Q3 2019 Earnings Call
Good morning, welcome to the Lithia Motors third quarter 2019 conference call.
All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session I'd now like to turn the call or <unk>, Eric <unk>, Vice President of Investor Relations and Treasurer. Please begin.
Thank you and welcome to Lithia Motors third quarter 2019 earnings call presenting today are Brian de Boer, President and CEO , Chris Holzshu Executive Vice President and Tina Miller Senior Vice President and CFO . Today's discussion may include statements about future events, including financial projections expectations about the company's products market and growth.
Such statements are forward looking and subject to risks and uncertainties that could cause actual results to differ material from the statements made we disclose those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission, whereas you can't really consider these disclosures and not to place undue reliance on forward looking statement, we undertake no duty to update any forward looking statements, which are made I'd love to do.
That's really our results. It's got today include references to non-GAAP financial measures. Please refer to the Texas todays press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, let the investor Relations Dotcom highlighted in our third quarter results with that I would like to turn the call over to Brian de Boer, President and CEO . Thank you Eric good morning.
And thank you for joining Oh.
Earlier today, we reported the highest adjusted third quarter earnings in company history up $3 from 39 cents 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 a hallmark of our mission growth powered by people.
We continue to purchase and build strong businesses that have yet to realize their potential well in new geographies, we look for strong operational team.
This results in increase market share significant cash flows and strong profits all while maintaining low leverage.
Our biggest single asset is our amazing experienced improving network of over 15000 team members as such we want to take a moment to recognize or 11 store team 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 in 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 line saw strong increases similar to the past few corn.
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Used vehicle revenues grew 14%, that's when I was up 13% and service body in 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 lifecycle.
For the 50 or in a row and the foreseeable future, we see new vehicles, our remaining stable at approximately 17 million units.
The economic environment is also strong with medium household income near all time high unemployment at historic lows and overall consumer confidence remains strong.
In addition, lower interest rates and widely available consumer credit or making cars more affordable than ever.
These favorable economic conditions combined with our unique growth strategy makes lift the a unique opportunity compared to most other competitors in specialty retail model.
That's one of the largest auto retailers in the United States selling more than 335000 vehicles annually operating the second largest found inventory marketplace online and servicing more than three and a half million vehicles only a year massive opportunity to grow still remains.
Our industry is highly fragmented what the top 10 companies controlling less than 8% or the U.S. market and no single company controlling more than 2% combined the addressable new and used vehicle market is over one trillion dollars 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 and do expanding our physical network by acquiring strong assets targeting an after tax return up 15%.
We execute with an 80% success rate and our five year end beyond after tax return it's over 25%.
As we continued 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 considered the value of the right teens could 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 flow and an adjusted leverage ratio below two times, we are well positioned for continued growth through acquisitions and modernization.
Using our targeted equity investment at 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 for yacht and Morgantown, Subaru in West Virginia.
In order to fully capitalize on the opportunities over six business lines, we continue to look to expand our nationwide footprint beyond our current reach of 82%.
In addition, we're improving the density ever network to better service, our customers and grow our highest margin business lines.
Our customers proximity to our physical network is important as it enables us to supply convenient touch 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 and the math to 70000 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 an incremental approach to modernization, we recently activated our own proprietary sell from home technology, and the Pittsburgh market, allowing customers to sell a vehicle to us and Jeff minutes.
This experience provide consumers and it's an offer with convenient pickup service at their home and expands our reach to procure used vehicles.
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 wonder one used to new ratio to move closer to the national ratio up 2.3 to one.
We believe that modernization can be profitable and by approaching solutions incrementally our model what she 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.
And entrepreneurial culture that attracts and retains the best talent World class proprietary performance management systems.
Proven growth strategy and a capital discipline with regenerating cash flows adds to the uniqueness of Lithia Motors.
Our industry remains ripe for considerable consolidation and our teams multi decade track record of executing and both operations in acquisitions has positioned us to do just that.
Notwithstanding any economic change our milestone a $15 S is eminent and now we look towards our longer term goal, a 5% national market share as our inspiration with that I'd like to turn the call over to Chris.
Thank you, Brian maybe if mission of growth fire by people continues to be the foundation of our high performance culture as our team members engage each and everyday 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 value of continuous improvement to set their annual operating plan to achieve earnings potential. They continue to identify the levers to pull which in turn improve operating results and further season, then in the Lithia platform with over 7 billion, an annualized revenue purchase in future.
Moving on 14 significant opportunity remains.
In the quarter total sales increased 8% gross profit grew 9% and pre tax income improved 13% following as additional color on each of our six business line.
The new vehicle business line, which is top of funnel and automotive retail grew 5% are ever average selling price increased 6% and unit sales decreased less than 1% gross profit per unit was down slightly at $2049 compared to $2073 last year, a decrease of $24 our store for me NIM.
People and their strategies that balanced volume and gross and adapt to local and regional market condition.
Used vehicle business line was up 14% comprised of a 12% increase in unit sale and a 2% increase in average selling prices used retail gross profit per unit was $2257 compared to $2205 last year, an increase of $52 are used vehicle mix was 27% certified.
59% core or vehicle three to seven years old and 14% value auto or vehicle older than eight years.
Our top performing used vehicle operators achieve it used to new 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 a lot for consumer to receive an instant valuation online and selling 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 merchandise as we further expand these offerings and more of our location.
This modernization in our stores expands our reach and our ability to procure a more used vehicle, which translates to more sales opportunities and our network.
As a result, we continue to target selling at least 85 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 finance and insurance business line remains strong at $1471 per unit compared to $1371 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 at the vehicle you sold in the quarter, we arranged financing on 73% sold a service contract I'm, 48% and total lifetime oil product on 22%.
We continue to focus on capturing the additional earnings potential and have an eye by improving the customer experience and seamlessly integrating the online in brick and mortar experience in our stores.
Strategically, helping identify financing options for consumers, while providing an integrated one stop shopping experience allows us to customize the right product 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 opportunity through the resale of additional trade in vehicles greater manufacturer incentives for nice sales and future parts and service work. One measure of this is through the growth of our total gross profit per unit, which was $3631 this quarter or an increase of $110 per unit overlap.
Here.
We remain focused on our highest margin lines of business service parts in our body shops as onboard technology in vehicles becomes increasingly complex and the car Park continues to grow the need for skilled certified technicians will continue to drive demand and create more recurring repair and maintenance opportunities.
Our service bottom in parts revenue increased 9% over the prior year customer pay work, which represents over half of our fixed operations revenue stream increased 9% warranty increased 11% or wholesale parts grew 8% and their body shops increased 11%.
Same store adjusted EPS, you need a gross profit was 68.8% and improvement of 10 basis points compared to the third quarter of last year, bringing our year to date improvement to 100 basis points.
Our seasoned stores have been asked you need to gross profit metric of approximately 60% ended acquisition, we typically see stores with an S. DNA to gross profit metrics over 90% or higher.
This adversely impact our overall SG any performance until those stores or season. Our teams continue to make progress on cost saving efforts and focus on personnel amortizing and facility costs, which make up the majority of S. DNA considering over half of our stores are still on season significant opportunity to drive down our industry leading led.
Average remains.
In summary, Lithia is unique operating model it 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 plan and carried a trend into 2020 and beyond with that I'd like to turn.
The call over to Tina. Thank you, Chris our team are the foundation to our high performance culture and continue to execute our operating model of acquiring integrating and growing our store in the past five years, we have acquired over 7 billion and revenue and have achieved an 80% success rate based on expected return our team.
Some body the talent and discipline needed to execute this model through aligning our core values, but the key metrics that drive success in operation and having support team to standardize non customer facing processes, we create scalable profitable framework that effectively leverage is fine.
