Lithia Motors Inc (LAD) 2015 Q2 法說會逐字稿

Greetings and welcome to the Lithia Motors Incorporated second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. John North, VP of Finance. Thank you, sir. You may begin.

Thanks and good morning. Welcome to Lithia Motors second-quarter 2015 earnings conference call. Before we begin, the Company wants you to know this conference call includes forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition, liquidity and development of the auto industry and markets in which we operate may differ materially from those made and/or suggested by the forward-looking statements in this call.

Examples of forward-looking statements include statements regarding expected operating results, projections for our third-quarter and 2015 full-year performance, expected increases on our annual revenues related to acquisitions or open points, anticipated availability from our unfinanced operating real estate and anticipated levels of future capital expenditures. We urge you to carefully consider this information and not place undue reliance on forward-looking statements. We undertake no duty to update our forward-looking statements, including our earnings outlook, which are made as of the date of this press release.

During this call we may discuss certain non-GAAP items such as adjusted net income and diluted earnings per share from continuing operations, adjusted SG&A as a percentage of gross profit and adjusted pre-tax margin. Non-GAAP measures do not have definitions under GAAP and may be defined differently, and not comparable to, similarly titled measures used by other companies. We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures. We believe the non-GAAP financial measures we present improve the transparency of our disclosures, provide a meaningful presentation of our results from core business operations because they exclude items not related to core business operations and improve the period-to-period comparability of our results from core business operations.

These presentations should not be considered an alternative to GAAP measures. A full reconciliation of the non-GAAP items is provided in the financial tables in today's press release. We have also posted an updated investor presentation on our website, Lithiainvestorrelations.com, highlighting our second-quarter results. On the call today are Bryan DeBoer, President and CEO; Chris Holzshu, Senior Vice President and CFO; and Sid DeBoer, Executive Chairman. At the end of our prepared remarks, we will open the call to questions.

I'm also available in my office after the call for any follow-up you may have. With that, I'll turn the call over to Bryan.

Good morning, and thank you for joining us today. Earlier we reported second-quarter adjusted net income from continuing operations of $49.4 million, compared to $35.2 million a year ago. We earned $1.86 per share in the second quarter compared to $1.34 per share last year, an increase of 39%. Our revenue was nearly $2 billion in the second quarter, an increase of 63% over the prior period. From this point forward, all comparisons will be on a same-store basis.

Total sales increased 11% as all four business lines enjoyed strong comps. New vehicle SAAR was $17.1 million in the quarter, the highest national result since 2006. In the quarter, new vehicle revenues increased 8%. New vehicle average selling prices increased 2%. Unit sales increased 6%, which was higher than the national average of 3%. Domestic units increased 9%, compared to 3% nationally. Import increased 3%, compared to 4% nationally, and luxury units were flat compared to a 10% increase nationally. Gross profit per new vehicle retailed was $2,124 compared to $2,250 in the second quarter of 2014 for a decrease of $126 per unit.

Increasing unit volume as well as leasing penetration created most of the decline in the quarter. Leasing penetrations improved on a same-store basis, up 14% from the prior period. Retail used vehicle revenues increased 16% in the quarter. Our retail used vehicle average selling prices increased 4% as late model vehicles outpaced other categories. We retailed 12% more units over the prior year, resulting in a used-to-new ratio of 0.8 to 1. In the quarter, certified units grew 20%, core units increased 13% and value auto units, or vehicles over 80,000, miles increased 4%.

Our used vehicle gross margins declined 80 basis points, mostly due to higher average selling prices. Gross profit per unit was $2,698 compared to $2,746 last year. On a 12 month rolling average, we sold 59 used vehicles per store, up from 55 units in the comparable period last year. Our goal to retail 75 used vehicles per store still provides considerable upside in the future. We continue to grow used vehicle sales as inventory availability improves in the marketplace. Additionally, our stores continue to recruit and develop used vehicle managers with the ability to source, recondition, and merchandise used inventory.

Our F&I per vehicle was $1,280 compared to $1,202 last year, or an increase of $78 per vehicle. Of the vehicles we sold in the quarter, we arranged financing on 75%, sold a service contract on 45%, and sold a lifetime oil product on 37%. Our penetration rates improved in all three categories over last year. In the second quarter, the blended overall gross profit per unit was $3,699 compared to $3,713 last year. The nearly flat year-over-year performance was complemented by an 8% increase in unit volume, generating $10.6 million in additional gross profit. As we had previously discussed, our store personnel monitor overall gross profit per retail vehicle sold and total gross profit generated to evaluate and drive their performance.

