Greetings and welcome to the Lithia Motors Incorporated Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a remainder, 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 that 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 in 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 in 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, diluted earnings per share from continuing operations, adjusted SG&A as a percentage of gross profit and adjusted pretax 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 item is provided in the financial tables of today's press release. We’ve also posted an updated on 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 am also available in my office after the call for any follow-up you may have. With that, I will 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 a $1.86 per share in the second quarter, compared to a $1.34 per share last year an increase of 39%. Our revenue with 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 unit 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 for new vehicle retail was 21.24 compared to 22.50 in the second quarter of 2014 for a decrease of a $126 per unit, increase in 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 at their categories. The retail 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.…

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 days 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're in compliance with all our debt covenants. During the quarter, we completed $9 million 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 expenditure which reduces free-cash flow figure were $23 million for the quarter. We estimate generating over a $145 million in free-cash-flow in 2015, providing significant capital for internal and external investment. Our annualized net debt to EBITDA is approximately 1.9 times with produced by over a half a turn from year end demonstrating the impacts of strong financial performance it 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’ve retained after selling cost and adjusted to reflect same store comparisons was 26%. Our 70 basis point…

Thank you. At this time we will conduct a question and answer session. [Operator Instructions] Our first question comes from Paresh Jain with Morgan Stanley. Please proceed with your question.

I 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 experienced kind of change acquisition preference in a way meaning would you now prefer acquiring bigger dealer groups from time to time, and set of acquiring smaller ones?

We definitely have learned a lot from our time together since the combination in early October, the DCH acquisition it really belief taught us that as a management team we have built an autonomous type of 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 the perspective of acquisitions we believe that our staple diet of one and two acquisition are type of dealerships, we 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. And with leverage coming in quite a bit and management bandwidth must have certainly improved over the last three quarters, how comfortable you feel that you will be able to acquire more stores before the end of this year?

I believe, and John may correct me if I am 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 are at a point where we can grow. We believe that market is very robust and we have a lot of activity with I would say pen’s moving.

Just to add to that, in my prepared remarks we said we had about $300 million in liquidity and we were going to generate [north] of $145 million of 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 definitely prepared for that.

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

So sales evolution in the DCH stores, if you recall there were 27 stores, we now have seven stores that are implementing different parts and utilizing different parts of sales evolution with the primary function really being iPad functionality that allows more transparency from that living room to showroom type of philosophy whereas they can walk into the showroom and pick up the 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 have allowed them to make those transformational decisions if they chose to.

Our next question comes from Bill Armstrong with CL King & Associates. Please proceed with your question.

Good morning, gentlemen. Nice quarter. Once we’ve talked about gross profit per unit on the new side down year-over-year, we’ve seen other of your competitors reporting decline as well. And also one of you can comments maybe break that out of little bit for us, we are hearing that the midline imports and particular seeing a lot of margin pressure and with the DCH acquisitions yours exposures to midline imports obviously has increased substantially, as one of you could just maybe kind of flash out that for us little bit and then what you see in the market.

The domestic margins were down in the quarter about 40 basis points, import down about 50 basis points and luxuries were down about 50 basis points. ASP’s were up a little bit overall which does impact that number as well even if we are generating the same gross profit unit dollars but that’s kind of how the numbers came out, I let Bryan can I answer some questions related to volumes.

I think the other thing to keep in mind is margin percentages are less relevant and overall gross to stores develop and the reason we say that is when we develop our expense and cost structures, we look at what overall gross were going to develop which is ultimately would bring to the bottomline and I think that’s why there was such a nice [speed]. 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 are not in our same store numbers yet to keep that in mind but they are able to, somehow able to attack the market. Now, we would say that in DCH we still have some volume opportunities that we should be able to – the attacking in the coming month and coming quarter as well.

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

We were very fortunate that all of our states were up, it was really led by Oregon, Washington, New York, Montana, Hawaii and Alaska which is pretty broad including some oil base economies. And Texas was still up high single digit.

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

Good Morning, guys. First really broad question in obviously you guys, way up performed your expectations for the second quarter by almost $0.30. I am just curious what you think biggest drivers were in the quarter little that drove that I mean you have some pretty conservative guidance and still looks like going forward but just trying to understand plus factors could repeat going forward.

I think if you're trying to put your finger on where did the expectations get exceeded, literally a good majority of the deal came from the DCH organization. We actually accomplished all the synergies that we expected to achieve initially in the first 2 years plus we're getting a fair amount of the operational improvements really quickly. Lithia obviously had a strong quarter as well reflected in the same-store sales results. But, really that's where we were a little bit off. We still believe though that there is a lot of upside much like the Lithia's stores where we managed them by a third. We still have that top third DCH storage, that middle third and then that third that really hasn't realized the opportunities of what has been. Chris, do you have more detailed information?

Yes, John, specifically I guess I'd say that we did do well on the Lithia side where we're happy with the results for the top line and on the leverage perspective but what we really saw the incremental opportunity and benefit in the quarter was DCH lost about a thousand basis points and SG&A growth leverage so they picked up a significant amount of income, the changes that they are making with their operating team and restructure and its really coming to the bottom line so, $85 million in gross profit in the quarter for DCH obviously that has a sizable impact on the overall deal.

That's pretty impressive. And then if we think about this $3700 in gross per unit you guys are focus on, where is that relative to history, I mean, is that at all time highs or we looking at something that a number that has been maintained for a significant amount of time and you think you might be able to maintain instead of trading off between new used and F&I grosses?

John, year over year, it was virtually flat. This 3700 and 3699 all are in deal average is towards the upper end of where we've been in the past. But we also believe that if we look at the peer group in the industry in terms of F&I there's growth opportunity. We also believe that our deal average can improve through improved, what we would say, supplier chains on used vehicles which is a lot of our battle so we're able to find more vehicles and the right vehicles on the used car side. It helps improve that deal average as well.

But you do not see anything whether there is $100 to $200 drop in gross per unit that we're seeing at, some of your [indiscernible] but also you know at some of the other groups out there. It’s something that portends a disciplined or pricing or gross that are falling apart in the industry across the board, it’s more of a rebalancing any growth?

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 our used vehicle trade ends and eventually in our service and parts operations which is ultimately our judge that’s why we have 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 months to 36 months to be able to increase your velocity in your service department, in your used card trading and in your customer lifecycles.

John its Chris, I mean just to add to that as well. I mean one of the opportunities that we have with the customer is that are coming into our stores is the F&I. We reported a nice improvement in F&I year-over-year. It was up 78 buck to 1280, but I think [indiscernible] this morning reported something like 1540, so we do have an opportunity there that we're working on to continue 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 on F&I eventually.

And then just lastly as we think about the used vehicle opportunity 75 cars per store. I think you guys were -- I think you're saying about 59 in a quarter. I mean it's basically 40% or 50% by loss 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 of 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.

Our next question comes from Rick Nelson with Stephens. Please proceed with your question.

You have made opportunities to improve performance at DCH from here. If you could enumerate there what are the major buckets of improvement pipeline?

Rick this is Bryan. I think the biggest areas that we still have these opportunities is still allowing our stores to become more autonomous to their thinking for themselves what George and TY and their 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 in directives to the stores but much like Lithia was five to seven years ago, it took a three or four years for stores to really believe and respond to their own market and not really look to corporate to be able to make these decisions. Now that seems more cultural or a theory let 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 than your competitors can do. So 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 1000 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. So we think it's a big volume formula there is obviously you can deleverage improvements that can come in that bottom third of stores, because their margins are still considerably less and maybe even the industry and definitely less and obviously Lithia however they are in exclusive markets. And we still have a few what we would call personnel advancements and reinspirations that we need to achieve to get a number of stores may be a half a dozen or so that still have a lot of opportunity.

Thank you for that, thank you, guidance was $0.70 accretive, do you see, is held to size [indiscernible] what you are thinking DCH can contribute?

Yes Rick this is Chris, what I giving you specific guidance any longer on DCH is because it’s too hard to break out a lot of the shared services functions that we have. But I can tell you, when you look at the 85 million or so in gross profit that they are generating each quarter and leverage that they are getting on their platform, you can probably back into a number that significantly higher than what we originally anticipated. I think the other thing that Bryan alluded to you are really on with it this is going to be a three to five integration things are ahead of schedule but we still see that there is opportunities for them to continue to improve when you look at their trend, estimated SG&A to gross, it is still somewhat higher than some of our public peers that are heavy import in metro markets and so. And their team is diligently looking at all the opportunities that they have, they continue to expand topline growth and manage the cost effectively overtime. What we do not want to do is cut cost and see a deterioration in overall gross profit dollars.

Got it. -- can I ask you about the acquisition environment. Some of pillars are speaking to high multiples from sellers, what’s you are seeing there, is the opportunity more small markets or bigger metro areas?

Maybe play a little bit 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 were very progressive, they are inventive, is exciting for us. So we are looking in both metropolitan areas as well as our typical exclusive areas, I would say that our closest deals are traditional with the 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 by average or possibly even underperforming stores, because as you remember we have 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 run people mix and it's a matter of bringing in new talent and then we can realize the synergies and the advantages that maybe have not been realized. 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.

Our next question comes from Brett Hoselton with KeyBanc. Please proceed with your question.

Well, I guess simple question for you which was you kind of talked about some additional improvements that you'd thought you could make in DCH in the core Lithia business model. I guess as you kind of 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 top two or three things?

This is an easy one. Sid you may even have a comment after, but this is Bryan. Used vehicles is obviously our number one push because as [car] begin to flatten a little bit even though I believe there's still some headroom, it's really a limitless growth opportunity. So whether it's 50 units, 90 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 a 100 or 200 used vehicles. It's a matter of supply and great people to be able to do it, so that's the first area of improvement and that's the bulk division. 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 department and that lifecycle of the consumers. We have spent a lot of money on our facilities over the last four years or five years and upgraded our capacities. Many of our stores now are expanding hours. They're expanding their offerings with what we call commodity sales which is really being a one stop shopping experience and again at close to 10% same-store sales growth in service. We're 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. So those are the two big areas, but obviously we still have non-performance in many of our stores and that's really the people formula. Sid, you got something?

Since Bryan opened the window for me to say something. Returning managers losing 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 when we're 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, they use car opportunity, but remember this is not a story about increasing margins on new vehicles 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 where your margins are shrinking. Well, we're gaining more total gross profit out of our fixed costs and that's the goal.

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

Yes, the same-store basis, I think the number was 28% but one of the issues that we had on comparable basis year-over-year is that we had some sizeable adjustments in the prior year that benefited our overall throughput which I think was like 51%-52% last year. And, so on a comparative basis, it may have been 28% seem a little low but we're going to continuing the target that throughput at that 45 percentage range and expected these over for the full year.

One more thing, too, on the service and parts growth, people missed that right time oil change that we're selling. 37% of our customers bought that in this quarter and that means they're coming back. Our problem's been teaching people to sell them the rest of the service and helping them, get to more customer paid labor. But it's working and that's an automatic, it’s like annuity out there, always customers coming back in.

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

A quick question. The leasing growth of 14%, that was comp stores and did you give what’s your total lease penetration is in the quarter.

We're just looking it up real quick. That was just comp stores. 39.4% at DCH and the other was Lithia.

Okay, and I guess this related throughput, is it kind of throughput with incremental productivity, your throughput might be at DCH versus the core stores and the incremental dollar productivity, the difference on the East Coast and versus the legacy stores?

Yes, it’s 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. So what we are doing now is maximizing every opportunity that we can find with DCH we are implementing the same productivity metrics that we used for personnel and headcount that we use at our Lithia stores. We set a benchmark for them comping their own stores against each other to show them where the opportunities are, so really in the first couple of years of an acquisition, I don’t think the throughput number is really meaningful because there is so much opportunity that's there so 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%.

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?

Our luxury sales were -- we were actually up about 12% in our Mercedes brands. Unfortunately we 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 and a few franchises was really tough in our luxury business, but 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.

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

I 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. And I just assume that was because of DCH's higher exposure to Japan clearly than I thought I heard earlier in the Q&A that mid-line imports were not an issue on pricing, so can you just clarify what's the difference for most of the percentage changes, the delta there in the percentage changes?

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

Yes.

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

Okay, also on the Honda financing with CPB, it sounds like a lot of dealers saying it's really not going to impact their F&I business and probably because there is also [indiscernible] on top of that, are you an agreement with that?

We have wonderful relationships with all of our finance partners including Honda and with 70% penetration on vehicle financing, I think we have a 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 work with Allied, we work with the couple of 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 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 is 1% in one of the core percent rate cap. We think it adds transparency to the consumers and actually levels of blank fill a little bit competitively.

Okay. And last question is as much more longer term, I love to hear your opinion on [indiscernible] discussion about 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 are leased in the row markets and Lithia markets always want to have their own vehicle?

Yes, I think we can probably break it down into a DCH discussion and then Lithia discussion, it’s the question about that, we are not seeing any of those trends in our more lower markets, however, it may change and I think ultimately what we are seeing in our metropolitan areas, there is car sharing going on whether it’s [Indiscernible] Zip cars are so on and so on , we really believe that even if that occurs that the utilization rate on those cars, as long as where the person selling those, which means we are get into some fleet business and those type of things, which DCH does, Lithia does with the cars to go vehicles, [Indiscernible] 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 are the one servicing those vehicles, which is a pretty dramatic amount at our team Mercedes stores in the Portland area. So either way it seems like it can have its benefits as long as our people on the stores continue to understand their market and make their own decisions that have a capture job sharing individual vehicle purchases.

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

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