During the third quarter, we generated free cash flows of 83 million and have generated 224 million for the first nine months for the year, we define free cash flows as adjusted EBITDA plus 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 ended the quarter.
Additional liquidity could be obtained through our on finance real estate or accessing that that are equity market.
This strong balance sheet position has is poised to support future growth.
Target, 65% investment and acquisition, 25% investment and capital expenditures modernization and diversification and 10% and shareholder return and the pharma dividends and share repurchases earlier. This morning, we announced the dividend of 30 cents 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 Thirtyth, we had 2.3 billion outstanding as floor planning used vehicle financing a unique aspect of that in our industry is the financing of vehicle inventory with four plant that.
As this financing is integral to our operation Uncollateralized fighting assets the industry treats the associated interest expense as an operating EBITDA excludes this that from our balance sheet leverage calculation on adjusted our total debt to EBITDA is overstated up 5.8 times adjusted to treat these items of an opera.
Our net debt to adjusted EBITDA is too tight at the low end of our targeted range of two to three time.
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 remark, we would now like to open the call to questions operator.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation total indicate your line is in the question in queue. You made press star to if you'd like to remove your question from the Q.
Or participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment. Please why we poll for questions.
My first question comes from Rick Nelson with Stephens. Please proceed with your question.
Thanks, Good morning.
Great quarter.
Two.
Follow up on barrel.
Any updates there were.
For old technology out to some early learnings from.
Metrics you can provide on those stores would be great.
Sure Rick Thanks for joining us today this is Brian .
The Pittsburgh market is progressing nicely as you know our modernization strategy is incremental but last month, we were able to further roe rollout or some of the.
The tools that we are building primarily a sale.
A vehicle to us from your home.
Solution that fully proprietary in the past we were using a different engine on 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 partnering cards at a fairly good rate and there's definitely strong demand outside of Pittsburgh from our other leadership team.
Teams.
That are wanting to kick that off as well in terms of it by from home or the digital solutions to be able to affect the deal and by 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 in chosen by consumers as much as we believe that they will in the future.
Thanks for that.
Also.
So much.
You know how you're using.
Yes term plan plan views.
From a technology.
Yeah, Hey, Rick This is Chris I think a big thing just leveraging off of a Brian just said is in the quarter. We provided over 70000 online purchase offers a for used vehicles that weren't actually tied to a customer purchase and so you know those offers came from all three of the channels that we have right now which is the cell dot bear.
I'll Dot Com channel our partnership with shift and then other solutions that are already available by third party.
Great and then.
On our progress, yes, Jim Hey.
From you know you've been very acquisitive over the last several years I know DCH, we saw nice tail.
Our.
Interest.
Are you, saying we are.
With that was from thanks much.
Sure.
Dan.
Where are you, saying the most progress.
Where the laggards might be in terms of extracting value.
Yeah like this is Chris again, so you know as we stated in our prepared remarks, you know 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 S. Genie fraud and it takes is typically three to five years to season those stores. So you know as we bring those stores.
Then on day, one they typically run at 90% or higher S. You need a gross and our season stores are running in the low 60 percentage range. So as far the inning I I'd say, we're in the mid innings of kind of where we're add on SDN and our goal is to continue to drive all of our stores down to a combined this you needed roast and that low 60 percentages.
And.
Great.
Hi, good luck.
Thanks, Rick.
Our next question is from Steve Dyer with Craig Hallum. Please proceed with your question.
Thanks, Good morning.
Nice execution.
Even if I could start in the in the U.S business sales were obviously very strong in the quarter, but your GPU perform much better I think them one of your peers, who reported yesterday I'm just wondering if there's any specific initiatives that are driving some of that improvement whether its acquired stores are better inventory position et cetera, what do you see.
You can use.
Hey, Steve This is Brian .
We're really pleased that our value autos were up 19%, we actually make about $100 more per unit on value auto and is as many of you know our gross margins on those.
Those items, which is an eight year old and older vehicle is almost 20% so.
