Good morning and welcome to the Lithia Motors first quarter 2019 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Megan Kurz, Director of Corporate Finance. Please begin.

Thank you and welcome everyone to the Lithia Motors first quarter 2019 earnings call. Presenting today are Bryan DeBoer, President and CEO, Chris Holzshu, Executive Vice President and Tina Miller, Vice President and Chief Accounting Officer. Today's discussions may include statements about futures events, including 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 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 the earnings release for a reconciliation to comparable GAAP measures, which can be found at lithiainvestorrelations.com. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Good morning and thank you for joining us. Today, we reported the highest adjusted first quarter earnings in company history at $2.44 per share, an 18% increase over last year. Our earnings improvement were driven by strong topline growth of 7% and an even greater increase in pretax income which was up over 12%. As a growth company powered by people and innovation, our strategy centers around purchasing strong assets that have yet to realize their earnings potential. We then refocus our teams on creating memorable consumer experiences and install clear performance measurements to deliver operational excellence. These customer experiences are generated from several distinct business lines, new vehicle sales, used vehicle sales, finance and insurance, service, parts and body shop. This diversification creates resiliency in our revenue streams at the top of these each of these business value chains and provides multiple options for growth. As a result, in the quarter, we made meaningful strides towards realizing our earnings potential. We increased our total same store sales 3%, which was achieved despite a somewhat soft national new vehicle market and resulted in our new vehicle sales decreasing 3%. This was more than offset by strong same store improvements in used vehicle retail sales up 11%, F&I sales up 9% and service, body and parts sales up an aggregated 6%. This is the key differentiator of our business model compared to other companies that have risk concentration in just one of these business lines. Our trends over the previous few quarters make our pathway to achieving $15 in EPS much clearer. We have added over $7 billion in annualized revenues and grew EPS over 250% from $4 in $2013 to $10 last year, all while maintaining low leverage. As a result of our value-based acquisition strategy, earnings potential is continually…

Thank you Bryan. Lithia's mission of growth powered by people is the foundation and driving force of our culture that promotes high performance. Our team members embrace our customer focused core values and promote an environment of continuous improvement. In addition, Lithia's proprietary strategy for acquiring and integrating stores utilizes our store performance scorecard or SPS to align these core values with the key metrics that drive our short and long term success. The SPS provides immediate visibility when diagnosing trend and identifying areas of opportunity that our empowered store leaders can use to take immediate action that improves results. Last quarter we discussed how our store and department leaders developed individual annual operating plan or AOP for 2019, a key component of the SPS. In the first quarter, our teams made good strides towards executing on their AOPs and where gaps remain they will continue to reassess plans to drive higher results. Turning to same-store results and as Bryan mentioned, total sales increased 3% in the quarter, reflecting strong performance in used, F&I and service, body and parts. Our operating model is built upon several independent business lines that drive our overall performance. And for example, over 80% of our gross profit is derived from used vehicle sales, F&I, nice service, parts and our body shops, which all coexist with the new vehicle nameplates we represent. We continued to grow our total gross profit per unit, which was $3,614 or an increase of $140 per unit over 2018. This measure continues to demonstrate the resiliency and flexibility our stores have in balancing volume and growth in the current environment. Gross margin was 16%, an increase of 60 basis points from the same period last year. New vehicle revenue decreased 3%. Our average selling price increased 4% and unit sales…

Thank you Chris. At March 31, we had approximately $280 million in cash and available credit. Unfinanced real estate could quickly provide us with an additional $247 million for an estimated total liquidity of approximately $527 million. Our leveraged EBITDA, defined as adjusted EBITDA less capital expenditures, was $83 million for the first quarter of 2019. Our net debt to adjusted EBITDA is 2.1 times, a reduction of 0.2 from December 31 and at the low end of our targeted range of two to three times. As a reminder, for those new to the industry, we finance vehicle inventory with floor plan debt, a common instrument within the industry. As of March 31, we had $2.5 billion outstanding of floor plan in used vehicle financing. Unadjusted and not reflecting how we think of our business, our net debt to EBITDA is overstated at 6.4 times. Vehicle financing is integral to our operations and collateralized by these assets. Because of this nature, we treat the associated interest expense as an operating expense in our EBITDA and exclude this debt from our balance sheet leverage calculation, resulting in a ratio of 2.1 times. Our adjusted tax rate was 27.5%, up 210 bips compared to 2018. This was primarily driven by the tax impact of our annual vesting of stock awards and changes in certain state tax laws enacted late last year. We adopted the new accounting lease guidance this quarter, which requires us record our right-of-use assets with corresponding operating lease liability for leases with a duration over one year. This new guidance had an immaterial impact on our income statement. As of March 31, we had a right-of-use asset of $250 million as we own over 80% of our rooftop. This is a small amount compared to our own property of $1.5 billion. We continue to balance our capital uses of reinvesting in our business through acquisitions and innovation investments and returning cash to our investors. Earlier this morning we announced a 3% increase in our dividend to $0.30 per share. Additionally, we have approximately $234 million in remaining availability under our existing share repurchase authorization. This concludes our prepared remarks. We would now like to open the call to questions. Operator?

