Good morning and welcome to Lithia Motors Third Quarter 2019 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin..

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

Today's discussions may include statements about futures events, including financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made.

We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release.

Our results today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our third quarter results.

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

Thank you, Eric. Good morning and thank you for joining us. Earlier today, we reported the highest adjusted third quarter earnings in company history at $3.39 per share, a 20% increase over last year. Our earnings were driven by record revenues of $3.3 billion for the quarter with same-store revenue growth in all business lines.

Our team remains focused on creating convenient and transparent consumer experiences in order to achieve operational excellence. This remains the hallmark of our mission growth powered by people. We continue to purchase and build strong businesses that have yet to realize their potential, while a new geographies, we look for strong operational teams.

This results in increased market share, significant cash flows, and strong profits all while maintaining low leverage. Our biggest single asset is our amazing experience and proven network of over 15,000 team members.

As such, we want to take a moment to recognize our 11 store teams that were awarded the automotive news 2019 best dealerships to work for. Congratulations to you all. Our operational results from this point forward will be on a same store basis. We generate revenue from six distinct business lines, creating a strong, nimble and diversified model.

During the quarter, total revenue grew 8%, and total gross profit was up 9%. We saw new vehicle revenues grow 5%, and our highest margin business lines saw strong increases similar to the past few quarters. Used vehicle revenues group 14%, F&I was up 13%, and service body and parts increased 9.5%.

These lines accounted for approximately 42% of our revenues and 80% of our gross profit. Our operating model is built to provide a full spectrum of products and services throughout the vehicle ownership life cycle. For the fifth year in a row and the foreseeable future, we see new vehicles are remaining stable at approximately 17 million units.

The economic environment is also strong with medium household income near all-time highs, unemployment at historic lows and overall consumer confidence remains strong. In addition, lower interest rates and widely available consumer credit are making cars more affordable than ever.

These favorable economic conditions combined with our unique growth strategy, makes Lithia a unique opportunity compared to most other competitors in specialty retail models.

As one of the largest auto retailers in the United States, selling more than 335,000 vehicles annually, offering the second largest owned inventory marketplace online and servicing more than 3.5 million vehicles a year, massive opportunity to grow still remains.

Our industry is highly fragmented with the top 10 companies controlling less than 8% of the U.S. market and no single company controlling more than 2%. Combined, the addressable new and used vehicle market is over $1 trillion annually, of which we represent only 1.2%.

We have built a model that is powered by growth, people, capital, modernization, inventory and physical network, and believe the combination of these differentiations can take us beyond 5% share of our nation's vehicle market.

Our revenue has increased at a compounded annual growth rate of 24% and earnings have increased at a compounded rate of 33% since 2010. We continue to invest two-thirds of our capital into expanding our physical network by acquiring strong assets, targeting and after-tax return of 15%.

We execute with an 80% success rate and our five year and beyond after-tax return is over 25%. As we continue to expand our national reach, we acquired, developed and retain strong teams to build out our network.

When moving into new geographies, our investment metrics consider the value of the right teams to become the foundation to execute our value-based acquisition strategy.

With more than 500 million in available liquidity, over 250 million in annual free cash flows and adjusted leverage ratio below two times, we are well positioned for continued growth through acquisitions and modernization.

Using our targeted equity investment of 15% of revenues, our available liquidity and annual free cash flows could add up to $5 billion in revenues or 40% growth. More conservatively, if we choose not to add any incremental leverage and just utilize annual cash flows, we could add more than 1.4 billion in revenues or approximately 12% annually.

The acquisition market remains extremely active as we have purchased seven stores totaling over 470 million in revenues so far this year. Earlier this month, we acquired Morgantown Chrysler Jeep Ram Fiat and Morgantown Subaru in West Virginia.

In order to fully capitalize on the opportunities of our six business lines, we continue to look to expand our nationwide footprint beyond our current reach of 82%. In addition, we are improving the density of our network to better service our customers and grow our highest margin business lines.

Our customer’s proximity to our physical network is important as it enables us to supply convenient test points throughout the ownership experience. This network also provides an infrastructure to deliver our digital solutions to further leverage our assets and expand our reach. Each customer's behavior is unique and ever-changing.

We continue to leverage our most important assets of skilled personnel in a massive 70,000 vehicle owned inventory through our physical network and digital solutions.

We strategically invest in modernization that supports and expands our core business with the goal of providing customer with choices that meet their desire for affordability, convenience and transparency. This is evident in our same-store sales results with strong increases in revenue and profitability.

As part of our holistic and incremental approach to modernization, we recently activated our own proprietary sell from home technology in the Pittsburg market allowing customers to sell a vehicle through us in just minutes.

This experience provide consumers an instant offer with convenient pickup service at their homes and expands our reach to procure used vehicle. This is a scalable solution that we believe our operational leaders will quickly desire and adopt.