So some of the margin is coming from that but that's really being driven and our ability to procure cars and I think everyday 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. When 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 im 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 retail.
Got it.
Then I guess it in terms of the the online initiatives is your plan sorted a roll out all of the different functionality and products in that suite in Pittsburgh in them 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 all of it in place maybe what's your cadence of rolling out some of those technologies beyond the Pittsburgh market.
Hi, Good question, Steve It's Brian again, I think when we think about innovation or modernization. We don't we don't look at it is initiative based meaning that if we do this we're gonna do this in the next step we read the play as it happens, we let things happened organically and we.
Foster that there's 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 and 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 in a theory on 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 is definitely where we're doing most of the innovation on our programming and then 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 lithium model, that's really built around entrepreneurship and innovation within a 185 locations our stores and then one shares best practices here in Medford.
Got it and then I may have missed this but just to be clear your sold from home technology is that something that you bill yourselves proprietary in the last however, many months are utilizing someone else's technology on the back end of that.
It's 100% Lithia motors built and driven a it took us about 45 days to build it which we were shocked that we were able to do that and that's.
Kudos to George Heinz and his team, our Chief Technology, and 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 the.
On that side of the business that you will keep most of the cars the to procure and recondition them yourselves or we'll see some some to auction how do you sort of look at monetizing the revenue.
Great question I think this is the thing we fight and try to endure in people every single day, I mean part of lithium model as buying those underperforming stores.
Typically there's 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 in vehicle. What's 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 which is not really defined our 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.
Able to meet our customers' needs at the highest levels.
Got it okay ill pass it along thanks guys.
Okay. Thanks.
Our next.
Our next question comes from armor test think of Victus from Morgan Stanley . Please proceed with your question.
Great. Thank you for taking the question.
You.
Maybe maybe you can provide us with an update on the.
The B you acquisition philosophy.
You mentioned well positioned to accelerate the growth strategy in the coming quarters, you're at the low end of your leverage range I think you you've been.
Local about potentially targeting the south east maybe you could provide us with an update there.
So some of the B.
Perhaps obstacles that are.
Delaying a a dealer or maybe not but any update will be helpful.
Awesome. This is one of our favorite topics, so and it's part of our our core strategy of how to value invest there's considerable activity out there. We've only done about 475 million. So far this year and 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 this the central Atlantic States a lot of Metro there that we haven't really.
Entered the acquisitions are plentiful I wouldn't 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 a whereas beyond five years, we actually achieve about 25%. So we have a a fair amount of cushion there that when we find the right geography the management teams.
We should be able to step up and be able to put those transactions together and I'd say stay tuned I mean, you know how we are we believe in acquisitions and we have the the operational teams and the culture to be able to you know to really attract and add any type of business to our model and the success.
Festival at it.
Okay and just one separate question how are you thinking about.
Expanding into.
Other adjacent sees where does that rate among your priority being acquisition digital et cetera.
I I think when we think about the adjacent fees are diversified type of businesses.
Most of our strategies focused around the idea of it makes us more competitive.
With our consumers and provides a greater transparency in 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.
To to grow at a pretty exorbitant rate.
Great appreciate it.
Our next question comes from John Murphy with Bank of America. Please proceed with your question.
Good morning, guys.
Just a first question on sort of the connection with the parts and service and used.
If you could just kind of give us an idea you the way that you're booking parts and service whether for recon for your used vehicles. How much you gross are you doing per vehicle in the way you're doing in your internal accounting is in the ballpark 14 to 1500 Bucks trying to gauge what how much of a help that is do you parts and service and that seems like it's something we'll continue to grow overtime.
Hi.
This is Don.
So far our internal reconditioning, we actually reclassify that gross profit into new and used vehicle on based on front where the.
Turning now as Don.
[noise], John we've done that forever as well that's the guidance. So there's no internal recon in your and your part in your in your parts and service whatsoever as far as we'll go ahead.
Okay.
Then secondly, that's helpful. Then a second question on on floor plan.
Obviously floorplan interest expense was a little bit better than what we were expecting I'm. Just curious as you look at managing that going forward its rates coming down.
How big an impact sort of the rate reduction or rates coming down will have on that are there any floors in your evergreen facilities.
And is there an opportunity to get potentially even a little bit leaner inventory.
Yeah, Hey, 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.
I have a good day supply, but a lot of managing inventory appropriately and all of our stores as far as the impact of interest rates you know with 2 billion dollar for planned line you know 50 basis point.
Reduction or increase can affect our personnel by about $10 million. So.
Based on the current outlook in interest rates I think we we are we are anticipating some benefit in the future but.
At this point in time TBD.
And on those lines. There is no. There's no are there any floors on some of the spread or what you would whether reference rate is.
John This is Chris now.
Got it okay.
Then if we think about the U.S eagle acquisitions that you're doing.
On online or in home I mean, as you look at doesn't mean, you referenced corn value vehicles as a significant target for you as you are purchasing vehicles from people who were sitting in their house I mean, how.
Accurate or the Algos. So far in is there a larger buffer that you're putting in.
For sort of that that appraisal well given the quality of vehicle has that huge dispersion is it gets older.
John that's a great questions as Brian I think our valuation algorithms are pretty tight.
We tested them multiple times in different stores.
They stopped 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 a condition. There is no question that you just nailed the most important thing which is as you move down the spectrum in price range, you start to get more disparity in in qual.
Marty and I think that's something that the 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.
Gets lost in a pure digital play.
And I think we'll 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 $10000 bid online you show up in the car has something else. It's in the wear and tear that's demonstrably worse that you can.
Nok $500000 off of that I mean, how tight or how committed are you too that the actual numbers given to somebody online.
John I got I actually have numbers that are looking very similar in both a shift our partnership with the with the San Francisco Silicon Valley Company as well as what we're seeing in early stages of our own purchasing digitally.
And we're seeing that that most vehicles consumers are pretty darn good about going through the 20 or so condition questions.
But we are averaging about $750 a disparity.
On a from when we give them the bid online and when we arrived 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 to nine out of 10 purchases, while still being a.
Well to adjust condition that somewhere around $700 of vehicle. That's a really good insight that you saw their.
Gotcha, Okay, and then just lastly, I mean, we're hearing some noise, particularly around.
Sounds like Nissan there was a little bit a pullback in dealer support incentives cash in the trunk whatever way you want to you want to call it.
Is that something that 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 is very unique time in space situation with Nissan that we kind of heard about yesterday.
This is Bryan again, I think that.
We cherish our partner ship with Nishu 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 it has been provident prevalent in the industry and I imagine they'll work through those those opportunities as well to.
Be able to adjust profitability in volume.
Very good to hear thank you very much.
Thanks, John .
Our next question comes from Chris Bottiglieri with Wolfe Research. Please proceed with your question.
Hi, Thanks for taking my question.
Brad I guess, the first part it hi, first part when it got to delve into little bit can you get it just walk us through a little bit what's being done it barrel the kind of the local market level, you know how deliveries performs like who does the delivery and then to like the unik and could not concerned that much different than kind of the based brick and motor and how you think about if there's some.
Instead overtime is that becomes more prevalent.
Yeah. This is Chris so as far as what we're doing because specifically related to sell that barrel Dot com purchase offers is you have really options to do with the way that the customer chooses. So you can either come into one of our dealerships and deliver your car or we actually spent a valley out to your home. They do a quick inspection of quick test drive.
It typically takes 30 minutes or less and then we actually give them and 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 adoption from consumers is positive.
As far as the sell side is concerned we're working on as Brian mentioned earlier developing our own proprietary sell side technology that we can use on barrel in the future and our other platforms. Currently right now we're being supported by a third party vendor on on the sell side.
Chris One other quick thing. This is Brian I think when we think a little longer term about how do we go to market to really be able to meet our consumers demand 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. There 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 see our technology and our strategy is unfold, you'll see that we may have multiple brands.
That attract different segments or or or a consumer groups that may have specifics that they're looking for we may end up bifurcated things and find partnerships, where we're able to have spread our wings and really leverage the 15000, great people that we have that.
Of the knowledge to be able to help consumers and most importantly, those 70000 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.
Actually that was my follow up question actually the technology seems great I guess my <unk>, let's try this year alluded to but.
Is there the possibility of treating like an online brand. So you could maybe scale. This quicker just kind of benefit from kind of all my traffic and all of the kind of like Flywheels that come with that how do you think about that given like kind of your current for decentralized model.
There. This is a this is Brian I think you're looking into our and into our when did the future, but I think it definitely is and I think when you think about the engines that drive the decisioning.
Whether its valuation whether its pricing whether it's the workflow management that occurs on digital solutions I think that's where we think about that you have to be able to do these things internally you have to have a good adjacent season business lines and diversification to be able to be all three.
Thanks to all people and I think we have that solution to be able to do that and I think that you'll see 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 gonna beyond this system and then it's going to go to 30, that's not how we think okay. It's incremental.
No. 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 that fell to barrel dot 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 curve to be able to do these things can move pretty quickly.
And and we're positioned nicely to be able to leverage that throughout our network.
Okay alright, thank you.
Our next question comes from a shot Gupta with JP Morgan. Please proceed with your question.
Hey, guys Roger Thanks for the Alright. Thanks for taking my question. Your you know just wanted to follow up on parts and services.
Just curious as to you know the GM strike extending through October we have you seen any impact at all or do you expect to see any impact on your warranty business.
And you know just if you asked and I or should we think about growth the fourth quarter here and I have a couple of follow ups.
Sure Roger <unk>.
Our.
As a whole our service and parts business. We're very pleased that many of the things that we're doing whether it's our commodity pricing of multiple different items.
Our 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 similar which we love that some of the digital solutions are starting to take hold a 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 touch more consumers the way that they they are really asking to be.
Assisted.
Chris do you want to go in Atlanta.
More specifically on the GM side is you know as I'm sure you're aware GM makes up less than 10% or overall revenue net revenue base.
In total we were up over 18% in the quarter and general Motors revenue and our warranty trends. Since you asked me about that were actually up over 13% in a month.
On a 11% in the quarter. So we actually saw positive trend.
In the warranty work rolling into the quarter, we have plenty of inventory. There's no issue one day supply related to new vehicles and on the parts 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 where we traditionally would have used for the OEM parts on non warranty so our big focus.
As you know get the contract signed with General Motors, and and look forward to seeing them you know move forward with a 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 data and then you know just a follow up on you know the south from home technology Ah.
Yeah as it starts to expand into your other stores.
In other regions, we how should I should we think about do you know the impact on you know just as the retail at the retail Jeep use your is there.
I know you have a lot of upside from the acquisition is that your seasoning, but you know just just from this technology.
Extending across the regions I mean, how should we expect that to in fact, you abuse so longer term.
Roger This is this is Brian I actually believe that it doesn't affect you can be used a lot. It really doesn't affect volumes of pay close attention to our same store sales growth will be able to provide you more information in details on whether it's a certified vehicle a core product or a value.
Product as we get further into this and as we have more data to be able to queried to be able to see what's really happening what is the propensity for consumers to to really utilize this this tool from home.
Got it I would assume that you know just sourcing that from auction and direct I mean, when data to help or in some ways or is it just not just.
Given the mix fewer already selling probably not incremental is is that is that likely to think about it.
Yeah. 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.
I think that it will will be an adjunct to options or take away from buying from wholesalers are buying from other dealers or or you know that's 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 a trade in a better than we had in the past and even at auctions, where I believe there's a but that most people believe when we buy stores that auctions or a bad place to buy cars I think they're great place the by 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's very difficult to be able to do that our best stores are able to do that and as Chris said, they're selling Tito you know two to one used the new ratios in selling a massive amounts of core product upwards of 30% of our their mix and doing a nice job and I think that device.