[Operator Instructions]. Our first question comes from the line of Rick Nelson with Stephens. Please proceed with your question.

All right. Thanks. Good morning and congratulations.

Thanks Rick.

Good morning Rick.

Good morning. I wanted to ask you for an update on the acquisition environment. How the pipeline might look for you guys, especially the dealers that fit the type that you might [indiscernible], speaking?

Great, Rick. I think most everyone is seeing that we took a little bit of a breather. We really haven't bought anything over the last year. The attempt was really to catch up with our operational teams to be able to start to capture potential. I think we did more of that this quarter, which is great. So we have got three good quarters under our belt turning back to where we want to be. We sit at the bottom of our two to three times leverage ratio range, which is good. The market is active and we are ready to grow again. And I think the pipeline is fairly full and we should have a good three quarters of the remaining year.

Great. Thanks for that. You made a lot of progress on SG&A, down 150 basis points. If you could discuss some of the drivers there, maybe some of the acquisition that you made in the last few years where you are making the most progress and maybe where the opportunities of those might be lagging, where the opportunities might be?

Yes. Rick, good morning. This is Chris. I mean, you nailed it. The $7 billion in acquisition revenue that we have acquired over the last five years is all coming in at different pieces. And so it's hard to just look at individual groups, but rather look at individual stores to decide where our opportunities continue to stay focused on. And so when you think about what we do, our first intent obviously in acquisitions, is to drive growth. While a lot of stores do great in new car volumes, the used car volume, F&I opportunity and focusing on service, body and parts is a key focus which generates the growth. And then after, we continue to work to manage down the big cost, primarily in personnel, marketing and leveraging facilities. So as far as directly answering your question, if I look at where the Baierl acquisition group has come in, they are definitely in the lower 70s. Downtown LA, actually that group is in the lower 70s. We have got some opportunities in upstate New York that we are working through right now and starting to finally get some momentum on. And then continuing to leverage the acquisition from DCH to maximize the next and probably the final push for them to get towards what we look towards as store potential.

Rick, one another thing and for those that are joining us for the first time on the call, slide seven shows our historical returns on acquisitions and how we recapture our entire investment within a five-year period where you can actually see eight full years since we turned the profit back on in 2010.

All right. Great. Thanks for that. Finally, if I could ask you for an update on Shift and maybe what your plan is for using some of their technology in your own dealerships, perhaps procurement or other opportunities?

Rick, Bryan again. We are very pleased to how the progress has progressed over the first six months. It's neat to be able to learn how a digital company thinks and how they are so in tune with consumer behaviors and how to monetize those consumer behaviors through their technology. It's been fun to collaborate around people. The technology currently is only being utilized in a few of the stores. This is their independent channel for business and growth. It's not necessarily ours today. Someday it could become that, but for now it's really a second distribution channel directly to consumers' home to be able to purchase and buy cars from them. So I think for the time being, it is really their model. We are there to help guide them operationally and in execution, more than anything.

Okay. Thanks a lot and good luck.

Thanks Rick.

Thanks Rick

Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning guys. F&I was really strong in the quarter. It has been for a bit now. I am just wondering if you could give a little bit more granular on what's driving the strength there? Is it just increased take rates? Are there different product offerings? Are the ASPs on those going up? What are you seeing there and how sustainable is it going forward?

Yes. Steve, good morning, Chris. It's just got a same response really to what I mentioned to Rick about SG&A. I mean, we have acquired $7 billion in revenue. One of the biggest opportunities that we have with new acquisitions that are coming in is the F&I opportunity and that really comes down to three core areas. It's the people, products and the process that we instill to make sure that we stay focused on driving the F&I PVRs to the numbers that you see in a lot of our seasoned stores that are anywhere between $1,500 and $2,000 per unit. So we are going to continue to work kind of on the lower performers that continue to be part of the acquisition groups that we have done in recent years and we feel like there is still quite a bit of upside for us there as we continue to season those stores.

Great. And then I was going to ask about your parts and service a similar question and I am guessing potentially similar answer?

Yes. Steve, that's correct.

Okay. And then I guess, lastly for me, as you look at maybe restarting the acquisition engine a little bit this year, any change in terms of geographies or what your are looking for in terms of the legacy Lithia strategy of brand exclusivity in smaller mid-tier markets versus large markets? Any sort of change to the thought process as you go forward? Thanks.

Steve, this is Bryan again. Definitely no changes in our current strategy. No changes in our ROE hurdle rates. I think if we think about our national network, we would like to put some more meat on the bones in the areas where we are a little bit thin, which is the Midwest and the Southeast. We are starting to be able to make a digital push into those areas to hopefully be a preamble to something in the future, which is good but I would say that it's always about that value based investing and finding those 2,600 stores in the country that are really underperforming in those four or five key areas where we have been able to prove time and time again with an 80% certainty that we are able to get that hurdle rate of getting our money back within a five-year period of time.

Got it. Thank you very much.

Thanks Steve.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hi. Good morning guys.

Hi Bret.

Could you talk about maybe regional performance on the new side? Any dispersion in sales in the quarter? And then maybe how you think you saw your volumes relative to the market in those regions, sort of from a share standpoint?

Yes. Good morning, Bret. This is Chris. As far as the regions were concerned, we saw single to double digit improvements in gross profit across the board. I mean, the only market that we are actually saw a bit of a headwind on was our Hawaii market which was probably more personnel driven and some transitions with some people there. But overall, we are continuing to really push on overall growth. So even when we see a little bit of pressure on new car unit, our focus on used cars, F&I, service, body and parts has really generated a nice story for us and we continue to anticipate seeing a continued growth in gross profit across the board. If I had bit to pick like the big highlights that we saw, our markets in Nevada, New Jersey, Pennsylvania and North Dakota and Alaska all saw more than double digit growth. So those were probably the positive for us on the regions.

Okay. And I mean, a year ago, we were talking about the risk of maybe with a loss of state and local tax deductions, we would see some impact in demand. Did you see any, I guess, cadence shift through the quarter as people were doing their taxes and realizing they weren't going to get any deduction as far some of these state and local tax markets?

Yes. Bret, Chris again. I mean, obviously, the impact of some more refunds for certain consumers may have had an impact on volume, but overall our local market leaders are making great decisions as far as how to address what's happening in each of their stores. And I would say, we didn't see a big impacts there.

Okay. Great. And then one final question. I guess you talked about Shift with a $1 billion target for revenues. Do you have a timeframe around that $1 billion?

We will let them answer that question. I know that they are on a clear path to be able to get there and we are there to hopefully be some of the gaps that goes into the engine to be able to get there.

All right. Great. Thank you.

Thanks Bret.

Thanks Bret.

Thank you. Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Good morning guys. I just wanted to follow up on used and the strength there. How much of the 11% growth in same-store sales could be attributable to some incremental sales going through the Shift network? I am just curious how many of your stores are currently connected to the Shift system and how we should think about that over time?

John, this is Bryan. There is only three stores that have any interaction with Shift at the current time. So it's not a big impact. The 10% increase in same-store sales in used cars is driven primarily off of our ability to procure inventory. That is the number one thing. And I think as you think about the used car business, those that can procure inventory and own the inventory are the ones that will end up in the greatest dominance of market share in the future. Chris, you have got some other color to add on that?

Yes. Just kind of as a follow-up to our prepared remarks, just really around our street purchases which is a big focus area for Shift on the one-sided marketplace. I think we have woken up a lot of our leaders to kind of look at maybe off the street purchases as a real opportunity to improve their procurement cycle. And right now, only 6% of the vehicles that we retail are coming from direct street purchases and as we mentioned, we anticipate that will continue to grow.

Okay. And how are you going out with those street purchases? I mean it's cars for cash. Is there a natural system or is there signs? I mean how is that house actually working? That's not part of a regular transaction, right. That's just a going out and sign a trade and buying the car.

That's correct, John. This is Bryan again. That is directly buying and that is trade. Our trade-ins are almost 50% of our inventory. So being at the top of the food chain on that sure helps a lot of well. I think when we look at going forward, a lot of our repurchases today from consumers are done with heavy lifting. It's calling out a Craigslist. It's them walking in. It's then maybe not buying a car from us but still wanting to sell their car. And I think as we think about going to market in the future and many of our stores are starting to touch on the digital presence and being able to go right into people's living rooms and say, we will come pick up your car directly at your home. And I think if you go to Baierl.com, you can start to see what we are talking about, which is a pilot for the future of Lithia.com as well.

Got it. Okay. So that's going to become much more sophisticated over time. That's encouraging. Second question is just on inventory on the new side. I mean you kind of alluded to it being a little bit higher. It looks like the industry is a little bit heavy. What are you kind of hearing from automakers as far as them pushing inventory on you? Are you able to push back a little bit? Or do you expect the spring selling season to help you work out? Just to kind of understand how that might get cleared in the next few months?

John, I think that's our one big area of opportunity and without increases in interest costs or inventory, we would have really had a killer quarter and I think that's part of the drag. I think when we think about our manufacturer partnerships, we think about seasonality a lot. So we are going into it seasonally better time of the year. So you should automatically see drops in that. We are in the process of implementing an interest rate incentive for our stores to be able to drop inventory from our current about $1.8 billion in new car inventories, but we think that we can drop that somewhere in the 15% range through incentivizing our people to be able to, what I would say, discern a little bit better with utilizing technology and past sales to be able to determine what things they should be stocking. But I would still say that we may still be a season or two away from having that really active and rolling. The other thing that we are seeing is, with our manufacturers, it's primarily being driven off of incentives. I mean, you see incentives rise when there is too much inventory and you see incentives shrink like they did over the year-over-year basis. They are down about 10% or so. That's usually an indication that inventories are going to start to thin out.

Okay. And then just on the front end gross. You had some growth in the quarter. I think there had been a lot of concerns with rates backing up that the F&I PVR part of that front end gross may come under pressure, but now with the reversal and intentional reversal in rates here, we will all see where this goes. It doesn't seem like there is a lot of risk to the F&I PVR number. Could you foresee growth in your front end gross? What do you think is kind of a -- do you have an actual target there? And is there kind of hypothetical limit we should be thinking about? I mean it just seems like there might be more opportunities if rates are heading flat to maybe back down?

Yes. John, this is Chris. I definitely think we have opportunity. And it's the balance that you know we put on our general managers to figure out each and every day based on the brand that they represent. So across-the-board, we were up in GPU dollars on every business line and that's a function of the reaction to maybe declining volumes on the new car side that a lot of our stores experienced. So I think we anticipate that the based on whatever the market is putting in front of us, our stores will react appropriately knowing that the ultimate goal is to generate gross profit dollars not generally drop off the bottomline, exactly and bring it to the bottomlime.

Is there sort of rough rule of thumb we should think about that potentially going to $4,000? Is that something that's too pie-in-the-sky for an average? Over time, can this continue to grind higher?

John, this is Chris. A lot of stores are focused on velocity. I wouldn't say that $4,000 is what they are focusing on, but in smaller markets there are stores that have hit kind of that 120%, 150% sales efficiency number where they have kind of captured the market or they are doing great on the used car side. I think then they will start to sweeten the pot like pushing out more GPU dollars. So it's a store-by-store call and definitely an opportunity there, but it's hard to predict what the final number is going to look like.

Got you. And then just lastly, Tina, you gave us an explanation of floor plan and why it shouldn't included in the cap structure of the debt numbers, which I totally agree with. I am just curious why you felt it necessary to give that explanation on the call? Do you think there are some investors that are you confused about this? Or has something changed? I totally agree with the way you are looking at it, it's the right way to look at it. I am just curious what the motivation was?

Great question, John. It's surprising, we have been out on the road, Megan and I, for the last couple of months with investors and it's surprising how much overhang there is about people outside the industry that have not really invested but are very nervous when they see that there is a six times plus leverage ratio and they don't understand the flooring implications of that that really bring it down the two times. So we thought for those people that are new to the call or new to the industry, it was very important to point that out because we think it's part of the drag on why our sector trades at such a discount to specialty retail or to exclusive used vehicle or service providers.

Okay. Thank you very much. I appreciate it.

Thank you. Our next question comes from the line of Armintas Sinkevicius with Morgan Stanley. Please proceed with your question.

Good morning. Thank you for taking the question. Just a few small ones here. Your same-store used was down roughly 7% and the comment was that it's in line with retail SAAR, although we have a retail SAAR number of down 5%. I am sure your data is better than ours. But just, it doesn't seem to quite match up with retail SAAR. So is it a push for gross? Is it something else going on? Just curious there on the same-store sales for the new sign?

Yes. Armintas, this is Chris. Just to clarify your question. I think you led with used car sales down 7%. I think you meant new cars. No worries with the rest of your questions. So just to clarify that. And I think it really comes down to just a general mix issue. So just based on where we sit, we saw the biggest pressure on our domestic brand and some of the import brands as well. So based on what the national numbers are, we don't line up exactly to what national looks like. And I think we saw just a little bit more pressure in those areas and we are working through that. And one of the focuses on working through that is continue to push GPU dollars, which we did in the quarter.

Okay. And then on the used side then, the strength there, is it the push for Shift? Is it a new focus? Is it getting the acquired stores more seasoned? Just trying to understand the strength look a little bit better.

Armintas, this is Bryan again. There is very little impact from Shift. Remember, it's only and three stores. And I think the procurement level was about 50 to 75 cars in the quarter. So it's a small impact. Business coming 100% from our stores, finding the right cars and then pricing them at the right numbers and providing options for consumers to be able to finance them or to pick them up in different areas, whether it's our dealerships or at their home and really create a different type of experience, wherever, whenever and however they choose.

Okay. And then with regards to Shift. I know you mentioned it's only in a few stores. It's their independent channel for business and growth and for the time being it's their model. But any thoughts on what you would start putting your inventory on their site? Or is Baierl.com the sort of the push of where you putting the inventory online?

This is Bryan again. I would almost explain it this way. I don't believe it's about getting more eyes on the inventory, I believe it is about getting more inventory. So the idea of giving more visibility to Shift inventory on Lithia stores or Lithia inventory on Shift stores is less relevant than getting more vehicles. So I think we focus at Lithia and I think Shift's done a very nice job at focusing on procurement knowing that that's not where the battles is going to be won or lost. It's about being there to be able to buy the right cars. I hope that clarifies it and I hate to simplify it that much but that is what the endgame is in the space, is being able to procure the right inventory.

Got it. That's very helpful. Much appreciated.

Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. I just wanted to follow-up a little bit on parts and services. Could you elaborate a little bit more on the sources of strength there, both on sales and margins, which were up nicely? And again on across different parts of the business, is it coming from different kind of brand of vehicles or could it really just help parse that our a little bit.

Yes. Good morning. This is Chris. I think that's kind of a two answer question there. The first part is really about UIO and if you look back over the last 10 years, we are starting to see dropping off some of the smaller year SAARs in the $10 million to $13 million range that were back in 2009 to 2011. So our UIO is continuing to grow, which is also evident in the overall car park, which is at 276 million units right now in the U.S., which I think is an all-time high. So that's continuing to help just as first natural traffic. The other big piece goes back to acquisitions again where that $7 billion in revenue that we brought in, typically we see stores with service retention well below the dealers' expected average rate of retention and what we are continuing to do is push those stores to get to where a lot of our seasoned stores are out which is at plus 20%. So I think there is a lot happening related to the general market, but then our acquisitions coming online and focusing on service, body and parts the way our seasoned stores do is helping out a lot.

One other thing to add is that it's key to remember that in those businesses, we are the top of the food chain and we have been letting that business really move to independent. And over the last seven to 10 years, we have really started to look at how do we become a commodity type of experience that's about convenience and value for the consumers and that's starting to take hold and I think it's part of the reason why we have had now what I would imagine at close to seven to eight years of continual same-store sales increases in parts and service. But it's really a function of that that we just weren't very good at that in the future and now we are a one-stop shopping experience for our consumers.

Got it. That makes sense. I just wanted to follow on your M&A comments earlier this year. It sounded like we could see an uptick in acquisition activity later this year. Could you talk a little bit about the size of deals we might expect? Could it be something as big as DCH? Or is it more a combination of smaller ones? I mean just digging it out segregate that a little bit?

Sure. I don't mind giving you a little more color. This is Bryan again. We typically call our one to three store groups staple diet, okay. So you will see those trickling in periodically like we typically have done. I think when we think about the areas that I mentioned, Midwest and Southeast, we would want to midsize our larger group to be able to spend time logistically getting back and forth into those areas. And we need a management team with similar values that our customer base to join our team. So I think unless we find that cultural fit, much like a DCH, we probably will move into those markets more as a slow-move into adjacent states. Outside of that, we always have our oars in the water and track those 2,600 stores. And I think it's fairly clear that a lot of the VC and private equity money seems to be leaving the space and having a fair amount of troubles, which is breaking some stores loose and obviously makes the buying environment much less competitive. So prices seem to be coming back into the realms of reality.

Got it. That makes sense. Just lastly on SG&A to gross profit. Obviously, good improvement here in the first quarter. Excluding any acquisitions you might do, is that kind of the trajectory we should be anticipating for the rest of the year, all else equal? Or is 1Q a little bit more of an anomaly and we could see a little bit of -- the question is basically, should we expect similar kinds of decline the rest of the year?

Yes. This is Chris. I mean, we anticipate a continued focus on SG&A to gross and we don't anticipate going backwards in that line item.

Got it. Okay. Thanks. That's all I had.

Thank you.

Thank you. Our next question comes from the line of Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Hi. Thanks for taking the question.

Hi Chris.

I wanted to first talk on warranty growth that really exploded this quarter. One of your peers stated a similar outcome. Curious if you expect this to continue for the rest of the year? Or is there any like large lumpy recall campaigns that you would expect to roll-off?

Yes. Hi Chris, this is Chris. And we saw a number of OEMs that have significant positive recall activity, but really focused on four primary brands with Volkswagen, Subaru, Ford and Chrysler. And the big impacts are the big recalls that helped drive the warranty related to airbags, some valve issues and some brake lights which obviously we anticipate continuing for the rest of the year. So some good trends there. And outside of that, again as we continue to push on UIO and selling more retail new vehicles that warranty numbers will continue to go up.

That's really helpful. And then trying to understand kind of the impacts on -- is there a way to dimensionalize parts and service growth between traffic and ticket. I am trying to understand the impact from wage growth and probably parts inflation via the CPI growth like what that's contributing to parts and service growth right now?

Yes. Chris, I think we have a lot of data that we could probably compile into an answer for the question. But we will take that one offline with you, if that's all right, later this afternoon.

That's great. Okay. And then just one final one. I am trying to think through this explosive growth in parts and service, same-store sales and gross margin rate. And it sounds sustainable from what I am hearing in the call it now. So I am trying to think through the incremental margins or SG&A impact from that, just trying to see what it's doing to SG&A-to-gross metric. So is there a way to contextualize the incremental SG&A that you have with parts and service growth? Or kind of maybe then more specifically how much the parts and service's SG&A rates improved this quarter?

Yes. Chris, Chris again. Our on all of our core business lines is to continue to push for that 50% incremental throughput. So the incremental gross that we are generating in parts and service, we would expect to see at least 50% of that flow through to our operating profit. And that will continue to be our focus for the rest of the year. I think one of the opportunities and one of the advantages that you have as a larger dealer, it really comes down to technicians. We have 75,000 technicians retiring out of this space in 2019 and from what I understand there is 35,000 new techs coming in. So again being kind of a larger dealer where we leverage better benefits, better pay, better training, able to attract more technicians and make sure that we can retain and do the work that's coming in is a big focal area for us and we anticipate that with UIO increasing and our focus on tech recruiting, I think we are going to see continued positive trends for the rest of the year and beyond.

That's great. Very helpful. Thank you.

Thanks Chris.

Thank you. Our next question comes from the line of Michael Ward with Seaport Global Securities. Please proceed with your question.

Thank you. Good morning. Just a point of clarification. I think Chris, you mentioned in your remarks and Bryan, you commented about incentives being down 2% year-over-year. Are those the incentives from the vehicle manufacturers?

Yes. The incentives from vehicle manufacturers was at $3,850 last year and they are just under $3,600 this year approximately. This is a triangulated number, okay, so kind of keep that in mind.

Right. So have you seen that continue in April?

We have. It's a similar trend line.

Okay. And just a follow-up on parts and service. One of the things that I think the industry, you have always had this big drop-off after year one and year two with the retention levels. How has your experience been with the three, four and five years into the ownership experience with retention levels?

That is a great question, Michael. This is Bryan again. I think when we think about old automotive new car retailers, we were warranty businesses. Today, that's not who we are. We think about the lifecycle of the consumer of what they do with their vehicles for the entire ownership period and possibly even into their second gen. So we actually, when a warranty begins to get close to expiring, which is typically three to five years, we start to introduce the idea of lower-priced parts and service experiences that comes through some aftermarket, although we do prefer OEM parts on our cars. We teach our people to be sensitive to that with the consumers, because not all consumers will stay with us if we only sell them OEM parts when a aftermarket could be half the price. That's allowed us to really retain customers at a higher rate. I noted in my comments that when we buy stores, retention of consumers, which means a consumer that's in our 10 year UIO comes into our dealerships, at least one or two times a year depending on what manufacturers we are talking with. But was basically happens is, we have increased that retention rate to over 25% of average which is a fairly substantial increase and beyond. The other adjacencies of us being able to sell and expand our product offerings into batteries or windshield wipers and tires and brakes and shocks and all the other things that we are top of food chain on are now adding to that existing business. So the idea of a two to three year life and service with our consumers is not quite the same as it used to be. Keep in mind this one thing as well. Our facility utilization in our service departments still remains at less than 50%, which means that if we open longer hours and filled our stalls and we are able to turn that business into production that we still have double the potential with our existing base without spending any additional capital.

Okay. So it sounds like the growth from the parts and service, there is no reason not to expect that we shouldn't see those types of levels. Maybe incentive in the past where we talked 3$ to 5%, maybe the 5% to 7% type levels of growth are more normal?

Michael, I think that's probably accurate and I think the better our stores are at understanding consumer needs, the better it will be in the longer that we will be able to retain those customers.

And just one last question on Shift. If their website says they have roughly 700 units in inventory, to me that suggests that they are selling 3,000 to 4,000 units a year. Is that's the right bucket, is that what explain why we wouldn't see anything, any equity income line or anything like that on your results? As it grows towards or it starts to expand out and grow the inventory that you enable, there could come a point that we start to see those numbers on the equity income line. Is that how it would be presented?

This is Bryan again, Michael. Yes, if we get into an equity position, you are accurate. We currently don't sit at an equity position.

You do not, okay.

We do not sit at an equity position yet. I think if you think about their inventory as well, their inventory may not show their entire inventory on that specific site. I believe it's about double that. But we have you circle back with George and Toby at Shift and they can give you the particulars and what their run rate and stuff are.

So the relationship is just a partnership? You have no equity stake.

Correct. You want to elaborate on that, Tina?

This is Tina. So just to clarify, we do have some ownership in Shift, right. We made the investment back in the second half of last year. It's not a material component of our financial statements, which is why you don't see it called out.

Okay. And at what level does that become significant? Is there a certain barrier that has to reach as far as impact 1% or something like that?

Yes. Typically, under guidance, right, it's less than 20% ownership allows you to --

Okay. That's fine. So it's more the ownership of it.

Yes.

Perfect. Thank you very much.

Thanks for your questions.

[Operator Instructions]. Our next question comes from the line of Derek Glynn with Consumer Edge Research. Please proceed with your question.

Good morning and thanks for taking the question. Given continued growth in new prices and loan rates where they are, do you think we are probably approaching an affordability problem in new vehicles?

Derek, this is Bryan. No, I believe that manufacturers and retailers are pretty adaptable to those increases and figure out solutions for consumers to be able to afford new cars in any type of environment.

Okay. Got it. And then just secondly, just want to get your thoughts on the auto credit environment. Is credit still widely available? Have you seen any signs of a pull back?

Derek, this is Bryan again. No, it's widely available. I would say that it's definitely a driver. Leasing is in full swing, which is an important part of the model. Valuations are stable in terms of LEDs which is great. We don't foresee any blips on the radar, which is good. And we look forward to a solid next few quarters and years.

Got it. Thank you very much.

Thanks Derek.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. DeBoer for any final comments.

Thank you everyone for joining us today and we look forward to updating you on the second quarter results in July. Bye, bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.