Greetings and welcome to the Lithia Motors Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. John North, Vice President of Finance. Thank you. Mr. North, you may now begin.

Thanks and good morning. Welcome to Lithia Motors Fourth Quarter 2014 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 and liquidity and development of the industries 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 profit, projections for our first quarter and 2015 performance, projected EBITDA, 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 to 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, 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 and a full reconciliation of the non-GAAP items is provided in the financial tables of today's press release. We also posted an updated investor presentation on our Web site lithiainvestorrelations.com, highlighting our fourth 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 and I am available in my office after the call for any follow-up you may have. Now with that I will turn the call over to Bryan.

Good morning and thank you for joining us. Earlier today we reported fourth quarter adjusted net income from continuing operations of $37.5 million compared to $25.7 million a year ago. We earned $1.42 per share in the fourth quarter compared to $0.98 per share last year or an increase of 45%. Our revenue was approximately $1.8 billion in the fourth quarter, a 75% increase over the prior year. From this point forward, all comparisons will be on a same store basis. For the third quarter in a row, we saw double-digit increases in all four business lines as total sales increased 14%. In the quarter, new vehicle revenues increased 12%. Our new vehicle average selling prices increased 2%. Unit sales increased 9% which was higher than the national average of 7%. Domestic units increased 12%, import increased 7%, and luxury units were up 9%. Retail used vehicle revenues increased 16% in the quarter. Our retail used vehicle average selling price increased 5% as late model used vehicles continued to make up a greater percentage of the overall vehicle sales mix. We retailed 10% more used units over the prior year, resulting in a used to new ratio of 0.8 to 1. In the quarter, certified units grew 17%, core units increased 12% and finally value auto units, or vehicles over 80,000 miles increased 1%. Consistent with our third quarter results, our used vehicle gross margins fell approximately 130 basis points from the prior year. Despite this our store personnel have adjusted nicely, lowering selling expenses and maintaining their volume focused to produce higher operating profit. We sold a monthly average of 56 used vehicles per store, up from 53 units in the fourth quarter of 2013 and 48 units in the fourth quarter of 2012. We continue to focus on…

Thank you, Bryan. As previously announced on October 1, we acquired the DCH Auto Group. After this transaction and other general activity related to our existing operation, we ended the year at $641 million in debt, excluding new vehicle floor plan financing. Of this debt, $334 million is mortgage financing, $134 million was outstanding on our used vehicle financing facility, and $135 million was outstanding on our revolving lines of credit. At December 31, 2014, we had approximately $100 million in cash and available credit as well as unfinanced real estate that could provide another $110 million in 60 to 90 days for a total liquidity of $210 million. Since year end we have completed another $25 million in mortgage financing and are targeting an incremental $40 million to $50 million in mortgage financing in the next 60 to 90 days to increase our working capital and take advantage of the current rate environment to lock in long term financing. We have been strategically extending our mortgage maturity and we currently have no mortgages maturing until 2016. Despite the increase in our leverage as a result of the recent acquisition, our net debt to projected EBITDA is approximately 2.0 times, well within our targeted range. At the end of the fourth quarter, we were in compliance with our debt covenants other than our current ratio, which came in at 1.16:1, slightly under 1.2:1. Our bank group has agreed to reduce the covenant to 1.1:1 for all future periods and granted us a waiver for the covenant as of 12/31/2014. I would like to thank all of our bank and captive finance companies for their support. Our free cash flow as outlined in our investor presentation was $17 million for the fourth quarter of 2014. Capital expenditures which reduced this free…

[Operator Instructions] Our first question is from Jamie Albertine with Stifel. Please go ahead.

Very quickly, just a housekeeping item. On the margins that you reported for the fourth quarter, this is the first time we get to see DCH flow through the model. So can you talk a little bit about how that degradation at least sequentially versus where you have been running. How much of that is contributed from DCH relative to your core business. That's the first question. And then from a much higher level, talking about, from a capital allocation standpoint, I want to ask about your return targets. How do you kind of relate your expected IRR for different capital deployment initiatives? And then ultimately it seems like you have settled on M&A as the best use of capital for the last six years and continue to be focused on M&A. Why is that so important for your business model going forward? It's really the second follow-up. Thanks.