Our service, body and parts revenue increased 10% over the second quarter of 2014. This was on top of last year's 10% increase over the second quarter of 2013. Customer pay work increased 7%, warranty increased 27%, wholesale parts increased 4% and body shop increased 1%. Our total gross margin was 15.4%, compared to 15.7% in the same period last year. As of June 30, consolidated new vehicle inventories were at a day supply of 65, for a decrease of 6 days from a year ago. Used vehicle inventories were at a day supply of 54, or a decrease of 6 days from a year ago.

The acquisition market remains robust and we continue to see a significant member of deals in the marketplace. We are now actively pursuing both Lithia and DCH targets. As a reminder, we have identified over 2,600 potential stores nationwide. We remain confident that we will find accretive purchases in the near term to increase our portfolio and continue to grow earnings.

In addition to growth through acquisitions, we still see considerable opportunities within our existing store base to improve results. Last week, the 23 general managers that comprise the Lithia Partners Group attended of the roundtable discussion here in Medford. These proven leaders have even greater autonomy over their stores and provide invaluable feedback to our corporate teams to improve the entire Company's performance. Their ability to challenge and inspire each other is a critical cultural component of personal ownership and continuous improvement. We believe this partnership allows us to attract and grow the best general managers within the industry.

The DCH integration is ahead of expectations. Originally, we planned to realize corporate synergies over the first two years. The ability of DCH's team to drive change has allowed us to accelerate the process of realizing these savings and is now mostly complete. Despite the real-life corporate synergies, many opportunities remain for continued organic growth. Clear and transparent performance expectations allow store leadership to continue to drive results towards industry-leading benchmarks. The performance of Lithia and DCH stores have allowed us to increase our guidance, which Chris will share with you in just a moment.

In summary, we remain humbled by the ability of our people to live continuous improvement and challenge each other each and every day.

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

Thank you, Bryan. At June 30, 2015, we had approximately $191 million in cash and available credit, as well as unfinanced real estate that could provide another $117 million in 60 to 90 days, for an estimated total liquidity of $308 million. We estimate these funds, if fully deployed, could be used to acquire $1.5 billion to $3 billion in revenue. At the end of the second quarter, we were in compliance with all our debt covenants. During the quarter we completed a $9 million in mortgage financing. We will continue to selectively mortgage properties to provide additional flexibility and take advantage of the current low rate environment.

Our free cash flow, as outlined in our investor presentation, was $44 million for the second quarter of 2015. Capital expenditures, which reduce this free cash flow figure, were $23 million for the quarter. We estimate generating over $145 million in free cash flow in 2015, providing significant capital for internal and external investment. Our annualized in net debt-to-EBITDA is approximately 1.9 times, reduced by over a half a turn from year end, demonstrating the impact that strong financial performance has on our balance sheet. As a result, we have ample liquidity if necessary to complete larger acquisitions.

Our capital strategy remains unchanged as we balance acquisitions, internal investment, dividends, and share repurchases. Our first choice for capital deployment remains to grow through acquisitions and internal investment. Regardless of category, all investment decisions are measured against strict ROE metrics that generate solid long-term returns. Our second-quarter adjusted SG&A as a percentage of gross profit on a same-store basis was an estimated 65.6%. Throughput, or the percentage of each additional gross profit dollar over the prior year we retain after selling cost, and adjusted to reflect same-store comparisons, was 26%.

Our 70 basis point increase in SG&A as a percentage of gross profit on a same-store basis was a result of certain periodic adjustments related to insurance reserves. We continue to target incremental throughput in a range of 45% to 50% in the future. On a consolidated basis, including the effect of recent acquisitions, our adjusted SG&A as a percentage of gross profit was 66.6%. This is a reduction of 470 basis points from our consolidated 71.3% result in the first quarter of this year. As we continue to integrate the DCH acquisition into our operations, we will target an industry-leading full-year consolidated SG&A-to-gross profit in the mid-60%.

Based on our results in the second quarter, we have increased our 2015 guidance as follows. We expect third-quarter 2015 earnings per share of $1.83 to $1.87 and full-year 2015 earnings per share of $6.63 to $6.72. This will be driven by incremental performance from our recent acquisitions as well as continued enhancements in our existing base of stores. For additional assumptions related to our earnings guidance, please refer to today's press release at lithiainvestorrelations.com. This concludes our prepared remarks.

We would now like to open the call to questions. Operator?

(Operator Instructions)

Paresh Jain, Morgan Stanley.

Good morning, everyone, and congratulations on the quarter. Had a question on acquisition. Now, DCH was obviously one of the biggest acquisitions in this space that any public dealer did and the integration just keeps getting better every quarter. As a Management Team that is already very focused on acquisitions, has the DCH experience kind of changed acquisition preference in a way, meaning would you now prefer acquiring bigger dealer groups from time to time instead of acquiring smaller ones?

Hi, Paresh, this is Bryan. Thanks for joining us today. We definitely have learned a lot from our times together since the combination in early October. The DCH acquisition I really believe taught us that as a Management Team, we built an autonomous type company that from the top level is there to really inspire and challenge and set clear expectations for the divisions.

So I think in terms of a perspective of acquisitions, we believe that our staple diet of one and two acquisition type of dealerships will still always continue. However, the idea of larger groups is something that will be much more simple and easier to integrate in the future. Especially now knowing that we can grow in both metro markets, as well as in our typical exclusive markets.

Understood. With leverage coming in quite a bit and management [ban win] must have certainly improved over the last three quarters, how comfortable do you feel that you will be able to acquire more stores before the end of this year?

Paresh, this is Bryan again. I believe, and John, you may correct me if I'm a little off here, but I believe our leverage ratio is almost half the way back to where we were prior to DCH, which is ahead of schedule a little bit because obviously, our earnings increased a little bit more than expected. So we really believe that our ability to grow again, we're at a point where we can grow. We believe the market is very robust, and we have a lot of activity with, I would say, pens moving.

Paresh, this is Chris. Just to add to that, in our prepared remarks we said we had about $300 million in liquidity and that we were going to generate north of $145 million in free cash flow, so I think combining those metrics together would make it apparent that if a large acquisition like DCH came to market, we would definitely be prepared for that.

Excellent. And just lastly, talking about synergies with DCH, you were trying out a few digital initiators them. Can you give us an update on the progress there?

Sure, Bryan again. Sales evolution in the DCH stores, if you recall, there was 27 stores. We now have seven stores that are implementing different parts, or utilizing different parts of sales evolution with the primary function, really, being iPad functionality. That allows more transparency from that living room to show room type of philosophy, whereas they can walk into the showroom and pick up a deal really where they left off. The progress on that is good. We believe that some of the Lithia stores will start adapting some of those processes as well. Outside of that, it's really a store's decision and we allowed them to make those transformational decisions if they choose to.

Excellent. Would love to try that out someday. Thanks, guys.

Great.

Bill Armstrong, CL King and Associates.

Good morning, gentlemen. Nice quarter. Wanted to talk about gross profit per unit on the new side, down year over year, and we've seen other of your competitors reporting declines as well. I was wondering if you could maybe break that out a little bit for us. We are hearing that the midline imports in particular are seeing a lot of margin pressure and with the DCH acquisition, your exposure to midline imports obviously has increased substantially. I was wondering if you could just maybe flesh that out for us a little bit and then what you see in the market.

Yes. Hey, Bill. This is Chris. The domestic margins were down the court about 40 basis points, import down about 50 basis points and luxuries were down about 50 basis points. ASPs were up a little bit overall, which does impact that number as well, even if we're generating the same gross profit unit dollars. But that's kind of how the numbers came out. I'll let Bryan answer some questions related to volume.

Bill, I think the other thing to keep in mind is, margin percentages are less relevant than overall gross as the stores develop, and the reason we say that is when we develop our expense and cost structures, we look at what overall gross we're going to develop, which is ultimately what brings to the bottom line and I think that's why there was such a nice beat. In terms of the DCH side and the impact of midline imports, they actually saw increases in deal average year over year, which was nice. Now, obviously, those aren't in our same-store numbers yet, so keep that in mind, but they're able to somehow be able to attack the market. Now, we would say that in DCH, we still have some volume opportunities that we should be able to be attacking in the coming months and coming quarters as well.

Got it. Thanks for that color. And then, just in Texas and some of the other markets that maybe have a little more exposure to the oil and gas sectors, are you seeing any weakness or any changes in demand or the cadence of sales in any of those markets?

Bill, Bryan again. We're very fortunate that all of our states were up, with -- it was really led by Oregon, Washington, New York, Montana, Hawaii and Alaska, which is pretty broad, including some oil-based economies. Texas was still up high single digits.

Okay. That's great. Thank you very much.

Thanks, Bill.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

Hey, John.

A first really broad question. I mean, obviously, you guys way outperformed in your expectations for the second quarter by almost $0.30. Just curious what you think that the biggest drivers were in the quarter that drove that, because I mean, you have some pretty conservative guidance, at least it looks like, going forward. Just trying to understand if those factors could repeat going forward.

John, this is Bryan. I think if you're trying to put your finger on where did the expectations get exceeded? Really, a good majority of the beat came from the DCH organization. We actually accomplished all the synergies that we expected to achieve initially in the first two years, plus we're getting a fair amount of the operational improvements fairly quickly. Lithia obviously had a strong quarter as well, reflected in the same-store sales results. But really, that was where we were a little bit off.

We still believe, though, that there's a lot of upside. Much like the Lithia stores, where we manage them by thirds, we still have that top third of DCH stores, that middle third and then that third that really hasn't realized the opportunities afforded them. Chris, did you have some other more detailed information?

Yes, John, specifically I guess I'd say it that we did do well on the Lithia side. We were happy with results, both top line and on a leverage perspective, but where we really saw the incremental opportunity and benefit in the quarter was, DCH lost about 1,000 basis points in SG&A-to-gross leverage. So they picked up a significant amount of income off of the changes that they are making with their operating team and their structure and it's really coming to the bottom line. At $85 million in gross profit in the quarter for DCH, obviously, that has a sizable impact on the overall beat.

That's it. That's very impressive. And then, if we think about this $3,700 in gross per unit you guys are focused on, where is that relative to history? I mean, is that at all-time highs? Or are we looking at something that has been -- a number that has been maintained for a significant amount of time and you think you might be able to maintain and sort of trading off between new, used, and F&I grosses?

John, year over year it was virtually flat. The $3,700 in -- well, $3,699 all-in deal average is towards the upper end of where we been in the past, but we also believe that if we look at the peer group, or the industry, in terms of F&I there's growth opportunity. We also believe that our deal average can improved through improved, what we would say, supply chains on used vehicles, which is a lot of our battle so as we're able to find more vehicles and the right vehicles on the used car side, it helps improve that deal average as well.

Do you not see anything where this $100 to $200 drop in gross per new that were seeing at some of your dealerships but also at some of the other groups out there, is something that portends a discipline or pricing or grosses that are falling apart in the industry across the board? It's more of a rebalancing in the gross?

Yes. On the new vehicle side, it was down $126 per unit, so there is something that's occurring there, whether it's greater competition or whether it's influence from third-party factors. There is something happening there. But ultimately, we still believe that if you can continue to drive top-line volume in new vehicles, it's worth the sacrifice because of the downstream impacts in their used vehicle trade-ins and eventually in our service and parts operations, which is ultimately how we are judged. It's why we've been spending a fair amount of time on the Lithia side pushing leasing, which DCH taught us a few things about how to build the lifecycle of a customer, starting with leases and then changing them out of cars every 30 to 36 months to be able to increase your velocity in your service departments, in your used cars trade ins, and in your customer lifecycles.

John, it's Chris. Just to add to that as well, one of the opportunities that we have with the customers that are coming into our stores is in F&I. We reported a nice improvement in F&I year over year. It was up $78, or $1,280, but I think Auto Nation this morning reported something like $1,540. So we do have an opportunity there that we're working on to continue to enhance all aspects of the transaction. If we take a little bit lower-gross profit unit dollar on the new side, we'd like to pick it up in F&I eventually.

And then just lastly, as we think about the used vehicle opportunity, 75 cars per store. I think you guys were at -- I think you were saying about 59 in the quarter. That's basically a 40% to 50% all else equal increase in used vehicle gross profit potential. Can you remind us what the timeframe is for that and how you ultimately will get there?

That's good, John. We haven't actually given a timeframe but we did make a lot of headway over the last few quarters and we expect that to continue as the supplies continue to loosen. So I mean, it's probably a couple years out still, but as DCH grows their business and as our stores continue to grow their business, it goes back to that ability to attract and grow those used vehicle managers that have that what we call mining, the ability to go find those used vehicles that are the demand vehicles that our consumers are really looking for.

Great. Thank you very much.

Thanks, John.

Rick Nelson, Stephens.

Thanks. Good morning. You've mentioned many opportunities to improve performance at DCH from here. If you could innumerate there, where are the major buckets of improvement to pipeline?

Rick, this is Bryan. I think the biggest areas that we still have as opportunities is still allowing our stores to become more autonomous, so they're thinking for themselves. What George and TY and the leadership team at DCH did was really, with the synergies of the corporate staff, we took out a lot of the teams that were giving directives to the stores, but much like Lithia was 5 to 7 years ago, it took us 3 or 4 years for stores to really believe and respond to their own market and not really look to corporate to be able to make those decisions. Now, that seems more cultural or ethereal, let's say, but ultimately that is what auto retailing is about, is the ability for you to motivate your staff and find those customers in a better way then your competitors can do.

Now, if we look at the actual hard areas of where the improvement came from, we actually did go backwards a little bit in our market share within DCH, which tells us that we maybe didn't spend the money to continue to drive that market share. So we really believe that despite our big earnings increases that came a lot from SG&A improvements of that 1,000 basis points, that we can gain that volume back, because they are impeccable when it comes to customer service and that ability to retain and grow their teams. We think it's a big volume formula. There's obviously some deal-average improvements that can come in that bottom third of stores, because their margins are still considerably less than maybe even the industry and definitely less than, obviously, Lithia. However, they are in exclusive markets. And we still have a few what we would call personnel advancements and re-inspirations that we need to achieve to get a number of stores, maybe a half a dozen or so that still have a lot of opportunity.

Thank you for that. I think your original guidance was for $0.70 accretive to DCH for this year. Is there a way to size that up now, what's your thinking DCH could contribute?

Yes, Rick. Hey, this is Chris. We're not giving the specific guidance any longer on DCH just because it's too hard to break out a lot of the shared services functions that we have. I can tell you, when you look at the $85 million or so in gross profit that they're generating each quarter, and the leverage that they're getting on their platform, you could probably back into a number that's significantly higher than what we originally anticipated. I think the other thing that Bryan alluded to early on was that this is going to be a 3- to 5-year integration. Things are ahead of schedule, but we still see that there's opportunities for them to continue to improve. When you look at their current estimated SG&A to gross, it's still somewhat higher than some of our public peers that are heavy import in metro markets. So their team is diligently looking at all the opportunities that they have to continue to expand top-line gross and manage the cost effectively over time. What we don't want to do is cut cost and the see a deterioration in overall gross-profit dollars.

Got you. Finally, if I could ask you about the acquisition environment. Some of the dealers are speaking to high multiples from sellers and what you're seeing there and is the opportunity more small markets or bigger metro areas?

Rick, this is Bryan and maybe I'll play a little bit off of our previous expectations for DCH. I think the biggest thing that we have with DCH at this stage is the ability to open up that second door in the metro markets for growth. The ability for us to leverage their people, which are very stable, they're very progressive, they're inventive, it's exciting for us so we are looking in both metropolitan areas as well as our typical exclusive areas. I would say that are closest deals are traditional Lithia-exclusive deals. However, we have a good handful of deals that are percolating in both the LA and the New York markets and we look forward to announcing in the coming quarters our first deal on the DCH side.

The pricing on deals seems to be robust. There is no question about that. We also believe, though, that both the Lithia and the DCH model is to be able to provide -- to buy average, or possibly even underperforming, stores because as you remember, we've always said that people drive the performance in stores and we believe if the store and the franchises are the right franchises for the area, then stores can have the wrong people mix and it's a matter of bringing in new talent and then we can realize the synergies and the advantages that maybe haven't been realize. So despite high pricing, we believe that our value approach to investing by buying underperformers or average performers can still be very lucrative in even a robust market like today.

Great. Thanks a lot and good luck.

Thanks, Rick.

Brett Hoselton, KeyBanc.

Good morning, Bryan, Chris, John and I assume Sid is in the background there.

I'm here. It is fun to watch of these youngsters make this thing hum.

Brett, you've got to ask Sid a question. He's sitting here chomping at the bit.

There we go. Well, I've got a simple question for you, which was, you talked about some additional improvements that you thought you could make in DCH and the core, Lithia business model. I guess, as you sit back and you guys think about maybe the top two or maybe three areas that you think that you can improve on the current business, what would you say would be those the top two or three things?

This is an easy one and Sid, you may even have a comment after. This is Bryan. Used vehicles is obviously our number-one push because as SAAR begins to flatten a little bit, even though I believe that there is still some headroom, it's really a limitless growth opportunity. Whether it's 59 units per site today or 75 units in the future, once we hit the 75 we're going to be talking about something different, because I think what we know that even some of our smaller stores can sell 100 or 200 used vehicles. It's a matter of supply and great people to be able to do it. That's the first area of improvement and that's for both divisions. We're seeing some nice moves in DCH in terms of value auto sales. It's something they hadn't really done in the past and probably half the stores have really taken kindly to that and are really growing their business in that arena.

The second area, we really believe, is the service and parts departments and that life cycle, the consumers. We have spent a lot of money on our facilities over the last four or five years and upgraded our capacities. Many of our stores now are expanding hours. There are expanding their offerings with what we call commodity sales, which is really being a one shop -- stop shopping experience. Again, at close to 10% same-store sales growth in service, we are starting to still find ways to be able to increase our capacity, attract new customers, and provide great values to them as well as time savings.

Those are the two big areas, but obviously, we still have nonperformance in many of our stores, and that's really a people formula. Sid, you've got something too?

Since Bryan opened the window for me to say something, turning managers loose and attracting and keeping the best talent in the industry is one of the biggest opportunities and people are beginning to love to work for us because they have that autonomy. They have the ability to shine, make decisions on the ground. It's a wonderful model and we've tried that consolidation one where corporate dictated how everything happened and DCH was experimenting with that and as we free that up, it takes time, and we get these great people in there, the used car opportunity. But remember, this is not a story about increasing margins on new vehicle and used vehicles.

It's about total gross-profit generation out of our fixed costs. And that's going to be the story. People get all excited about, gee whiz, your margins are shrinking. Well, we're getting more total gross profit out of our fixed cost and that's the goal.

Just a follow-on question. Chris, you may have mentioned this and I may just have missed it, and I apologize, or it may even be in your press release, but gross-profit throughput for -- kind of on a same-store sales basis? I can probably calculate it. I just was wondering if you happen to have that off of the top of your head. Again, maybe you mentioned it and I just missed it.

Yes, on a same-store basis I think the number was 28%, Brett. One of the issues that we had on comparable basis year over year is that we had some sizable adjustments in the prior year that benefited our overall throughput, which I think was 51%, 52% last year. On a comparative basis, it made the 28% seem a little low, but we're going to continue to target that throughput at that 45% range and expect to do so for the full year.

Okay. Great.

Brett, one more thing, too, on the service and parts growth. People miss that lifetime oil change that we are selling. 37% of our customers bought that in this quarter, and that means they're coming back. Our problem has been teaching people to sell them the rest of the service and helping them get to more customer-pay labor. But it's working and that's an automatic -- it's like a annuity out there, all those customers coming back in.

Okay. Thanks, gentlemen.

Thanks, Brett.

Bret Jordan, Jefferies.

Hey, good morning. The question on the leasing -- the leasing growth of 14%, that was comp stores and, did you give a -- what your total lease penetration is in the quarter?

We're looking it up here real quick. That was just comp stores. 39.4%.

At DCH.

At DCH and the other was Lithia.

[13.8]%.

Okay. And I guess, as we look at throughput, is there -- have you carved out what the incremental productivity or throughput might be at DCH versus the cores stores? I mean, an incremental dollar productivity, the difference on the East Coast and versus the legacy stores?

Yes. Brett, it's Chris. If not really relative when you look at a comparative year-over-year basis, without taking into account what they did in the prior year, just because your first year of business is effectively equal to any profit that you generate above your SG&A line. What we are doing, though, is maximizing every opportunity that we can find with DCH. We're implementing the same productivity metrics that we use for personnel and headcount that we used at our Lithia stores. We set up benchmarks for them, comping their own stores against each other to show them where the opportunities are. Really in the first couple years of an acquisition, I don't think the throughput number is really meaningful, because there's so much opportunity that's there. What you want to do is get a baseline set of business that you feel comfortable is operating at a high level, and then from there, as you continue to generate growth, focus on that targeted throughput of that 45%.

Okay. And then one last question. On luxury, you said your luxury was flat versus some growth on the industry average. Is that just where your luxury is in your markets? Was your luxury performance more in line with the industry or was there something specific there?

Brett, this is Bryan again. Our luxury sales were -- we were actually up about 12% in our Mercedes brands. Unfortunately, the offset on the other brands wasn't as good. We had pretty good comps, we would say, from last April and May and for some reason, this April in a few franchises was really tough in our luxury business. We don't see that as a continuing trend, but it was something that we were a little bit -- maybe we lost a little bit of opportunity in that arena.

Okay. Thank you. Appreciate it.

Thank you.

David Whiston, Morningstar.

Thanks. Good morning. Wanted to go back to pricing on new and used. I guess I need a clarification here, because when I looked at the results on the percent of change in gross profit per unit, both overall versus same-store, it's a pretty big spread. New, for example, is down 12% versus down 5.5% on the same-store level. I just assumed that was because of DCH's higher exposure to Japan [free] than I thought I heard earlier in the Q&A, that midline imports were not an issue on pricing. Can you just clarify what's the difference for most of the percentage changes, the delta there in the percentage changes?

David, this is Bryan. I think more specifically, when we look at the decline in units, that was only Lithia. That does not include DCH, okay? All those numbers are off same-store sales. I think you understood that, right?

Yes.

Okay.

David, I think, maybe to answer your question a little differently, each of our stores make decisions on pricing in order to generate the volume and the gross-profit dollars that they are expected to hit in an individual store. I think we're looking at three pages of data right now, trying to answer your question. It might be easier to take that one offline with John.

Okay. Also, on the Honda finance [with the] CPB, it sounds like a lot of dealers are saying it's really not going to impact their F&I business, in part because there's also the flat fee on top of that. Are you an agreement with that?

Yes, David. Chris. Yes. We have wonderful relationships with all our finance partners, including Honda and with 78% penetration on vehicle financing, I'd say we have strong relationships with our customers as far as finding them affordable and good options for them for arranging the financing. We work together with Honda. Last year, we worked with Allied. We worked with a couple credit unions to really manage the business just to make sure that in the end, we all recognize that we provide a service, both for the consumer and for our financial partners and we're going to find a good balance to make sure that we're compensated fairly for that.

Specifically, to Honda finance, we actually like the fact that there's a 1% and 1.25% rate cap. We think it adds transparency to the consumers and actually levels the playing field a little bit competitively.

Okay. Last question is much more longer term. I'd love to hear your opinion on -- there's been a lot of discussion about the turn of car sharing and how that could actually eliminate a lot of private car ownership in this country longer term. Do you agree with that opinion, or do you think customers at least in the rural markets and the Lithia markets always want to have their own vehicle?

Yes. I think we could probably break it down into a DCH discussion and a Lithia discussion. There's no question about that. We're not seeing any of those trends in our more rural markets. However, it may change, and I think ultimately, what we're seeing in our metropolitan areas is there is car sharing going on, whether it's Cars2Go or Zipcars, or so on and so on.

We really believe that even if that occurs that the utilization rate on those cars, as long as we're the person selling those, which means we get into some fleet business and those types of things, which DCH does, Lithia does with the Cars2Go vehicles in Portland, Oregon, the utilization and the wear and tear on those vehicles is very high. Despite the fact that we make really no margin on the front end of those vehicles, we get the vehicle back as a trade-in and most importantly, we're the ones servicing those vehicles, which is a pretty dramatic amount at our two Mercedes stores in the Portland area. So either way, it seems like it can have its benefits as long as our people in the stores continue to understand their market and make their own decisions of how to capture job sharing or individual vehicle purchases.

Okay. Thanks very much.

Thanks, David.

Thank you. At this time, I would like to turn the call back over to Management for closing comments.

Thank you, everyone, for joining us today and we look forward to updating you on further results in October. Bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.