Q2 2019 Earnings Call

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You're welcome <unk> revenue up, 14% and service body and parts revenues increasing 10%.

These lines accounted for approximately 42% of our revenues and 80% of our gross profit.

From core and value auto used vehicles to lifetime oil contracts and one stop service offerings. Our operating model is specifically built to touch the entire life cycle of vehicle ownership and all consumer types.

We generate income from six distinct businesses, new vehicle sales used vehicle sales finance and insurance and service body and parts.

This diversification create strength in our revenue and profit streams and combined with our growth strategy results in a unique opportunity. Unlike most other competitive models.

We generate more than 250 million in free cash flows annually, allowing us to expand our network invest in innovation in adjacencies and deliver shareholder value.

Our physical network enables us to supply convenient touch points throughout the customers ownership experience and drive our higher margin used Ethernet service and parts business lines.

This network also provides an infrastructure to deliver our digital solutions to further expand our reach.

We target investing two thirds of our capital into expanding our physical network through acquiring strong assets at a targeted average equity investment of 15% of anticipated revenues.

Our current available liquidity is over $500 million.

Combined with $250 million in annual free cash flows, we could add more than $5 billion in revenues or 40% growth.

To further illustrate the benefits of our model if we chose not to add any incremental leverage and just utilize free cash flows for acquisitions.

We could add $1.4 billion in revenues and grow approximately 12% annually.

The acquisition market continues to be robust as we have purchased over $320 million in annual revenue. So far this year, expanding our national reach to 82%.

In the second quarter, we purchased Hamilton Honda in Hamilton Township, New Jersey Freedom forward in Morgantown, West, Virginia, a new state for Us and Jaguar land Rover in mission Viejo, California.

We are excited to welcome these new teams to the Lithia family and we look forward to becoming a top performer with our new manufacturer partners Jaguar and land Rover.

We continue to optimize our nation wide network during the quarter, we divested two smaller locations totaling 12 of the past year.

As a reminder, all of these stores originally were acquired as part of a previous group acquisition or as open points.

As one of the top three largest auto groups in the United States retailing more than 335000 vehicles annually.

Operating the second largest owned inventory marketplace online and servicing more than three and a half million vehicles, a year opportunity to grow still remains.

Our industry is highly fragmented with the top 10 dealership groups controlling less than 8% of the us new vehicle market and no single company controlling more than 2% of the used vehicle market.

Combined the addressable new and used vehicle market is over one trillion annually of which we represent 1.2%.

Over the coming quarters, we look forward to continuing to expand our nationwide footprint through our disciplined acquisition strategy that historically has achieved an 80% success rate of exceeding our after tax ROI targets.

New digital technologies enable us to further activate our physical network and capture additional earnings.

We seek to provide customers a seamless blended online and physical retail experience with broad selection and access to specialized expertise and knowledge.

Our ability to retail a full age range of used vehicles is a hallmark of our growth.

Sourcing of the REIT used vehicle drives this business line.

Our operational leaders have taken us to one to one used to new ratio.

Technology now also supports our procurement decisions by guiding us to more of the right vehicles.

This combination of aptitude and technology will help us drive towards the national used to new ratio of 2.3 to one.

Our finance and insurance profits continue to grow but opportunities to increase vehicle volume and ethanol per unit remain plentiful.

To illustrate further almost half of our consumers have a credit rating of 700 or below and 71% of our consumers with trade ins have negative equity.

The majority of our customers need specialists, who can help obtain a financing structure that balances their credit rating desired vehicle purchase potential negative equity and an affordable monthly payments.

Alongside this expertise digital solutions are creating a convenient transparent environment for those customers that have the financial strength to transaction complete financing online.

These specialists along with digital flexibility allows us to maximize the full economic benefit of this channel while selling a greater number of vehicles throughout the entire credit and vehicle age spectrum.

This combination will continue to grow profits and expand the reach of our network.

Our partnership with shift continues to mature we learn from their digital solutions that are simplifying the car purchasing and selling experiences.

Our team provides industry knowledge to shift as we continue to create synergies. Thus far we are sharing data technologies, our physical network and vendor lender relationships. This strategic partnership supports one aspect of our evolution as shift inspires us to think differently as a retailer.

In closing, we like to reflect on the diversification and value each of our six business lines creates relative to other companies that only have one or two of these components.

Then add the industry consolidation opportunity our proven growth existing network potential combined this with our ability to generate significant cash flows and the differences in value creation and profitability become apparent.

We have included further details on page 16 of our online investor presentation.

We look forward to continuing to drive operational excellence.

Further the reach of our network and expand our cup customer offerings with innovative solutions.

Combined this unique strategy springboards us towards a much more meaningful share of the one trillion dollars in new and used vehicle market and achievement of our $15 EPS milestone and beyond.

