts and service as a lower opportunity on those older vehicles, but the reality is that it actually might be sort of think -- flip that thinking on its head, and there actually might be more of an opportunity? I mean, how do you think about the finance insurance and parts and service attach rate and then just absolute opportunity on some of those older vehicles?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [32]

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John, it's Bryan again. I think we look at things holistically in a whole deal average rather than specifically F&I. So I think we build things around that. I think it's -- the disadvantage that you get in F&I on a value auto product is that you're bringing someone into your business life cycle earlier in their life, which is something that is easy to discount and say that you shouldn't do it because it's bringing your F&I average down. But ultimately, if it brings dollars to the bottom line or expands your customer base, which is how we look at everything, then it's an important give and take, that you always need to balance between.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [33]

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Okay, that's helpful. And then just a second question, on -- when you're talking about adjacencies, it seemed to sound like that you were alluding to a potential captive finco or growth there. Is that something you guys are kind of kicking around and looking at a model like a Carmax, particularly on the use side is something that's working fairly well?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [34]

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Yes, John, this is Chris, definitely something that we're kicking around and exploring further. For several years, we've been in -- we've had our own finance company. It's been in the deep subprime segment, and I think we're just looking at if there's ways to profitably move upstream with that business. Since we're top of funnel, we have the opportunity to look at those deals. And if they're profitable for us, why not add them onto our profit stream. Also in terms of -- if you think about digital strategies and the ability to be able to be hyper responsive to the consumers, the ability to have your own financing takes out a lot of the APIs that need to occur between us and the 200 lenders that we currently are signed up with and simplify things and is more transparent to the consumer.

The other thing I think that's important to remember is, and you mentioned it that Carmax does produce 40% of their profits in their finance companies. So how much low-hanging fruit is there for a Lithia Motors to be able to capture at some point, which can make us more competitive in terms of what our ROIs are and our acquisition aggressiveness as well as the ability to diversify to some extent. Now I think you know, Lithia well enough that we will incrementally grow into something much like we've done with the $70 million portfolio that we have today. We'll move slowly and learn from our experiences and perfect. And ultimately, if we do end up going in that direction, it will be something that will be profitable and a positive thing for all of us.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [35]

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This would be organic off the current platform? Or would there be a small acquisition? Or I mean, how would you handle that?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [36]

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I think if look at Lithia's history, I think it does typically come organically. Because it is how you learn the knowledge that you need to be able to really further the business. And I mean, I would say this, the expertise within Lithia Motors in regarding finance is deep and broad. We have almost 600 finance specialists that we can tap into to gain knowledge, plus we have 200 lenders that have taught us a lot about the world of finance and so on. So I would believe that it would be organic.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [37]

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Okay. And then just lastly, I mean, you set out sort of long-term goals that are big and a bit audacious and you've been hitting those. So we have to take everything you're saying very seriously. But the 5% market share nationally in the new vehicle market does sounds a bit high. And what we've understood from sort of the Auto Nation experience, I mean, framework agreements can be prohibitive as far as making acquisitions and kind of growing significantly above 2%. So I mean, is there something going on in the framework agreements or relationship with automakers that you think might make it easier than it has been in the past to kind of grow that much because it's a big number. But like I said, you've hit long-term targets before. So just curious how are you thinking about that.

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

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John. Great. That's a really great question. And I think it identifies the differences between how Lithia Motors has built a value-based strategy that typically buys underperforming strong assets and then improve them. So the relationship that we have built with our manufacturers is deep and strong because of that ability to bring value to them, okay? And I think framework agreements, albeit have limited some of our peer group. In fact, at times, it can limit our growth as well. And I think we always have the -- our partners in mind when we buy acquisitions and balance those things. And I think that's why many people invest in Lithia Motors because of that ability, not only to bring shareholder value, but bring value to our partners, which is our manufacturers that ultimately hold the keys to the Kingdom to get to 5% growth. Lastly, our current framework agreements in their entirety, allow us to get considerably beyond 5%. So as long as our performance stays or at the levels that we're currently at and we're able to bring value and improvement then there shouldn't be framework limitations like others may or may not have.