Along with our buy from home technology launched earlier this year, this sell from home solution will help us improve our one-to-one used to new ratio to move closer to the national ratio of 2.3 to 1.

We believe that modernization can be profitable and by approaching solutions incrementally, our model will achieve both our short and long-term objectives. In closing, our diversified high growth business strategy is complex making it difficult if not impossible to replicate.

An entrepreneurial culture that attracts and retains the best talent, world-class proprietary performance management systems, our proven growth strategy, and a capital discipline with regenerating cash flows add to the uniqueness of Lithia Motors.

Our industry remains right for considerable consolidation and our team's multi-decade track record of executing in both operations and acquisition has positioned us to do just that. Notwithstanding any economic change, our milestone of $15 EPS is eminent. And now we look towards our longer-term goal of 5% national market share as our inspiration.

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

Thank you, Bryan. With the admission of growth powered by people continues to be the foundation of a high performance culture as our team members engage each and every day to find ways to increase market share, exceed customer expectations, and improve profitability.

As we prepare for 2020, our store leaders are leveraging our core values of continuous improvement to set their annual operating plans to achieve earnings potential. They continue to identify the levers to pull which in turn improve operating results and further season them in Lithia platform.

With over 7 billion in annualized revenue purchased since 2014 significant opportunity remains. In the quarter total sales increased 8%, gross profit grew 9%, and pretax income improved 13% following this additional color on each of our six business lines. The new vehicle business lines which is top of funnel and automotive retail grew 5%.

Our average selling price increased 6%, and unit sales decreases less than 1%. Gross profit per unit was down slightly at $2049 compared $2073 last year, a decrease of $24. Our stores remained nimble and their strategy that balance volume and growth and adapt the local and regional market conditions.

The used vehicle business line was up 14% comprised of a 12% increase in unit sales and a 2% increase in average selling prices. Used retail gross profit per unit was $2,257 compared to $2,205 last year, an increase of $52.

Our used vehicle mix was 27% certified, 59% core of vehicles 3 to 7 years old, and 14% value auto or vehicles older than eight years. Our top performing used vehicle operators achieved a used single ratio of two to one or greater with the value auto segment comprising nearly 30% of those sales.

The recent activation of our proprietary valuation algorithm allows for consumers to receive an instant valuation online and sell it vehicles from the comfort of their own home. A significant number of these vehicles fall into the core and value auto segment and will be prime merchandize as we further expand these offering in more of our locations.

This modernization in our stores expands our reach and our ability to procure more used vehicles which translates to more sales opportunities in our network. As a result, we continue to target selling at least 85 used units per location per month. In the quarter, we reached 74 used units per store per month an increase of 9% over the prior year.

Our financial insurance business line remains strong at $1,471 per unit compared to $1,371 per unit an increase of $100 per unit over the prior year. Overall growth was due to high penetration rates and per unit profitability in nearly all of our product offerings.

The vehicles we sold in the quarter, we arrange financing on 73%, total service contract on 48%, and total lifetime oil product on 22%. We continue to focus on capturing the additional earnings potential in F&I by improving the customer experience and seamlessly integrating the online and brick-and-mortar experience in our stores.

Strategically helping identify financing options for our consumers, while providing an integrated one-stop shopping experience allowed us to customize the right products at the right price and allows our consumers the power to choose what's best for them.

Overall new and used vehicle sales create incremental profit opportunities to the resale of additional trade in vehicles, greater manufacturer incentive, F&I sales and future parts and service works.

One measure of this is through the growth of our total gross profit per unit, which was $3,631 this quarter, or an increase of $110 per unit over last year. We remain focus on our highest margin lines of business, service, parts and our body shop.

As onboard technology and vehicles becomes increasingly complex and the car park continues to grow, the need for a skilled certified technician will continue to drive demand and create more recurrent repair and maintenance opportunities. Our service, body and parts revenue increased 9% over the prior year.

Customer pay work, which represents over a half of our fixed operations revenue stream increased 9%, warranty increased 11%, our wholesale parks grew 8%, and our body shops increased 11%.

Same-store adjusted SG&A to gross profit was 68.8%, an improvement of 10 basis points compared to the third quarter of last year bringing our year-to-date improvement to 100 basis points.

Our season stores have and SG&A to gross profit metric of approximately 60% and its acquisition we typically see stores with an SG&A to gross profit metric of 90% or higher. This adversely impacts our overall SG&A performance until those stores are seasoned.

Our teams continue to make progress on cost-saving efforts and focus on personnel, advertising and facility costs, which make up the majority of SG&A. Considering over half of our stores are still on season significant opportunity to drive down our industry leading leverage remains.

In summary, Lithia's unique operating model leverages our team members to make decisions closest to our customers, allowing us to react quickly to evolving market dynamics and still leverage our scale. Our people are taking the steps necessary to exceed their annual plans and carry the trends into 2020 and beyond.