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

Thank you Brian with the admission of growth powered by people is the foundation of our high performance culture. Our team members embrace our customer focused environment and promote our value to continuously improve.

Our resort to driven by our operating model, which combines acquiring integrating and growing our stores. This model utilizes our store performance scorecard or Sps to align our core values with the key metrics that drive our short and long term success with our recent acquisition or a season store that has been with us since inception, our 15000 team members Leverages information to find ways to improve the customer experience and improve operations at each location. Additionally, we standardize our non customer facing processes, removing the need for store personnel to manage administrative aspects of the business. So they can stay focused on creating customers for life.

Turning to same store results in the quarter total sales increased 6% and total gross profit grew by 9%, reflecting strong performance in used vehicles, and I and service body and parts as Brian mentioned earlier, our operating model is built upon six independent business line that driver overall performance and the following as additional detail on each of these lines.

The new business line, which is a top of funnel in automotive retail rose slightly our average selling price increased 5% and unit sales decreased 5% inline with retail SAR gross profit per unit was $2087 compared to $2068 last year, an increase of $19. Our stores remain nimble on their volume and growth strategies and adapt to local and regional market conditions.

Retail used vehicle revenues increased 12% unit sales increased 12%, while average selling price for prices remained flat used retail gross profit per unit was $2179 compared to $2247 last year, a decrease of 3%.

Our used vehicle sales mix in the quarter was 24% certified 54% core or vehicles, three to seven years old and 22% value auto or vehicles with over 80000 miles both core and value auto continuing to see unit growth in the mid teens, we remain focused on procurement of these units and the operating Trinity to sell more of these vehicles at most of our rooftops.

Our investment in different innovation channels health store leaders leverage technology to procure and so more used vehicles. Overall. Most recently, we have incorporated additional online functionality for used vehicles in certain markets that adds customer directed monthly financing and payment options instant price quotes on trade ins and negotiation free finance and insurance insurance product offerings. These changes mark our stores continued progress in creating a blended online and physical retail experience with the additional information customers provide our financing specialist gain insights faster that help guide customers through a personalized solution that meets their specific needs and personal budget.

As a result, we continue to target selling at least 85 units per location per month in the second quarter 2019, we reach 72 unit used units per store per month, an increase of 7% over the prior year.

After nine per vehicle remains strong for the quarter at $1451 compared to $1304 an increase of $147 per unit.

Overall growth in fund I was due to higher penetration rate in per unit profitability in nearly all of our product offerings.

Of the vehicles, we sold in the quarter, we arranged financing on 74% solo service contract on 48% and total lifetime oil product on 22%.

As Brian mentioned, we continue to capture the additional earnings potential and Funnye by leveraging our ethanizer specialist to provide the right products to consumers, while leveraging relationships with current overnight partners as 71% of our consumers with trade ins have negative equity averaging $5100 are experienced associates have tremendous opportunity to help customers meet their buying needs and accelerate our sales growth.

New and used vehicle sales create incremental profit opportunities to the resale of additional trading vehicles greater manufacture incentives ethanizer sales in future parts and service work one measure of this is through the growth of our total gross profit per unit, which was $3602 this quarter or an increase of $129 per unit over 2018.

We continue to exert growth in our highest margin line of business service body and parts as onboard technology and vehicles becomes increasingly complex the need for our skilled certified technicians will continue to drive demands in service. In addition, as the car Park continues to grow with an average age of almost 12 years more vehicles are staying on the road longer creating more recurring repair and maintenance opportunities.

Our service body and parts revenue increased 10% over the prior year customer pay work, which represents over half of our fixed operations revenue stream increased 8% warranty increased 19% and wholesale parts grew 4% and our body shops increased 7%.

Same store adjusted EPS, you need a gross profit was 69.9% an improvement of 110 basis points compared to the second quarter of last year as we work to integrate the 7 billion in acquisitions completed over the last five years, we target an estimated gross profit metric in the mid to high 60% range. Our teams have made progress on cost savings efforts and continue to focus on personnel advertising and facility costs, which make up over 85% of SGN name.

Lithia has unique operating model leverages, our employees to make decisions closer to our customers, allowing us to react quickly to market dynamics and still leverage our scale. Our employees are taking the steps necessary to exceed their annual plans capture store potential in carry the trends in the first half of the year and to the rest of 2019 and beyond now before I turn it over to Tina I wanted to say congratulations on your promotion working with you over the past 14 years, it's been a great to see you embrace our operational mission and watch you live our value of growth powered by people. We look forward to your continued leadership in many more years of success together.

Thank you, Chris we have a great company and are fortunate to have a strong talented team and accounting tax finance and DNA. It is an honor to work with each of them and to support and partner with our operational team.

As of June Thirtyth, we had approximately 263 million in cash and available credit.