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Operator [39]

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Our next question comes from Bret Jordan with Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [40]

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Back to the finance for a moment. I guess, what do you see as far as the credit availability trends? And obviously, you've got some real experience on the subprime. Where are you seeing the subprime mix right now? And I guess, maybe any trends on delinquencies just around the borrower?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [41]

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Bret, this is Chris. Our trends are pretty consistent. We're seeing about 15% of our business in the subprime speed. It really hasn't shifted much at all over the last several years. So continuing to see that space stay where it's at. And then as far as overall finances, what Bryan has mentioned, we have over 200 lenders available, and they come and go at different paces. But our job is to make sure that whether it's an internal finance company or an external finance company that we have, the breadth of lenders available for our stores to be able to put transactions together and meet customers' needs and continue to see that going forward into 2020.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [42]

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Okay, great. And the question, I guess, you commented on collision being up 8%, which is, I think, a whole lot better than repairable claims growth in the period. What's driving that? Are you guys focusing more there? Is that sort of taking share from independents, given vehicle complexity? Or how much is price versus traffic? I mean, a little background on that number?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [43]

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Sure, Bret, this is Bryan. I think on collisions, 85%, 90% of our work is driven off DRPs in the insurance company partnerships. So I think that, combined with our ability to put the right people in the right jobs is the biggest driver for that. The market is definitely robust. It's a matter of us capturing a larger portion of that. I believe we have -- we're pushing mid-20s in terms of collision centers and a number of those are actually independent. And it's a 7% part of our fixed operations. And I think I'd leave you with this final thought. Our relationships with our consumers are deep. We provide offerings that are expansive and complete. So the business is really ours to lose, including the collision repair centers that many consumers typically call us to be able to ensure that their vehicles are repaired at a standard that is as good as it was prior to the REC or need assistance when it comes to valuations, to be able to determine a total salvage type of vehicle, okay? And I think that's something that we're getting more involved with, and it is profitable, and it is something that is right in our wheelhouse.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [44]

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Do you see that being an area of growth, I guess, mid-20 stores, is that something you're expanding? Or is it just really too small to move the needle?

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

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I believe that Lithia Motors has the ability to grow people and grow businesses because of our basic mission of Growth Powered by People. And that's obviously, a little ethereal. But I think when you manage performance by the numbers and through people, I think anything is possible. And I think body shops are something that we see as attractive, as lucrative and as part of the customer fulfillment of their life experience with personal transportation.

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Operator [46]

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Our next question comes from Derek Glynn with Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Senior Research Analyst, Vice President [47]

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I had a follow-up on used. You spoke about moving across the age spectrum to older vehicles. How has the competitive environment changed on the procurement side over time? It just seems like there's a lot of investment from others into digital marketplaces or platforms and there's arguably more price transparency today for both dealers and consumers. And so what do you view as your advantages in procuring?

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [48]

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This is Bryan, again, Derek. I would say this, getting into scarcer vehicles has lots of risk and without massive expertise in reconditioning in sales, in guarantees and promises to our consumer, it's not something that most people want to get into because it's messier. It also requires deeper financing sources, more specific or more unique financing sources. That what you're starting to see is the new entrants are pretty good at the one to 5-year-old vehicles, which is something that is attractive and there's a plentiful supply of vehicles, and many of those don't necessarily come from new car dealership. It comes after new car dealerships decided they don't want the car, and they're able to buy those cars at auction. So it's the easy entrance point, whereas we believe that the profitability in both reconditioning as well as in having people enter the Lithia family earlier comes from those lower-priced vehicles. And our people are excellent at being able to recondition those vehicles and find those vehicles.

Our new technology that we're utilizing now in the Northeast is also pinpointing those vehicles, so we're more aggressive in terms of procurement of those vehicles. Which is allowing us to increase that as well. And we believe that core and value are part of the promise that Lithia Motors gives to our customers when we're a new car store. There are tendencies that consumers believe that they can't buy cars that are of value or within their price range. So -- and what we provide is a great experience for them to be able to buy at a professional facility and be serviced in a professional manner, whereas we're typically competing in value and core products with more of the Joe's used cars. And small used car lots, not so much national retailers at this stage. Now I believe Lithia Motors can move into those channels and become the national retailer in those categories. And I think you'll see our strategies unfold over the coming 3 to 4 quarters.