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

Thank you, Chris. Our teams are the foundation to our high performance culture and continue to execute our operating model of acquiring, integrating, and growing our stores. In the past five years, we have acquired over 7 billion in revenues, and have achieved an 80% success rate based on expected return.

Our teams and body, the talent and discipline needed to execute this model through aligning our core values with the key metrics that drive success in operations and having support teams, who standardize non-customer facing processes, we create a scalable profitable framework that effectively leverages size.

During the third quarter, we generated free cash flows of $83 million and has generated $224 million for the first nine months of the year. We define free cash flows as adjusted EBITDA for stock based compensation, less interest, income taxes, dividends and capital expenditures paid in cash.

In addition, we have approximately $276 million in cash and available credit as of the end of the quarter. Additional liquidity could be obtained through our unfinanced real estate or accessing the debt or equity markets. This strong balance sheet position has us poised to support future growth.

We target 65% investment in acquisitions, 25% investment in capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share repurchases. Earlier this morning, we announced the dividend of $0.30 per share related to our third quarter results.

Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization. As of September 30, we had $2.3 billion outstanding as floor plan and used vehicle financing. A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt.

As this financing is integral to our operations and collateralized by these assets, the industry treats the associated interest expense as an operating expense in our EBITDA and excludes the set from our balance sheet leverage calculation. On adjusted, our total debt-to-EBITDA is overstated at 5.8 times.

Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is two times at the low end of our targeted range of two to three times. Our adjusted tax rate was 27.3%, up 90 basis points compared to 2018 primarily driven by changes enacted in certain states late last year. This concludes our prepared remarks.

We would now like to open the call to questions.

Operator?.

[Operator Instructions] Our first question comes from Rick Nelson with Stephens. Please proceed with your question..

I like to follow-up on Baierl.

Any updates there where you've rolled technology out to some early learnings and any metrics you can provide on those tours would be great?.

Sure Rick, thanks for joining us today. This is Bryan. The Pittsburgh market is progressing nicely. As you know, our modernization strategy is incremental, but last month we were able to further rollout some of the tools that we are building primarily as a vehicle to us from your home, a solution that's fully proprietary.

In the past, we were using a different engine, and now it's all built by us. It took us about 60 days to do that. And we're very excited with the initial results in our procuring cars at a fairly good rate and there is definitely strong demand outside of Pittsburgh from our other leadership teams that are wanting to kick that off as well.

In terms of it buy from home or the digital solutions to be able to affect the deal and buy a car from the comfort of your own home that's been progressing since the start of the year. It's doing well.

It seems to expand our market share and our consumers are really, enjoying that option, though at the current time it's still not being utilized and chosen by consumers as much as we believe that they will in the future..

Also curious about shift, how you're using shift or plan to use shift from a technology standpoint?.

Yes. This is Chris. I think the big thing just leveraging off of what Bryan just said is, in the quarter we provided over 70,000 online purchase offers for used vehicles that weren't actually tied to a customer purchase.

And so those offers came from all three of the channels that we have right now, which is the sell.baierl.com channel, our partnership with shift and then other solutions that are already available by third parties..

And a lot of progress on the SG&A front, you've been very inquisitive the last several years. I know DCH which saw nice tail there - interested where you think we are with those improvements with the acquisitions you've made and where are you seeing the most progress and where the laggards might be in terms of extracting of value..

Rick, this is Chris again. So, you know, as we stated in our prepared remarks, we've acquired over 7 billion in revenue over the last five years. And as you recall, we normally by strong assets that are underperforming a lot of times in the SG&A front, and it takes us typically three to five years to season those stores.

So, you know, as we bring those stores in on day one, they typically run at 90% or higher SG&A to growth and our season stores are running in the low 60 percentage range.

So as far as the inning, I'd say we're in the mid innings of kind of where we're at on SG&A and our goal is to continue to drive all of our stores down to, we'll combine SG&A growth in that low 60 percentage range..

Our next question is from Steve Dyer with Craig Hallum. Please proceed with your question..

If I could start in the used business, sales were obviously very strong in the quarter, but your GPU performed much better. I think that one of your peers who reported yesterday, just wondering if there's any specific initiatives that are driving some of that improvement, whether it's acquired stores or better inventory position, et cetera.

What are you seeing in used?.

Steve, this is Bryan. We're really pleased that our value autos were up 19%. We actually make about $100 more per unit on value auto and as many of you know, our gross margins on those items, which is an eight-year-old and older vehicle, is almost 20%.

So some of the margin is coming from that, but that's really being driven on our ability to procure cars. And I think every day that we think about used cars it's not so much of the offerings that we provide on a retail standpoint. It's our ability to go mine those cars and we talk about the five channels that we really have opened up.

And I think there's a massive channel or about a third of the vehicles that are sold in this country to consumers are sold through private party, and I think that idea that we're going to be able to tap into that private party we have the intellectual property, which means the facilities, as well as the people that understand how to do that and now we have the digital solutions to be able to perfect that and really be able to procure those cars.