Finance real estate quickly provide us with an additional $247 million for an estimated total liquidity of approximately $510 million.

We generated free cash flows of 80 million for the quarter and $141 million for the first half of the year, we define free cash flow as adjusted EBITDA plus stock based compensation less interest income taxes dividends and capital expenditures paid in cash.

Our capital deployment strategy as a catalyst to support our growth, we target, 65% investment in acquisition, 25% investment in capital expenditures and innovation and diversification and 10% and shareholder return in the form of dividends and share repurchases.

Earlier. This morning, we announced a dividend of 30 cents per share related to our second quarter results. Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization.

Our unique aspect of debt in our industry as a financing of vehicle inventory floor plan debt.

Vehicle financing is integral to our operations and collateralized by these assets because of this nature at the industry treat the associated interest expense as an operating expense EBITDA and excludes this debt from the balance sheet leverage calculation.

As of June Thirtyth, we had 2.4 billion outstanding at Floorplan and used vehicle financing on adjusted our total debt to EBITDA is overstated at 6.2 times adjusted to treat these items as operating expense our net debt to adjusted EBITDA is 2.1 time at the low end of our targeted range of two to three times.

Our adjusted tax rate was 27.6% up 130 basis points compared to 2018, primarily driven by changes enacted in certain states late last year.

This concludes our prepared remarks, we would now like to open the call to questions operator.

Thank you.

At this time, we'll be conducting a question and answer session.

If youd like to ask a question. Please press star one on your telephone keypad, a confirmation till indicate your line is in the question queue.

You May press Star two if you like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.

Our first question comes from Rick Nelson with Stephens. Please proceed with your question or morning, Congrats on a great quarter.

Thanks, Rick.

All right, Okay, Scott a good theacquisition environment or how the pipeline looks today and are you seeing more opportunities and lithia type markets for or have the metro area.

Thanks, Rick This is Bryan we're seeing we're seeing good activity in all parts of the market. We've done a 320 million, thus far and we have a a fair amount of other things in the pipeline I would say, it's typical to where it was three or four years ago. There are a fair amount of larger deals as well, it's just a matter that the pricing on them, sometimes is a little bit outside of our pretty tight are are we expectations.

So we sit a little bit and watch those we also as we start to think about our footprint as a nation. The southeast is starting to come into focus a little bit better and we have a number of things in that area that hopefully will come to be in the next number of quarters or year.

Great Thanks for that color.

So.

Asking about that.

You know nice narrowing this quarter's 7.1%.

If you could.

Talk about the drivers there and the outlook.

Push forward for us.

Yeah. Good morning, Rick This is Chris.

As Brian mentioned, we purchased 320 million in Rav and the last a year, but over the last five years, we've purchased over 7 billion in revenues and typically those stores that were bringing on our team are strong assets, but our underperforming in running at SNA levels as high as 90% or more and so what we continue to do is optimize topline growth for those stores generate as much growth as we can and then leverage expenses and so you know through the three core areas really personnel advertising.

And and other incremental costs there we continue to drive our assay in a down to that mid 60% range that we're focused on.

Okay great.

If I could ask you on the technology.

You know Frank if you could update us on.

No shift, how how you're planning or RV, accusing or planning to use there.

Technology, and your dealerships and barrel.

There's an update there what you're learning from a digital standpoint.

This is Bryan again, the shift partnership is going really well, we should learn a lot from a I would say a clear perspective of our consumers and how to go to market with them.

We we've expanded the partnership in a pretty big way. If you remember we announced the data sharing back in May we now have three locations that were collaborating either with purchasing vehicles in selling the vehicles that they purchase for us in California, and then one in Oregon and then in many of those cases were doing reconditioning as well as storing their their facilities and we see that.

Continuing to grow as as their growth plans continue to grow I think it's important to note that their strategy is an independent channel for us it's their strategy doing that whereas our strategy is developing on its own and as we look at the Pittsburgh market in barrel Dot Com as you asked about we're showing pretty good signs of success in the digital space, there and we can elaborate a little bit more on that as we get into the used vehicles in the new vehicle sales.

Great.

Thanks, a lot.

Thanks, Rick.

Our next question comes from armour testing coverage with Morgan Stanley . Please proceed with your question.

Great. Good morning, Thank you for taking the question.

When I look at the strength and.

Same store used car sales running in the low teens.

And you've talked about the opportunity around procurement of vehicles, but then I see gpus coming in you know a little bit lower versus at least consensus expectations. Maybe you could help me bridge. The Delta on you know the strong same store sales growth with an emphasis on procurement versus.

Touch softer on on on the GPU side.

Sure. This is this is Bryan I think to begin with.

It's important to always recognized that we base our expense and cost structure based off total deal average, which was a little over $3600 a this quarter.

So looking at individual percentages on it on on margins isn't is relevant is looking at that because that will drive the bottom line profitability I think when you think about our ability procure we spend a lot of dollars in personnel cost to procure and that's got us to that one to one used to new ratio I think what you're seeing now is some separation from just pure heavy lifting on personnel and we're activating that would digital solutions that is helping us target the right inventory and I think much differently than most of the other new or used car retailers either peer plays or the new car retailers that are selling used.

What we do is specifically look for scarcity. Okay. So when you look at our numbers and you're looking at where do we build gross we build gross profit and margin through value auto and core primarily which is about 70% of our sales.

Okay and those are.

Lower cost cars that are very difficult to procure so being top of funnel in terms of our.

Trade in cycle is very important because those new and certified cars are the first shot at those core vehicles and if you remember those core vehicles I mean, we're producing oh, let's see here gross margins of a little over 10% in that bucket, Okay and that is primarily the only way that we are able to procure the value auto vehicle, which is producing 17% gross margins, which is massive and thats on a $13000 car base.

So as we think about the digital solutions that we're finding it's more about pointing people to scarcity and older products in that five year and older vehicle and how do we find those quicker.

By using digital solutions, which means.

Squaring, the web and finding things on Craig's list or ebay or different types of sources, we're running those through manheim or other things and hopefully pointing stores back to where can they find the right cars for our customers to be able to saw to sell in a wider spectrum of used vehicles.

And you were looking at barrel Dot com, it's quite a nice web site.

How do you think about the timeline of.

The inventory appears to be a bit limited on the website. As you are in pilot mode, but how do you think about expanding that to the broader lithia dot com.

Yes. Good morning. This is Chris I think it's a little too early to kind of gauge how we're going to expand that out.

Nationwide, we have a lot of positive things happening right now in the Pittsburgh market on barrel Dot com, specifically I mean like for example, we're seeing 6000 unique visits right now to the barrel dotcom site and when we start to do things like focusing on home delivery and looking at has stream seem line online purchase for those consumers that can actually take a vehicle purchased end to end or having fixed pricing and buying up an eye products directly online without a sales person or.

Even taking the sight unseen offers for purchasing a customer's vehicle I mean, all of these things are are generating a lot of data for us the leverage to figure out kind of what the next steps are and the evolution that we have and so I think Brian's got some more feedback on that as well, but thats early signs were seeing there as we as we think about how do we leverage what we're learning in the Pennsylvania market I think it's important to think about how we look at innovation.

We have 185 centers around the country that are always working on best practices, because we have a more decentralized model that we want decisions made closest to our consumers and because of that we get incremental innovation, which I think is a is it more important way to think about our development. So its not like theres. Some massive silver bullet that's going to change the world. We really believe that what's happening in Pennsylvania is the catalyst for other stores to begin to work on those same solutions at some point, we will pull the trigger and have a national footprint with either Lithia dot com or a third party.

Type of branding.

To really be able to leverage the inventory in the <unk> and the personnel that we have within our network right now, Pennsylvania for the for the.

So far for the quarter was up 18 was up 6% in sales, but they're up 43% in profitability, which is a nice move they're starting to produce I think they were up 4% operating margin, which is a pretty good move in a short almost 18 months that we've been together with them. When they were about half of that previously and their leadership teams are very in tune with the consumers and that next wave of digital retail.

Great I appreciate all the color.

You bet.

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

Thanks, Good morning Tuna welcome aboard first of all.

Secondly, just wondering if you could kind of go in a little bit more to what drove the adjustment strengths, obviously with new units down same store basis.

Up 14% are really really strong number.

Maybe just going to sort of if you could bucket how much of that is attachment as well as some of the ancillary products that make up that growth.

Good morning, Steve This is Chris.

We continue to focus on F and I as a core component of integrating the more recent acquisitions I mean, the disparity that we have between kind of our legacy.

Stores and the newer acquisitions that 7 billion in revenue that we picked up over the last five years is probably four or 500 box and in some cases between our top performing stores, which are closer to 2000.

And the bottom stores that are still at that 70 to 100, we have a lot of work to continue to do there and we see a lot of upside we did see attachment rates up in virtually every one of our business lines.

So our all of our business products, sorry, and we continue to leverage the strength of our finance specialist to figure out ways.

To to meet the customers needs to protect their vehicles input product offerings out there that customers want to buy so it's really around people products and making sure that we have a good process in the store.

To continue to improve that that if an IP VR.

Got it thats helpful on them.

Yes, same thing really around parts and service is that primarily just bringing up a lot of the newer stores of the newly acquired stores sort of up to what you'd consider to be a standard or was there anything in particular warranty work anything like that that jumped out in the quarter.

Hey, Steve This is Bryan.

We're seeing good strength across all all the business lines, which is nice, but most importantly, our CPR customer pay was up 8% in the quarter, that's a big number and I think it speaks to our commodity type.

Offerings in the service drives in that more customer transparent type of environment, where it's it's more affordable and convenient than most other types of businesses, where we're digging much deeper into the value base. If you remember we've been doing a non OEM parts now for over a decade, so as the warranty expires that becomes more prevalent.

We are at about 20% premium over what the average is in terms of retaining our customers and a lot of that starts with that if an i. attachments that Chris was speaking to as well, but you're starting to really see some of that separation, which is what we really want to see is in our higher margin businesses that were able to extract as those experiences and then and then profit from it so.

Got it okay, well done guys. Thank you.

I think Steve.

Our next question comes from or was shot Gupta with JP Morgan. Please proceed with your question.

Hi, Thanks for taking my question and also wanted to congratulate the narrowing the appointment.

Just wanted to follow up on the parts and services question tracking up double digits. So far in the first half I mean warranty obviously helped a lot there could you break out within the parts and services gross profit.

<unk> revenue and how much of that is.

You know water rooms or transactions versus price or you know how much of Sparks or service I mean could we get a little bit of color on that and then how should we expect that to trend in the second half and are you are you seeing any market share shifts you know versus the independent.

Hi, there. Thanks, Roger this is Brian .

So in terms of revenue mix in those areas in this in this service department customer pay as 55% of the mix.

Warranty is exactly a quarter 25%.

Wholesale parts is 14% and body shop Hearts is 6%.

So that gets you to the 100%.

When you look at the gross profit mix, 60% of the the gross profit is coming from customer pay followed by 30% from warranty and as you can imagine parts and body shop are really.

Low margin at only six and 5%.

If we extrapolate that forward, we actually had one less service day. This year than we did last year. So we're pretty pleased with those results. We believe that looking forward, we see strength in the warranty as complexity of vehicles still continues to be something that provides us opportunities to to up sell consumers and provide other services and win them back to our service drives with more convenient and affordable experiences.

And I think in terms of those commodity sales. Its it is something that is a little different than most new car dealers because I think we really think about the full lifecycle of a customer and it is the way to keep them as part of our family throughout their entire experience. So hopefully they're able to buy another used or new car from us.

Good.

Just to follow up on that I mean, oh, well if the of the.

A high single digit growth you know on same store sales.

Yeah, how much of that is you know just.

While you more says you know like price I mean is there a way to distinguish that or if you can get some color.

Well how's that.

Trended in the quarter.

Well why don't we start back back with you on that air can we get them that information and I I think it's important to remember that.

When we buy stores they perform at about 15% less than average when it comes to units in operation their ability to service units in operations, which is typically a 10 year model range or so and when we once they get to season, they're doing almost a 20% better than average so keep that in mind as you think about building out your models that is one of the drivers that were always have some pent up demand in those service departments because of lack of experiences and lack of offerings in those service lanes when we buy those stores.

Got it makes sense and then just to follow up on the NIGC views.

Could you breakout.

We are seeing a latest you know on used versus new there in terms of Gpus and.

And how much of the strength in knowing the recent quarterly is being driven by you know getting to.

Yeah, the prior acquisitions up to speed worsen as you know growth in the already well established dealerships a battlefield. Thanks.

Yes, so the Gpus are a little bit higher on new vehicles than used vehicles, but we're seeing opportunity and growth in both segments and about the similar overall GP dollar amount.

And your second question sorry was.

Let me take the second question. Roger This is Brian when we buy stores again, the average is $700 a car and if you. If you reflect back on the Fourteenfifty that we did that's about doubling of that F and I average, we usually gets about half of it or about $400.

In the first six to 12 months and that typically comes through a more transparent selling process an f. an eye. If you recall, we have a 100% fixed pricing in RF and eye products across our network. So it's that's pretty easy to be able to talk about benefits and really meet our customers needs and that's where we get most of that.

I believe the rest of it we get over the next couple of years and that comes through better personnel as well as more transparent what I would call vehicle purchasing process. So the consumer is more comfortable because they're in control of their buying experience and because of that they are less combative or they are more open to the idea of ethanol attachments because they are actually looking at their budgeting going this extra $30 on a finance.

On a service contract or something is smart to do whereas if you're pushing on the vehicle sales and then you push on the F. an eye product, it's not as easy to sell product as it is once that vehicle experienced becomes better.

Got it that makes sense. Thanks a lot.

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

Hi, Thanks for taking the questions.

One of the circle back on the parts and services.

It's pretty prolific rule, just wondering if as a way to help us think through the incremental margins in that business.

I would imagine so much harder the auto business and probably underappreciated piece of your business any way to contextualize that for us.

Yeah, I mean, I think we Brian hit on a lot of the items in the margins in the way they impact our bottom line I mean, we had 170 million in gross profit.

