Greetings, and welcome to the Lithia Motors Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John North, Vice President of Finance for Lithia Motors. Thank you, sir. You may begin.

Thanks, and good morning. Welcome to Lithia Motors Third Quarter 2014 Earnings Conference Call. Before we begin, the company wants you to know this conference call includes forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition and liquidity and development of the industries in which we operate may differ materially from those made in or suggested by forward-looking statements in this conference call. Examples of forward-looking statements include statements regarding expected operating results, projections for our fourth quarter and 2015 performance, expected increases in our annual revenues related to acquisitions, 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 release. During this call, we may discuss certain non-GAAP items such as adjusted net income and diluted earnings per share from continuing operations, adjusted SG&A as a percentage of revenues and 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 is provided in the financial tables of today's press release. We have posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our third quarter results. On the call today are Bryan Deboer, President and CEO; Chris Holzshu, Senior Vice President and CFO. At the end of our prepared remarks, we will open the call to questions. I'm also available in my office after the call for any follow-up you may have. Now, I will turn the call over to Bryan.

Thank you for joining us. Earlier today, we reported third quarter adjusted net income from continuing operations of $34.9 million compared to $29.6 million a year ago. We earned a $1.32 per share in the third quarter compared to $1.13 per share last year or an increase of 17%. Our revenue was approximately $1.3 billion in the third quarter, an increase of 21% over the prior year. From this point forward, all comparisons will be on a same-store basis. For the second quarter in a row, we saw double-digit increases in all 4 business lines. Total sales increased 12% and SAAR was $16.7 million in the third quarter, the best quarterly result since 2006. In the quarter, new vehicle revenues increased 11%. Our new vehicle average selling prices increased 4%. Unit sales increased 7%, which was slightly lower than the national average of 9%. Domestic unit sales increased 7%, import sales were up 5% and luxury unit sales were up 13%. Retail used vehicle revenues increased 13% in the quarter. Our retail used vehicle average selling price increased 7%. We retailed 6% more used units over the prior year resulting in an used-to-new ratio of 0.9:1. In the quarter, certified units grew 17%. Core units increased 3% and finally, value auto units, vehicles over 80,000 miles, increased 5%. As we announced earlier this month, while used vehicle retail revenue was up 13% in the quarter, some of our stores reduced retail prices in order to respond to weakening wholesale vehicle prices, in order to clear out extra inventory before the fall. As a result, margins fell 160 basis points from the prior year. We sold a monthly average of 55 used vehicles per store, up from 52 units in the third quarter of 2013 and 46 units in the third…

Thank you, Bryan. At September 30, excluding vehicle floor plan financing, we had $273 million in debt, of which $237 million is mortgage financing and $30 million was outstanding on our used vehicle financing facility. We completed approximately $70 million in mortgage financing in the third quarter in preparation for the DCH acquisition and anticipate closing another $130 million before the end of the year. We have no mortgages maturing until 2016. On October 1, we invested approximately $670 million to acquire inventory assets and intangibles to complete the DCH acquisition. After asset-backed financing, we estimate a net equity investment of approximately $280 million. As of today, we have approximately $122 million in cash and available credit as well as unfinanced real estate that could provide another $148 million in the next 60 to 90 days for a total liquidity of $270 million. These figures are all based off our recently expanded syndicated credit facility, which was upsized to $1.7 billion as of October 1. We have no high-yield bonds or convertible notes outstanding. We are in compliance with our debt covenants. Our net debt to EBITDA after the DCH acquisition is estimated to be approximately 2.2x, still below our target of less than 3x. Our free cash flow as outlined in our investor presentation was $20 million for the third quarter of 2014. Capital expenditures which reduced free cash flow figure were $19 million for the quarter. For the full year 2014, we estimate free cash flow will be $88 million. We estimate that combined Lithia DCH organization will produce $135 million in free cash flow in 2015, providing significant capital to reduce our leverage or to deploy for acquisitions, share repurchases, dividends or internal investment. We took advantage of the recent market volatility to repurchase stock when the…

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

I'd like to ask you about DCH. You've obviously been through the due diligence. You've owned it now for a few weeks. What you've learned there in terms of the opportunities to improve that operation? And also, if you could provide some color on the multiple that you paid for it?

This is Bryan. I think most importantly we spent the last almost a half a year with the DCH leadership team. So really the transition on October 1 was very smooth. We spent really the last 120 days preparing for that transition. And I think most importantly to remember, it's a combination of 2 organizations. However, we really believe that our opportunity is to build upon their success and continue to expand their market share and their offerings to their consumers. So all in all, very smooth transition. We're excited about their team and we're excited to see their results continue to grow. I would say that in terms of the actual acquisition, there is a few points that we can elaborate on. In relationship to what our previously announced hurdle rates are on acquisitions, we have a -- what, a 75% to 100% return on equity over a 5-year period, we ended up on the low end of that range. When we look at our EBITDA ratios, we were really on the high-end, or right around 5x. When we look at revenues, we were only around 12x revenue -- 12% of revenue, which is on the very low end of what we pay for acquisitions. And I think, even more importantly than that, if you look, and I think Chris mentioned this, our liquidity dollar amounts, we had about $282 million of liquidity before the acquisition, and after the acquisition because of the asset base of DCH as well as a little bit of an expansion in the working capital line, we still have $270 million of liquidity. So we got lots of dry powder to continue to grow if the opportunities arise. Also, Chris mentioned that our leverage ratio went from 1.8 pre-acquisition to 2.2 and our comfort level is up to almost 3. So we're very excited about the combination of the 2 organizations and I think the idea of sharing best practices and now having the ability to grow in not only our exclusive-sized markets, but now in the large metropolitan areas really provides a lot of upside in the future.

Also, I would like to ask you about the used inventory levels. So as you enter 4Q, do you think the challenge was onetime in nature and we're back to business as usual?

Yes. I think -- I mean, that stores that had some issues in regards to inventory levels and then sold through it. We think most of it is behind us, but we still don't know as whether the market continues to soften, but we're obviously on our toes and most of our stores ready to respond as need be, I think we ended the quarter at a 55-day supply, which was about the same as last year. Long term, I really believe that when you look at used vehicles, there is a very fine line between having the right cars and the wrong cars, meaning when you're trying to expand your used car retail unit sales, you try things. You're not as experienced knowing what cars specifically sell. So when you have a glut of trade-ins come off of new vehicle sales, or they become more available on the used vehicle wholesaler auction areas, it's easy to take the path of least resistance and buy newer cars, later model conquest cars that are really -- let's call it a sucker's bet, because it's easy to buy, it looks good, it's going to go through the shop easy, so on and so on. But those are cars that quickly are damaged when the market weakens and they are pretty readily available at competitors. So there is still some training there in some of the stores, but we really look towards that 75 unit go and believe that, that's still in our near future -- near mid-term future.

Our next question comes from the line of Bret Jordan with BB&T. David Lee Kelley - BB&T Capital Markets, Research Division: This is actually David Kelley in for Bret this morning. I just had a quick question on the used buckets and the performance from a unit standpoint. I think you mentioned the CPO is up 17% and core and value were in the maybe mid-single digit range. Could you talk about today, what you're seeing in the delta between those 3 buckets? Why CPO has been so strong. And what's happening in the core and value markets from an industry standpoint?

David, this is Bryan again. That's insightful because really the certified vehicles that up 17%. What really is happening is there is a loosening in that late-model product, which means the availability. And as I mentioned to Rick, when it's easy to get those vehicles, it's easy to buy them, and what happens is, you start to use up dollars on certified or late model conquest rather than core product or even value auto. And I think that's what the -- that's what happens when supply loosens and I think what we'll see as it begins to mellow out a little bit, it will be a little easier for stores to go back and find the correct core product and we should see that start to grow again at a more typical rate. David Lee Kelley - BB&T Capital Markets, Research Division: All right. Great. And then just to switch gears quickly on looking at parts and service. Can you maybe just talk about or provide some color on maybe the recall impact on the warranty business. And what we're seeing in customer pay and potential attachment into the customer pay segment going forward?

