John North - Chief Accounting Officer Bryan DeBoer - President & CEO Christopher Holzshu - VP & CFO Sidney DeBoer - Founder & Executive Chairman.

Paresh Jain - Morgan Stanley Elizabeth Suzuki - Bank of America Merrill Lynch Tony Cristello - BB&T Capital Markets Brett Hoselton - KeyBanc Jamie Albertine - Stifel Will Armstrong - C.L. King & Associates Steven Dyer - Craig Hallum Capital Group N. Richard Nelson - Stephens, Inc. Bret Jordan - Jefferies Michael Montani - Evercore ISI.

Greetings and welcome to the Lithia Motors Inc. First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

John North, Chief Accounting Officer for Lithia Motors Inc. Thank you. You may begin..

Thanks and good morning. Welcome to Lithia Motors' first quarter 2015 earnings conference call. Before we begin, the company wants you to know that this conference call includes forward-looking statements.

Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition, liquidity and development of the auto industry and markets in which we operate may differ materially from those made and/or suggested by the forward-looking statements in this call.

Examples of forward-looking statements include statements regarding expected operating results, projections for our 2016 performance, expected increases in our annual revenues related to acquisitions, anticipated availability from our unfinanced operating real estate and anticipated levels of future capital expenditures and free cash flow.

We urge you to carefully consider this information and not place undue reliance on forward-looking statements. We undertake no duty to update our forward-looking statements, including our earnings outlook, which are made as of the date of this release.

During this call, we may discuss certain non-GAAP items such as adjusted net income and diluted earnings per share, adjusted SG&A as a percentage of gross profit and adjusted pre-tax margin. Non-GAAP measures do not have definitions under GAAP and may be defined differently and not comparable to similarly titled measures used by other companies.

We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures.

We believe the non-GAAP financial measures we present improve the transparency of our disclosures, provide a meaningful presentation of our results from core business operations, because they exclude items not related to core business operations and improve the period-to-period comparability of our results from core business operations.

These presentations should not be considered an alternative to GAAP measures. A full reconciliation of these non-GAAP items is provided in the financial tables of today's press release. We've also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our first quarter results.

Presenting the call today are Bryan DeBoer, President and CEO and Chris Holzshu, Senior Vice President and CFO. Also in the room is Sid DeBoer, Chairman of the Board. At the end of our prepared remarks, we will open the call to questions and I'm also available in my office after the call for any follow-up you may have.

And with that, I would like to turn the call over to Bryan..

Good morning and thank you for joining us today. Earlier, we reported first quarter adjusted net income of $40 million compared to $37 million a year ago, an increase of 9%. We earned $1.55 per share in the first quarter compared to $1.39 per share last year, up 12%. Our revenue increased 11% in the quarter to $2 billion.

All numbers from this point forward will be on a same-store basis. New vehicle revenue increased 6%, as average selling prices were up 1% and our unit sales increased 5%. This outpaced the national unit volume increase of 3% was translated to quarterly SAAR of $17.1 million. Our domestic unit sales increased 2% compared to 5% nationally.

Import increased 7% compared to 2% nationally, and luxury units increased 2% compared to 1% decrease nationally. Gross profit per new vehicle retail was [$2,400] compared to $2,016 in the first quarter of 2015, an increase of $24 per unit.

Within our segment, both import and luxury gross profit per unit increased, which was partially offset by lower domestic gross per unit. Some of our domestic stores faced difficult stair-step incentive objectives and elected not to pursue them, making it difficult comparison against the prior year.

In the quarter, retail used vehicles increased 12% and used vehicle average selling prices increased $304 or 2%. We retailed 11% more used units over the prior year, resulting in a used-to-new ratio of 0.83:1. In the quarter, certified units increased 16%, core units increased 12%, and value auto units increased 3%.

Gross profit per unit was $2,384 compared to $2,462 a year ago, a decrease of $105 and declined in all three categories of used vehicles. On a 12 month rolling average, we sold 64 used vehicles per store per month, up from 57 units in the comparable period last year.

We continue to make incremental progress towards our goal of selling 75 used units per store per month. The increased supply of used vehicles is impacting our growth per unit, while allowing our stores to generate additional sales and earnings, independent of new vehicle market conditions.

Our F&I per vehicle was $1,292 compared to $1,181 last year, or an increase of $111. Of the vehicles we sold in the quarter, we arranged financing on 73%, sold a service contract on 43%, and sold lifetime oil products on 26%. Our penetration rates and profitability improved in all three categories over last year.