In parts and service we continue to see growth are you Io continues to grow you know the technology advancements that we continue to see in vehicles make our certified technicians to kind of the go to place for.

Any significant repairs and we continue to focus on commodity sales. So I think the parts and service business that we have is a core part of what we're going to continue to do and we expect to see continued growth in that area.

Got you, but from an M&A perspective, as well as more curious like when you put what do you push the incremental sale is there any rule of thumb to help us think through how much incremental us today you occur when you do it when you drive more parts is it not that simple.

Yeah. This is Chris again, I mean, our overall goal that we have in all of our stores is continuing to try and leverage 50%, where we call throughput. So for each incremental dollar of gross that we generate we want to see at least 50% of that come to the bottom line and that's the way that we continue to focus on it does seem that in parts and service.

The opportunity to exceed that through puts a little bit higher but 50% the target and if you look in the quarter.

Overall as a company.

We saw about $42 million, an incremental gross profit and weeks and we hit our 50% throughput target.

On that line.

Yes, that's really helpful. And then just want to talk about warranty specifically like that.

That's scripted right plus 90% that's pretty unsettled level.

Can you help us think through like how much more legs. There is to this I know, it's not easy to forecast and its lumpy.

But it's it's all being driven just by more campaigns given the kind of source on flat for a period of time now.

Are there other factors driving it.

You know of a sepia or prior insurance contracts sold anyway to just help us kind of think through.

The growth in warranty over the next call. It like six to 18 months would be helpful. Thank you.

Yes again this is Chris I mean overall on pretty much all of our mainline manufacturers, we saw pretty good growth in warranty work and you got to remember warranty work. This isn't a function of of of a major problem. It's just general wherein tear that happens the vehicles that are covered by the mainline manufacturer so increasing new Io increase in sales increased focus on retention, which is another big component of when we do an acquisition trying to grow the retention in our service departments are all driving to or really nice lift that we're seeing in overall warranty work and if we do a good job in warranty work and we continue to push on good customer satisfaction. The goal is they come back then for the CP work down the road as they retain their vehicle pass the warranty lifecycle of the manufacturer.

That's helpful. Thank you.

Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.

Hey, good morning, guys.

Hi, Brett Brett.

Question, I guess sort of regional dispersion did you see any particular strength or weakness from an underlying demand standpoint, and then sort of follow up would be regional dispersion on performance within your stores, you talked about Pennsylvania being up 4%.

EBIT.

And maybe what are you seeing in a trajectory with DCH or upstate New York.

Stores as well.

This is Bryan Brett we're seeing a pretty balanced same store sales growth across the country, which is great. Alaska was up 12% I was up 9% Montana was up 10, New Jersey was up 11, Washington was up 18, so you're seeing some of the better numbers. The double digit numbers, you know kind of broadly spread across the country and I think a pre tax profits followed that similarly.

We did also see some strength in brands.

Such as Subaru and BMW.

As well as a few other luxury which was nice and that translated into the bottom line as well.

In terms of Chris do you have numbers on each of those.

The other acquisitions DCH their operating margins I saw that somewhere.

I believe DCH is pushing 4% now barrel is it for our one are one weakness is still in upstate New York and Carbone, which is.

A little bit it's really close to breakeven.

Which isn't where we would have liked to see that but we've got some good opportunity there to be able to grow. Yeah. Then one other one that Brian already mentioned was Pennsylvania and the you know the incremental lift that we're seeing right there in that market with the barrel day acquisition.

So you know it and again it comes down to people. So we can talk about regions. But then you look within the region at specific stores and we have pockets of stores that are doing extremely well and in a couple of opportunities that we continue to focus on.

Okay, great. Thank you.

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

Good morning, Thanks for taking our questions.

So do you think about your target leverage to three times in the context of a newstar, which may be turning.

You still have a pretty robust pipeline of M&A opportunities do you have a preference or expectation to be at the low end of that range at this point in the cycle.

Derek This is Brian I think the way that we look at two to three times as our target is that we want to have headroom that if they're if we are late cycle, which.

I think most indicators are are pointing towards that we still have a number of years and that 17 million Saar is pretty stable for the next couple of years, we still want to have that headroom and I think our covenants go all the way up to five times. So that gives us the ability to be able to grow at a quicker rate. When we believe that pricing on deals maybe come down a which is a one way to look at it I think as we think about our geographic.

Positioning the southeast is an important part of our ability to activate digital solutions on a national basis. So I think we're willing to push that into the middle of that range. If we can find the right opportunity.

In the southeast and hopefully get a footprint. So we can then go apply our typical value based model to be able to do that.

Thank you.

Our next question comes from Michael Ward with Seaport Global. Please proceed with your question.

