Bryan DeBoer - President and Chief Executive Officer John North - SVP and Chief Financial Officer Chris Holzshu - EVP and Chief Human Resources Officer.

Chris Bottiglieri - Wolfe Research John Murphy - Bank of America Merrill Lynch Michael Montani - Evercore ISI Irina Hodakovsky - KeyBanc Capital Markets, Inc. Richard Nelson - Stephens, Inc.

Steve Dyer - Craig-Hallum Capital Group William Armstrong - CL King & Associates Bret Jordan - Jefferies Derek Glynn - Consumer Edge Research David Whiston - Morningstar Brian Sponheimer - Gabelli & Company Inc..

Good morning, and welcome to Lithia Motors’ First Quarter 2017 Conference Call. Management may make statements about future events, including financial projections and expectations about the company’s product, markets and growth.

Such statements are forward looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. The company discloses material risks and uncertainties in its filings with the Securities and Exchange Commission.

The company urges you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. Management undertakes no duty to update any forward-looking statements, which are made as of the date of this release. Management may also discuss non-GAAP financial measures.

Please refer to the text of the earnings release for reconciliation to comparable GAAP measures. Management will provide prepared remarks and then open the call for questions. I will now introduce Bryan DeBoer, President and CEO. Mr. DeBoer, you may begin..

Good morning, and thank you for joining us today. On the call with me are Chris Holzshu, our Executive Vice President; and John North, Senior Vice President and CFO. Earlier today, we reported adjusted earnings of $1.78 per share, or $45 million for the first quarter.

Through a disciplined acquisition strategy and strong operational execution, we’re pleased to report our 26th consecutive quarter of record earnings per share. We grew revenues 13% and adjusted earnings 12% over last year, while considerable room for improvement remains. On a same-store basis, total sales grew 3%. New vehicle sales were flat.

Retail used vehicle sales and F&I, both increased 6% and service body and part sales were up 8%. Our ability to drive substantial increases in earnings from our base business, coupled with a robust acquisition market positions us to win in either a growing or contracting new vehicle market.

To ensure that we thrive now and in the future, innovation is generated at all levels of the organization and executed with an experienced profit focused and aligned management team. Since 2010, we have grown our revenue four-fold and our EPS seven-fold, all while currently maintaining a leverage ratio of less than two.

The rapid expansion we have undertaken has propelled us to the fourth largest auto retailer in the U.S., with aspirations to continue this growth. The ability to flex our balance sheet coupled with our free cash flow provides capacity to continue acquisitions at a similar or accelerated cadence in 2017 and beyond.

As one of the fastest growing companies in the Fortune 500, we are committed to continue expansion. We are at the Nexus of two industries; retail and transportation that face continued evolution, which will bring considerable opportunity.

Our growth provides us with the scale, the capital and the partnerships to lead the change affecting our industry, as we focus on helping customers with a range of personalized transportation solutions.

We see a path to grow our company another four to seven-fold, while leveraging our existing operational strengths and creating new ways to serve our customers. Our entrepreneurial culture remains a competitive advantage for attracting and retaining talent, creating innovation, and generating exceptional profitability.

Each store and every team member is empowered and challenged to exceed our customer’s expectations. As a result, we have many diverse models being deployed throughout the company with exceptional support at the store level.

This results in more engaged employees, a favorable customer experience, strong manufacturer relationships, and improved financial results. We’re also eager to continue to apply our expertise to other complimentary businesses to diversify and capture ancillary revenue streams.

We remain driven to constantly improve our customer experiences, our team members’ lives, and to enrich the communities that we are a part of. With that said, the opportunity to consolidate dealerships has never been greater and will continue to grow through strategic acquisitions, as we seek dominant franchises with significant upside potential.

This allows us to purchase at attractive forward multiples and generate compelling returns on investment as we integrate each location. These acquisitions provide the internal dry powder to continue to grow the organic earnings of our base business as they are rebuilt, integrated and improved.

Over time, our local entrepreneurial leaders can realize improvement through strengthening their teams and improving experiences with our customers. Operationally, we continue to focus on the blocking and tackling that have been behind our 26 quarters of record performance.

Our manufacturer partners can count on us to further increase market share in new vehicle sales, which currently stand at a 112% of the expectations with our sights set on the levels of some of our higher-performing stores that are achieving nearly 200%.

We sold 66 used vehicles per store per month, up from 64 units in the comparable period last year. We continue to make incremental progress to our goal of 75 used units. Most importantly, we look forward to increasing this goal in the near future, driven by an increasing supply of vehicles entering the marketplace.

The past half decade of results have been stunted by the lack of vehicle supply, a trend which is finally reversing. We continue to improve customer retention in our service departments and benefit from an increasing number of units in operation to provide the bedrock of our profitability.

Our fixed operations make up the largest portion of our gross profit at north of 30%. Despite the noise in the marketplace around credit, plateauing SAAR and used vehicle valuations, our fundamentals remain sound. The retail environment is healthy, and the outlook for our future remains bright. With that, I’ll turn the call over to John..

Thanks, Bryan. All numbers from this point forward will be on a same-store basis. In the quarter, new vehicle revenue was flat. Our unit sales decreased 1.4%, slightly lagging national results, which decreased 1.2% from the prior year, resulting in a quarterly SAAR of 17.3 million units.

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

Our used-to-new ratio was 0.88:1. In the quarter, certified units increased 1%, core units increased 6%, and value auto units increased 5%. Gross profit per unit was $2,278 compared to $2,346 last year, a decrease of 68. Our F&I per vehicle was a record $1,353 compared to $1,291 last year, or an increase of 62.

Our penetration rates increased for service contract and lifetime oil. Of the vehicles we sold in the quarter, we arranged financing on 73%, sold a service contract on 45% and sold a lifetime oil product on 27%. In the first quarter, the blended overall gross profit per unit was essentially flat at $3,496 compared to $3,502 last year.

Our service, body and parts revenue increased 8% over the first quarter of 2015. Customer pay work increased 7%, warranty increased 9%, wholesale parts increased 6%, and our body shops were up 11%. Our total gross margin was 15.5% unchanged from the same period last year.

As of March 31, consolidated new vehicle inventories were at a day supply of 76, a decrease of two days from a year ago. Used vehicle inventories were at a day supply of 50, a decrease of three days.

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

We’ve taken advantage of the volatility in our stock for some opportunistic share purchases. Since March 31, 2017, we have repurchased approximately 136,000 shares at a weighted average price of $81.60. Year-to-date, we have repurchased approximately 198,000 shares at a weighted average price of $86.41 per share.

Under our existing $250 million share repurchase authorization, approximately $176 million remains available. Our free cash flow, as outlined in our investor presentation, was $62 million for the first quarter of 2017. Capital expenditures, which reduced this free cash flow figure were $16 million in the quarter.

We predict free cash flow after capital expenditures of nearly $200 million in 2017. This cash flow coupled with a significant availability on our credit facility and through unfinanced real estate, means we remain in good shape to accommodate incremental investments in both our own shares and an additional acquisitions as opportunities arise.

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

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

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

To continue to improve earnings in our store base and to support the significant acquisition cadence we have established, we continue to elevate and grow our most important assets, our employees.

The distribution of performance in our store base is significant and improving results for our organization requires mentoring, developing and recruiting the best talent in the industry. Much of our focus in the coming months and quarters will continue this effort to allow us to be agile and adaptable to our customers needs in an evolving industry.

Our first quarter adjusted SG&A as a percentage of gross profit on a same store basis was an estimated 70.9% unchanged from the first quarter of last year. On a consolidated basis, including the effect of recent acquisitions, our adjusted SG&A as a percentage of gross profit was 71.1%.

As easily identified by our measurement systems, the distribution of performance with our store base on an SG&A as a percentage of gross profit is immense. Approximately, 13% of our stores have SG&A to gross of under 60%, while 28% of our stores have SG&A to gross over 80%.

With $1.5 billion in gross profit, small changes can have an exponential impact on our bottom line. Our largest line item in SG&A is personnel expense, where we invested nearly $164 million in the first quarter of 2017, and we’ll annualize to a number greater than $650 million.

As our stores improve productivity and leaders unlock ways to increase efficiency, we can manage this cost down using our transparent best-in-class measurement systems. This allows our stores to quickly manage trends and inspire all levels of the organization to improve.

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

Operator?.

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from the line of Chris Bottiglieri with Wolfe Research. Please go ahead with your question..

Hi, guys. Thanks for taking my question. Just wanted to dig on your - hey, I just wanted to dig on your rural strategy.

Did it - like, is there any way you could maybe quantify us how your rural stores are performing relative to your larger metros? Just wondering with the inflated inventory levels like, if there’s any differences there?.

You bet, Chris. This is Bryan. Our rural strategies, which is primarily the Lithia Division is still operating at about 56% SG&A to gross. Their operating margins are a little north of 5%, and we continue to grow in those size markets.

In terms of inventories relative to those numbers, we’re down a couple of days on both new and used vehicles, which is what we like to see at this time of the year. It helps to build and retain gross margin and keep the attrition in the [indiscernible] as we call it out of our gross profit. So all things are looking pretty good.

That relative to the metropolitan areas, which are growing, which is primarily DCH in the LA market and the New York City suburbs are just over about 2% operating margins and about a 84% SG&A. So lots of room for upside there.

They’ve come a long ways, but we’ll continue to be able to grow that business in not only our rural markets, but in our metropolitan areas..

Okay, that’s really helpful.

And then just dig in on SG&A a little bit, I think last quarter you quantified, I wasn’t really quite sure it happened, but you were quantifying some kind of accrual that you were facing in Q4, does that repeat in Q1 and then separately a sub-facility cost kind of bumped up a little bit this quarter, any kind of one-offs we should think about?.

Yes, Chris, this is Chris. I don’t think anything really to call out differently in the current year.

I mean, we had some adjustments in the prior year if you are looking at it on a comparison basis on the facility side, but I think ultimately we had a pretty clean quarter and our goal is to continue to maximize the opportunity of those stores that we mentioned that are over that 80% SG&A to gross this and really what it comes back to in that case is people and productivity, so we are going to continue to focus on that area and continue to push that number down..

Okay, that’s helpful. Alright, thanks a lot for the time, I appreciate it..

Thank you..

Thanks Chris..

Our next question comes from the line of John Murphy with Bank of America. Please go ahead with your question..

Good morning guys. Just a first question on F&I which was reasonably strong in the quarter and seems to be the one factor that is leading to your, sort of your slightly higher guidance.

I’m just curious, you know what is driving that? If you see any risk as interest rates ramp up and obviously it seems like you are probably not, I mean, as you are seeing more opportunity there, so what’s giving you that confidence to raise that range about $15?.

Yes, John, good morning, this is Chris. I mean it all goes back again to performance, I mean over the last three years, we’ve integrated about $4 billion in strategic acquisitions or over 60 stores.

And one of the things that we see in most acquisitions is a lot of F&I opportunity and so the disparity that we have between really our seasoned stores that are running F&I, PVR consistent with what our peer group is doing and some of the more recent groups that we have is still significant.

And so our goal is not to continue to raise the top, but really focusing on maximizing the opportunities that we have on our more recent acquisitions over the last few years and we see a steady increase each quarter and we keep focusing on making sure we have the right products, the right people at the right price and we feel like that upside should continue..

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

Yes, probably the best F&I stores we have are you know 2000, 2200, 2300 and per copy and then on the low-end on some of the recent acquisitions that we have are just north of $500.

So, a pretty large disparity between them and it’s our job to go in and make sure that we can provide and identify the opportunities that improved our performance, but there is a lot there and we are confident we can execute that?.

That’s greatly helpful.

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

John, this is Bryan. Thanks for your questions. I think we are not seeing large changes or any type of scenarios that we believe in the next coming quarters are going to change dramatically. We typically see pretty stable incentives throughout the summer months and as we begin to move into the fall is when incentives start to accelerate.

I think as we start to look at the build of vehicle, we’re obviously still overproducing for what the current SAAR run rates are, which does lead to those incentives, but fortunately we’ll be able to be rewarded for those if our inventories are in a controllable position, whereas each individual market can respond separately based of the value proposition that each of those individual stores has created for their individual markets and the consumers..

Okay that’s helpful.

And then just lastly on parts and service which is particularly strong, it looks like all buckets, customer pay, warranty, wholesale and body shop were all very strong in the quarter, I’m just curious, is there anything going on in the market that is driving this? I mean obviously it sounds like supply is increasing available cars to service.

From the market perspective, what you’re doing to drive that and how sustainable these very high same-store sales comps are in parts and service?.

John, Bryan again. I think that’s a good realization that what’s needed is all four of the buckets that drive fixed operations, we are pretty balanced. We are coming off a numerous years of what mid-teens to even into the 20 percentile range on warranty. Same store sales growth, now that that’s subsiding slightly, we were up 9%.

It appears that we’ve been able to attract a new customer base through that warranty work and those recalls that are now sticking with us.

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

Impressive stuff, thank you very much..

Thank you John..

Thanks John..

Our next question is coming from the line of Mike Montani with Evercore ISI. Please go ahead with your questions..

Hey guys, good morning..

Good morning..

Just wanted to ask if I could you know on the new vehicle side for a moment, the decrease there was a little bit below the flattish run rate we had seen from the industry and I can’t really remember the last time that had been the case for you all.

On the other hand, gross profit dollars per unit were down a little bit less than we thought, down three.

I guess the question is, you know how are you all thinking about the need to continue to take volume in the stores to be able to do better acquisitions? Is there any shift strategically in how you’re thinking about balancing GPU versus units? And also can you just talk about regionality, you know Texas versus say the Northeast et cetera?.

Mike, Bryan. A great question and I think as we reflect back on the quarter and then look forward to what’s occurring in many of our marketplaces, I think the way that we look at deal average is primarily different than how many look at it. We’re a growth company that’s building relationships and growing relationships with our manufacturers.

In fact, we have positive relationships with each manufacturer in approvable scenarios with all but one or two, which those we have strong enough foundations that the idea is that we will have their support for growth are pretty well cemented.

The volume proposition comes that we really believe that volume is what creates the lifecycle of the consumer and it starts with that new car sale.

Now, we will talk about it at 6% margin in new cars, it contributes only a fifth of our gross profit in our company, so it’s a small amount, but that contribution is what generates the trade-ins that generate the service and parts business in both new and used that creates that future opportunity to sell that next vehicle.

And as we look forward, I think the ideas of margins are not really part of our formula, it’s more that it’s creating stability for our future, so we’re really focused on that in terms of market share and penetrating the market to capture as much customer base as we possibly can.

If we look at the state question that you had given us, we are starting to see that in our energy-based states they are stabilizing which is great.

More importantly than that, in March and I’ll give you some quarterly numbers, but in March we saw in Texas finally that they’re starting to sell used vehicles which is a concerted effort on our management team to go back in with that store leadership and help them understand that critical cog in the lifecycle of a customer and the total model of auto retail of where it generates profit.

So we had a pretty good month in March in Texas which is our first good used car month in probably 40 months, 35, 40 months, so it’s been a bit. But in Alaska, sales were down about 2%, but earnings were flat. In Montana, sales were up 3% which was great to see and our earnings were up 9%.

In Texas, we were down 4% in sales and earnings were down 12%, however in March we were flat in earnings, which was a good indication that we may be peaking out.

And all signs in Texas are that the confidence in not only our team, but the consumers coming into the stores feel stronger and they’re talking about being back to close to full production in the oilfields.

They are obviously probably doing it more efficiently they may did three to five years ago, but people are back to work and starting to generate disposable incomes which they can then use to buy their initial car or second cars..

Great, thank you for that color. If I could just follow-up, can you discuss a little bit you know what you’re seeing in terms of the acquisition pipeline out there.

How willing are the sellers coming to market and also with multiples, what you are seeing?.

Sure Mike, this is Bryan again.

You somehow know where my love is, don’t you?.

Yes..

I think when we think about acquisitions at Lithia Motors, this is something that perpetuates in each and every leader in the organization, here in Medford or in the stores and it’s a day-to-day process that each of us are looking for growth opportunities. If we look at the physical market, it is the most robust market that we probably ever seen.

We believe that pricing is starting to equalize where sellers are asking relative prices to what buyers can be expected or willing to pay and I believe that the coming quarters and years will be a good acquisition climate.

More importantly than that, I think Lithia is uniquely positioned because of the couple hundred million, somewhere between $200 million and $300 million of cash that we generate annually that could be deployed to purchase somewhere between $1 billion and $3 billion of revenue annually, which is unlevered which is 10% to 30% of our current base that’s driven through people.

And I think we’re also uniquely positioned to be able to grow and attract people at a faster and higher rate than much of retail, not only auto retail, but retail because of our ability to allow people to run to some extent their own model with great foundations of centralization and common measurement systems to be able to generate that..

Okay, great and just the last one I had.

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

Absolutely, what we’ve learned is that these larger deals seem to take a little less manpower and it also seems that the culture in those size organizations are a little bit higher level than the typical one and two acquisitions, ma and pa kind of stores that we used to buy 5 to 10 years ago and it’s still part of our staple diet, but these larger acquisitions it’s easier to communicate and to try to build closer at a high level to instill our values of customers for life, creating continuous improvement, taking personal ownership and having fun, and then let their professional management teams go drive it.

So, these synergies that are being realized, with DCH we had realized almost all the corporate synergies in about six months. We thought it was going to take us two years. With Carbone, we still have some work to do, but we’ll probably be able to accomplish that in the next 6 to 12 months.

And then once you have that foundation of cost management from a corporate level that begins to propagate into the individual stores and the people in those stores to really get it into the blood that SG&A is a direct reflection of our people’s abilities that are selling and servicing vehicles to do it in a cost-effective manner.

And I think sometimes it’s easy to jump and say we have an acquisition and it performs at 1.5% or 2% pre-tax and we can get it to 4% overnight, it’s not that way.

We want to build market share, we want to build stability and we want to build those margin improvements and those revenue growth over a period of time and to be fair, it can take two, three, four, five years to be able to build upon that foundation, which is what creates that organic dry powder which allows us to continue to grow our same store sales to reach potential within those new acquisitions, it just takes some time..

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

Chris, do you have any thoughts on that?.

Yes, Michael, I mean, I think what we talked about is that, we generated about $1.5 billion in gross profit per year on an annualized basis. And if we could get the entire group down to what we feel like our core group at 65% SG&A to gross is, I mean, that’s 5% on the $1.4 billion.

And I mean those are the numbers that we’re looking at and that’s what we’re working to execute on. But as Bryan said, it’s not something that we can do in a quarter, or even in a year, it takes time, and energy, and people and - but it’s there, and we see it and we’re making progress toward.

But as fast as we’re making that progress, we’re also bringing in more acquisitions. And so our goal isn’t to fix our SG&A to gross by slowing down the acquisition growth, it’s - to do everything. And so….

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

Definitely..

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

Okay. Thank you, guys, and good luck..

Thanks, Mike..

Thanks, Mike..

Our next question comes from the line of Irina Hodakovsky with KeyBanc. Please go ahead with your questions..

Thank you. Good morning, everyone..

Hi, Irina..

I had a couple of questions for you in terms of your guidance revisions. The EPS is up and the revenue is maintained, reaffirmed. So it appears that you’re a little more confident on execution.

Can you discuss, which segments is, we talked about F&I a little bit, or which area of the operations are driving your confidences there, the improvement in Texas perhaps with the cost, I know last year cost in Texas were a little bit high.

So a little bit more detail on exactly which areas are driving your confidence?.

Hey, Irina, this is John, thanks for the question. I mean, I think as we look at our guidance, we’ll go back to the same philosophy we’ve had from the beginning, which is we take current market conditions and current store performance looking for a high probability of success. There’s obviously a range given in the guidance.

We’ve gotten away from a quarterly guidance. We’re looking more annually and I think we’re making tweaks to it. One of the earlier analyst asked the question around, volumes being down a little bit more, but gross being down a little bit less. I mean, we’re looking at those kind of variables all the time.

And then I think Chris talked a little earlier about some F&I improvements. So when you put that all in the mix take a look at our day supply in inventory and kind of that run that through the model that gives us some confidence that we can bump the range up and we remain pretty confident for our outlook in 2017..

Thank you for that. And then a question on acquisitions, it’s - a driver of growth for you going forward, we’ve discussed this quite a bit this call and in the past. A couple of questions in terms of your excess cash allocation. In the past, things were targeted for acquisitions.

But you’ve added recently a share repurchase program and then increased your dividend today.

Wondering if there is perhaps maybe a change in the pace of acquisitions and what you’re seeing, or are you just making too much money and just giving it back to your investors?.

Irina, this is John. I don’t know you can ever make too much money in our minds, but we’re trying to do the best we can. I mean, I think we have a balance and obviously our top priority is acquisitions and we see a very robust pipeline. I’d point out, we added $1.1 billion in acquisition revenues last year and actually lowered our leverage ratio.

So as I think people that look at this business understand the cash flow characteristics are one of the best parts of it. And I don’t know many places you can get a 10% plus free cash flow yield with a company growing at a 27% CAGR. So we feel like the pretty good business for that reason among many others.

And we’re definitely excited for the acquisition pipeline. I feel like we can have a balance of paying out a dividend and opportunistically buying back shares when the market has the volatility we’ve seen over the last 60 to 90 days on frankly very little moves. So that’s how we look at it, but our first priority remains acquisitions..

That’s good to hear. And the last question on that - on the acquisitions as a priority. You’ve - in your previous presentation showed us that you estimate the accretion comes - boils down to about $0.90 per $100 million in revenue.

Certainly through that integration process, as you discussed, earlier on the call, there would be some inefficiencies and it appears that that billions you added last year. you’re factoring some of the efficiencies since this year.

And how should we think about your integration process going forward? In the past, we talked about 6 to 12 months, what do you think today for the length of the integration? And how should we think in terms of the headwind? Is it instead of $0.90, or are we directionally looking at $0.50, $0.65.

So can you give us a little bit of an idea of how to think about the aggressive pace of acquisitions and how they would impact earnings in the first year, let’s say?.

Well, I mean, this is John. I think there’s not really a rule of thumb that I think we’re going to be able to give you, because every acquisition is different.

We’ve obviously given some color around both DCH and Carbone, which were larger acquisitions where we directly stated and increased the guidance based on the contributions they were bringing in day one. So I mean, I think those would be a good case study if you wanted to go look at them.

But if you look at the core business, which is doing north of a 5% op margin, our objective is to get our stores to that range or beyond. And as we talked about, I think a couple of questions ago, I mean, that can take 24, 36 months in some cases.

But that’s part of the dry powder that remains available to us for us to be able to grow organic earnings into the future is, because a large majority of our stores in the $9.5 billion revenue base are still not optimized to the way we see them..

Thank you for that. Congratulations on an excellent quarter..

Thanks, Irina..

Thanks, Irina..

Our next question comes from the line of Rick Nelson with Stephens. Please proceed with your questions..

Thanks. Good morning. I’d like to….

Hi, Rick..

Hey, Bryan. I’d like to follow-up on those strategies to grow market share, same-store unit sales were down 1.4%. John mentioned the interest rate was down 1.2%.

Do you, in fact, think that you captured share within your regional markets and those national numbers are not indicative of what actually happened?.

Rick, this is Bryan. I think you are right on track there. Our market share continues to grow with virtually all of our manufacturers. We gained, I believe 2.5% for this time relative to last year, which is a pretty good market share gain. We also believe though that there’s more to come.

And that those new acquisitions that have been with us for one, two, or three years are starting to gain momentum and season, which is where we get a lot of those gains from. So anytime we’re comping those, you’re still bringing your base down, because you’re bringing in a lower performance that maybe hasn’t fully seasoned.

So that relative number of 2.5% is probably something a little higher than that, because of that contribution from younger less mature stores..

Gotcha.

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

We’re pleased with the combination with the Carbone Auto Group that $0.25 target, we’re right on pace for it. It’s a little bit different than the DCH experience, but it’s been a good experience that is a little bit fundamentally not quite as tech savvy as the DCH, where they’re in more rural markets like we are.

So the ideas and the sharing of best practices were more fundamental to what Lithia used to be. So it was a lot of fun trying to reevaluate each other. So the best practices sharing weren’t quite as dynamic as it was with DCH. So there wasn’t a lot of other tools, we’re pulling out of the tool chest that would have given us more revenues.

But the niche thing is that that $0.25 target, we really believe that there’s even more untapped potential, because what we’re realizing is their ability to conquest market share is substantial more than what we expected. And their ability to sell used vehicles is also more than expected.

That combined with the fact that they had five franchises that were dueled scenarios.

We believe that the underperformance in those stores and we’ll be spending some capital on that that we had previously disclosed to de-duel [ph] all five of those primary franchises, dominant franchises, BMWs, Subarus, Toyotas, so on are going to de-dueled, and with that comes that unleashing of the power of that lifecycle and that ability to take markets - market share and to sell used cars at two or three-fold.

So we’re excited about the Carbone combination and really believe that that type of model can be done again and again fairly easily and integrated because of the ability for their personalities to really remain and foster continued growth..

All right. Great. Thanks for that color. Finally, if I could ask you about the financing environment.

If you’re seeing any changes at all on availability at the prime and the near prime, or subprime level, or if you think these declines and residual values are risk on the financing side of the business?.

Yes, good morning, Rick, this is Chris. So not seeing a lot of changes overall in the portfolio, the gauge that we continue to monitor is really the subprime financing on our lower tier credit customers. And that continues to be around 13% of our business, which in the bottom of the recession was fairly low-single digits.

So we feel like, we’re steady in the credit availability for our customers. I think what you may be seeing with residuals is just a mix in the products that they’re acquiring and making sure that we have a lot of that value auto products and a lot of core products are a lot is important for that, and so not seeing a lot of shift there.

We are seeing some changes in what some of our core lenders are doing, some of our top lenders seem to be shifting in market share a little bit as far as their buying patterns. But overall, as far as the number of lenders that are out there, we still have a lots of credit available for consumers..

Great. Thanks and good luck..

Thanks..

Thanks, Rick..

Our next question is coming from the line of Steve Dyer with Craig-Hallum. Please go ahead with your questions..

Hey, thanks. Good morning, guys..

Good morning, Steve..

We haven’t talked much about used on this call yet. And then obviously, there was a lot of hand-ringing kind of intra-quarter on residuals, and pricing, and margins, and inventory. And you guys seem to sort of keep all of that relatively tight.

Just wondering if you could give us a little bit more color on what you’re seeing in used? And are you just being exceptionally disciplined in the trades you’re taking, et cetera, any color there would be great?.

Steve. I think you’re right, mid-quarter there is a lot of noise around the idea of pricing being devalued in LEV’s being reduced in those type of things. And I think from a retailer with a less than two months supply and many of our stores have less than one month supply, that’s not the relative story.

The relative story is that supply is increasing, which allows strong used car retailers to procure and find vehicles at a quicker and more expansive amount than what we could in the past.

So we’ve been excited to see that we are now having some looseness in the used car market, which creates the disconnects to be able to go buy the right product and begin that life cycle that creates our additional business. So we were up in value auto, which is great. If you remember a few quarters ago, we saw that flattened.

We’re back up 5% in units in value auto, which is where we create about 18% margin. They stop a base of 12%, that’s great to see. That’s going to continue to losen as those 10, 8 SAARS and 12 million SAARS begin to fill that pipeline again. The core product was up 6% and certified, which we only make about 9% on was up 1%.

So we’re pleased to see that that supply chain is getting a little loser. And with those people out there now understanding what vehicles to procure and which ones build demand from our consumer base, we’re going to continue to build upon that positive impact of supply increase..

Great. That’s helpful, Bryan. And then just as you look at service, we’ve talked about that a little bit, interested to see body shop has really performed extremely strong this quarter than coming off a very good year last year.

Anything different about your strategy there, or the customer you’re getting there, or is it just been unusual weather? Any color around sort of the mix of the four buckets you’re seeing within SP&P?.

Good question, Steve. I think if you go back and look at our case from the last few years, you’ll see about three years ago that we were flat and even had a few quarters, where we were down. Those were functions of personnel.

And I think this last 18 months or so, we put new people into about 30% of those body shops and they’ve done a wonderful job rebuilding their business and rebuilding their insurance providers to be able to build the base of business and we’re starting to see the early signs of double-digit same-store sales increases, which we’re starting to become a little bit more seen even last quarter or the quarter before that..

Okay, great. Thank you, guys. Nice job..

Thank you, Steve..

The next question comes from the line of Bill Armstrong with CL King & Associates. Please go ahead with your question..

Good morning, everyone. On the luxury side your unit sales were down about a 11%.

I was wondering if that was mostly concentrated in Lexus, which has reported a pretty big decline for the quarter, or was it more a broad-based? Any color you could give on the luxury side?.

Good question, Bill. This is Bryan again. I think when we look at our individual markets, the Luxury segments are performing much differently in our markets than they are as a whole in the nation, because our market share in luxury is increasing still. We’re approvable with all three of the majors in luxury and continue to grow our market share.

So I think it’s more of a function of rural markets versus metro, that is about 80% of the country. And we don’t have a big presence in metro markets in luxury yet. But I believe we would respond more similar to what national was, at a what, plus nine or something relative to that..

Okay. And then on the domestic side, looks like you had pretty decent unit numbers there. We saw Ford and FCA reporting some sharp negatives.

Do you think you took - you outperformed those OEMs relative to their national performance?.

So on a less positive note in luxury, we’re actually only up about 1 percentage point in domestic, despite being a - what a seven-point delta between - between domestic down nationally three and we were up, we were flat on units.

So we didn’t gain as much as we had thought, but that’s also a function of a lot of domestic stores in more rural markets, where they were probably stronger than the national market, which is more dependent upon metro based..

Got it. Okay, thank you very much..

Thank you for your question, Bill..

Our next question is coming from the line of Bret Jordan with Jefferies. Please go ahead with your questions..

Hi, good morning. On the M&A outlook, you’re talking about it being pretty robust.

Is there a much difference between the rural M&A prospects versus metro?.

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

Okay. And then a follow-up on the financing question, I think you’re saying there’s not a lot of shift in the lending standard, or maybe focus.

But as far as both the lease focus going forward, do you see any of the OEs falling back, given some of the declining used vehicle values and maybe some residual assumption spread there, or are they as focused on leasing as ever?.

Yes, and we haven’t seen a big shift in that. And in fact, we continue to try and get our vision to continue to push up their leasing, which is at around 15% when our DCH Division is somewhere north of 40%. So we still see lots of opportunity for leasing.

And I think keeping that customer in a shorter lifecycle is great for future sales, it’s great for service, it’s great for used vehicles. And we see real opportunities for us to continue to push on leasing and aren’t seeing pull back from OEM..

Okay.

And then one last question, in the prepared remarks, you mentioned sort of diversification and complementary businesses, is that anything that’s actually - is that a strategic change in all or are we sort of talking about focus in collision and other certain extensions of the dealership business?.

Bret, this is Bryan. I think that’s more of a horizontal integration that we would be in reciprocal businesses. If you remember, we started southern cascades five, six years ago, that’s starting to gain momentum. We still believe that there’s expansion, or possibly even acquisition opportunities in that space.

We also believe that other ancillary businesses such as buying services, or fleet management, or other types of businesses that are similar to us would be possible targets. We really believe that if the business is our retail-oriented and are people-driven that we can make a difference in those ancillary businesses.

So I don’t think you’re going to see big deviations from where we know. But we’ll be able to grow from our base and our knowledge to be able to make strategic acquisitions, or strategic investments in innovation to be able to continue to stay at pace with where the market changes end up..

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

I would say this, it’s slightly different. And I think, because we innovate at all levels of the organization, we really believe that our ability to create business models that are different and unique that may be able to meet demands of consumers down the road are created in our stores most of the time.

We believe that that’s creating different types of opportunities, and we’re going to be able to fuel those and create exponential growth within those realm when we see that.

We’ve - I mean, not only southern cascades, we have a partnership with an organization based out of China, where we’re starting to sell vehicles directly to Chinese students that come to university in America.

We’re going to be working on that with other countries as well, which is the - it’s the genesis of what we believe is a more lucrative lower-cost delivery model.

In our stores, we have more transparent living room to show room type of models, or may even be living room to living room type of models in many of our stores now, where we are home delivering. And there are things that we don’t share, but have been going on for a decade.

And I think we’re going to be doing a better job trying to spark that growth and generate additional greenfield opportunities from that that synergistic type of business..

Okay, great. Thank you..

Thanks, Bret..

Our next question comes from the line of James Albertine with Consumer Edge Research. Please proceed with your questions..

Yes. Hi, thanks for taking the question. This is Derek Glynn on for Jamie. I just want to get your take on the broader demand environment. This is sort of a follow-up to the used commentary. But there has been quite a number of new vehicle sales over the past seven or eight years as we’ve come out of the recession.

And it seems pretty clear that used supply is going to increase over the next couple of years.

So what is - what sort of impact on demand for used do you see going forward? And should we be concerned, there’s not enough demand to meet this forthcoming rise in new supply?.

Great question, Derek. This is Bryan, again. I think the relative size of the used car market to the new car market, which is 2.5 times on a national basis what our 17 million SAAR is, which is a pretty darn big number. And dealers only control about one-sixth or one-fifth of that total amount, because they sell about 0.5 to one, as a whole.

We really believe that the upside opportunity in used cars is endless. And when we talk about our individual stores opportunity at 75 units per store, we really believe that the best stores within our organization that are now upwards of 200, and we have numerous stores at those levels can continue to grow.

And remember, we’re bringing in stores that may sell 20 or 30 cars into that base, which is making it more difficult to get to the 75.

But if you were static and you weren’t growing, we should be able to get to the 75 in a matter of a couple of quarters at 6%, 7% unit sales growth, right? And I think that’s the nuance of used vehicles that the demand is there.

It’s whether or not, we as new car dealers, can create the experience for consumers from the lowest end of the market at $3,000 to $5,000 vehicles to the highest end of the market, at $50,000 to $100,000 vehicles.

And I think Lithia Motors is uniquely positioned, as well as its partners with Carbone and DCH that really haven’t played in that space are ready to take on that other 2.5 times larger market than new in the future and I think you are going to continue to see that growth in that segment for us..

Great. All right, best of luck. Thanks..

Thanks, Derek..

Our next question is coming from the line of David Whiston with Morningstar. Please go ahead with your question..

Thanks, good morning. Continuing on these pricing dynamic, how much - my question I guess is really a - is the fear of used pricing hurting new, do you think that’s a bit overdone in your mind, anyways amongst your store base or this is - just it hasn’t….

Great question, David. I think there’s no question that the sensitivity of the world’s press and maybe even analyst to some extent regarding SAR rates or margins or incentives are not what this business is about or is not what retail in general is about.

I think because we’re in an industry that is so measurement focused, it becomes the focus point of many of us rather than the fundamentals of what our business is as a capital engine for growth.

And the idea that there is internal dry powder within our organization that can grow gets lost somehow in the clouds and the fog of you know pricing disconnects and incentives or used vehicle pricing being down 0.3%, but those nuances, even if you go back 8, 10 years ago on the recession, that’s not what created the differences in the model.

