Q4 2019 Earnings Call
Good morning, and welcome to the Lithia Motors fourth 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 answer session.
I would now like turn the call over to Eric <unk>, Vice President of Investor Relations and Treasurer. Please begin.
Thank you and welcome to the Lithia Motors fourth quarter 2019 earnings call presenting today are Brian de Boer, President and CEO, Chris Holzshu Executive Vice President and CEO.
You know Miller senior Vice President and CFO.
Today's discussion may include statements about future events, including financial projections and expectations about the company's product markets and growth.
Such statements are forward looking at subject to risks and uncertainties that could cause actual results could differ materially from the statements made.
Those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission.
Due to carefully considered these disclosures and not to place undue reliance on forward looking statement.
We undertake no duty to update any forward looking statement, which are made the data that's really.
Our results disgusted anchored references to non-GAAP financial measures. Please refer to the Tech today's 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 fourth quarter result, with that I would like to turn call over to Brian The board President and CEO. Thank.
You, Eric and welcome everyone.
Earlier today, we reported the highest adjusted fourth quarter earnings in company history at $2 than 95 cents per share.
18% increase over last year.
Full year adjusted EPS was 11, 76, and 18% increase over last year.
Our annual revenues mirrored $13 billion driving strong gross and net profit improvement.
As a growth company powered by people in innovation, our teams remain focused on incrementally and profitably modernizing our industry by elevating the consumer experience through affordability transparency and convenient.
Our omni channel strategy, let us to another record earnings in revenue year, and one large step closer to our $15 Vps milestone.
With that I want to congratulate our 35 Lithia partners group or LPG winners for their exceptional performance in 2019.
Recognition as an LPG member is highly coveted at Lithia and represents the pinnacle of our mission growth powered by people.
So high performance reside throughout Lithia these stores demonstrate a relentless and elevated focus on culture customer experience and continuous improvement degree impressive profitability.
With the addition of this year's Winterthur LPG membership now totaled 77.
We aspire that all of our locations can rise to a partner level. Thank you to our entire team and well done in 2019.
We continue to purchase and build strong businesses that expand our network accelerate our core business it.
And deploy our digital strategies.
This unique combination result in increased market share strong profits and significant cash flows all while maintaining low leverage.
The realignment of our operational teams and corporate leadership, culminating with the promotion of Chris Holzshu to Chief operating officer positions, our team to further accelerate lithia its growth and capture potential in our existing store base faster.
And just a few minutes, Chris will provide more details on our core business well achieve their potential through their 2020 annual operating plan.
Our operational results from this point for will be will be on a same store basis.
During the quarter total revenue grew 7% and total gross profit was up 10%.
We saw new vehicle revenue grew 4%.
Fueling our higher margin business lines to grow even faster.
Used vehicle revenues enough and I were up 17%.
Service and parts were up 6%, excluding a one time reclassification.
And our collision centers were up 8%.
Our digital modernization investments are only beginning to reveal how our experienced workforce.
And with our owned inventory and physical network can be leveraged to improve our organic growth.
For the year I would like to highlight our double digit revenue growth and used vehicles in ethanol high which were both up over 13%.
What service parts and collision centers up 7%.
For the year, we also achieved double digit gross profit growth across her used vehicle ethanol I and service parts in collision centers.
That diversification in our six core business lines creates resiliency and our revenue and profit strings, well considerable new adjacent see opportunities remain and finance insurance real estate, new distribution channels and more.
That's consumer behavior involved we invest in modernization that supports an expands our core business by further activating our existing network and allowing our stores to best serve consumers wherever whenever and however, they desire.
This pragmatic in incremental approach to modernization continues to take hold and the Pittsburgh market, where we are currently growing our cell and buy from home technologies and other customer offerings.
Our proprietary sell from home technology, utilizing machine learning and real time feedback has allowed us to be agile and adapt the consumer preferences and market specific conditions.
These scalable solutions are ready to be activated in additional markets throughout 2020 as demand from consumers and our operational leaders increases.
These technologies will also be the engines for future business and marketplace solutions.
The U.S. automotive retail industry remained strong with the number of licensed drivers and the U.S. hitting an all time high of over 227 million.
Over the last five years, the U.S. has added more than 15 million drivers.
The largest increase of any five year period since the 1970.
In addition, the percentage of licensed drivers relative to the population has increased every year over the same period.
2019 also represented the fifth you're in a row that new vehicle SAR Eclipse 17 million units and we expect to see similar strength in both measures moving forward.
With record licensed drivers on the road stable vehicle sales low interest rates and widely available consumer credit significant opportunity remains to capture additional earnings within our existing store base as we also accelerate or acquisition growth.
Our industry remains fragmented with the top 10 companies controlling left an 8% of the total you aftermarket and no single company controlling more than two person.
It's highly fragmented market has allowed us to consistently in that and increasing the reach and density of our physical network by acquiring strong assets.
For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after tax return.
Over 25% annually.
With our most recent fund raising costing below 5% interest that's a massive return and unrealized impact to earnings.
With more than $1 billion them available liquidity, almost 300 million dollar for an annual free cash flow.
And then adjusted leverage ratio below two times, we're well positioned for continued growth.
Assuming an average equity investment of approximately 20% of revenues are available liquidity, an annual free cash flows could add up to $6.5 billion in revenues or 50% growth.
In November we acquired the Williams automotive group in Florida, which consisted of three high performing stores in the southeast.
Entering the desirable greater Tampa market expanded our network coverage from 82% to 92% of the U.S. and establish teams to springboard from in the southeast.
No 2019 was a light year, we added nine locations totaling over 825 million in revenue or about 6% more volume to our network.
We continue to seek acquisitions to improve our reach more convenient we serve our customers and grow our higher margin business lines.
Our customers proximity to our physical network as a key element of our growth strategy as it enables us to supply convenient touch points throughout the ownership lifecycle.
Lithia now has the broadest coast to coast network of any auto retail or any United States and it is yet to be fully activated.
With over $1 billion up liquidity leadership expertise accessible to all 50 states.
And an active market, we expect 2020, it could be a banner year of growth for our company.
Despite another successful year of earnings in revenue growth in 2019, we're just getting started.
Our company and its 15000 team members live our mission of growth powered by people and the corresponding value to constantly improve.
As such we remain humble and never quite satisfied and our Canadian totally committed to improve grow and find new opportunities.
In closing our diversified high growth business strategy, it's 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 the capital discipline, which were generating cash flows adds to the uniqueness of Lithia motors.
Our industry remains right for considerable consolidation and its thirsting for modernization.
Our teams multi decade track record of executing at both operations and acquisitions.
Have positioned us to continue to lead in both.
Our milestone or $15 D. P. S is eminent and now we look towards our longer term goal of 5% national markets share as our inspiration.
That I like the turn call over to Chris.
Thank you Brian.
As we enter 2020, our cultural high performance continues to creep engagement from each of our entrepreneurial team members that find ways to exceed customer expectations increased market share and improved profitability. Our store leaders challenge there seems to maximize the performance by setting individual departmental goal that's supported by each stores annualized.
Operating plan or LP.
These ale piece focused on the specific actions necessary to drive higher levels of performance and continuously improve combined with our proprietary performance management system. Each store leader is able to identify the necessary levers to pull that enhances <unk> consumer experience and drive profitable growth.
I'd now like to expand our same store results in the quarter total sales increased 7% gross profit grew 10% and pre tax income improved 16% following as additional color on each of our six business line.
The new vehicle business line, which is top of funnel for consumers in automotive retail grew 4% our average selling price increased 5% and unit sales decreased 1% slightly better than national average gross profit per unit increased to $22267 compared to $2127 last year.
An increase of $140.
Well our team balances volume of gross profit and evolving regional market conditions. They continue to find new ways to leverage our 40000, new vehicles in inventory and our mass the selection of OEM branded products and services.
To reach the entire country.
Our used vehicle business line was up 17% comprised of a 16% increase in unit sale and a 1% increase in average selling prices used retail gross profit per unit was $2088 similar to last year.
Our used vehicle mix was 24% sort of 555% core or three vehicles three to seven years old and 21% value auto or vehicle older than eight years, we ended the year, where they used to new ratio of almost one to one up from 0.8 to one in 2018, which as a reminder is less than half of the national average.
2.3 to one.
Our experience used car managers remain focused on leveraging innovation do expand procurement or more used vehicle, which is the primary path to improving volume.
In addition, we're looking closely at the 50000 used vehicles, we hold so annually to ensure we capitalize on every opportunity we have to retail those vehicles.
Given the confidence we're gaining in the digital solutions that enable us to buy and sell more used vehicle. We have increased our target to sell at least 100 units per location per month, and 18% increase over our previous target of 85 units.
In the quarter, we reached 77 units per store per month, an increase of 12% over the prior year.
New and used vehicle sales are supported by our experience financing specialists that help mass consumer needs with the lending option and over 200 financial institution with over 70% of consumers having average this equity in their trade in vehicle.
<unk> $5100 financing experts capture the additional earnings potential by providing transparent product offerings and purchase options at all levels or the credit spectrum.
Our finance and insurance business line continued the incremental improvement we have seen the last several quarters, averaging $1526 per unit retail compared to $1388 an increase of $138 per unit over the prior year.
This growth was due to higher penetration rates and per unit profitability and nearly all of our product offerings.
Overall, New York, New and used vehicle sales create incremental profit opportunities to the resale of additional trade in vehicle greater manufacturer incentive overnight sale and future parts and service work. We continue to monitor this to the growth of our total gross profit per unit, which was $3705 this quarter or an increase of 100.
At an $85 per unit over last year.
We remain focused on the highest margin business lines, our service parts and collision centers in 2019, the U.S. recorded the oldest lead on record with the average age of a vehicle at nearly 12 years, our stores continue to offer a full spectrum or service and product offerings that are convenient and affordable, creating a one stop shopping experience for all.
In summary, our state of the our facilities create a wonderful atmosphere for quick service needs, including our oil changes tire replacement wiper blades and more we expect continued growth in the competitive express service offerings, which increased almost 20% in 2019.
Overall, our surface parking collision center revenue increased 6% over the prior year customer pay work, which represents over half of our fixed operations revenue stream increased 6% warranty increased 5% wholesale parts grew 4%, Antarctica listen centers increased 8%.
Same store adjusted asked you need a gross profit was 70.4% in the quarter, what's was similar to last year, bringing our improvement for the year 70 basis point.
Our highest performing stores maintain an S. You need to gross profit metrics are approximately 60% significantly lower than acquired stores, they're typically 90% or higher obviously that adversely impacts our overall s. DNA performance until those stores or season.
In summary, our team delivered solid increases in revenue and gross profit in 2019, well delivering S DNA and an industry leading level. However, significant opportunity remains to improve the consumer experience through incremental steps will expand the reach of our products and services throughout the nationwide footprint of U.S. consumers we now.
Yes. This focus will support the plans our stores have to drive additional profit and eventually a teen each stores potential with that I'd like to turn the call over to Tina. Thank you Chris.
For the quarter, we generated free cash flow 63 million, bringing our total to 286 million for the year, we define free cash flow as adjusted EBITDA plus stock based compensation lots of falling items paid in cash interest income taxes dividends and capital expenditure.
In December we took actions to strengthen our balance sheet to support the company's future growth.
We amended the terms of our syndicated credit facility, increasing with five 2.8 billion extending them to treat the 2025, increasing maximum allowable leverage by nearly one full turn and reducing the interest rate on the new vehicle used vehicle and working capital lines of credit.
Additionally, we raised approximately $400 million through issuing 4.6 to five <unk> senior notes due in 2027.
As a result, we ended the year with over $1 billion, an available liquidity and the forms of cash available credit and on finance real estate with additional liquidity available through accessing the debt and equity markets, we target, 65% in Bachmann, an acquisition, 25% investment and capital expenditures modernization and.
And 10% and shareholder return in the form of dividends and share repurchases.
As of December 31st we have 3.5 billion outstanding and that of which 2.2 billion with floor plan used vehicle and service line or financing a unique aspect of that in our industry is the financing of vehicle inventory with floor plan that this financing is integral to our operations and collateralized by these ads.
The industry treats the associated interest expense as an operating and EBITDA and excludes the that from the balance sheet leverage calculation.
On adjusted our total debt to EBITDA is overstated fixed time adjusted to treat these items as an operating expense our net debt to adjusted EBITDA is 1.9 times.
Earlier. This morning, we announced the dividend of 30 cents per share related to our fourth quarter result. Additionally, we have approximately 234 million remaining availability under our existing share repurchase authorization.
Our adjusted tax rate was 28.2% in the quarter and 27.6% for the full year changes in certain state tax laws negatively impacted our rate during the quarter, we anticipate our tax rate to be approximately 29% for the next year due to state law changes enacted and 2020.
As Brian Chris mentioned earlier, we are well positioned for growth from 2020, we have 1 billion in available liquidity to the point acquisitions that meet our hurdle rate. Additionally, in the upcoming year, we plan to pragmatically in Boston modernizing the consumer experience through digital solution and building the teams needed to support new opportunities for growth.
Aligning our core values, but the key metrics that drive success and having an assertion support structure, we have the talent and discipline to achieve our operational goal a 5% market share.
This concludes our prepared remarks, we would now like to open the call to question operator.
Thank you, ladies and gentlemen, we will now be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation to indicate that your line is in the question Q.
You May press star to if he would like to remove your question from the Q.
All participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.
One moment, please hold the poll for questions.
Thank you. Our first question comes from Rick Nelson with Stephens. Please proceed.
Hi.
[laughter].
Hi, Rick.
Service parts through them.
Same store sales for attracting 8.7%.
Fourth quarter.
Got it.
Two of 3.7.
If you could speed.
To the drivers there.
Hey.
Jim.
Sure.
Yeah.
How you're thinking about 20 to 20.
Sure Rick I I think I mean, this is Brian I think to start as a reminder, we were actually up 6%. So it's not quite as big a contrast is what it was from the year to date number 8%, a and that was because of a reclassification of our tire sales.
I think in the quarter, we're still seeing good growth in most areas.
Specifically in regards to service.
Customer pay work.
Let me just give you that information we were up.
And these are under these are on adjusted as well. So you can add about 3% to each of these numbers I would assume customer pay was up three or relatively six about the same is what the company wants a warranty was up five for about eight.
Parts wholesale was up four or relatively seven and as we mentioned body was up eight and tires don't really affect that.
[laughter].
Right.
Hey.
The acquisition environment.
You point to it.
Steve acquired.
825 million Robin <unk>.
Last year.
What you're saying.
Okay Fair.
Good.
<unk>.
2020, and the multiples.
Sounds good.
Sure.
[music].
<unk>.
Hi, multiple discrete Rick yes.
Sure. Let me, let me talk about a couple different things here I think most importantly, our pipeline is pretty pack. Okay were excited about that and I think you could get the timing from our ER remarks, I think it's important to always to remember what our long term goal.
<unk>.
I've, achieving 5% market share within the United States, which means we have the ability to grow about three times our current size.
Obviously, if you then extrapolate what that means to acquisitions.
It's important to remember that we do produce a considerable amount of money. We just did a debt offering and we had a fair amount of money in a the piggy bank, which will allow us to grow almost $6.5 billion.
In revenues, if we were to utilize all of that capital a that would increase our leverage about two times a few notice we talked specifically about that our leverage ratio went up in our new bank deal about one about one full term so some pretty exciting stuff as you begin to think about.
Well, how do we put a our balance sheet to work.
We also restructured our teams six months ago to be able to accelerate growth or most importantly, I think it's important to pay attention to page eight.
Which is how we buy acquisitions and what opportunities.
Come to be from those acquisitions.
Each of those departments and I think at any given time and you can also extrapolate on page 16, which is some of parts analysis that really talks about each of the different departments and where value is created so I think when we think about acquisitions. It's it's it's clear to us.
Yes that it's something that we're good at that were experienced that and that we can accelerate and we even readjusted things to be able to do just that.
All right that's helpful.
Oh.
<unk>.
Yeah.
Pittsburgh.
Sure.
How cheap.
[noise] attachment.
Yes.
How about supporting him.
Any update on shelf.
So would be helpful.
Great. Rick This is Bryan again, and I'm, not I'm going to spin it to Chris after I'm done with some fun facts on the on the Pittsburgh market I think I think most importantly, what we're seeing is is pretty good demand from our consumers and maybe ill new segment of consumers that we really haven't attracted in the past.
A which is exciting for us I think that the technologies are we continue to perfect.
Whether its pricing or valuations or experience with our consumers those those technologies as well as experiences a stay tuned on because we'll be will be deploying those into a new channels that are not I typically through our existing footprint.
So we can then touch a broader reach of consumers across the country as well as have higher density. A then what we currently have to be able to really leverage our inventory our experienced personnel at 15000 people and and ultimately that network. Chris do you want to give us some fun facts on Pittsburgh give you bet.
Good morning, Rick I think really when we look at some of the digital solutions that we're offering and being able to see how consumers respond to those or some kind of cool things that we're learning real quickly is one over 90% of all the traffic is coming from mobile devices. So this is from phone and tablet so not from a PC.
It's coming from phones and tablets second is a when customers actually book appointments at home, they're keeping our employments, 92% of the time versus 53% of a time when they booked those into dealership and then one appointments take place at home on the acquisition side, we're acquiring the vehicle, 83% of the time or 15%.
It's higher than we do a when they come into the store and lastly.
When customer only book home appointments about 30% of the time.
With the remaining 70% choosing to come into our facilities, which is a real Testament to you know continuing to think about the bricks to clicks model that we're focused on and giving consumers the choice of either doing business in their home or at the dealership.
Great.
Thanks, a lot.
[music].
Thank you Eric.
Thank you. Our next question comes from Rajat group that with Jpmorgan. Please proceed.
Hi, good morning, Thanks for taking my questions.
Just wanted to follow up on the acquisition.
Commentary you've closed a number of deals in 29 team, including the one in Florida lead into your language, which I believe is immediately accretive you know like a little on like.
So the other deals that you have done in the past did you give us a sense of you know how we should think about the accretion from all these acquisitions you know from your perspective into 2020.
During the Florida, one and the others that do you have done Oh, I don't have a follow up.
Sure sure. Roger This is Bryan again, I think if you think about the Williams deal, it's probably had a quarter or so accretive <unk>.
I do think that as we think about <unk>.
Acquisitions, we're gonna have both Williams type acquisitions as well as what we would call our traditional value based investing where there's a where they're usually still accretive but usually they they ramp up over time and that's back to this slide eight.
I think if we think about longer term in 2020 and 2021.
Right now the acquisitions leads have increased about two times over where they were last year. This time and it's mostly driven in the southeast we were shocked to find that there was many acquisition available. They are definitely priced on the upper end of our rig.
Turn expectations, but we seem to be able to find those opportunities that are still highly accretive given that our cost of funds are only four and five 8%.
As Ive a few months ago that we believe that there's going to be good opportunities for growth count going into it into 2020.
Honestly just to clarify the accretion you said the quarter <unk>, you mean like 25 cents Yeah 25.
Got it.
Got it and under just laughter die or continued solid execution here.
You into perhaps you've talked about you know some potential on the captive side did you provide an update on dad into how should we think about any contribution to earnings in the near to medium term. Thanks. Yeah. Good morning. This is Greg So I mean as far as our own in house finance portfolio, we have about 70 million <unk> Oh assets on.
Our management, but we do continue.
So look at the opportunities to expand that business go further upstream right now that is probably a deep subprime portfolio and we're figuring out ways.
Do you know have adjacent businesses. In addition to the auto retailing parts and service business in collision centers that we have that can bring incremental profit and so we do expect to continue to pursue those opportunities and you know are investigating at at this time.
Got it just lastly from me on the edge you need to gross profit.
It was down pretty nicely here in 2019 overall.
What should be there like Green show you could provide us for 2020 or you know like what kind of decline expectations should we have a that will be on for Matt. Thanks.
Yeah. Good morning. This is Chris again, we're not going to give guidance really on the 2020 year, but I will tell you as you know we mentioned a bit ago that we pride over $7 billion in acquisitions and those acquisitions under the traditional model that lets use acquired and being in that 90% range and so were still incorporating a lot of those stores, then and while we saw.
70 basis point reduction year over year, we are going to continue to stay focused on the three core line items that make that up which you know really come down to our personnel costs advertising and facility costs and so as we mentioned in the prepared remarks, our stores have aoki using their Lps are about generating top.
Gross as well as leveraging cost and getting back to that 50% throughput number.
We're focused on where we bring 50 cents and every dollar.
Grossed up to the bottom line. So we'll continue to see I hope booking a efforts on that and continued progress.
Great. Thanks, a lot.
Thank you. The next question is from arm interesting, Kevin <unk> with Morgan Stanley. Please proceed.
Hi, Good morning, great. Thank you for taking the question you mentioned the digital rollout here, how should we thinking about that for the course of 2020.
This is Bryan again are meant is I I think that it is incremental improvements. So I think today when we look at the Pittsburgh market in a few adjacent markets.
It's really a what we would call life sales sales to consumer currently that we'll get a lot heavier in more robust where its full transparency handful interaction and fortune full choice for the consumer whether they'd like to do business at home or or or in the dealerships I think.
As well right now it's it's also full capacity buying of vehicles from consumers and that can be done in multiple ways and that's being well accepted which is helping accelerate not only the pittsburgh market, but other markets that are starting now to dip their foot into into this arena.
We're very fortunate that we're purchasing the of the vehicles, we purchased about 60% of them our core product on the other 40%, which is almost the entire tranche is value auto which are very difficult cars defined.
So as we think about furthering our digital efforts I think what you're going to see as Pittsburgh will put on a more content and more options for consumers as many other lithia markets start with those lights solutions and then begin to fulfill the promise to the consumers to be able to go.
Go to them wherever whenever and however, they may choose.
But do you have any sense on your your in Pittsburgh as you launch other markets. You know do you think you'll get a half of your footprint with the other markets or you know a quarter just.
I I get the sense it might be a bit more measured but maybe I hear you.
I hear you I think I don't think we look at it that way because I think as as as Chris spoke too I think we think about annual operating plans and today and 2020 I think we think about how do we get incremental improvements our existing store and how do we start to change behaviors in our consumers as well.
As those that deliver experiences to their consumers our employees and I think we're at that stage throughout most of the year I think you'll see us leverage our technologies and begin to.
Step into different consumer demographics or bases, where we're going to attract a less traditional consumer but that will be later in the year in Q3 Q4 type of thing.
Okay.
And then just last one SGN and here in the fourth quarter was sequentially higher did it have to do with the acquisitions sort of phasing in.
Or was there something else that that we should be mindful of.
Our Mantas. This is Bryan again, I I think the biggest thing to think about with SGN a that we train our leaders today to be top of funnel sensitive meaning that we expect that they grow their used car business their new car business, which ultimately will push the higher margin businesses.
Service and parts. So if you see slowing in SGN eight like we did in Q4 will we were only saving 30 basis points relative to the 80 basis point things throughout the year, it's because there's a conscious effort to be able to provide offerings to consumers that may be more affordable and may not be is.
Lean as they will be in the future now as Chris said, there is ultimately that value based investing that comes into the fold as well that helped offset some of that and I think as we were talking about the Williams acquisition those acquisitions in self help us balance things to be able to redeploy capital in.
Not only our stores, but on global initiatives to be able to.
To further our modernization efforts.
Okay, great appreciate it.
Yeah.
Thank you. Our next question comes from John Jay Murphy with Bank of America. Please proceed.
Good morning, guys.
It first question on the new use targets of 100 vehicles for per store Im just curious me what does the age bucket. The easy you can't expand into or is that really sort of the wrong way to think about it. It's just a eight gross increase im just trying understand if you guys are going a little bit older needs spectrum, I think there's more opportunity there.
You'll just how you're going to drive that gross.
Hi, Good morning, John This is Chris I mean, obviously, we do remain focused on expanding that used car business in our target now when you think about the national are used to new ratio of 2.3 to one even at one to one we really see there's a huge opportunity, but as you were mentioning I think that opportunity is going to come from that core in value auto line and.
It's going to come down a procurement and Brian talked a lot about the digital solutions that are going to help us with procurement, but you know right now what we're fortunate enough to have 63% of our current used vehicles coming in on trade in order to push that envelope. Further we're going to have to go out and procure cars and I think it's getting away also from the branded products. So.
Right now our average stores are selling 60% branded products are the same make is what's on their shingle outside and 40% off brand, but our top used car stores in the company that are well above that 2.3 to one ratio or about 20% brand and 80% off brand. So we're trying to balance that mixed out.
A little bit more and focused on the procurement side Hey, John This is Brian just one other piece the incremental information I think when we think about our used vehicle sales, we always think it a bit in conjunction with our financing okay and I think when we build our inventories we think about value is typically about 50% fine.
Hansen about 50% cash.
As we get into core it's like 80% finance, it's a massive amount and that's where there's lots of profit opportunities I really believe that and it's it's where scarcity matters a bunch in terms of the vehicles because if you can track consumers with scarce product they it typically bill.
Gross margin. An example of that would be in value auto for the quarter, we were actually up $148 per unit or 22 or three we averaged 2088, our unit, whereas on certified in court, we were actually down about $50, but we're trying to build value and it comes from the ability.
To buy vehicles that are more scarce than what's typically found at auctions or available to two businesses that are further downstream as core as Chris mentioned than we are.
And there's a follow up to that I mean serve most people think about f. benign parts and service as a lower opportunity on on those older vehicles, but the reality is that they actually might be sort of think flip that thinking on its head and they're actually might be more of an opportunity I mean, how do you think about the.
Finance insurance in parts and service attach rate and then just absolute opportunity on the on some of those older vehicles.
John This brand again, I think we look at things Holistically in a whole deal average rather than specifically after an eye. So I think we build things around that I I think it's the did disadvantage that you'd get enough and <unk> on a value auto product is that you're bringing someone into Europe.
Business lifecycle earlier in their life, which is something that is easy to discount and say that you shouldn't do it because it's bringing your after an eye average down but ultimately if it brings both dollar so the bottom line or expand your customer base, which is how we look at everything then it's an important given take that.
You always need the balance between.
Okay. That's helpful. It's the second question you only when you're talking about adjacent Cheez. It seems you sound like you were alluding to a a potential captive finco or or growth. There is that something you guys are kind of kicking around and looking at a model like carmax, particularly on the U.S.
It is something that's working fairly well.
Yeah, Hey, John This is Chris I definitely something that we're kicking around in exploring further.
Now for several years, we've been in we've got our own finance company, it's been into deep subprime segment and I think we're just looking at it theres ways to profitably move upstream with that business since were top of funnel. We have the opportunity to tend to look at those deals in and if they're profitable for us why not add them onto our profit stream.
Also in terms of if you think about digital strategies and they'd be the ability to be able to be hyper responsive to the consumer.
The ability to have your own financing takes out a lot of he eyes that need to occur between us and the 200 lenders that we currently are signed up with and and and simplify things and as more transparent at the consumer the other thing I think that's important to remember is and you mentioned at the Carmax does produced 40.
Presented their profit [laughter] and in their finance company. So how much low hanging fruit is there for lithia motors up to be able to capture at some point, which can make us more competitive in terms of what our ROI is our and our acquisition aggressiveness.
As well as the ability to diversify it to some extent now I think you know lithia well enough that we will incrementally.
Grow into something much like we've done what to $17 million portfolio that we have today, we'll move slowly and learn from our experience isn't perfect then and ultimately if we do end up going that direction. It will be something that will be profitable and and a positive thing for all of us and this would be organic off the.
Current platform or would there be a small acquisition or I mean, how would you handle that.
I I think if you look at Lithia as history I think it does typically come organically.
Because it is how you learn the the knowledge that you need to be able to Oh really further the business and I mean, I would say this the expertise within Lithia motors and regarding regarding finance is.
His deep and broad a we have almost a 600 finance specialist that we can tap into the game knowledge plus we have 200 and lenders that have have taught us a lot about the world of finance and and and so on so I would believe that it would be organic.
Okay, and then just lastly, I mean, he you set out sort of long term goals that are that are big and they don't they shouldn't you be and you've been hitting though so we have to take everything you're seeing very seriously, but did the 5%.
Market share nationally.
The new vehicle market does downs are being high and what we've understood from sort of the Autonation experience I mean framework agreements can be prohibitive as far as making acquisitions and kind of growing skinny significantly above 2%. So I mean is there something going on.
You don't need.
The framework agreements or relationship with automakers do you think might make it easier than it has been in the past it kind of grow.
That much because it's up it's a big number like I said, you've hit long term targets before so just curious how you're thinking of doing great. If it's a really great question I think it I think it identifies the differences between how Lithia motors is built a value based strategy that typically buys underperforming strong.
Perfect and then improves them. So the relationship that we have built with our manufacturers is his deep and strong because of that ability to bring value to them, Okay, and I think framework agreement.
Agreements, albeit have limited or some of our peer group.
In fact at times it it can limit our growth as well and I think we always.
Have the our partners in mind, when we buy acquisitions and balance those things and I think that's why why many people invest and lithia motors because of that ability not only to bring shareholder value, but bring value to our partners, which is our manufacturers that.
Ultimately hold the keys to the kingdom to get to 5% growth.
Lastly, our current framework agreements in their entirety.
Allow us to get considerably beyond 5%, so as long as our performance stays or at the levels that we're currently at and were able to bring value in improvement then there shouldn't be framework limitations like others may or may not have.
Very helpful. Thank you very much.
Thanks, John.
Thank you. Our next question comes from Bret Jordan with Jefferies. Please proceed.
Hey, good morning, guys.
Hi, Brad it back to the Sun apps for a moment I guess, what do you see as far as their credit availability trends and obviously, you've got some real experience on the subprime where are you, saying the subprime mix right now and I guess, maybe any trends on delinquencies just around the borrower.
Yeah, Good morning, Chris or want to Brad This is Chris or trends are pretty consistent we're seeing about 15% of our business in the subprime space, which really hasn't shifted a much at all over the last several years. So continuing to see that space you know stay where it's at and then as far as overall for.
To answer Brian as mentioned, we have over 200 lenders available and they come and go at different paces, but our job is to make sure that whether it's an internal you know a finance company or an external finance company that we have the breadth of lenders available for our stores to be able to put transactions together and meet customers' needs and.
Continue to see that going forward into 2020.
Okay, Great and the question I guess, you're kinda collision being up 8%, which is I think a whole lot better than repairable claims growth in the period. It what's driving that are you guys focusing more there is that sort of taking share from independents, given vehicle complexity or how much is price versus traffic I mean, a little background on that number.
Sure breadth is Brian I think on collisions 85, 90% of our work is driven off GRP isn't the insurance company partnership. So I think that combined with our ability to put the right people in the right job.
Is the biggest driver for that the market is definitely robust it's a matter of us capturing a larger portion of that I believe we have will push in mid 20 in terms of collision centers and a number those are actually independent a and its you know it's a it's a a 7%.
Part of our fixed operations and I think I'd leave you with this final thought.
Our relationships with our consumers are deep.
We we provide offerings that are expansive incomplete.
So the business is really ours to lose including the collision repair centers that many consumers typically call us to be able to ensure that their vehicles are repaired or at a standard that is as good as it was prior to the rack or.
Need assistance when it comes to valuations to be able to determine a total.
Salvage type of vehicle, Okay, and I think thats something that we're getting more involved within it is profitable and it is something that is is right in our wheelhouse.
Do you see that being an area growth I guess mid Twentys stores is that something you're expanding or is it just relative too small to move the needle.
I believe that Lithia motors or has the ability to grow people and grow businesses because of.
Our basic mission of growth powered by people and that's obviously a little a theory, all but I think when you manage performance by the numbers and through people I think anything is possible and I think a body shops or something that we see as attractive as lucrative and as part of the customer fulfillment of.
Their life experience with personal transportation.
Great. Thank you.
Brent.
Thank you. Our next question comes from direct Glynn with consumer Edge Research. Please proceed.
[noise] Yeah. Good morning had a follow up on.
You spoke about moving across the spectrum to older vehicles, how has the competitive environment changed on the procurement side over time. It just seems like there's a lot of investment from others into digital marketplaces are platforms, and there's arguably more price transparency today, both dealers and consumers and so what do you use your advantages in procuring.
This is Bryan again, Derek I wouldn't say this.
Getting into scarcer vehicles has lots of risk and without massive expertise in reconditioning.
In sale.
In guarantees and promises to our consumer it's not something that most people want to get into because its messier. It also requires a deeper financing sources more.
More specific or more unique financing sources that what you're starting to see is the new entrants are pretty good at the one to five year old vehicle, which is something that is attractive and there's a plentiful supply of vehicles and many of those don't necessarily come from.
New car dealership. It comes after new car dealerships decided they don't want the car and they're able to buy those cars and auction. So it's easy entrance point, whereas we believed that the profitability and both reconditioning as well as and.
Having people entered the Lithia family earlier comes from those low lower price vehicles, and our people are excellent at being able to recondition those vehicles and find those vehicles are our new technology that were that where you are utilizing now in the northeast is also pinpointing those vehicles.
So were more aggressive in terms of procurement of those vehicles.
Which is allowing us to increase that as well and we believe that core and value are part of the promise.
Lithia Motors gives to our customers when where and new car store. There are tendencies to consumers believed that they can't buy cars that are a value or within their price range. So and what we provide is this is a great experience for them to be able to buy at a professional facility and be serviced in the pro.
Rational manner, whereas we typically competing in value in core products with more of the Joe's used cars and small used car lots not so much national retailers at the at this stage now I believe Lithia motors can move into those channels and become the national retailer in.
Those categories and I think you'll see.
Our strategies unfold over the coming three to four quarters.
Okay, great and when I look at parts and service you know the growth has generally been above.
That if you knew comp units, it's been more varied relative to use but you're growing units you have this opportunity within your own existing car park, so to speak but I'm curious if you could share what portion of your parts and service business.
Derives from vehicles that you did not previously retail and how that's changed overtime.
Derek will take that offline and try to get to some of that data.
Okay. Appreciate that thanks for all commentary.
You bet.
Thank you. Our next question comes from David Whiston with Morningstar. Please proceed.
Oh. Thanks. Good morning can you talk about a bit more about what tools, you'll use to get to this new a used target of 100 units per store per month and is shifting halls not at all.
Yeah. David This is Chris I mean, right now what we have as we have a core group of stores that are performing well above that goal of 100 units per rooftop and you know there the stores that are going above the national average of 2.3 to one used to new and so.
Well, we're gonna do is do what we always do is leverage our top talent, our top teams to support or other stores to show people away on how to do it and as Brian mentioned, there's a lot of work that goes with it where you know our used car managers have to in some ways you know roll up their sleeves get out and by vehicles right now only third.
Third of the used cars in the U.S. are sold through new car dealers and there's no reason that number shouldn't be much higher in our whole focus right. Now is just to educate our stores on what the opportunity is make sure that they have the resources the capital the expertise and technicians, the reconditioning <unk> to be able to get those views.
Goals through the shops on the front lines and get them finance. So there's a lot of pieces that go into that but it's really about the people in the talent.
So it sounds like it's not really a massive.
<unk> Big data type issue is more of just an African attention issue right.
David This is Brian I think it's multiple pronged I mean, I think you may know that my love at this at the Honda store that Iran. For six years that we were three and a half to one used to new ratio and it was primarily about three categories. It was about procurement. It was about your staff.
And it was about your ability to price and match cars in the proper manner.
I think when you think about how do we plan on doing that.
The nuances that occur in procurement are massive there's lots of different ways to procure vehicles and to pinpoint though.
I think today, when we think about procurement I think it's driven 50% by people and 50% by technology I don't know that we knew that until we began to partner with shift and began to think about the decisioning that our own used car managers go through.
And started to extract that knowledge from them to be again begin to build the foundation of our own a guy at in at barrel Dot Com in Pittsburgh that we're now starting to perfect that and that's what's bleeding into a lot of the other stores, even though there is not customer offerings. What is there is AI that's.
Training, our art store leaders, which typically there's two or three experts in the store that are buying cars to go buy more of the right cars and then on the pricing side, our our pricing models now are able to scrape. The web there then able to provide competitive pricing to consumers.
And I think lastly, as we think about valuation in pricing.
If we can expand our reach meaning that the footprint that we can deliver a car to expands from our current approximately 50 mile to 500 mile now you're able to turn cars quicker command even higher margins.
And create experiences with consumers for your higher profitability bit businesses in a little bit easier way and I think that's when we think about 100 cars. The that Chris talked here. These are the new portions of what were different than when I was running at store 20 years ago.
Okay. That's helpful. Thank you.
Florida.
Finally entered the market something we've talked about before you ultimately want to be only a metro areas or both.
Not sure and oral.
David This is Bryan again are definitely we want to be in both okay. Because we believe proximity it's important to capture the high margin businesses, because mobile service probably has a 50 to 100 mile effective range.
And that's something that rural markets can help fill in we have realized that the metropolitan markets are probably just is attractive and have a lot of profit upside and also typically take a management team of five to seven people to be able to lead. This store the same as a smaller store in a row mark.
It does but remember lithia is built on a traditional rural strategy in those hometown values and those experiences in bonds with our consumers is what we perpetrate threw it out the metro markets as well and I think that's something that is unique on how we.
Approach things with our relationships with our consumers as well as are our employees and team members.
Okay. Thanks, and just one more question.
But off the wall here, but.
In your you guys are an expert to selling pick ups to.
For all customers and a small cities I'm just curious if you're a store jams and those markets have heard any feedback on the tussle cyber trucks, most customers is up to kind of truck than they would ever want.
David This is Brian I think if you look at a pick up sales.
I think that the footprint of who those customers are and how they're built.
I'm not positive that that's the right attraction, yet I think in metropolitan areas it could be.
I think most importantly, it's a massive market in pickup truck pick up pickup trucks sell nicely in our typical rural markets as well as in the metropolitan areas.
Okay. Thanks, guys.
Thank you. Our next question comes from Chris Bottiglieri with Wolfe Research. Please proceed.
Hey, guys.
A couple of questions.
One of the could give them mix on the kind of how you see vehicle or did you give the growth rates in its not something it provide context for.
Hey, Chris This is Chris value auto is up 12% our core product was up 21% NRC PEO business was up 8% so our focus.
Our focus units in corn value auto definitely outpace what was going on with certified.
That's that's helpful. And then obviously the U.S grow it's been really explosive in 2018.
I'm just wondering if you could help dimensionalize that growth for us like where it's coming from helping us think through 2020 that specifically you're able to.
Was wondering if you quantify the contribution from the 2018 acquisitions that have had on the twitchy group. Thank you.
Yeah, Hey, this is Chris again, I think just going off the unit growth that we saw in the quarter represents really what we saw on year. Our focus is definitely on the corn value auto product and we'll continue to d., so going forward into 2020.
And then as far as specifics on the acquisition. It's a mixed bag I mean, a large lot of the larger stores and focused on C.P.O. units. So they had never actually even heard of value auto volume water for the somewhere down the street Internet.
Selling out of a trailer.
But as you know 21% of our vehicles that we sell their value auto product and we have great finance specialist to help out people that a lot of time to need support in their financing options on those value autos and as its our highest profit gross profit per unit vehicle and margin vehicle, it's something that we're very focused on in bringing into the.
Fold of those new acquisition, whether they've been and used car business in the past or not.
Gotcha and then one last one for me for that so the Pittsburgh Mark do you have a lot of interesting capesize.
I was wondering if there's any we can give like kind of any other way to frame in terms of contribution like how quickly. They grew relative to the company average or they're used to new ratio and that market relative to other markets. Just somebody help us frame for you know how about how big of a lift the investments has done.
Chris This is Brian I think the easiest way to think about it is incremental and its integrated into everything that we do so when you. When you look at an 18% growth rate in used vehicles. I think you have to earmarked a good portion of that is because of modernization and whether it's in the Pittsburgh market and that's why when.
We talk about roll out we're not really plan on rolling these things out it's incremental improvements at the stores are starting to use valuation model at some point, you'll start to use pricing models at some point there'll be able to provide consumers direct offerings and and home Servicenow and home sales those type of things so it's hard to.
Earmark, what specifically it is and that's not really how we manage our company management based off these incremental improvement I think as we look forward.
You will begin to see that we'll have multiple channels.
While we go to market and those will be easily detectable and easily discern between what is driven through that channel a and we'll be able to provide you that information as well.
That's helpful. Thanks.
Thank you we have reached the end of our question and answer session. So I'd like to pass the floor back over to management for any additional concluding comments.
Thank you everyone for joining us today, and we look forward to up updating you again on our for first quarter in April Bye bye everyone.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.