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Derek J. Glynn, Consumer Edge Research, LLC - Senior Research Analyst, Vice President [49]

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Okay. Great. And when I look at parts and service, the growth there has generally been above that of your new comp units. It's been more varied relative to use. But you're growing units, you have this opportunity within your own existing car park, so to speak. But I'm curious if you could share what portion of your parts and service business is derived from vehicles that you did not previously retail? And how that's changed over time?

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

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Derek, we'll take that off-line and try to get to some of that data?

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Operator [51]

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Our next question comes from David Whiston with Morningstar.

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David Whiston, Morningstar Inc., Research Division - Strategist [52]

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Can you talk about a bit more about what tools you'll use to get to this new used target of 100 units per store per month? And is Shift involved in at all?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [53]

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Yes, David, this is Chris. I mean, right now, what we have is we have a core group of stores that are performing well above that goal of 100 units per rooftop. And they're the stores that are going above the national average of 2.3:1 used to new. And so what we're going to do is do what we always do is leverage our top talent, our top teams to support our other stores to show people the way on how to do it. And as Bryan mentioned, there's a lot of work that goes with it. Where our used car managers have to, in some ways, roll up their sleeves, get out and buy vehicles. Right now, only third -- 1/3 of the used cars in the U.S. are sold through new car dealers, and there's no reason that number shouldn't be much higher. And our whole focus right now is just to educate our stores on what the opportunity is, make sure that they have the resources, the capital, the expertise the technicians, the reconditioning to be able to get those vehicles through the shops on the front lines and get them financed. So there's a lot of pieces that go into that, but it's really about the people and the talent.

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David Whiston, Morningstar Inc., Research Division - Strategist [54]

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So it sounds like it's not really a massive AI or big data type issue. It's more of just an effort and attention issue, right?

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

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David, this is Bryan. I think it's multiple pronged. I mean, I think you may know that my love at the Honda store that I ran for 6 years that we were a 3.5:1 used to new ratio, and it was primarily about 3 categories. It was about procurement, it was about your staff, and it was about your ability to price and match cars in the proper manner. I think when you think about how do we plan on doing that, the nuance that occur in procurement are massive. There's lots of different ways to procure vehicles and to pinpoint those I think today, when we think about procurement, I think it's driven 50% by people and 50% by technology. I don't know that we knew that until we began to partner with Shift and began to think about the decisioning that our own used car managers go through and started to extract that knowledge from them to begin to build the foundation of our own AI at -- in -- at barrel.com in Pittsburgh, that we're now starting to perfect that and that's what's bleeding into a lot of the other stores, even though there's not customer offerings.

What is there is AI that's pointing our store leaders, which typically, there's 2 or 3 experts in the store that are buying cars to go buy more of the right cars. And then on the pricing side, our pricing models now are able to scrape the web. They're then able to provide competitive pricing to consumers. And I think, lastly, as we think about valuation and pricing. If we can expand our reach, meaning that the footprint that we can deliver a car to expand from our current approximately 50 miles to 500 miles. Now you're able to turn cars quicker, command even higher margins and create experiences with consumers for your higher profitability businesses in a little bit easier way. And I think that's when we think about the 100 cars that Chris talked to you. These are the new portions of what were different than when I was running a store 20 years ago.

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David Whiston, Morningstar Inc., Research Division - Strategist [56]

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Okay. That's helpful. Florida, you finally entered the market, something we've talked about before. Do you ultimately want to be only in metro areas or both metro and rural?

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

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David, this is Bryan again. Definitely, we want to be in both, okay? Because we believe proximity is important to capture the high-margin businesses because mobile service probably has a 50 to 100-mile effective range. And that's something that rural markets can help fill in. We have realized that the metropolitan markets are probably just as attractive and have a lot of profit upside and also typically take a management team of 5 to 7 people to be able to lead the store, the same as a smaller store in a rural market does. But remember, Lithia is built on a traditional world strategy. And those hometown values and those experiences and bonds with our consumers is what we perpetrate throughout the metro markets as well. And I think that's something that is unique on how we approach things with our relationships with our consumers as well as our employees and team members.

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David Whiston, Morningstar Inc., Research Division - Strategist [58]

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Okay. And just one more question, a bit off the wall here. But in your -- you guys are an expert of selling pickups to rural customers and small cities. And I'm just curious, if your store GMs in those markets have heard any feedback on the Tesla fiber truck from those customers? Is that the kind of truck that they would ever want?

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

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David, this is Bryan. I think if you look at pickup sales, I think that the footprint of who those customers are and how they're built. I'm not positive that, that's the right attraction yet. I think in metropolitan areas, it could be. I think most importantly, it's a massive market and pickup trucks sell nicely in our typical rural markets as well as in the metropolitan areas.

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Operator [60]

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Our next question comes from Chris Bottiglieri with Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [61]

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A couple of questions. I wonder if I can give the mix on the kind of value CPO core. Did you give the growth rates? And if not, is that's something you can provide context for?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [62]

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Chris, this is Chris. Value auto was up 12%. Our core product was up 21%, and our CPO business was up 8%. So our focused units in corn value auto definitely outpaced what was going on with certified.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [63]

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Got you. That's helpful. And then, obviously, the used growth has been really explosive in 2019. I was wondering if you could help them dimensionalize that growth for us like where it's coming from, helping us think through 2020? And then specifically, if you're able to, I was wondering if you can quantify the contribution from the 2018 acquisitions that had on the 2019 growth?

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Christopher S. Holzshu, Lithia Motors, Inc. - COO & Secretary [64]

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Yes, this is Chris again. I think just going off the unit growth that we saw in the quarter represents really what we saw in the year. Our focus is definitely on the core and value auto product, it will continue to be so going forward into 2020. And then as far as specifics on the acquisition, it's a mixed bag. I mean, a lot of the larger stores had focused on CPO units. So they had never actually even heard of value auto, value auto is for the store down the street that is selling out of a trailer. But as you know, 21% of our vehicles that we sell are value auto product, and we have great finance specialists to help our people that a lot of time to need support in their financing options on those value autos. And as it's our highest profit, gross profit per unit vehicle and margin vehicle. It's something that we're very focused on and bringing into the fold of those new acquisitions, whether they've been in the used car business in the past or not.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [65]

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Got you. And then one last one for me. For the Pittsburgh market, you gave a lot of interest in KPIs. I was wondering, if there's anything you can give like kind of any other way to frame it in terms of contribution, like how quickly they grew relative to the company average or their used to new ratio in that market relative to other markets? Just some way to help us frame for how big of a lift, the investments have been.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [66]

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Chris, this is Bryan. I think the easiest way to think about it is incremental and it's integrated into everything that we do. So when you look at an 18% growth rate in used vehicles. I think you have to earmark, a good portion of that is because of modernization, and whether it's in the Pittsburgh market. And that's why when we talk about -- we're not really planning on rolling these things out. It's incremental improvements that the stores are starting to use valuation models. At some point, they'll start to use pricing models. At some point, they'll be able to provide consumers direct offerings and in-home service and in-home sales, those type of things. So it's hard to really earmark what specifically it is, and that's not really how we manage our company. We manage it based off these incremental improvements. I think as we look forward, you will begin to see that we'll have multiple channels of how we go to market, and those will be easily detectable and easily discern between what is driven through that channel, and we'll be able to provide you that information as well.

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Operator [67]

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Thank you. We have the end of our question-and-answer session. So I'd like to pass the floor back over to management for any additional concluding comments.

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Bryan B. DeBoer, Lithia Motors, Inc. - CEO, President & Director [68]

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Thank you, everyone, for joining us today, and we look forward to updating you again on our first quarter in April. Bye-bye, everyone.

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Operator [69]

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Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.