Although, the DCH stores have just recently started to offer the lifetime oil product, so the blended penetration in this category is below our historical average. In the first quarter, the blended overall gross profit per unit was $3,507 compared to $3,435 last year, or an increase of $72 per unit.

This was complemented by a 7% increase in unit volume. As we have previously discussed, our store personnel monitor total gross profit generated rather than on margin percentage to evaluate and drive their performance. Our service body and parts revenue increased 10% over the first quarter of 2015.

Customer pay work increased 8%; warranty 19%; wholesale parts increased 4%, and body shop increased 22%. Our total gross profit margin was 15.5% compared to 15.3% from the same period last year, an increase of 20 basis points. As of March 31, consolidated new vehicle inventories were at a day supply of 78, an increase of 16 days from a year ago.

Used vehicle inventories were at a day supply of 53, an increase of four days from a year ago. Both new and used vehicle inventory levels are elevated as a result of stop sale orders from our manufacture partners due to outstanding recall.

We believe this trend will not result in significant changes in gross profit per unit going forward and has likely created a backlog of sales that will be captured upon the stop sale order being lifted in these coming months. We remain optimistic on continued growth through acquisitions.

The market remains robust with a significant number of stores for sale. With Lithia targeting exclusive markets and DCH pursuing a metropolitan strategy, we have identified more than 2,600 stores nationwide as candidates. We remain confident that we will continue to find accretive purchases.

DCH continues to build momentum and stores in both divisions have significant opportunities to improve both top and bottom line results through improving our customer experience and managing costs.

Our team is capitalizing on increased used vehicle supply and additional units in operation and our service drive, while aggressively pursuing new market share to respond to the local market conditions. With that, I’d like to turn the call over to Chris..

Thank you, Bryan. At March 31, 2016, we had approximately $171 million in cash and available credit as well as unfinanced real estate that could provide another $150 million in 60 to 90 days for an estimated total liquidity of $321 million. At the end of the first quarter, we were in compliance with all our debt covenants.

Our free cash flow as outlined in our Investor Presentation was $58 million for the first quarter of 2016. Capital expenditures, which reduced the free cash flow figure, were $16 million for the quarter.

Our annualized net debt to EBITDA is approximately 1.9 times, among the lowest in our sector and providing ample liquidity to complete acquisitions or share repurchases. We again took advantage of the recent dislocation in our share price and repurchased approximately a 158,000 shares since April 1 of 2016.

Year-to-date we had deployed over $60 million to repurchased approximately 759,000 shares or a 3% of outstanding float. We have approximately $236 million remaining under our current repurchase authorization. Our capital strategy is unchanged as we balance acquisitions, internal investment, dividends and share repurchases.

Our first choice for capital deployment remains to grow through acquisitions and internal investment, but regardless of category, all investment decisions continue to be measured against strict ROE metrics that generate solid long-term returns.

Our first quarter adjusted SG&A as a percentage of gross profit on a same-store basis was an estimated 70.7%, an improvement of 70 basis points over the first quarter of last year. Throughput, or the percentage of each additional gross profit dollar over the prior year retain, after selling cost and adjusted to reflect same-store comparisons was 37%.

On a consolidated basis, including the effects of recent acquisitions, our adjusted SG&A as a percentage of gross profit was 71.1%, an improvement of 20 basis points from the quarter of 2015. In the first quarter we grew our topline revenue and gross profit nicely, generating approximately $34 million in additional gross profit dollars.

However, some of our stores pushed incremental topline sales growth through increased spending in personnel and advertising, resulting in lower throughput than our target.

Our sales will be focused on maintaining revenue growth while balancing incremental spending to ensure the additional gross profit generated is not helped by incremental spending and SG&A. We continue to target incremental throughput in a range of 45% to 50%.

This will allow us to achieve SG&A to gross profit for the full year in the mid to upper 60% range. As mentioned our store personnel will be challenging their teams and examining their operations to continue to drive topline improvement while ensuring the results fall to the bottom line.

Given the current year trends and marketing conditions, we're holding our full year guidance unchanged from our outlook provided 60 days ago. We expect second quarter 2016 earnings per share of $1.86 to $1.90 and full year 2016 earnings to $7.30 to $7.50 per share.

For additional assumptions related to our earnings guidance, please refer to today's press release at lithiainvestorrelations.com. This concludes our prepared remarks. We'd now like to open the call to question.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Paresh Jain with Morgan Stanley. Please proceed with your question..

Good morning, everyone..

Good morning, Paresh..

First question on the guidance itself, clearly used margin outlook is a headwind here, but again most of that has been offset by an increase in used sales, a similar thing happening with the parts and services outlook, so that seems to be a net positive as well and of course F&I per vehicle seems much stronger despite used outperforming you.

Add to that, favorable change in tax rate and check out and yet guide is unchanged. So is it more related to SG&A, which was perhaps a small headwind versus expectation in 1Q as well? Sorry for the long question..

No, problem Paresh. This is Bryan. I think you touched exactly on a summation of the quarter in a real eloquent way. I think when we look at the quarter and we look at what we can accomplish going forward, it's primarily that we generated $26 million in additional same-store gross profit.

If we would -- if we would have been able to maintain our typical 50% throughput, that would have generated an another $0.17 in earnings, which would have made a big difference obviously and I think the primary reason for that is each of our local markets are responding a little bit differently and I think when you reach a plateau in a market and I’d say a third of our markets, primarily the energy states are feeling the pressures of either flat or slightly declining sales.

They’re continuing to keep volume, but they're not responding to their SG&A. So they're having to push a little harder to be able to maintain that volume.

We believe that the volume model is the right model though because ultimately that's what builds our units and operations and service and part and secures our profitability long term in those fixed operations department.

So ultimately it's that we need to do a better job at finding those pockets and helping our stores and now help themselves obviously because we're in entrepreneurial model to adjust the markets when it comes and it can take a quarter or two for that to adjust..

Yeah, Paresh this is Chris. Just to follow-up on that, for the last five years, we've had a real consistent guidance philosophy, which is to do a bottoms-up forecast store-by-store and then based our annual outlook on what our current trends look like. And so, as Bryan alluded to, we had a tremendous topline growth. We generated a lot of growth.

We just need to figure out the right balance right now on the SG&A side. So, we're going to continue to work on that, but our guidance reflects solid topline growth, but doesn’t have the incremental throughput in it that we've had historically..

Thanks for the color. I have one follow-up on F&I, again one of the surprises in the quarter and the outlook as well. So the quarter itself saw a big jump and then your outlook was raised.

What’s really interesting is that there is bump in F&I expectation comes despite an unfavorable growth mix and by unfavorable, I just mean used which comes at much lower F&I significantly outperforming you. What changed in the last quarter and what gives you this confident in taking up F&I..

Paresh, as you know, this is Chris. As you know we've lagged our peer group for the last several quarters in F&I performance and what we really focused on was three primary things is people and make sure we have the right people, with the right pay plans, we have the right products and we have the right process.

And so we've been focusing on all three of those areas. We knew that we had the incremental opportunity there and we feel like right now we’re finally starting to see that execution happen and we feel confident that we can continue to do that for the remainder of the year..

Got it. Thank you..

Thanks Paresh..

Thank you. Our next question comes from the line of John Murphy with Bank of America-Merrill Lynch. Please proceed with your question..

Good morning. This is Liz Suzuki in for John. Regarding inventory, your day supply in new and used are pretty significantly and you talked about the stop sales for vehicles without sending recalls.

Could you just go into a little more detail about where brands were affected and how many vehicles are currently on the lot that have these recalls outstanding?.

Sure Liz. This is Bryan. Like we mentioned in our comments, new was up 16 days to 78 days supply. Our used was up four days. What we're really seeing is and we think it's going to continue for another couple months, but we believe in it will start to loosen these stop sale orders.

So a little more color on that is, in new vehicles it's Civic, B2 TDI, as well Toyota GM and now it appears that Nissan maybe announcing something in regards to stop sale. On the used side, CR-Vs, fits on Acura and in Acura TL, RDX and RL are all in stop sales which is a good portion of our used vehicle sales in those areas.

BMW X5 and most 3 series are on stop sale, as well again is more BWs, and if you've been following the press on that, this has been occurring for about 90 days now.

Most of the manufacturers are supporting us with flooring assistance, but those cars have built up because they have asked us not to wholesale those vehicles, as well to ensure that they as certified dealers get those sales eventually.

So we really believe that there is a pretty good pent-up demand on those vehicles and will start to break loose in that May, June, July timeframe as those parts become available..

Okay. Thanks. It's really helpful. And looking at the acquisition environment, do you think it's – it looks little pricey at this point into share repurchases seem relatively more attractive and should we therefore expect maybe some lower contribution from acquisitions this year.

I mean even excluding DCH, but just fewer acquisitions of one and two franchise businesses?.

Liz, Bryan again. The acquisition market is, I mean it continues to build momentum, there is no question about it. The prices are however pretty steep and we are pretty disciplined on what our hurdle rates are on acquisitions.

So unless it's that that opportunity that truly underperforming our average performing that we can believe we can double or triple the profitability, we’re going to sit and balance that with share buyback at opportune times when there is price disconnections in relationship to what we can invest on new acquisitions.

And I think that we'll see in the coming quarters and years opportunities still, I wouldn’t say that it’s going to slow but I do think that we’re pretty picky. I mean again when we look at acquisitions, we look at approximately 10 to 15 acquisitions for every one that we’re able to buy.

Well that's a pretty type filter to be able to accomplish those and right now there is a ton of acquisitions and I think as the market begins to plateau, local markets begin to change and people can see that maybe earnings for the next two or three years are reaching their potentials, then they are going to look to sell and I think we’ll be sitting there ready with open arms to join them into our organization.

In terms of large groups, there is a lot of activity on those currently. I think many of you saw a large Northwest group that announced a couple of weeks ago. That was obviously - it appeared pretty pricey, it’s a wonderful group but it just doesn’t fit our ROE thresholds when they are performing at a high level..

All right. Thanks very much..

Thank you. Our next question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed with your question..

Hi, thank you. Good morning. The question I want to touch on is with the stop sale if you will. What is the implications on the service of the business as we move forward into the next quarter or two. And what is that imply for sort of the mix between customer pay and warranty in your availability to continue to perform all these necessary repairs..

Good question. Always the glass if half full, right, Tony. I think as these parts begin to hit the ground, I think initially we'll be fixing consumers' cars, because there are many people out there that are either in loaner cars or are sitting waiting for those parts. So we'll be fixing those first. And then we’ll be fixing our stop sale vehicles.

Now to keep that in perspective, last quarter we had a 19% increase in warranty parts and service sales which is big. I mean that five quarters is going to row a positive comp. We believe that when the airbags and the igniters start to come in, that should be as robust or possibly even more.

If you recall we've talked in the past about workloads and it's really availability of productive time. So there are limitations to that but I think the idea that there is more warranty work out there for the next quarter or two, and the implications that are pretty large.

I think we are staffed up to be able to handle both that and customer pay, which was up 8% for the quarter, as well the fact that units and operations continue to grow quarter-by-quarter. So there is a lot of upside in that arena especially as those parts begin to trickle in..

Okay. And then if I can just follow-up then on the inventory.

How do you gauge the real demand of what you're seeing today? I understand that you don’t have certain unit, so inventory is building but from the customer standpoint are you getting the sense that there is, there would have been demand to absorb the volumes that you have today or is it a little bit soft or has weather impacted anything.

Just kind of little bit more color on what you’re seeing from the end user?.

Sure Tony, this is Bryan again. The demand is strong. I mean we have backlogs of consumers waiting for those stop sales vehicles especially the CR-Vs and Civics and some of those nice older BMWs that are sitting there, that would have sold if they weren’t there.

And I think the implications of frozen capital on your lot creates actions by managers in the stores that impact SG&A and I think those stop sales have mental effects of too much inventory whether or not the rest of their inventories are turning or not, that can affect SG&A in ways that are negative.

And I think once those cars start to be relieved in their pipeline and the loss become empty again, I think everything begins to more rationally control cars and more rationally look at margins to be able to continue to grow where we left off in the previous quarters..

Okay. Very helpful. Thank you for your time..

Thank you. Our next question comes from the line of Brett Hoselton with KeyBanc. Please proceed with your question..

Good morning, Bryan, Chris, John and Sid. Bryan, do you want to take a stab at trying to guess at the impact of stop sales on your new vehicle same store sales. Europe is nearly 5% kind of same store basis.

Any guesses to what that might have been and if you didn’t have the stop sales and I know it’s a tough question but any thoughts there?.

I’m probably as good at lagging thing as the next but I probably fair a couple of percentage points of new maybe a little higher unused..

Okay.

And then given the entrepreneurial nature of your business model, which I'm a component of, how do you control that SG&A spend that you’re talking about?.

Yes Brett, this is Chris. I think we continue to do is leverage the same tools that we’ve had for the last several years. I mean we have two primary expenses that drive our SG&A as personal cost and advertising.

We evaluate that on a store-by-store basis and we work with our original teams and the individual store general manager to help at least highlight the opportunity and discuss the ramifications of continuing to run it to the extent levels they have if they don’t have the growth.

But our first approach is always identify if there’s ways to generate additional growth with the cost that they has, and then if there is not, then we’ll talk about cutting the cost. But - and again we have 140 stores that we’re looking at.

We went through the quarter, we evaluate them, we find our top opportunities and then we work with our regional teams and individual store leaders to work on addressing that..

Brett, to expand on that, we’re are approaching each individual department and each individual store to be able to find us opportunities and I think it's important to realize that this is not a global issue, this is a local market-by-market, department-by-department issue.

I could give you a little bit of color of where we’re feeling some of the pressures and where we are responding to these changes. Alaska was up 4% in revenues and down 18% in profitability year-over-year. California in contrast very strong market was up nearly 15% in both the North and the South regions and pretax was up almost 10%.

Oregon was up 11%, pretax was up 10%. Texas was flat in sales, in fact down 1% and profitability was down 20%.

And I think if I went into the individual stores within those days, you would see that it is a people equation, it’s an entrepreneurial equation that those that are looking at this as an opportunity to take market share, to leverage the fact that there is a greater supply of used cars out there than there has been anytime in the last five years, that your units and operations is growing every single day.

And then manage your expenses when you attack those three components, the opportunities are strong and those stores are getting the 50% plus throughput and achieving what their forecast are. The DCH store in both Southern California and the Northeast are realizing the throughput.

They are aggressively pursuing their opportunities and showing nice gains still around the same track they were on. Many of the Lithia stores are doing the same thing but there are pocket in both divisions that are feeling the pressures and haven’t responded as rapidly as they probably could..

Thank you, gentlemen. And then finally, as you kind of consider the M&A market, obviously the deal flow is pretty good, you mentioned the prices are somewhat steep. As you kind of net all of it out and you think about your past experience in the M&A markets in terms of dollars and so forth that you’ve been able to acquire.

What's your general sense going forward? DCH is a bit of anomaly, has a very large acquisition, so taking that out of the picture, what’s your sense going forward do you think that you’re – we should expect a deceleration in terms of your net M&A activity or do you think it's still going to be unparallel with what you’ve done over the past few years or might it actually accelerate kind of net-net what are your thoughts there?.

Brett, I really believe that it's market dependent. I mean we don’t plan on changing our ROE thresholds. So we’ve done approximate eight deals in the last 12 months. So that's the pace that I’m pretty confident that we can maintain. I think if we go back 24 months and we include 2.5 billion from DCH that maybe is a little less realistic.

But I also believe that the DCH combination provided an opportunity to attract people and to expand our presence to now nearly twice as many opportunities as we had before. And I think we’ve always spoke to the idea that there may not be another DCH type combination out there. But to be fair I think this year could be.

Now it may not be the magnitude of $2 billion in revenues.

But I believe that the opportunity for a group that's performing at an average or slightly above average performance can combine with us and together we can find the synergies, give the authority back to the stores and create detective measurement that managed trends and finally opportunities in earnings that allow both sellers and us as buyers to be able to add value to each other..

Thanks Chris. Thank you very much. Appreciate it..

Thank you. Our next question comes from the line of Jamie Albertine with Stifel. Please proceed with your question..

Great. Thanks for taking the question. Good morning everyone. Wanted to just ask if you could help jog our memory with respect to compares. I recall and John helped us with this little bit, John North historically thinking about incentive, trends among the domestics.

One thing that jumped out was your operating income performance for the domestic segment in the first quarter was down a little bit more than we thought that it might be.

Can you help us understand what you were lapping in the first quarter and then how the compares will trend and what considerations we should keep in mind from the second quarter? Thanks..

Sure Jamie, this is Bryan. Really our pressures have been felt in the domestic. We averaged $255,000 per unit which was down $216,000 from the prior year. That was about 5.4% gross margin minus 70 basis point year-over-year. Units though were up 2%, the implications is stair steps.

You do reach plateaus where they became difficult and I think some of the stores have chose not to play that game, we still believe that it is the right game to play and manufacturers are taking the right approach.

But sometimes they can get the carried out a little further than our stores can see and I think that will be adjusted in the coming quarters because I don’t believe many of our domestic manufacturers to achieve the targets that they expected retail wise either and I think we’ll get the benefits of that in the coming quarters..

Okay. Great.

And there wasn’t any one stair step program or anything that sort of jumps out in your mind from the first quarter or that you recall when you think about the second quarter compare?.

No. We cherish our relationship with our manufacturers that we tend to globalize when it comes to stair step there, the implications of stair step..

Understood. And then if I may just a follow up related to the broader supply chain just in light of what we we're hearing out of Japan with the earthquake and ramifications thereof, you talked about stop sales already, which by the way thank you for all that details. It’s stunning how many vehicles that crosses how many brands.

And now with flooding at least in the Eastern side of Texas, which may not be as much of an exposure to yourselves, but help us understand what you’re seeing perhaps more from the import side here and how we should think about modeling import contribution in the second quarter?.

Jamie, Bryan again, the earthquake is very minor in terms of the implications it will have on supply. If you recall we do have stop sales that are sitting there, which has increased our day supply in import, luxury and domestic. So those will start to free flow within the next couple of months.

So I think the balance of the two probably is a net positive in terms of supply. So I don’t think there is going to be the implication. I do believe that the demand will be there.

It sure appears in most of our markets that there is a robust environment that the best that we’ve seen in our lifetimes and I think that will continue and a good portion of our markets and like we stated in the past, markets that are maybe energy based, are starting to feel the pressures of it and it's how this management team and our store leaders that have the autonomy to respond to those their individual local conditions that will drive our performance in the future..

Okay. Great. I’ll get back in queue, but thank you so much for taking the questions..

Thanks Jamie..

Thank you. Our next question comes from the line of Will Armstrong with C.L. King & Associates. Please proceed with your question..

All right. Good morning, gentlemen. On your segments breakout, corporates had a pretty big increase.

I was wondering if you could flush that out for us a little bit?.

Yeah Bill. This is John.

I can give you a little bit of color offline, but the biggest change is really related to some insurance proceeds that we saw earlier to a fire that we had at one of our locations that was closed and that was several million that wasn’t allocated to any particular division because it was a body shop, but that was the biggest change.

Other than that, it's just normal increase as for internal rent adjustment..

Okay. Got it.

And then on the stop sale on the recalls, is that primarily airbags or are we looking at some other parts as well and what’s the outlook in terms of those parts flowing into your dealerships?.

Bill its igniters and airbags and that they’re starting to flow now which is a good sign. They expected it was going to be a mid-to late summer, but we’re already starting to see them now late spring, which is wonderful. We stored in some computers, but it’s a small amount as well..

And what sort of I guess compensation or other breaks are the OEMs providing you and other dealers as a result of this?.

So depending on the magnitude, they could be providing flooring assistance.

They could be providing depreciation assistance on used vehicles that are frozen and then there is also slush funds with manufacturers such as Volkswagen or others that allow you to really maintain your customer's attitudes or allow you to put them into loaner vehicles if there’s extreme cases especially in those high humidity states, which is really for us it’s just really Texas and Hawaii, but those are the three main things that they are able to provide us..

Okay. Got it and then finally on subprime, could you update us on the percentage of sale to subprime customers in the quarter and what are you seeing out there? We’re hearing that some subprime portfolios are starting to see increases in delinquencies in the fall rates.

So I was just wondering what you guys are seeing in terms of sub-prime financing?.

Yeah, hey Bill, it’s Chris. So about 13% of overall finance deals are to sub-prime consumers, which is flat on a year-over-year basis. So we feel like things are relatively stable right now. And no real trends to talk about..

Okay. Great. Thank you..

Okay. Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question..

Good morning, guys..

Hi Steve..

Hi Steve..

I would like to drill down in the used a little bit, obviously Manheim has softened a little bit in your expectations for margins there, particularly lower as well for the remainder of the year.

Could you just talk a little bit the dynamics there, what you’re seeing? Obviously a lot off leads coming this year, how you’re managing that and making decisions around that?.

Sure Steve. This is Bryan. I think the softening of Manheim index is a positive thing that usually indicates that supply is loosening. I believe our stores are feeling that as well. Our turns on used vehicles are actually pretty stable, despite the stop sale vehicles, when you remove those.

What we are seeing though is that the value auto vehicles are still tight. They're still difficult to get. I believe -- let me give you some specific numbers here. So our revenue mix is about 14% value out of 52% core and 34% certified units are 23.50% and 26%. So about a third, or a quarter, a quarter and half.

Our value auto vehicle gross profit was down 1%, whereas bout core and certified were up 10%, which gives indications that the supply of those vehicles, we’re finally to get the cars that we need and more importantly able to be more discerning in our choices of those cars to find the demand cars, which is where is where we build our gross profit.

I think that can continue, but it’s still tight in our core and value auto and over the coming quarters and years I believe that will continue to happen. You did notice that we stepped about eight units further towards our 75 unit goal as well from 56 to 64.

So we think that 75 is now maybe let’s call it near to midterm rather than midterm like we've always been saying and I think we’ve seen some nice increases in a dozen stores or so and we more than ever see that it's people, inventory and the ability to attract the customers that are looking for those vehicles and I think that will continue..

Got it. Very helpful. Thank you. On the parts and service side anecdotally, we've heard more and more about a shortage of tech.

Are you finding that in any of your markets? Is that an impediment at all, or you haven't success there?.

Steve, Bryan again. What the last 6 to 12 months, our big problems has always been in Texas and Alaska and that loosening. We're starting to be able to get tech. I really believe that that’s where we’ll continue to grow and most of the other markets have been stable throughout..

Got it. Okay. Thanks guys..

Thanks Steve..

Thanks Steve..

Thank you. Our next question comes from the line Rick Nelson with Stephens, Inc. Please proceed with your question..

Thanks. I want to follow up on the commentary about Texas. I believe it looks as sales were down 1% and pre-tax down 20%.

So that market seem to be getting sequentially more difficult and if you could talk about your flow through there also I think 37% growth goes to corporate versus your target 45% to 50%, I believe is helped in the energy markets were significantly below that?.

Good question, Rick. Texas has been flattening, there is no question. Your recap of those numbers is correct. A little more color on it would be the gross profits in that state. So despite dollars, revenue is being up or down 1%.

Our gross profit was down about 6% and that was down to 20% that talked to, which means the throughput is not looking good, but I will say this. We have a handful of stores and I think we have 16 stores in Texas.

There is approximately five or six stores and they're actually fairly season stores that are really the ones that are struggling with adjusting to a tougher new car market and replacing those sales with used vehicles and I think the misnomer that we all find ourselves and get trapped into is, well if the new car market is tough than the used car market is tough and I think the Texas markets have been so strong in new vehicle sales, that used cars have become secondary over the last five to ten years.

And I think now they’re having to retrain themselves on how to go find the used vehicles and teach their sales people how to sell those used vehicles and more importantly how to attract the customers back into a store that wasn’t known for used vehicles and that takes some time to adjust, but fortunately those stores are responding.

They understand that the supply chain is more robust than ever and they can look outside the Texas market to obviously find those vehicles and I believe that they can adjust to it in the coming months and quarters..

All right.

It's good color but also I’d like to ask about the 2Q alright those might relate to which is on the first quarter a lot of the dealers that we speak to had a tougher March and wondering if that’s something you guys saw and what’s incorporated into the guidance and maybe what you’re seeing in April is that reflected in the guidance or April has five weekends, would you expect that to be a better period?.

Good question Rick. This is Bryan and I'm sure Chris will have a quick follow-up as well on guidance. March was a little bit softer than we expected especially coming off fairly solid January and especially February.

March seemed to not have quite the volume that maybe we were driving for when you looked at a year-over-year basis and some of that could come from a difference in days and that maybe caused many of our stores to overestimate what their SG&A was going to be.

The good news is it appears that April is on track and I think that balance between the March and April every store has one of those months that seems pretty good and it seems like that’s what’s happening again this year and we expect things to look solid in the future. Chris do you want to talk a little bit about guidance..

Yeah hey Rick, as Bryan alluded to earlier, every market is unique and we definitely saw some real positive trends in a number of the markets that we have in March and as we look forward towards our guidance and lay that out in our presentation, we do use as much information as we can prior setting those numbers.

So we’re midway through April and are leveraging everything that we’re seeing right now in the numbers that we laid out in both new, used and servicing parts. So I’d say that that’s the opportunity top line and we’re confident we can achieve the numbers that we gave you.

And as I alluded to earlier, what we didn’t do is forecast the big improvement in our leverage and our SG&A throughput over what we saw in the first quarter. We’re confident that we can execute on that.

We got people in the field going store by store, identifying those opportunities and working specifically with those stores that have opportunity to improve their cost and leverage of where it sits today, but that is not baked into the guidance that we have for the remainder of the year. So….

Rick, Bryan, just one quick follow-up, I think as a company, we're always a glass that's half full. So we’re always looking at the opportunities and despite us not achieving the throughput that we typically have been accustomed to, I think we also look at that 17% opportunity.

If we would have 15% throughput it gives us the excitement to be able to wake up each morning and go find it and I think those are the challenges that this management team faced over the last eight years and I think that challenge is what excites everyone and I do know this that our personnel that our managing our departments and our stores have the ability to change very quickly and are well prepared for this challenge.