Thanks, Good morning, everyone I'm personally can't Michael.

How are you guys doing.

Chino do you can you provide the what you spend on acquisitions in the second quarter.

Sure give me that.

So.

[noise] [noise], so we invested about 80 million acquisitions as well as any capital expenditures associated with acquisitions from the prior year in terms of capital deployment associated with that Okay, and there was no share repurchase.

I'm the only share repurchases in the first half of the year that we've had have been associated with stock compensation that asset so no no opportunistic share repurchases.

Okay and.

So it sounds like if I can tie this together with the acquisition strategy.

I think last quarter.

One of the comments you made.

The company made was that you were letting some of the other acquisition does that include completing the year with your two years before to kind of season, you get back up to more.

Close to the corporate average.

And so now it looks like the ship is now towards growth through acquisition is that a fair statement.

Michael This is Brian I think we always are balanced in terms of our approach.

I think you're seeing that where we are doing more acquisitions and I think.

We oh, there there's a belief that we stop buying stores in 2018 because of a maybe a lapse in performance of the existing stores that we were trying to capture the potential love.

We don't believe that was why we believe that there was a disconnect in stock price that made it more attractive for us to buyer own stock than it did to buy other acquisitions and now that our stock price has recovered to a somewhat respectable level, we again turn to acquisitions rather than by our own stock back. So it's kind of how we've always looked at things is just to balance those two things as we look forward I do believe that the market is pretty robust and there's a lot of good deals out there and I think the more that we find ways to activate our network with digital solutions or to find adjacent seat to generate more profit out of our stores. It does make us more competitive because ultimately our ROI is up 15% to 20%. After tax returns will still be achieved but we'll be able to forecast those profit that profitability at even a higher number than what we currently forecast to that if you look at the acquired stores in specific.

Yes, DNA it sounds like they're getting the acquired stores over the last couple of years, they're getting closer to the corporate average corporate average get back to the 2017 levels with us today.

As a percentage of gross.

Yes. This is Bryan again, I mean, we believe that the corporate SGN can get back to the the a is that the 2014 level before we were buying a fair amount of stores, we bought that $7 billion in revenue where it was in the mid 65% range, though that I'm really and remember this Michael I mean, our best stores operate in the mid to high 50 percentile range. So when we buy stores, they're typically at 90%. So it's really that equation of being able to grow your new car business grow your used car business that brings along the f. and I and then over three to five years. Your units in operations grows to be able to drive your service and parts business and those things combined together create two to four times more profitability, which is ultimately the entire basis of our value based model in wire leverage ratios remain so much lower than even our peer group, while still growing at two to four times faster than the rest.

As to the peer group.

One last question I think.

I think I may have missed this is shift currently working with three stores is that correct or is it more now.

Oh, it's for its three in California, and one in Oregon.

Well done thank you very much really appreciate it.

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

Hey, guys. Good morning. This is your downtime on for John .

Good morning, Ryan Hey, So I think you touched upon his trophy in your opening remarks, but can you maybe give us an update on your portfolio optimization for it I think it was about a year ago. When you mentioned youre starting to focus a bit more on divesting underperforming stores. So what do you know how we end with respect to this process.

Sure. This is Brian ER. So this is we believe that calling out our network is really important because it keeps the bar of performance really high. So we sold 12 stores in the last 12 months.

All those stores were purchased with aim a group or were open points to those okay. They were all underperforming to some level. We sold two very small ones of that 12 in this quarter. A one was in what great Great Falls Grateful and falls and the other was a in the Pittsburgh market. So and I think that's something that we will always do but I would say this it's a minor part of what we do and if you're talking about innings, we're probably in the seventh to eighth inning, I mean, we'd probably have a half a dozen to eight nine stores that we believe.

Are not as stronger assets as we typically buy and if you. If you recall, we have a pretty darn good success rate over 80% of hitting that 15 plus percent are are we achieve meant within that five year period. So and these are typically those outliers that we believe are just don't quite fit the network, but occasionally we test and try to make sure that we're always capturing every part of growth that we can that we can.

Great very helpful. Thank you and then on the M&A fine to more broadly I think you've expressed in the past and interest in potentially expanding internationally to Canada UK.

Is this an option you guys are still considering or would you still prioritize domestic acquisitions.

This is Bryan again, we definitely prioritize domestic acquisitions and when the market is so lucrative and it's still plentiful you know, it's it's really hard to look at other countries and go this makes more sense than deploying dollars domestically, especially when we only touch 82% of the country today, we really want to get that closer to the 90 95 percentile. So as we begin to co develop these digital solutions that will have the footprint there to be able to activate the entire country to be able to gain many of those leverage benefits you can in marketing or other personnel type of benefit.

Okay. Thank you and then finally can you maybe share with us how big or value auto sales into Q eight thing I think you said it was 22% of total used vehicle sales. This quarter I'm just trying to have a better idea of how is that business evolving.

So that that is what we call the third tier or the waterfall, it's evolving very nicely.

I would still say this over half of our stores don't play in the value auto game and right now it's about a fifth of our total sales in in used cars. It's also somewhere that most other retailers don't plan, including the peer play used car retailers part of the reason is is is it's a very difficult business to play in because of reconditioning standards and for US, it's really important to sell Super safe vehicle and I think what we found is jumping into that space that our guarantees in our offerings are much better than what Jos used car retail store down the street or wholesale place for people typically by this but consumers still aren't used to looking at new car dealerships to find those type of stores and our salespeople aren't used to selling a car in that type of condition, which is typically over 80000 miles a NR technicians don't typically want to fix those.

Kinda cars, so you're working on three different dichotomy that have to work in adjacent seem to be able to maximize that streaming that benefit all throw in one more thing to think about okay. As you think about the financing part and the ability to sell that type of car or for that matter a three to five year old core product.

The ability to finance those cars is something that Lithia motors is specialists that so we have nearly 100 lenders that are out there to meet each individual specific needs. Okay and I think it's it's easy to get distracted that all consumers are going to be able to buy digitally online. When we really believed that only 20% of the consumers can do that and that's really because of their equity situation in their trading okay, which means it translates into the loan to value on the car that their purchasing.

Combine that with their credit score and you get about 80% of the consumers that really need expertise to help them find financing for whatever type of vehicle, they're looking at and I think one of the things that Chris mentioned that I thought was really important 71% of lithia consumers that have trade ins have this equity on the car that they are trading in that's a big that's a large number of our customers more importantly than that the average this equity on those consumers in our company is $5100. Okay. So if you think now about value auto core product certified or for that matter, even new vehicles, the ability to get into an equity position requires a lot of capital down Okay, and that's where specialists are able to really fit credit scores and loan to values with what the consumers trying to buy.

Great. Thank you so much that was very helpful.

Thats It for me.

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

Thanks, Good morning.

Tina congratulations.

I wanted to go back to last night.

I guess I'm, just trying to understand something at the at the market level in terms of what you see at <unk>.

The stores you acquire because it sounded like.

I think as Chris earlier, you were basically saying that.

Some stores they just focus on selling the vehicle and they don't do enough with.

With all the add ons and what's surprising to me about that is that even if they're smaller dealer I would think you would really like a 100% gross profit business, but it sounds like that's the beginning so yeah, you would think and that's what that's what's confusing me Theres I just want to confirm there's nothing structural that prevents a smaller.

One or two store eight store five store group from pursuing ethanol anymore. It's just purely a choice of those managers are making right.

Yes, David This is Chris I think partly it's a choice that's correct, but the other thing that we're able to do is leverage our scale and size to work with a national vendor to create products that.

Really from a cost perspective bring incremental gross profit to the bottom line. So.

Comparing an individual dealer to our network of.

12 billion in revenue was very difficult to do and so I think it is partly a focus on you know the price of the product.

The people that we have and then obviously the offerings, we barely make sure we tailor offerings to the individual markets individual brand in the individual regions, which may be more difficult for an individual dealer to do but the opportunity is there specifically you know and I mentioned this earlier lad.

Traditional lithia stores, almost 2000, a copy in certain stores versus newer acquisitions, you know trying to bust past that thousand dollar per unit Mark and it's an area that is definitely on the radar. It's a constant source of discussion is front and center on our store performance scorecard, which is which is our key catalyst for permit and regular form it all drops to the bottom line exactly that brings to the bottom line.

Okay. Thanks is there any moving on to the light trucks and just your customer preferences is there any two part question. There is there any change and perhaps a waning enthusiasm even slightly at the margin for light trucks and two.

Do you have you gotten any feedback from your customers, especially your pickup truck customers in terms of how how much interested are they in a pure electric pickup truck, whether it's from the Detroit three already on or Tesla.

David This is Bryan the answer to your first question is there has been a.

No weakness in trucks and the answer to your second is there's virtually no interest in electric trucks at least from the domestic side and and we really believe that it's not just about the power plant in the truck. It's about the build of the truck in the features in the truck and the utilization of the truck that makes it a different game than you know a.

You know as the Dan that you get into new move people around but you know overtime that can that can change and it will adapt and I think we will see some oh, we will see some demand for that overtime as that becomes more available to consumers.

Okay. Thanks, guys.

Thank you very much.

Ladies and gentlemen, we have reached the end of the question and answer session. At this time I'd like to turn the call back over to Brian to bore for closing comments.

Thanks, Rob and thank you everyone for joining us today, and we look forward to updating you on third quarter results in October .

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

The conference call has ended please disconnect your lines. Thank you.