People created the differences in that model and I think when you look at who Lithia Motors is, whatever those sensitivities are, what we’ve built is an organization that people closest to our customers in individual markets are able to respond to those differences in a very rapid and nimble way that creates a more recession proof model and the ability to grow through that power curve when the opportunity arises and in either way I believe were positioned to win..

Okay that’s helpful. And I guess my other question is probably a bit of an unfair one, but I just want to think of this more from a shareholder perspective even though personally I’m not allowed to own your stock.

You guys are always very good at executing and delivering tremendous numbers, but at the same time there’s always a huge chunk of your store base or like a significant chunk of your store base that does drastically underperform.

And I guess my question is, do you think you ever really hate your true potential or is it just something you are always going to be working on, because there is always going to be a bottom tier to the store base?.

Yes, David, Chris.

I mean I guess, you know I tried to allude to that earlier, I mean we could definitely hit our potential if we stop growing and you know leveraging the strategic acquisitions which are a big part of our company, but from a shareholder perspective I think if we can continue to integrate the acquisitions and you know at the proven rates that we have and continue to see success in those year-over-year, it would be silly to try and fix the leverage number with using SG&A as the metric versus purely trying to move all of our stores and improve the profitability and the op margin that they produce.

And so, yes, we could get there on pure SG&A to gross number, but that’s not our goal. Our goal is to continue to integrate acquisitions and continue to improve those stores..

David, I think you’ve been around Lithia Motors long enough to know that I think when we think about our future and we think about how we built our people within our organization, you have a team of people that are pretty humble, they are pretty realistic and they’re built to always continuously improve and the idea of maximum potential.

When we look at a store like a Subaru store in Reno, that’s a top five Subaru store in the country and 160th biggest market in the country and the store produces upwards of 6.5% of operating margin and sells 400 used cars a month and it’s 300% sales effective. You look at the potentials of what people can do over time.

So I don’t think the goal is to get there immediately. It’s to continue to build on a base to be able to create a engine that can grow and compound itself and grow exponentially through people and the expansion of people. And I think whether we’re looking and comparing ourselves to a Cabela [ph] or some other type of retailer.

I think everyone is built around the idea of people and whether or not they talk about the opportunities, or the dry powder that’s there. It’s there, they just may not be putting physical dollars to it.

And I think what we know is that great people are coming to our organization and are growing within our organization and over time those trends will create a less percentage of nonperformance in stores. But to us, that’s a positive characteristic.

And I know that, as investors, sometimes that’s looked at as well why can’t you get it in the next 12 to 18 months.

And I think when you look at a four to seven times growth rate of what we’ve went through and what we will continue to grow through in our future, I think when you balance the two, it’s a win-win model to be able to have that dry powder and be able to expand at the rates that we have and we’ll expand at..

That’s all, really helpful. I appreciated it..

Great, David. Thanks for your questions..

Thank you. And our next question comes from the line of Brian Sponheimer with Gabelli. Please go ahead with your questions..

Hi, good morning. Congratulations..

Hey, Brian. Thanks, Brian..

Just a question on is the opportunity in used, and you talked about the lifecycle for getting the used buyer.

And can you maybe talk about the difference between a - difference for your parts and service business between a used vehicle purchaser versus that of a new buyer?.

Sure, Brian. Our retention rate on used vehicles is about half of what it is on new vehicles or around 25%, 30%, which means that over the life of a five to seven-year period, the customers that will come back are about 30% of that base at least one time a year, okay.

On a new vehicle if you remember it’s around 60% and our best stores around 80% of that customer base will come back at least one time a year. So not quite the adhesion. However, the repeat and referral business that come from that are still high. And we still believe that it’s part of the generation engine that creates that lifecycle..

You see a higher average ticket for a used car coming back, I would imagine that would be something that would be an offset?.

Yes, on a customer pay basis, okay, but on when you include warranty, it’s about a push..

Okay..

Which is on the mix are primarily right or uncertified..

Right, and I appreciate that. And then just more longer-term thought, we’re seeing a company come to market this week that is end-to-end online solution for buying a used car. What are your thoughts on the potential for your business to evolve to offer that sort of potential down the road.

And is that something that you see is where the industry may be headed?.

Brian to be fair, Lithia Motors is already there. We probably sell 40% of our used cars as an end-to-end solution. I really believe that that auto retailers have built a model that’s an end-to-end solution, where it’s a living room to living room model.

We have applications, we have websites, and we have the inventory to do that and we do it at a profitable level, an extremely profitable level.

And I think when you start to think about sector killers, or people that could modify what the used car model is, I think you need to go back and look at what’s occurred in those segments and understand that auto retailers and especially Lithia Motors that is very adept at selling used vehicles that’s built into who we are and has been built in for the last decade or so.

So if you’d like to talk more on that too, we can get into, how our applications work and how we reach out to those customers, how our OE - how our SCO marketing works, and how that relationship is generated through our ISCs, which is our Internet sales centers and how we leverage our what $175 million in used car inventory to be able to create that.

And I think most importantly, remember, the top of the food chain is the new car trade ins, okay. And that’s something that used car retailers aren’t at liberty to have, which is what creates that waterfall effect..

I agree and I think it’s a tremendous competitive mode for you. Thank you very much for the color, and best wishes for a continued success..

Thanks, Brian..

Thanks, Brian..

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

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

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