And I think whether their market is still up or whether it started to plateau, they're ready because they're empowered to take action and in those areas where they haven’t, then as Chris said, our field teams will help challenge them and point out the opportunities to be able to capture it as the market begins to adjust. .

Great. Thanks a lot guys and good luck..

Thanks Rick..

Thanks Rick..

Thank you our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question..

Hi good morning.

Follow-up a little bit on Rick’s question and I appreciate that Texas was flat year-over-year, but sequentially have you seen any improvement as the trajectory of energy has improved somewhat from the trough levels earlier in the year?.

This is Bryan again. I think its static from where it’s been the last few quarters. I think the small increases into the mid $40 a barrel range will help over time because I think they’ve indicated that $30 to $40 is kind of where they can breakeven and they can kind of hold firm on the number of pump jacks that are out there.

Anything beyond that, they start to drill again, which we think is an exciting thing that could happen and we’ll walk through that. More importantly, it’s still easy to forget that the used car opportunity in Texas, we’re and I don’t have the exact number, but I think we’re like 0.5, 0.6 to 1 in Texas in our used car sales.

So that’s our big opportunity in Texas and obviously their units in operations are growing at exorbitant amount because they’ve had the biggest boom. And I think their ability to meet the customer's need in a timely and cost effective way in the service apartments will create a turnaround there despite what happens with oil prices..

Great. And I might have missed this.

Did you quantify the 16 days new inventory growth, how many were related to stop sales?.

So the increase, I can probably quantify that it’s probably half from stop sale and the other half would be luxury focused on yearend build-out and some model endings that we had to take some additional products that we’re still working through..

Okay.

And then one last question, 22% collision growth what happened there?.

To be fair, we had three body shop managers that two of which we promoted, one from the outside that have really taken hold. A lot of that again is in Texas on a positive note, so….

Okay. Great. Thank you..

Thanks Bret..

Thank you. Our next question comes from the line of Michael Montani with Evercore ISI. Please proceed with your question..

Hey good morning. First I wanted to ask if I could just about the reduction in guidance for service gross profit rate, even though the dollar growth is up in terms of sales dollars.

A little surprising to me just because I was thinking you get better absorption and labor hour scheduling, but then there was actually a 30 Bps reduction in the guidance there.

So can you just help flush out a little bit what would have changed there in the thinking?.

Yeah Michael this is Chris. One is looking at current trends it’s kind of equal to where our overall fixed margins are coming in. A weighted portion of that’s going to go towards the body shop, which has a gross profit margin about 20 or 15 basis points lower than our CPM warranty work.

And so as we improve that business and get that back on track, it’s going to weigh down our overall GP margins, but what we guided for the year is really consistent also of what we saw in the quarter and no overall changes that we’re anticipating on that..

Okay.

Got it and then if I could on used, the reduction there in gross profit and also the step-up in inventory, is there any way to quantify and maybe Bryan or Chris how much of that was stop sale?.

This is Bryan. I'm pretty confident that we would had a reduction in day supply that wasn’t for the stop sales. So it’s definitely at least a 100% of the four days because we know that in many of our haunted stores, we have 20%, 30% of our inventories that have frozen because of [CRVM and fits]..

And then on the gross profit outlook that's been lowered on growth is there for used, is that primarily related to the inventory build for stop sale or is there anything else going on there?.

I think that is a combination of both. I think that certified is the area that we’re filling at the most.

We were down $240 per unit and I think that’s a function of a greater supply, but ultimately that’s the top of our waterfall effect and that’s where we have to be able to capture those core products that eventually lead to the highly profitable value auto. So we're willing to sacrifice that in the short term..

If I could lastly, could you just split out what the comp trends look like? I think 7% total co. I'm sorry 8% total co same-store, but could you give us a granularity into DCH versus core with you..

Yes Michael, Chris. We're not breaking out that comp at this point in time. I think that again it's store by store and trying to break it out by division. This is fair to say, they were comparable in the two divisions.

The difference was that if the throughput at Lithia was a little softer, then the throughput at DCH that was robust, but they're also coming up, now they're second year of being able to find those cost advantages and I believe that DCH will continue on that and I think Lithia will again capture that $0.17 or so opportunity that was really out there that hasn’t quite been responded to, but we're on coming quarters..

Thank you guys for taking the questions..

Thanks Michael..

Thank you. Mr. DeBoer, there are no further questions at this time. I would like to turn the floor back to you for any final remarks..

Thank you for joining us everyone and we look forward to updating you again in July..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..