Absolutely. This is Bryan, again. And then Chris can maybe talk about the F&I question on warranty as well. I really believe that we're just starting to see the tip of the iceberg when we look at our service department overall business. And what we really now have is this blend of being able to keep customers for a longer period of time, and we're starting to stretch out now 8, 9, 10 years with certain customers. But your units and operations now is starting to be your bulk of the business. So that 3- to 5-year old vehicle is now also starting to grow. Now that comes through a focused effort over the past few years of improving our service drives, putting them front and center in the dealerships, as well as really helping our frontline people understand how to listen to our consumers and quickly respond to their needs, many times even before they even know what they're asking for. So I think our ability to capture that and I think that, that expansion I think we ended up the quarter at 13%, which is our highest same-store sales quarter I believe in our history. So and I think a lot of that is coming from customer pay, which is where it needs to come from, because that's the heavy lifting where dollars speak louder than in the warranty business that's really paid for by the manufacturer. Now I would also talk to you about the warranty business because, obviously, it's up at a dramatic amount, almost 27% for the quarter, which is coming off of a lot of these recalls that happened really in the spring of this year. We still haven't seen the Takata recalls on the airbags, as they're starting to come into the service department. And a lot of those domestic recalls and import recalls that we had from spring still were not all pushed through the service departments back then, but now are starting to trickle in, so parts are starting to loosen up. The people that weren't quite as concerned about it, now are still coming into the dealerships and we really see that as continued strength.

As it relates to the F&I products specifically, one of the important products that we sell in our finance department is the service contracts. Our penetration rate overall for the service contracts is at 43%, which is actually up 100 basis points in penetration year-over-year. And that product is critical when it comes to, especially, that core and value auto product, which makes up almost 71% of our used vehicle sales, because it not only retains warranty customers, but it also ensures that those vehicles that are off-warranty are coming back into the service drive as well and it's something that we continue to focus on along with our lifetime oil product, which we have a penetration rate of 36% overall on -- and 33% on used vehicles. So both those products combined are -- really support the efforts that we get from the OEM in getting that service retention back into the service drive.

Our next question comes from the line of Ravi Shanker with Morgan Stanley.

This is Paresh Jain in for Ravi. Couple of questions. One on F&I. You highlight on Slide 12 how your F&I per vehicle is $90 lower than your peer average. Assuming transaction prices are flat, can you provide more specific as to how you can close that gap? And any color on what peer averages are for service penetration and lifetime oil contract?

Yes, this is Chris. I think the biggest driver of that is really the mix that we have between new and used vehicles. Our new vehicle F&I per unit is about $1,400 a unit, and our used vehicle is about $1,000 a unit. So just given our ratio, our used-to-new ratio, at almost 1:1. I think that's one of the most obvious opportunities that creates a differentiation between our peer group. That's not to say that we don't have a lot of opportunity given that a lot of our peers are running at $1,400, $1,350 a copy. We realize that there is additional opportunity and I don't think it comes from additional penetration. I think it's just trying to find the right pricing in the right mix of products to offer in each one of our stores. And as we continue to try new things, offer different products in different stores, we're seeing that take hold and feel like that's really what's responsible for the success that we're seeing in the growth, that we're seeing in F&I PVR.

You asked about penetration rates, our finance penetration was 72%, our service contract penetration rate was 43%. Again, like Chris said, a little higher on new vehicles at 45% and our lifetime oil penetration is 36%.

Got it. On DCH, one of your peers has been actually disposing of stores in New York, and is also looking at New Jersey, citing high cost to run business and perhaps competition as well. Just wanted to get your thoughts on how different it is for DCH stores in that region, and if having scale makes it any better?

This is Bryan again. So I don't believe there is any intent to dispose of any stores. And I think when you look at the New Jersey market or Southern New York market, it's obviously highly competitive. We're very fortunate that the DCH brand that they built in New Jersey, New York has high customer belief and adhesion to the dealerships, the products that they sell, Honda being the #1 product in the Tri-State area, it seems to be well received. Their stores are top stores within that area and their personnel have been there a long time. I think it's also important to restate that in the DCH transaction, their real estate and their locations, being in good locations, solid locations, typically on interstates or expressways are also owned, okay. 75%-plus of their facilities are owned, much like what Lithia is, which adds for stability of location without having to be transient to some extent in those locations.

This is Chris. The thing I'd add to that is, just like we do on the Lithia side, we go through each store and we evaluate each store individually, we look at the opportunities in each location and make sure that the return that we're going to get out of each store is sufficient. And we're very excited about the opportunities in each one of the DCH locations. I know George Liang and T.Y. both see the same opportunities and we anticipate that the store footprint that we have is perfect.

[Operator Instructions] Our next question comes from the line of John Murphy with Merrill Lynch.

This is Liz Suzuki on for John. Looking at the same-store performance in used retail, your average selling price went up by almost $1,200 per vehicle, but your gross profit per vehicle declined by about $150. So it's some combination of the used vehicle acquisition cost, reconditioning or transportation would have had to have gone up by over $1,300 a vehicle. So can you talk about just what happened and whether there was something going on where you had to acquire used vehicle inventory through more expensive channels or if that was just a conscious decision to move up into the late models?

This is Bryan. I think you hit on, what I was discussing earlier was this idea of what really relaxed in terms of supply was the ability to find 1- to 3-year old vehicles. And again, those conquest vehicles that aren't what you sell new are the easiest cars to find. Well, we're trying to push the expansion of conquest vehicles, but it's more in the 3- to 8-year old vehicles, which didn't loosen up in supply. So I think that the combination is, we bought a lot of higher dollar cars of off-brand and then you have the competitive pressures of selling against a certified car that may have incentives on financing or extended warranties that are included in the price or most importantly, knowledgeable sales people that you're competing against on selling those products. And ultimately you increase your average cost per unit, but you don't make any more money doing it and I think that's what you're seeing in that bucket. That's not typical though in all of our stores. It's when those stores haven't been through that experience of learning to expand their business with the right cars. And like I said, it's a very fine line between a 3-year-old vehicle and a 5-year-old vehicle and what the equipment is on that car, the colors of that car, the mileage or something like that to find the right price inflection point between a new car and now a used car.

Just given what happened with used vehicle ASPs and what you mentioned in terms of the growth in CPO, which I imagine would continue to take more used vehicle market shares, off-lease volume comes back and more late model units are available. Do you think it's fair to say that used vehicle ASPs should remain somewhat elevated given that mix shift for like a longer period of time?

I think that's fair to say, Liz.

Our next question comes from the line of David Whiston with Morningstar.

On going back to recall repair, does the labor for that get reimbursed by the factory at cost for you guys or the same rate you would charge consumers?

David, this is Bryan. We get reimbursed at warranty rates just like we do on all breakages.

And on the Nissan deal near Fresno and Clovis, you talked more about how the central value in California hasn't recovered yet. Is that market an exception, or is that market still struggling? I was just surprised to see more exposure there.

Yes. I mean the Nissan deal in Clovis, we have the Nissan store in Fresno as well, so that was the clustering strategy to really control the Nissan brand within that 1.1 million person market. The Central Valley is still depressed somewhat. I believe the actual numbers are somewhere around the low double digits. So we still believe that it was an opportune time to get that additional pop and not pay for it.

Okay. And last question, I know you don't have a lot of Ford exposure, but was just curious what percent of your technicians are going to be ready to repair the aluminum F-150 by early next year?

They will all be ready.

Our next question comes from the line of Irina Hodakovsky with KeyBanc.

I only had a question for you on the subprime. You mentioned that you remained below the national average. Could you speak to what you think are the drivers of that and what opportunities you see, I mean, your way that could bring you up to the national average?

This is Chris. Yes, as we stated our subprime business is about 11% of our overall finance business and the national average on that is much higher. We think the real opportunity that we have is in the depressed markets that we lay out in our slide deck. It's really unemployment based. So while credit is available for customers who have a job and have income, I think that the opportunity that remains is for those customers who are still unemployed in several of our rural and midsized markets still have high unemployment. And I think as that recovers you'll continue to see that number climb.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Thank you for joining us, everyone, today. We look forward to giving you further updates in February.