And I think you'll see that our ability to get those front and center will generate higher margins because we're able to screen cars and have more choices as to what we're going to put on our lots of retail..

And then I guess in terms of the online initiatives, is your plan started a rollout all of the different functionality and products in that suite in Pittsburgh and then move it nationwide or are you - I guess are you looking to move bits and pieces beyond Pittsburgh before you sort of have all of that in place.

Maybe, what's your cadence of rolling out some of those technologies beyond the Pittsburgh market?.

All right, good questions Steve. It's Bryan again. I think when we about innovation and modernization, we don’t look at it as initiative base meaning that if we do this we are going to do this in the next step. We redeploy as it happens, we let things happen organically and we foster that there is growth and innovation throughout the organization.

I think Pittsburgh is really looked at as the hotbed for our proprietary digital solutions that can not only be deployed throughout the Lithia network in our entire 82% of the country reach. But it can also be put into a white label type of scenario where it's just utilizing an ethereal network of stores to be able to do that as well.

So I think when we think about whether Pittsburgh is that hotbed for that, I would say yes. That it is definitely where we're doing most of the innovation on our programming and an application into our consumers.

But I think that innovation in our organization is occurring anywhere and everywhere at any given time which is what's really special about the Lithia model that's where we built around entrepreneurship and innovation within 185 locations our stores. And then one shares best practices here in Medford..

And then I may have missed this but just to be clear your sell from home technology is that something that you built yourself proprietary in the last - however many months you are utilizing someone else's technology in the back end of that?.

It’s a 100% Lithia Motors built and driven. It took us about 45 days to build it which we were shocked that we were able to do and that’s kudos to George Hines and his team, our Chief Technology & Innovation Officer. We really have ramped up our ability to go to market and to be able to modify things quickly.

And I think you'll see the same type of things as we move towards the proprietary solution on the sell side as well..

And is your expectation on that side of the business that you will keep most of the cars that you procure and recondition them yourselves or we’ll see some to auction.

How do you sort of look at monetizing that avenue?.

I think this is a thing we fight and try to endear in people every single day. I mean part of Lithia model is buying those underperforming stores. Typically, there is a belief in those stores that they can't sell deep into the model mix even outside of their like brand that they sell new.

And that’s a mental state that usually takes time to get people path, but I think when you go to market and you're willing to buy any vehicle, what you quickly learn is that you have the ability to sell those cars when they're available, whereas most dealerships typically live off of the trade-in which is not really defined or proactive.

Whereas now you’re going to get so many vehicles that you can pick and choose. The vehicles that are going to have the best margin are going to turn the quickest and be able to meet our customer’s needs at the highest level..

Our next question comes from Armintas Sinkevicius from Morgan Stanley. Please proceed with your question..

Maybe you could provide us with an update on the - your acquisition philosophy you mentioned well-position to accelerate the growth strategy in the coming quarters. You are at the low-end of your leverage range I think you've been vocal about potentially targeting the Southeast.

Maybe you could provide us with an update there is - some of the - perhaps obstacles that are delaying a deal or maybe not but any update would be helpful?.

Awesome, this is one of our favorite topics so and its part of our core strategy of how to value and vest. There is considerable activity out there. We’ve only done about 475 million so far this year in seven different deals. We went into a new state West Virginia we’re kind of excited about that.

We obviously are looking heavily into the Southeast, as well as some of the central Atlantic states, a lot of metros there that we haven't really entered. The acquisitions are plentiful, I would even go as far as to say that the deals are stacked up and we can be extremely choosy.

Now obviously our hurdle rates are always pretty high targeting 15% return on our equity whereas beyond five years we actually achieve about 25%. So we have a fair amount of cushion there that when we find the right geographies and management team, we should be able to step up and be able to put those transactions together.

And I’d say stay tuned I mean, how we believe in acquisitions and we have the operational teams and the culture to be able to really attract and add any type of business to our model and be successful at it..

And just one separate question, how are you thinking about expanding into other adjacencies where does that rank among your priority being acquisition, digital, et cetera?.

I think when we think about the adjacencies are diversified type of businesses. Most of our strategy is focused around the idea of it makes us more competitive with our consumers and provides a greater transparency and speed. And also it helps us be more competitive on purchasing acquisitions, because if we can extract more value out of that stream.

It allows us to maintain those 15% to 25% return thresholds while still being able to grow at a pretty exorbitant rate..

Our next question comes from John Murphy with Bank of America. Please proceed with your question..

Just a first question on the sort of the connection with the parts and service and used. If you could just kind of give us an idea – the way that you're booking parts and service for recon for your used vehicles.

How much gross are you doing per vehicle and the way you're doing in your internal accounting? Is in the ballpark of 1400 to 1500 bucks, trying to gauge - how much of a help that is to your parts and service and that seems like it's something we'll continue to grow over time?.