Hey. Jamie, good morning. This is Chris. I think, to answer your first question on the margin degradation, I think the easiest way to look at that is looking at the same-store performance in relation to the overall performance in the press release. And definitely it's down. But as you know in the urban markets, I think more competitive environment. There is more of a volume approach to the selling model and in return they are going to see a little bit lower margins. But all in all, we are going to continue to stay focused on gross profit dollars. They generate the used car trade, the F&I work and business into the service drive. The second question, IRR...

I can take that real quick. This is Bryan, Jamie. On capital allocation, we are staying focused that internal investment and acquisitions are our primary use of capital. However, we do balance it depending on stock disconnections or those type of things when it comes to share buybacks and of course we would like to maintain stable dividend. Also on acquisitions, I don’t know how deep you want me to talk about that, but that is one of our primary uses basically because it perpetuates through, hopefully eternity, and it can continue to build capital for the organization. The market continues to be fairly robust. We are still actively pursuing candidates and believe that our future looks bright in that arena as well.

Got it. That's fantastic and I appreciate the color there. I mean is it fair to say you sort of reached a point as you have grown over time that centralization efforts kind of, they can only draw so much or drive so much leverage. It really becomes about adding volume, I would argue. And so the best way, the fastest way to do that, I would imagine, is M&A. And then quickly I guess, from a multiple standpoint, what are you seeing in the market right now in terms of seller expectations for takeout multiples. Thanks.

Jamie, this is Chris. As far as leverage is concerned, we continue to look at each one of our stores individually to identify the opportunities. And several of the acquisitions that we have brought online over the last two or three year as well as some of our existing stores still have opportunities to improve our leverage, bring down the SG&A to gross and we continue to work on those. But you are exactly right. I mean bringing on a company the size of DCH into the organization and being able to identify additional [growth] [ph] opportunities that bring down the SG&A number as far as leverage is concerned, is something that we are very focused on. But I think our focus is more on generating additional [growth] [ph] opportunities and less about cost cutting initiatives in the field. And I think that’s a very important distinction for us.

Jamie, in terms of sellers’ expectations on acquisitions, I think it's fair to say that prices are up. I think the activity and the number of buyers is up as well. I do believe that we have been pretty good about keeping our head down and focus on specific acquisitions. And I believe those specific acquisitions aren't really targeted by other groups or other companies. So I really believe that the prices that we have paid in the past that we can stay disciplined at those five to six year payback to be able to recapture our investment as we always have. So we really look at that, it's really about building the relationship for a period of time of up to decades at times to really be there at the right time when a seller chooses to make that lifetime decision.

Thank you. The next question is from Steve Dyer of Craig-Hallum. Please go ahead.

I am wondering may be if you could give a little color on what you are seeing in the energy markets, be it Texas or elsewhere given the steep drop in oil.

You bet. This is Bryan, Steve. In Q4 I think what we really saw was a mix shift from new vehicles to used vehicles. The oil states performed slightly lower than the rest of our states in Q4. If you want a little more color of what's happening in January, Alaska was up 28% year-over-year in total revenues. North Dakota which is a highly based energy state even though we are in the eastern part of the state, was up 4%, and Texas was up about 3% which was a little bit behind. It still seems strong though. I mean we are still very pleased. It's a robust economy, there is no question about it. If there is one thing that we could say that’s an opportunity is some of those pumpjacks are now not running which means that those technicians that are fixing the broken ones are coming back into our company and are able to now fix the cars that are in service which we all know that the throughput in service and parts is a much higher rate than what it is in new vehicle and used vehicle sales. So we think that there is a little bit of a yin and yang benefit here.

That’s a good segue. Parts and service was obviously extremely strong in the quarter. Is there anything specific you can point to that’s driving that? There has obviously been a lot of recall activity but I think you guys are pretty much far and away best performers in the group. What are you seeing specifically that’s working?

This is Bryan again. I mean it's primarily driven solely off units in operations and despite us being up 12% in aggregate in fixed operations, yes, it's driven off warranty and it's driven off customer pay. But primarily still we have probably half of our stores that are considerably below that 12% level. And that hasn’t reinvented themselves to be able to attract our consumers back to our stores and be able to meet their needs when it comes to a cost proposition or a time proposition. And I keep saying that and I am saying that again, our teams are out there helping people see the opportunities that are afforded them with these huge units in operation increase. So to us 12% is just keeping pace with the units in operation growth. And that’s assuming that we were really good before that and I don’t think that’s how we operate our stores. And I think our store leaders and department leaders always look for opportunities. They may know that there are still considerable opportunities above and beyond in this idea of double-digit growth in service and parts. I think we are just now starting to reach some type of equilibrium where we are dropping off a 10.7 and 12.2 SAAR that it's starting to help us. So I believe that this is going to continue and it feels really good to me. And I think our people out in the field are saying, you know what, it's people based, how do we attract our consumers in a better way. And I think we will see this continue.

Got it. Last one from me. I think as it relates to DCH, it seems like there is a lot more in the way of synergies there. Low hanging fruit I guess if you will, than may be you guys even anticipated going into it? Can you comment a little bit on that and sort of how that plays out throughout '15? Any color there would be great?

Absolutely. Steve, Bryan again. When it comes to how we looked at DCH, let's talk pre-acquisition first or pre-combination. We really looked at -- that we were going to get some of the benefit, about half of the benefits coming from synergies in the first two years. And the other half coming from operational improvements, whether it's cost management or whether it's gross improvements coming in the next 3 to 5 years. We are very pleased how DCH has really welcomed changed management and the idea and the challenge to respond to managing cost. So when we look back at what we talked about 4-5 months ago, we really look at the synergies. In terms of corporate synergies, we have everything fairly well completed in that arena even though we originally talked about a two-year time scale. Now we will realize those and some contracts have to wind down and there is still negotiations on some things. But we are on a clear pathway on that, to accomplish that. In fact there may even be a little more than what we expect. George and his team back in New Jersey have done a wonderful job at that and are way more proactive than expected. When it comes to the operational side of things, the stores in DCH are quick responders and quick movers. They have responded it well. They have established forecasts. They are working towards those forecasts. The western stores are doing phenomenal. The eastern stores have been hit with a little bit of weather, but we really believe that they are taking action as well in finding those cost saving opportunities as well those margin improvement opportunities and are really responding nicely. So I really look at the change from then to now, is we are very pleased with what we purchased and the combination and how it's going. And I think that there is likely more opportunities on the operational side than we originally expected.

Steve, this is Chris. Just to add a little more color on that. SG&A as a gross for DCH is in the high 70. As you know, Lithia has been running in the mid to high 60s and so transitioning that opportunity and gross into leveraging cost as a joint organization is something that we are very focused on. And then when they are generating $75 million a quarter in gross, you can just see the opportunity that’s going to come in over the next 12, 24, 36 months.

Thank you. The next question is from Scott Stember of Sidoti and Company. Please go ahead.

Can you maybe talk about, within your core Lithia markets, the smaller niche markets, I know that over time since the recession you have seen a nice catch up effect there. And it seemed as if -- maybe that was plateauing a little bit. Can you maybe talk about where that stands right now within those markets and the additional opportunity?

Sure, Scott. This is Bryan. Let's see here. On registration levels, it's actually very similar what we have been reporting in the past. Where the Texas, the Montanas, those energy based states are still considerably above where there pre-recessionary numbers were. Oregon is still 5% recessed. Nevada down 10%. Idaho down 10% still. Hawaii down 5%. California is actually flat now which it was a little bit recessed. Even though I believe the central valleys are still 5% to 10% recessed.

Okay. Got you. And on the parts and service angle. Obviously you guys have been putting up fantastic numbers on that side. Now that we have DCH in the mix, can you maybe just flush out a little bit the strength that was contributed there? Whether it be customer pay, warranty. Maybe just give us a little bit of a flavor of where the strength in parts and service from DCH is coming?

Yes, sure we can. Scott, this is Bryan again. In terms of the Lithia side on same store basis on 12%, obviously that’s all Lithia, right. I would say though and reiterate that probably between 30% and 40% of the Lithia stores are at 2% to 3% increases and as warranty grows, it creates this anomaly that happens where you don’t increase your customer pay. Which means we are not re-attracting those new units and operations that are out there. So we believe that there is still a lot of opportunity within our existing Lithia stores. When we look at the DCH and what's occurring there. They actually are lagging year-over-year where the Lithia stores are. And I think George and his [PVP] [ph] team as well as their general managers and service managers are fairly aware that the units in operation growth that are afforded to them, provide the big opportunity to be able to expand their business. And I think until the combination of the two companies, that wasn’t quite as known a number. So we are starting to see the early stages of some stores really try to market and attract what I would call an expanded radius of consumers to be able to bring them into our stores for the first time or back at the stores and to really grow that business. Now they are very good about expedience and price awareness, okay. Which is a thing that Lithia has really been focusing on because of the hypersensitivity and the competitive market. However, I also believe that the idea of trends management and common measurements that Lithia and DCH combined together have brought to the party, have been able to really highlight those opportunity and see where to pinpoint and attack on a marketing basis in specific stores and department to be able to capture that opportunity. So I think they are actually seeing those opportunities even though they have the solutions already built to meet those needs. They just need to know when to drive it.

Thank you. The next question is from Brett Hoselton of KeyBanc. Please go ahead.

First, just on the used car issue. Should we consider that to be largely behind you at this point in time or is there the -- is that going to potentially bleed over here into the first quarter of '15 as well.

Brett, it's Bryan again. I would say this, our Lithia stores rally pretty hard from the Q3 opportunities that were afforded us in Q4. And I think they have got to figure it out that even if margins remain a little bit below where they have historically been. They have now adjusted pricing and they have adjusted compensation to accommodate those things. If you notice, our day supplies were down pretty good. We are not a position of panic anymore. Where it should regain margins but even if it doesn’t we believe it's a better model. I think if you recall, that $9.5 million in added gross that we got, were 1% reduction in overall deal average, we believe is an absolute trade-off that we should take every single time. And despite the Q3 anomalies I think it opened up some of our stores eyes, that they may be able to have a little of both and actually make a lot more in net because of it.

And switching gears. Thinking about the DCH acquisition, obviously, quite a sizable acquisition for your company. Generally, when I think about an acquisition of that magnitude there are some potential integration risks and some potential opportunities. And what I am wondering is, can you possibly provide maybe the top one or two risks that you see and the top one or two specific opportunities that you see.

Yes. Sure, Brett. Bryan again. I think that the risk -- the number one risk is most likely behind us. It was this idea of a cultural shift from a volume-based organization to a balance of volume and net profit. Their people and their stores are responding very well to it. When we looked at the corporate synergies, we thought that there was additional risk there as well. But we have now integrated our staff on the marketing side, we have integrated them on the legal side, we have integrated them on the F&I side, we have integrated them on the accounting side. Our corporate synergies like I just mentioned, are fairly well done, okay. The teams that are out in New Jersey are integrated and working well with Lithia. They are wonderful people that we believe are here for the long haul. George is leading that part of the organization in a way to really grow that into a growth entity for us as an organization. And we are kind of at that stage now that we are looking at what's next despite it only being what ,145-150 days into the combination. But I mean on that means we are looking at that 2.5 times additional opportunities of where can we go buy stores. What are the opportunities, where are our people talent and where can they grow from. So I think the risks are really behind us in terms of that integration which was probably the biggest uncertainty. And that shock when we talk about that volume model versus a volume profit model balance.

And then as you think about the opportunities, I think most of them seem to lie in the operational side. Can you cite me on what you think of maybe those top one or two specific opportunities or areas of opportunity for your company?

Yes. Brett, this is Chris. I mean I think one of the key things that we were able to do very quickly was unify our reporting metrics that we used to really engage each store and identify the opportunities in each store. And so now that we have done that and we are working to transition that information down into the field, it makes it very easy for us to gather it to identify the opportunities and the successes that we that. And so I think one of our opportunities is now that we have the information in front of us, for us to continue to use that. Operationally, an area that I think is a focal point for both Lithia and DCH, it hasn’t come up yet today on the call, is definitely our F&I performance. You know we lagged the peer group right now in F&I. And if you look at our same store comps compared to our total comps, the Lithia number is lagging, or the DCH number is lagging a little bit where Lithia is on F&I. But together what we have both done is lined out a past, take our F&I, PVR from 1200 now to 1300. And it's something that we are focused on and it's going to take some time but it's an effort that we know is going to generate a lot of additional gross for the organization.

Brett, additionally, DCH has been working on something that they call a sales evolution. They have rolled out three stores and allowed those general managers to start to test the waters on a, what we would call a more transparent sales process and a more cost efficient sales process. The initial intent was to capture a greater market share while doing it with a lower delivery cost, meaning that we could ultimately generate more net profit. Okay. The initial results on that are fairly good. Their front end averages are up a considerable amount, a couple of hundred dollars a car in those initial three stores. We believe that that can be a model that some other stores may chose to use in the future. But we believe front end deal average is also an opportunity. And then along with that comes that ability to find the productivity benefits and the cost reductions to help bring the money to the bottom line.

And Bryan I know one of the areas that you have really done a nice job and you continue to focus on, is actually over the long-term used cars. And I am kind of wondering, metro dealerships tend to lag a little bit in terms of used cars, using new ratios and so forth. But is that another opportunity for you at DCH specifically.

Absolutely. In fact the biggest area that was -- I would say 80% of their stores didn’t play in what we call that value auto. In fact they only played in the upper end of the core products typically. And I think they are quickly finding that those are fairly easy vehicles to keep on your lot and don’t take a lot of personnel cost to be able to keep them on your lot and sell those vehicles. So that’s something that’s taking hold fairly quickly. You are correct that the use in new ratios is definitely lower in metropolitan stores. However, if you remember, our space constraints are fairly minimal. Meaning that most of our stores have the ability to growth their used car inventory while continuing to grow their new vehicle inventories, which we are pretty excited about. And if you recall, they own 72% of their facilities which means that those space constraints aren't going to get tighter. We control those assets, which is good. The other thing that we believe is a big opportunity that spun off of this idea of more used car volume is the idea of detail departments. Lithia runs detail departments in all of its stores. So we have now I believe two stores that are piloting what we call detail departments, which is another way to improve reconditioning. Despite it being eliminated, it's still something that’s passed along to consumer cost and doesn’t have any cost associated with it. So it's bottom line profit that’s generated fairly quickly.

And then switching to the acquisition outlook. As I think about your acquisitions in the past, I kind of tended to think about it as driving mid-single digit revenue growth. 4%, 5%, 6% or something along those lines. Obviously DCH accelerating that. As you kind of look forward, obviously there are a lot of large numbers. You have now have a $7 billion entity. So how do I think about that revenue growth rate and your expectations there with regards to acquisition specifically. I mean is it still reasonable to think that you can drive that mid-single revenue growth rate or should we kind of curtail that somewhat given that you have got a much larger revenue growth base at this point in time?

Yes. I hear what you are asking. So we don’t specifically give -- we don’t really have any quotas per say of how many acquisitions we do. We do believe that there is enough headroom in the market to be able to continue in that mid-single digit range. We also believe with the opening of this idea that now we have 2.5 times the opportunities in metropolitan areas because of the combination of DCH. That provides some additional opportunities. And I think maybe to round that out for you, if we look at the idea that we just introduced a milestone far, which is $7 a share, we believe that we need to do somewhere in the 12 to 15 additionally stores on top of the DCH stores to be able to achieve that seven dollar EPS milestone.

Thank you. The next question is from Elizabeth Suzuki of Bank of America Merrill Lynch. Please go ahead.

Your outlook for 2015 has gone up pretty meaningfully and the fourth quarter EPS beat the midpoint of your outlook by 20%. But you didn't revise your first quarter outlook at all, so should we assume that some of your 1Q '15 outlook is pretty conservative or are there other factors that have developed that make that 118 to 121 range still look realistic.

Yes, Elizabeth, this is Chris. I think two things, we continue to guide the same way we have done it consistently for the last 5 plus years, which is look at the store performance that we are currently seeing, make some assumptions on what's happening in our market and roll that forward. And that's where the raise for really '15 came from. In Q1 is specifically, the issue that we ran into had to do with vacation accrual for the DCH teams. We didn't realize that all of their employees actually vested vacation on January 1. So we take a huge hit in the quarter for vacation which had the traditional Lithia stores comes in over the year. So it was more of a, the timing of an accounting adjustment which I think was around $0.06-$0.07 and that's why you didn't see a meaningful lift in Q1.

Okay. That's really helpful. And regarding your digital strategy, it seems like a lot of your peers are placing more emphasis on this and trying to engage with the consumer online and through smart phone apps etc. So what's Lithia doing along these lines and how does that kind of strategy translate into your unique market?

You bet, Elizabeth. This is Bryan. When we look at our opportunities from what we would call living room to showroom, a lot of the reason for a combination with DCH was we really believed that the IT, the technology that they have developed around their sales evolution was something that had a lot of meaning to us. Despite us having partnerships with vendors like ELEAD or CDK, ADP, we have grown those things but it's not able to, to be able to adapt as quickly to changing consumer demand, is what we believe that [indiscernible] and his teams back in New Jersey have done. So we really look at it as a two-pronged approach. One is, this very flexible model that DCH has brought that we will hopefully be bringing into some of the Lithia stores, as well as the, maybe a little bit more stable models of the CDK and ELEAD that we are kind of used to. But they are not as transparent when it comes to in your living room. Whereas the DCH model is something that you can sit in your living room, you can be on an iPad or so on and so on and work through a sales transaction and then come into our showroom and have that same experience on iPad with our sales personnel and our sales management staff and quickly complete an automotive vehicle purchase. So we are pretty excited on what's happening there and they get it in a fairly cost-efficient way to be able to accomplish a lot of transparency in the consumer's mind.

Thank you. The next question is from Rick Nelson of Stephens. Please go ahead.

I would like to follow up on DCH and the [accretion] [ph] guidance that you provided coming in into this year of $0.70. What your thoughts are now and how much of that $0.30 raise in guidance for 2015 at the midpoint related to DCH?

Hey, Rick, this is Chris. One of the things that's getting really difficult for us to do very quickly is just identify the additional leverage that we are gaining from either Lithia or the DCH team. And that comes because working together as a combined management team, when we had an employee, let's say in our corporate headquarters and let's say the payroll department, was that a DCH add or was that a Lithia add. And so what we're finding is that the synergies that we are getting are really benefiting both sides of the organization. But, yes, coming out of the expectations that we laid out for DCH last year, there is a large piece of the incremental life that we're seeing in our guidance in 2015 related to what Bryan said, was a smooth integration with DCH.

I think you had pointed out that DCH generates about $75 million third quarter in gross profit.

Yes. That's correct. I mean if you just look at the revenue base and apply an average gross profit margin, Rick, it should be somewhere around $75 million.

Okay. And the SG&A you said for DCH was high 70s?

That's correct.

Okay. And Lithia SG&A in the high 60s. I am curious how long you think it would take or if it's even possible to close that gap.

There is no doubt that we want to become industry-leading again, Rick, in that 70.2%. You know we have a runway here in front of us now to get back to, let's start in the high 60s. But DCH knows the opportunities are there. They know that the first thing to do is generate additional gross in the areas that they can with new cars, used cars, F&I and service. And then from there we will start talking about cost control and pay plans and advertising which make up about 75% of our SG&A. So, definitely opportunities on the table and we are going to work through those over the next 36 months.

Thank you. The next question is from Bret Jordan of BB&T. Please go ahead.

Quick question on the service side of the business and I guess as you are cross-selling in the warranty volumes on this historic recall against customer pay, do you have a feeling for what percentage of business comes in for warranty that you can sell customer pay service on?

Bret, this is Bryan. I really believe that it's probably in the neighborhood of 50% of the consumer that come in. Many of them are just typical customers that are always coming into our service departments. And if you recall, our retention rate in service is in the high 50s, low 60% range. So if you make that assumption, those are typically not people that you are going to be getting additional up sales on. So that remaining 40%-50% is what you can up sell and hopefully generate new relationship with.

Okay. And then a follow-up. You have covered some of the spread on the F&I between DCH and Lithia. What the lease penetration is compared to the two? I would imagine DCH is significantly higher. And does a higher lease penetration limit what you can do in F&I because people are going to spend some incremental dollars when they are not actually owning the car.

Well, Brett, that's a great realization. That is actually the single biggest benefit that Lithia is learning from DCH, is how do you get to 40%, 41%, 42% lease penetration on new vehicles, which is a huge benefit when you look at the cycle of a consumer and how you generate a trade-in that’s a built and certified car. It's something that we have really missed in the past other than in our Highline stores at Lithia. So our Lithia stores are really starting to grasp on to this ideas and look into the opportunities that are afforded them when it comes to leasing. Yes, there may be a little bit of degradation in margin and slightly in F&I. But it is still minimal for the benefits that you gain out of a higher lease penetration that we believe that it's a big opportunity. Lithia on a side note is in the mid to high single digits, which most of it comes from highline product. So there is a large opportunity in our mainstream franchises such as Honda, Toyota, Chevrolet, Chrysler and Ford that we really believe can help expand our market share and not just replace other deals but more expand those transactions.

Yes, Brett, this is Chris. The one that I would add to that is that when you look at some of those DCH stores that have high lease penetration and they are doing F&I PVR in the 1200, 1300, 1400 range. I mean it opens our eyes to the opportunities that we have, not just in the DCH stores but also in our existing Lithia footprint. And it's evident by what, our public peer group is doing an F&I in high lease markets that there is still opportunity there and we are focused in on that.

Thank you. The next question is from Paresh Jain of Morgan Stanley. Please go ahead.

I had a question about the $7 EPS target. So it seems like you guys are on track to almost double your EPS in three years in 2015. And originally your timing there was three to nine years to achieve that. Clearly it's coming in at the low end of that. And now you have a $7 target following $6 in one to three years and it seems like acquisitions have some weigh to those. So if we were to assume that these acquisition targets can be met in one to 1.5 years rather than 3 years, are there liquidity or management bandwidth constraints that prevent you from getting there?

This is Bryan, again. When we look at the $7 EPS and we look at where we came from at $3, it's easy to think that it's a big hurdle. But I think we have multiple things in place that allow us to see the vision on the $7. And like I reiterated once before -- like I said once before, the idea that we still need 15 acquisitions to get that done, we need an environment where a SAAR starts to push about $16.5 million pretty consistently. We need DCH to fully integrate together and realize their benefits to accomplish that. So we really look at it as achievable but we also look at it as a long ways from where we have come. So we have to re-inspire our people and help them stay humble to see the opportunities in front of them.

Understood. And then a follow-up on the F&I, you talked about leasing there. But when we look at the current $100 gap versus peers, what are the main buckets that explain that gap?

This is Chris. I think the biggest thing that we are looking into is where we generate the majority of our F&I profit after the finance reserve is definitely service contracts and gap. And I think those are some opportunities that we have to improve. One that makes Lithia unique is that we have a fixed pricing model in all of our F&I offices. So we don’t negotiate pricing on F&I products, which puts us on the right side of compliance I think with the CFPB. But at the same time, we may lose a little bit of F&I revenue that if we are not competitive in the market on what we can ask for the products and services that we sell. So we are experimenting with some new things. We are trying some new things. We are adjusting pricing in a few areas and that’s the core of our focal for 2015.

Thank you. The next question is from Bill Armstrong of CL King & Associates. Please go ahead.

So it looks like inventories were well under control, both going into the quarter and coming out. And I'm just wondering if you could review on the same-store basis, gross profit per unit. Both new and used were down year-over-year. What was driving that trend in the quarter and what are we looking at maybe going forward?

Bill, this is Bryan. The drive on both new and used declines is primarily that we believe that volume is a better model than higher gross. So we were down to 30 some dollars in aggregated the leverage, so we made some of it up in F&I if you recall. But we believe that that $9.5 million that we made an additional gross is going to generate downstream business over the next 3 to 5 years in service and then possibly use car trades and all the other things that it's a big benefit. Sid, do you have something to add?

Bill, this is Sid. Just I think focus on gross margins is a mistake in the sector, the focus would be on total gross generated. And those goals have to be a part of every piece of our organization. Lithia's values are on this decentralized model where store leadership makes such a huge difference. And we think that these people, particularly the DCH group have a lot of opportunity when they realize that corporate isn't going to tell them how to do this. They reach out, they find solutions individually with each brand, each market, in each a different way. And we avoid major investments as well in restructuring or in making everybody off of a common playbook. I mean none of that is going to go on at Lithia. We are an organization that believes that the store manager, the store leadership and that total gross generated is the goal.

Thank you. And our next question is from David Whiston of Morningstar. Please go ahead.

I wanted to go back to leasing first. Traditionally, I believe automotive news and the recent story and you guys are saying that traditionally you have thought your overall customers don't like to leave. Could you just talk about the mindset of that because I would think at the end of the day it is a matter about a low monthly payment wherever you live?

David, Bryan. I think that the mindset of the consumer may be established from the mindset of our teams in our stores. The more that we get out there and we route in -- we were in Washington in Northern Oregon last week visiting 14 stores. And what I heard time and time again were arguments but then when you look underlying what those arguments are that a consumer is not used to leasing, it's not typical. And when we were able to show them competitors around us that had two or three times of lease penetration rates and were able to ask them how do they actually, what we call desk a deal want to lease. And find out that their technology doesn't even have the ability to do a leasing very easily where you can compare it and show them the benefits, compare it to a purchase and show them laid up to each other so they could see the benefits that it is actually less expensive many times. If you recall, many manufacturers subsidize their lease products at a higher rate than what they do their purchase or their cash products. And the reason is, is because they know they have better control of the customer in three years. And it's more likely that they will buy another car. In fact the numbers that Toyota and Honda have both given us is, there is a retention rate on buying a new car again, which is around 40% for a non-leasing customer. It goes up to 60% or 50% better retention rates for leasing that vehicle. So they are willing to pay $500-$700 to $1000 more to do that. So we are helping open up our Lithia stores eyes. And the good thing is, many of the stores, especially the Highlines, they already get it. They know this. But our other mainstream franchises were having to open up their eyes to the ideas that leasing is a better value for our consumers and despite them possibly being adverse to some extent in small regional markets where maybe disposable incomes are a little bit less, that’s even more reason that they should be lease because ultimately the monthly investment is about 10% to 20% less than what it is on a finance purchase.

That's very helpful. And how long do you think it's going to take on the Lithia side of your stores, for them. Not only -- it sounds like the message is already sinking in, but how long it will take to actually changed the execution and operations in the store?

Yes. I really believe like I said, it's a mindset. So when we look at -- I mean we talk so much about how do we get to 75 units per store in used cars, right. What we are at, 57 or so. Right. It's really a -- you have to have your people in the store believing. Which means you have to challenge them and point out the opportunities and then hopefully follow-up and provide them with solutions so they can take the baby steps to continue to build off of their base business without losing everything. Otherwise, they could end up leasing cars to consumers that really want to finance and actually maybe lowering their gross because of it. