Lithia Motors, Inc.

Good morning, and welcome to the Lithia Motors first quarter 2020 conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Eric Pitt, Vice President, Investor Relations and Treasurer. Please begin.

Thank you, and welcome to the Lithia Motors first quarter 2020 earnings call. Presenting today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President and COO, and Tina Miller, Senior Vice President and CFO. Today's discussions may include statements about future events, including the duration and contemplated impact of the COVID-19 pandemic, financial projections, and expectations about the company's products, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiuminvestorrelations.com, highlighting our first quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Eric. Good morning and welcome, everyone. Before discussing our Q1 earnings results, I wanted to take a moment to express our empathy and thoughts for those directly affected by the COVID-19 pandemic and and the disruption it has brought to our society and economy. During this time, our priority is to ensure the health and wellbeing of our team members, customers, and communities. Providing reliable transportation to support our customers, emergency workers, and everyday heroes in this pandemic has required us to further adapt and shift to ensure these essential services are available. Each area of our country is being impacted differently by stay-at-home and shelter-in-place orders as states, counties, and cities have and will all respond in unique ways as we navigate out of this challenge. Currently, 95% of our markets are impacted by shelter-in-place orders, with 100% of our service departments open and 95% of our sales departments open at varying levels nationwide. We are inspired by the diverse array of solutions our team members are developing to ensure our fellow employees and customers are safe in receiving our services as requested. Earlier today, we reported adjusted first quarter earnings of $2.01 per share. These results were driven by our strong January and February performance, with same store new vehicle revenues increasing 4%, used vehicle revenues increasing 22%, F&I increasing 18%, and service body and parts increasing 6% for that two-month period. This robust start to the year was offset in the quarter by a significant decline in the second half of March as shelter-in-place policies were enacted across most of the country. For the full month of March, same-store new vehicle sales declined 33%, used vehicle sales declined 27%, F&I declined 29%, and service, body, and parts declined 9%. As a result for the quarter, total same-store revenue declined 5%, while total same-store gross profit declined 2%. Chris will share further details on the quarter's performance and our response to the current environment in a few moments. For the remaining duration of my discussion, I'll be outlining the design of our diversified, high-growth, highly complex strategy that makes Lithia so unique. Our preparation, foundational strengths, and the current environment provides us the opportunity to accelerate our progress towards our aspirational goal of 5 percent national vehicle market share. The foundation of our strategy that we have spent years building is stable and difficult to replicate. It is built on a high performance and result-based culture, six highly diversified business lines, a coast-to-coast physical network, a near limitless value-based growth plan, and a strong balance sheet with regenerating cash flows. Diversification through our core business lines creates resiliency in our revenues and profits. Different than the recession over a decade ago, we are much more positioned in this less certain environment. Today, each of our six business lines are now being expanded and activated through in-home and digital solutions. In addition, no single manufacturer makes up more than 18% of our new vehicle product mix, and we are regionally diversified with the broadest national network of any auto retailer reaching over 92% of our great country. Our balance sheet is also the strongest in our history, with the lowest leverage in our industry and cash reserves of over $550 million, plus an additional $500 million available through our unfinanced real estate. Our capital discipline has positioned us well, with no significant debt maturities until 2025 allowing us the flexibility to make strong, opportunistic decisions with our capital. Most importantly, our culture and teams are empowered, entrepreneurial, and driven to achieve high levels of performance by making decisions closest to our customers. As discussed in our preliminary earnings release last week, this uniquely positions Lithia to respond to the extremely variable market conditions thrust upon us due to the differing levels of shelter-in-place orders. Our stores and their teams are completely in tune with their customers' needs and are making proactive decisions on their behalf at all levels. In addition, our proprietary performance management systems and measurements interlace our cultural values to create transparency, trust, and action, the catalyst for high performance. Combined with persistence and adaptability, we direct all of our attentions on what we can control, allowing us to maintain focus, remain humble, and drive for better results. We see the growth and expansion of our physical network comfortably taking us halfway to our 5% goal. Just shy of 1% national market share today, our physical network will be leveraged with digital home solutions to complete the rest of the journey. Consolidation opportunities within our industry remain plentiful, allowing us to continue to grow rapidly. Our experiences over the past several years in our stores and with our business partners have taught us that expert personnel, the right inventory, digital solutions, and a physical network All are required elements to seamlessly provide transportation solutions on a national scale. The traditional dealer model is highly profitable. However, the current customer experience lacks the speed, ease, and transparency found in other retail transactions. Digital solutions are improving consumer experiences. However, most consumers still require expert assistance to complete their purchase. Unlike most products, vehicles are highly complex, last for over a decade, involve a trade-in and financing, require maintenance and are large, making them expensive to transport. Thin-unit economics offset by high logistics costs results in a six-region strategy to most effectively compete and deliver profitable solutions. With the addition of the Williams Group late last year, we are now located in all six regions and ready to add density to our network. Our customers' proximity to our physical network is a key element to our design. This enables us to supply convenient and affordable touchpoints throughout the ownership lifecycle, especially related to our 50% margin service and associated parts businesses. Increasing our physical network to between 400 and 500 locations results in 2.5% market share and the ability for us to reach most U.S. consumers in two hours or less. As such, our top priority for allocating capital will continue to be expanding our network by acquiring strong new locations. Our investments in modernization are well underway, and we expect only minimal development costs in 2020. As we continue to develop the engines to power our digital home solutions, we also work to transform the actions and behaviors to our teams within our existing network. Our people and these engines will be powering our future national brands that will overlay our six regions to attract a larger population of digital consumers thirsting for transparent, empowered, flexible, and simple buying and servicing experiences. Through sharing of best practices, new digital solutions, and our support for social distancing, these actions have taken hold at an accelerated pace in our network over the past few quarters. We are providing digital shopping experiences contactless test drives, and home delivery and curbside pickup for vehicle purchases and service. Nationwide, we estimate that over 25% of our April deliveries are being completed off-site. We are well positioned as stay-at-home orders are further relaxed and ultimately removed as we continue to expand our holistic strategy to capture additional market share and exponentially grow our companies. To summarize, Lithia's sound business foundation is composed of a dynamic entrepreneurial culture that attracts and retains the best talent, world-class proprietary performance management systems, a proven growth strategy, and capital discipline with regenerating cash flows. Our growing physical network composed of people, inventory, and facilities combined with our digital home solutions completes our unique omni-channel strategy. The additional advantages of a persistent, adaptable, and optimistic team with a multi-decade track record of executing together are more apparent than ever and are the catalyst for emerging from this pandemic stronger than ever. This complex strategy outlined for you today positions us to continue to lead our industry's transformation and progress towards making our goal of 5% national market share a reality. With that, I'd like to turn the call over to Chris. Thank you, Brian. While the situation in our nation is unprecedented, our operational leaders are living our mission of growth powered by people by focusing on what they can control and identifying the levers they can pull to persevere in this environment. Our stores continue to follow CDC guidelines and local government directives, while implementing strong safety measures for our customers and employees. With that, I'd like to discuss our same-store quarterly results, as well as trends in the first quarter and what we have seen since our pre-release on April 14th. For the three months ended March 31st, total same-store results were down 5%, led by an 11% decrease in new vehicle sales, a 3% increase in used vehicle sales, a 1% decrease in F&I revenue, and a 1% increase in service body and parts revenues. As shared last week, shelter-in-place policies have caused varying levels of business interruption across our network, depending on the timing and the restrictive nature of the orders posted by local governments. Specifically, during the second half of March, when shelter-in-place policies were enacted, vehicle unit sales declined approximately 50%, with new and used vehicle sales responding similarly. Vehicle sales in our stores varied greatly, with declines between 15% and 75%, other than in our most restricted state, Pennsylvania and Vermont, which had virtually no sales due to government orders. The most stable states were Montana and Texas, with little year-over-year change. Service body and parts sales in the second half of March declined approximately 30%. Our state performance during this same period had declines in service varying between 10% to 50%, with Nevada and Texas remaining the strongest at the lower end of the range, and the northeast towards the upper end of this range, where the strictest shelter-in-place orders remain. Since last week's pre-release, we have seen restrictions on shelter-in-place policies, and specific guidance for auto retailers continued to be relaxed. Vehicle sales departments saw some improvement, with new vehicle sales being down less than 40%, use less than 20%, and service volume parts still hovering around a decrease of 30%, as our teams adjust and respond with safe, responsible business practices that provide customer solutions wherever, whenever, and however they desire. In the quarter, the new vehicle business line was down 11%. Our average selling price increased 5%, and unit sales decreased 15%. Gross profit per unit increased to $2,200 compared to $2,177 last year, an increase of $23.00. For the past several weeks, most OEMs have announced closures of their factories through the early part of May, and our teams are incorporating those potential impacts in their plans. Despite this, our history has taught us that OEM partners will support us and aggressively incentivize vehicles in the coming months as consumers return to more normal lives. For used vehicles, we saw gross profit per unit of $2,073 in the quarter, a decrease of 1% or $18 over last year. One large advantage we have over other used retailers are that our OEMs also provide programs or subsidies to support certified pre-owned vehicle sales. Our balanced inventory is comprised 90% of the less volatile used vehicles, certified pre-owned, core, or vehicles three to seven years old, and value auto, vehicles older than eight years. Due to the scarcity of these units and the OEM subsidies, we can maintain better competitive pricing and margins. The remaining 10% of our used vehicle inventory is late model conquests or vehicles less than three years old and less than 40,000 miles that are positioned at off-brand locations. We are actively moving through those vehicles to reposition ourselves to opportunistically acquire replacement units. Our strategy of selling deep into the used vehicle age spectrum to our core and value auto vehicles, which are 60% of our sales, are resistant to value degradation. Additionally, in weaker economic cycles, these already scarce vehicles are in higher demand as consumers move to less expensive monthly payments and more affordable products. New and used vehicle sales are supported by our experienced finance specialists that help match consumer needs with lending options at over 150 financial institutions. In the quarter, our finance and insurance business lines continue the incremental improvement we have seen the last several quarters, averaging 1,557 per retail unit an increase of $89 per unit over the prior year as consumers continue to take advantage of the product offerings available that protect their mobility investments. We have not seen any tightening in the credit market. In fact, financial institutions and OEMs have significantly enhanced the programs and incentives they are providing consumers with zero payments for 90 to 180 days, 0% APR financing, and $0 down, as well as more competitive leasing. Overall, new and used vehicle sales create incremental profit opportunities through the retail of additional trade-in vehicles, greater manufacturer incentives, F&I sales, and future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $3,697 this quarter, or an increase of $84 per unit over last year. We remain focused on the highest margin business lines, our service parts and collision centers, which in the quarter increased 1% over the prior year. These teams have made massive operational shifts to adapt to consumers being confined to their homes. Our home digital efforts that began in Pennsylvania and have become the incubator for sharing both digital and manual best practices in all departments has been a catalyst for new ways to support our consumers. The demand from consumers for all of our stores to offer home solutions has created a mindset shift in our teams that we expected to be one of the more difficult parts of our strategic transformation. As of this week, approximately 75% of our network is performing home service solutions by actively picking up vehicles to and from our consumers' homes. Combined with our online vehicle sales and used vehicle purchases, our at-home digital solutions position our company to leverage our growing network, which now has the largest reach in the industry. Our facilities, inventory, and people are ready to deliver our online, in-dealership, and in-home solution to non-traditional auto consumers that we previously may not have appealed to. Our culture and world-class performance management systems have enabled our teams to be nimble and responsible to this rapidly changing environment. Store leaders have taken prudent and decisive cost-saving measures in personnel and advertising expenses, which is comprised of 75% of our SG&A. Our marketing teams are identifying the advertising channels and messages that provide the most efficient investment on our advertising dollars. Overall, we expect store advertising spend to reduce 20% to 30%. Additionally, we'd like to thank our vendor partners who have provided additional support in the form of fee concessions for the next several months. Our teams have reduced our staffing levels by approximately 40% through the elimination of positions and by furloughing our performing team members that we hope return to work soon. To financially support furloughed employees who are impacted by COVID-19, we are providing additional financial benefits, starting with up to an additional two weeks of paid time off, paid benefit premiums, and adjusted compensation plans for active employees that recognize their contribution in this unique operating environment. In summary, our teams continue to adapt and operate in the ways that best match each of their local markets and the ever-changing consumer desires. The insights provided by our world-class performance management system allow our teams to be nimble and responsive to the changing environment. We are innovating and improving the consumer experience through incremental and pragmatic modernization and are poised for the shelter-in-place orders to be lifted and the economy to reopen. Our team's ability to achieve high performance in any environment continues to be the foundation as we remain focused on our longer-term goal of 5% national market share. With that, I'd like to turn the call over to Tina.