This is Tina, John. So for our internal reconditioning, we actually reclassify that gross profit into new and used vehicles based on – where the internal work is done..

John, we've done that forever as well..

So there is no internal recon in your parts and service, whatsoever as far as what we're looking at?.

Yes..

Then a second question on floor plan obviously floor plan interest expense was a little bit better than what we were expecting. I'm just curious, as you look at managing that going forward with rates coming down, how big an impact sort of the rate reduction or rates coming down we'll have on that.

Are there any floors in your Evergreen facilities, and is there an opportunity and to get potentially even a little bit leaner on inventory?.

John, this is Chris. I mean obviously we continue to try to manage the inventory levels that we have regardless of interest rates. Just to make sure that we have a good day supply, but manage the inventory appropriately in all of our stores.

As far as the impact of interest rates with $2 billion floor plan line, 50 basis points reduction or increase can affect our P&L by about $10 million. So based on the current outlook and interest rates, I think we are anticipating some benefit in the future, but at this point in time it's TVD..

And on those lines there is no – are there any floors on sort of the spread or – what the reference rate is?.

John this is Chris, no..

And then if we think about the used vehicle acquisitions that you're doing on online or in home. I mean, as you look at those, you referenced core and value vehicles as significant target for you as you're purchasing vehicles from people who are sitting in their house.

I mean, how accurate are the algos so far, and is there a larger buffer that you're putting in for sort of that appraisal.

So given – so like the quality of the vehicle has a huge dispersion as it gets older?.

John, that's a great question, this is Bryan. I think our valuation algorithms are pretty tight. We tested them multiple times in different stores based off the knowledge of used car managers and we were within a couple of hundred dollars one way or another.

I think when you think about our condition, there is no question that you just nailed the most important thing, which is as you move down the spectrum and price range you start to get more disparity in quality. And I think that's something that digital solutions can only do so much.

You have to have physical people that understand the quality of a vehicle, that understand the touch, feel and smell of a vehicle. The mechanical operations and just the general appearance that I think we've learned get lost in a pure digital play. And I think we will be more competitive most likely to be able to do that..

And is there an adjustment factor that you're allowing for. If you say you give somebody a $10,000 bid online, you show up and the car has something else that's in the wear and tear that's demonstrably worse that you can knock $500 or $1,000 off of that.

I mean how tight or how committed are you to that that actual number if given to somebody online?.

John, I've got - I actually have numbers that are looking very similar in both shifts our partnership with the San Francisco Silicon Valley company. As well as what we're seeing in our early stages of our own purchasing digitally. And we're seeing that most vehicles, consumers are pretty darn good about going through the 20 or so condition questions.

But we are averaging about $750 of disparity – from when we give them the bid online and when we arrive physically to pick up the car. The exciting news is we're at about five to six out of 10 purchases on the Lithia side. Shift is higher than that, somewhere between seven and nine out of 10 purchases.

While still being able to adjust condition at somewhere around $700 a vehicle. That's a really good insight that you saw there..

And then just lastly, I mean we're hearing some noise particularly around, it sounds like Nissan that there is a little bit of pullback in dealer support, incentives, cash in the trunk, whatever way you want to call it.

Is that something that's sort of a trend that you're seeing from the automakers as they try to claw back a little bit of the profitability out of dealers? Or is this a very unique time and space situation with Nissan that we kind of heard about yesterday?.

This is Bryan again. I think that we cherish our partnership with Nissan. We have a very small portion of Nissan, but I believe this is inherent to just Nissan. We're not seeing that within other manufacturers. It's not something that has been prevalent in the industry.

And I imagine they'll work through those opportunities as well to be able to adjust profitability and volume..

Our next question comes from Chris Bottiglieri with Wolfe Research. Please proceed with your question..

Hi, first part - want to kind of build into a little bit. Can you kind of just walk us through a little bit what is being done at Baierl kind of the local market level. How deliveries performed like who does the delivery.

And then two like, if the unit that much different than kind of the base brick and motor and how you think about if there is an offset overtime as that becomes more prevalent?.

Yes, this is Chris. So as far as - what we're doing is specifically related to the sale.baierl.com purchase offers is. You have really options to do it the way that the customer chooses.

So, you can either come into one of our dealerships and deliver your car or we actually send a valet out to your home, they do a quick inspection, a quick test drive, it typically takes 30 minutes or less. And then we actually give them an offer that they can redeem if they choose from U.S. bank.

So it's a very quick and seamless process that we have and we're finding the early adoptions from consumers is very positive. As far as the sell side is concerned, we're working on as Bryan mentioned earlier, developing our own proprietary sell side technology that we can use on Baierl in the future and our other platforms.

Currently right now, we're being supported by a third-party vendor on the sell side..

Chris, one other quick things, this is Bryan. I think when we think a little longer term about how do we go to market to really be able to meet our consumers demands wherever, whenever, and however they choose. We think about our nimbleness of being able to own our own proprietary software as a key solution.

And I think when you think about how consumers respond, and how they take action in today's retail environment, they're so different from one another.

So we're really looking at how do we build and attract not only the traditional buyers that want to go through a traditional automotive retail channel, but how do we attract those that are really looking for an experience that is different than the traditional automotive channel. And I think as you see our technology and our strategies unfold.

You'll see that we may have multiple brands that attract different segments or consumer groups that may have specifics that they're looking for. We may end up bifurcating things and find partnership where we’re able to spread our wings and really leverage the 15,000 great people that we have that have the knowledge to be able to help consumer.

And most importantly those 70,000 vehicles and growing that are really what drives our ability to sell vehicles and create experiences with consumers. Now we just have to find an affordable convenient and transparent way to do it..

That was my follow-up question actually the technology seems great I guess - mostly as we were alluding but is there the possibility of creating like an online brand. So you can maybe scale this quicker and is kind of benefit from kind of online traffic and all of the kind of like flywheels that come with that.

How do you think about that given like kind of or decentralized model?.

This is Bryan I think you're looking into our window to the future, but I think it’s definitely is and I think when you think about the engines that drive the decisioning. Whether its valuation, whether it’s pricing, whether it’s the workflow management that occurs on digital solutions.

I think that where we think about that you have to be able to do these things internally. You have to have good adjacencies in business lines and diversification to be able to be all things to all people. And I think we have that solution to be able to do that.

And I think that you'll begin to see separation and you won't hear from Lithia Motors that we’re going to have 22 stores you know that are going to be on this system and then it’s going to go to 30 that's not how we think okay. It's incremental it's something that you will see in our same-store sales results.

You'll see in our incremental information that we provide which is the sell to barrel.com which we urge everyone to go and try that. Think about it this way, we were able to achieve that in less than 75 days from start of touching those buttons and programming to where we sit today.

So we think speed and the curb to be able to do these things can move pretty quickly. And we’re positioned nicely to be able to leverage that throughout our network..

Our next question comes from Rajat Gupta with JPMorgan. Please proceed with your question..

Just wanted to follow-up on parts and services, just curious as to with the June strike extending through October I mean have you seen any impact at all or do you expect to see an impact on your warranty business.

And if yes then and how should we think about growth in the fourth quarter here and I have a couple follow-ups?.

Sure Rajat as a whole our service and parts business we’re very pleased that many of the things that were doing whether it's our commodity pricing of multiple different items are really growing our business at a more exponential rate than we initially planned. Customer pay was up 9% if you remember and warranty was up 11.

So they're pretty static in terms of where they were at and similar which we love that. Some of the digital solutions are starting to take hold as well in that area.

And I think as we look forward in parts and service it sure seems like this is an area that with mobile service we can really start to spread our wings and really touched more consumers the way that they are really asking to be assisted. Chris, you want to [indiscernible]..

Specifically on the GM side is as I am sure aware GM makes up less than 10% of overall revenue, net revenue base but in total we rough over 18% in the quarter in General Motors revenue. In our warranty trends because asked specifically about that we’re actually up over 13% in a month and 11% in the quarter.

So we actually saw positive trends in the warranty work rolling into the quarter.

We have plenty of inventory, there is no issue on day supply whether it’s a new vehicle and on the part and service side what we are finding is that on delayed repairs we are able to schedule out the work or use aftermarket parts to supplement what we traditionally would have used for the OEM parts on non-warranty.

So our big focus is get the contract signed with General Motors and you look forward to seeing them move forward with the exciting products that they have to offer us in our dealerships down the road so get this behind us and move forward..

Great thanks for clarifying that. And then just to follow-up on the sell from technology as it start to expand into your other stores and other regions.

How should we think about the impact on the retail GPUs here is there I know you have a lot of upside from the acquisition that you're seasoning, but just from this technology extending across other regions I mean how should we expect that to - that should be used longer-term?.

Rajat, this is Bryan, I actually believe that it doesn't affect GPUs a lot it really just affects volumes. So pay close attention to our same-store sales growth. We’ll be able to provide you more information and details on whether it's a certified vehicle or core product or a value product as we get further into this.

And as we have more data to be able to query to be able to see what really happened what is the propensity for consumers to really utilize this tool from home..

I would assume that just sourcing that from auction and direct mean wouldn’t that help in some ways or is it just not - given the mix you are already selling probably not incrementally is that the right way to think about it?.

Yes, this is Bryan again/ I don't think I think this is all incremental right now only 6% little over 6% now of our procurement of used vehicles is coming from direct to consumers from consumers.

So we don't think that it will be an adjunct to auctions or take away from buying from wholesalers or buying from other dealers or that we want incrementally more business. And I think what you'll see is us be able to expand those five channels where we typically have procured vehicles from.

And I think ultimately it will make us better at procuring trade-ins better than we had in the past and even at auctions where. I believe that most people believe when we buy stores that auctions are a bad place to buy cars I think they are great place to buy car if you're looking for one to five year old vehicles.

I think if you're looking for five plus year old vehicles where the heavy lifting is done and all the money is made that's another story that very difficult to be able to do that. Our best stores are able to do that.

And as Chris said they’re selling two to one use the new ratios and selling a massive amount of core products upwards of 30% of their mix and doing a nice job. And I think that the vision that we inspire all of our stores to achieve..

Just one last one on F&I what’s been the key driver of the GPU increases I mean is it mainly coming from seasoning of the acquisition or is the penetration of more products - have lower rates started to help in any way in 3Q?.

Yes, this is Chris. I mean I think the number one thing is really around awareness. As we’ve said when we do acquire stores typically we’re seeing F&I averages from the prior dealers in the $700 to $900 range.

And so, the first thing that we do is show what our other stores are doing so not hypothetical but actually stores in same make, same models, same region that are 1600 to 2500 a copy in F&I. And I think that wakes people up it makes sure that we have the right people that and then we bring in the right products.

And we do because of our size get leverage on pricing that does make our products more competitive and actually more profitable for our stores. And then the last thing is just make sure that we deliver the market at the right price. Now the other big thing when it comes back to people is that 71% of our transaction have negative equity of over $5100.

And so, we have to make sure we look at our F&I F team as professionals that have to be able to help customers meet their buying needs. And I think a lot of awareness around F&I and is what’s really driven us to bring our F&I PVRs up consistently over the last several years.

But at the same time when we still have several of our more recent acquisition platforms in the $1000 to $1200 range we know that there is significant opportunity for us to continue to capture as they see this..

[Operator Instructions] Our next question comes from Bret Jordan with Jefferies. Please proceed with your question..

A question I guess on the sell from home again the conversion rate. I think you said 50% to 60% of folks on the sell from home platform ultimately sell to you.

Is that the 50% to 60% of those logging in or 50% to 60% of the offers that you make transact and do you lose people in the appraisal process are in the filling out the questionnaire?.

Bret, this is Bryan. The 50% to 60% those are the people that said yes I want to sell my car. We’re closing 50% to 60% of those okay. On the shift side they are closing 70% to 90% about seven out of 10 initially and then another two within about a week where they go back to their home or they haven't delivered to stores’ location..

Okay..

Outside of that we definitely see attrition before that. So I think Chris mentioned that we’re getting over 70,000 unique requests for people to sell their cars. So which is helpful but a lot of that its SEO and SEM we are having to pay for those leads to be able to find those cars.

But I think as we build more proprietary solutions a lot of that will become more cost effective. I think if you look at our advertising 5% year-over-year same-store as a percent of the growth in advertising which is some early signs that we’d like to see while our traffic was still up almost 23%, 23%..

So the 50% to 60% of those people who have received a bit brought their car down to your lot you made an offer.

I think you said the average is about 750 below what they originally saw on the screen once you've seen it and touch it and they still transact?.

Yes, that so they don’t necessarily have to bring it down to us. We give them an offer within seconds okay. It’s doing it automatically on the algorithm okay so really quickly they are able to respond yes or no if they hit yes okay. Then we reach out to them or they schedule a time okay.

So once they hit yes we’re saying that five out of six times we’re able to get that car..

And then a question on the body shop side of the business being up 11 obviously a lot better than repairable claims growth.

What’s driving that - is it always certification programs that are pushing more volume to you or is it you getting better labor access than some of the independent competition?.

This is Bryan again Bret. I would say it's a couple different things it’s our direct to repair partnerships with our insurance companies. It’s typically the biggest driver of body shop business.

We've done a pretty good job about building national contracts with those and really reaching out to the different insurance providers to get that that means dream of leads coming into us. I would also say this if you look at our same-store sales last year in body shop it was down okay.

So we probably had a fairly easy comp and it's nice to see that our body shop and the people running those body shops are really starting to take hold and really believe in that growth powered by people in reaching for the sky on high performance..

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

Big picture given the success you had today what you view as of your competitor advantage with respect to pursuing or sourcing these M&A opportunities.

And just curious why do you think your public peers haven't tried to replicate the lithium model or pursue these types of acquisitions as aggressively as you have?.

This is Bryan again, and this is not a one answer question. So I am going to give you five or six different reasons why it’s unreplicable.

I think first and foremost it starts with an acquisition strategy that has been developed over 20 years and target specific acquisition that are going to yield the returns that create that cash flow engine that makes it very affordable and keeps leverage low.

Secondly, you have to secure manufacture support which I believe starts with that value-based acquisition strategy and the only way that you're going to be able to do that is to have a culture and a team of people that are high performing and that understand and are ready for a challenge to buy things that are broken sometimes or average.

And probably even in the Southeast that are operating pretty darn good, and not try to imprint on them to make them you but rather - to strive to stay focused that we care about pretty simple things okay. We care about customer loyalty, expanding market share to grow profitability, okay.