Vision that we inspire all of our stores to achieve.
Got it that that's helpful. Just one last one on F and I are you will what what's been the key driver of the of the GPU increases I mean is it mainly coming from seasoning of the acquisitions or is it penetration you are more products.
I I have lower rates started to help in anyway in Threeq you.
Yeah. 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 if an eye averages from the prior dealers in the 700 dollar to 900 dollar range and so you know the first thing that we do his show you know what are other stores are doing so nine a hypothetical but actually stores.
Same makes a model same regions that are you know 16 honored to 2500, a copy enough and I and I think that Weve people up and make sure that we have the right people that you know and then we bring in the right products than we do because of our size get leverage on pricing.
It does make our products more competitive and actually more profitable for our stores and then the last thing is just make sure that we delivered a market at the right price now the other big thing when it come 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 RF an eye.
Team as professionals that have to be able to help customers need their buying needs and I think a lot of awareness around f., an eye is what's really driven us to bring.
Our RF and I PB ours have consistently over the last several years, but at the same time when we still have no several of our more recent acquisition platforms. In the 2000 1200 dollar range, we know that there's significant opportunity for us to continue to capture as they season.
Got it that that's super helpful. Thanks, So much.
You're welcome.
As a reminder, if you like to ask a question. Please press star one on your telephone keypad one moment. Please what we poll for questions.
Your next question comes from Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys.
Hi, Brad a question I guess on the sell from home again, the conversion rate I think you said, 50% to 60% of of folks on the sell from a home.
Form ultimately sell to you is that the that 50% to 60% of those logging in or 50% to 60% of the offers that that you make transact and you lose people in the appraisal processor and not filling out the questionnaire.
Brett This is Brian .
The 50% to 60% is of 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're closing, 70% to 90% about seven out of 10 initially and then another two within about a week, where they go back at the home or they haven't delivered to a stores located.
And.
Okay outside of that we definitely see attrition before that so I think Chris mentioned that we're getting over 70000 unique a request for people to sell their cars.
So which is helpful. But a lot of that is it's it's FCO and FDM or we're 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 we were down almost 5% year over year same store as a percent is a growth in advertising, which is some early signs that we we'd like to see while our traffic was still up almost 23%.
Okay, so the 50% to 60% or those people who have received a bit brought their car down to your lot. You made an offer you I think you said the averages about 750 below what they originally fall on the screen once you've seen it and touched it and they still transact.
Yeah 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're 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.
It five out of six times, we're able to get that car. Okay. Great and then a question on like on the body shop side of the business being up 11, obviously, a lot better than repairable claims growth what what's driving that or are you is it always certification programs that are pushing more volume to you or is it you getting better labor access than some.
Competition.
This is Bryan again, Brett I I wouldn't say, it's a it's a couple of different thing is it's it's our direct to repair partnerships with our insurance companies is typically the biggest driver a body shop business.
We've done a pretty good job about building national contract with though than really reaching out to the different insurance providers to get that that mainstream of of leads coming into us I would also say this if you look at our same store sales last year and body shop. It was down okay. So we probably had a fairly easy.
Confident it's nice to see that are 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 on on high performance.
Great. Thank you.
Thanks, Brett.
Our next question comes from Derek blend with consumer Edge Research. Please proceed with your question.
Good morning, Thanks for taking my question.
They're big.
Big picture given the success you've had today what do you view is your competitive advantage with respect to pursuing or sourcing. These M&A opportunities and just curious why you think your public peers haven't tried to replicate the lithium model or pursue these type of acquisitions as aggressively as you have.
This is Bryan again and this is this is not a one answer questions on my I'm Gonna give you a five or six different reasons why it's on replicable I think first and foremost it starts with an acquisition strategy that has been developed over 20 years and target specific.
Acquisitions that are going to yield the returns.
That create that cash flow engine that makes it very affordable and keep leverage low.
Secondly, you have to secure manufacturer 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 they 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 where 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 strikes her to try to stay focused the.
That we care about pretty simple things, okay, we care about customer loyalty expanding market share to grow profitability, okay and that that discipline is built into our proprietary measurement systems.
That are highly a crucial to our ability to grow and expand the business Chris spoke to that a little bit earlier, it's not something that that anyone should take lightly their 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 11 t. there that creates an attraction grows amazing people that can 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 is.
More their incomes that 5% national market share in the inspiration that we believed 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 to fill the shoes of the people that are ready to go do the next things, Okay and I think most importantly in probably lastly is.
We have digital solutions now that allow us to leverage the things I just talked about that weve never been able to leverage 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 isn't dense enough.
Great. Thanks for all the commentary.
Our next question is from David Whiston with Morningstar. Please proceed with your question.
Thanks, Good morning.
Little bit surprised to hear you say, you're still from home Tech was 100% Lithia develops I was wondering if your partners that shift contributed in any way to that development.
Great question, David I, I would say that the the best practice sharing sharing between our two organizations is amazing.
We've had a full year together and we're really excited about that that future sharing of ideas are to continue to grow.
I wouldn't say definitely what we learned is that consumers. There's many there's 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's only light resistance.
So when it comes to.
Being able to interact.
And I think that idea sentence down this pathway.
That we had already been working on in partnership with other third parties, but what we quickly realize is our ability to respond in being nimble was probably more important then working on the partnership because ultimately we can do what we see is best which means we're gonna come up.
Up with multi faceted solutions, rather than a one size fits all because we ultimately believe that consumers are all wanting something a little bit you need to them.
Okay. Thanks did I hear correctly that only 6% of your use procurements free free inventory come from the consumer so it's 94% auction.
Okay. Let me let me let me back that up you know what let me give that to Chris it's not it's not 94% option. We have five channels that we get it from go ahead, Chris Yes, Dave the so trade trading vehicles represents 63% of the used vehicles. We sell auctions are only 12% you know we do by used vehicles from a lot of other new card.
Dealers that aren't in the U.S card game that them 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 will provide more color on number six and in the.
Quarters to Cai Love that Chris where we're growing all the time Artley exactly.
Okay. So on sell from home if you if you pick up the vehicle user interface you pick up a vehicle from persons home and then once you're in your recon may realize there's a much more serious problem do you have any recourse to the seller with the seller that point. It you can get any of your money back are you start with what you sold it.
David This is Brian I I think it's I think we look at things are 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 is what we get just like we've.
In doing for well for that matter in my career for three decades, Okay that we're growing up that understand the risks.
As well as understanding the rewards and those instances where it doesn't work out. Unfortunately, there's enough good that comes through and in growth in used vehicle sales that it all seems to be profitable and David. This is Chris I mean, as Brian mentioned earlier it only takes a couple of minutes to actually get the offer on your.
Vehicle and I encourage you to go to sell not barrel dot com and actually if you do you 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 how you've called out negative equity.
And that's great that's looks like you're still getting these people into vehicles, but these negative equity numbers are pretty high.
Are you concerned at some point lending partners are in a pullback in writing that paper.
Yeah, David this is Chris well, even or not that hasn't changed much over the years. So while 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 you know just provide lending solutions. The John takes a lot of working.
We continue to train and season, our teams they get better and better added.
But I do think that having you know the advantage in the new vehicles in the incentives that come with it and and rebates that are available for consumers all of those come into play when you actually work to finance, a consumer and and it could take advantage of being top of funnel, yeah, and we keep getting better at it.
Okay. Thanks, guys.
Thanks.
Ladies and gentlemen, we reached the end of the question and answer session I would now like to turn the call back to Brian de Boer for closing comments.
Okay. Thank you everyone for joining us today, and we look forward to updating you on our fourth quarter result in February I buy.
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