And that discipline is built into our proprietary measurement systems that are highly crucial to our ability to grow and expand the business. Chris spoke to that a little bit earlier. It's not something that anyone should take lightly.

They're simple, but they're very complex and wrapped around our value base of customers for life taking personal ownership, continuously improving and having fun. And there is a levity there that creates an attraction growth, amazing people that can do great things with great assets. Okay. And I think you just have to be able to find those assets.

We also have an executive team that is 100% aligned that believes in the strategy and more importantly believes that there's more, their incomes, the 5% national market share and the inspiration that we believe that we can achieve.

We have the capital discipline to be able to make sure that we don't go off the rails and that we're able to always be able to find the capital to be able to fill the shoes of the people that are ready to go do the next things. Okay.

And I think most importantly and probably lastly is we have digital solutions now that allow us to leverage the things I just talked about that we've never been able to leverage it before.

And I think that roadway to that 5% of the nation is probably clearer than ever because of that ability to really expand your wings in areas where our network currently doesn't touch or is intense enough..

Our next question is from David Whiston with Morningstar. Please proceed with your question..

Little bit surprised to hear you say you're sell from home tech was 100% Lithia developed.

I was wondering if your partners at shift contributed in any way to that development?.

Great question, David. I would say that the best practice sharing between our two organizations is amazing. We've had a full year together and we're really excited about that future sharing of ideas to continue to grow.

I would say definitely what we learned is that consumers, there is many buckets of consumers that are thirsting for a new way to be able to interact with their mobility needs. And I think more than anything we saw that there is only light resistance when it comes to being able to interact.

And I think that idea sent us down this pathway, that we had already been working on in partnership with other third parties.

But what we quickly realized is our ability to respond and be nimble was probably more important than working on the partnerships because ultimately we can do what we see as best, which means we're going to come up with multifaceted solutions rather than a one size shoe fits all because we ultimately believe that consumers are all wanting something a little bit unique to them..

Did I hear correctly that only 6% of your used procurements, the 94% auction?.

Okay. Let me back that up. You know, let me give that to Chris. It's not 94% auction. We have five channels that we get it from. Go ahead Chris..

Yes, Dave. So trading vehicles represent 63% of the used vehicles we sell, auctions are only 12%. You know, we do buy used vehicles from a lot of other new car dealers that aren't in the used car game. And then wholesalers bring us about 7% of our vehicles, and then our off the street vehicles are approximately 6%.

But I would also say that we're adding a new channel from the five channels with our online, digital solutions and so really the six channels we have we'll provide more color on number six in the quarters to come..

I love that Chris, we're growing all the time, aren't we? Exactly..

Okay. So on sell from home if you pick up the vehicle, you agree on a price, you pick up the vehicle from person's home and then once you're in your recon Bay, you realize there is a much more serious problem.

Do you have any recourse to the seller with the seller at that point that you can get any of your money back or are you stuck with what you sold it?.

David, this is Bryan. I think we look at things pretty broadly, meaning that we're a mature buyers. We have experience and knowledge that we should know certain things. So no, we do not go back to the consumers. Okay.

If they choose to sell vehicles to us, what we see as what we get just like we've been doing for - well for that matter in my career for three decades. Okay. That we're grown up that understand the risks, as well as understanding the rewards in those instances where it doesn't work out.

Fortunately, there is enough good that comes through and in growth in used vehicle sales that it all seems to be profitable..

David, this is Chris. I mean, as Bryan mentioned earlier, it only takes a couple minutes to actually get the offer on your vehicle and I encourage you to go to sell.baierl.com and actually if you do have a license plate or your vehicle then you can get an offer on your existing vehicle in minutes and see how the process works. It's pretty slick..

And we won't make you sell it to us. You can just test it. Okay. Even though we probably want the car. Okay..

Okay, cool. Last question, Chris, I think the past two calls, now you've called out negative equity. And it's great that it looks like you're still getting these people in the vehicles, but these negative equity numbers are pretty high.

Aren't you concerned at some point letting partners are going to pull back on writing that paper?.

David, this is Chris. Believe it or not, that hasn't changed much over the years. So all we're calling it out, we just wanted to call it out in the context of the amount of work that goes into our finance and insurance teams and what they have to do other than just provide lending solutions.

The job takes a lot of work and as we continue to train and season our teams, they get better and better at it.

But I do think that having the advantage of the new vehicles and the incentives that come with it and rebates that are available for consumers, all of those come into play when you actually work to finance a consumer and the big advantage of being top of funnel. Yes. And we keep getting better at it..

Ladies and gentleman, we reached the end of the question-and-answer session. I would now like to turn the call back to Bryan DeBoer for closing comments..

Thank you everyone for joining us today, and we look forward to updating you on our fourth quarter results in February. Bye-bye..

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation..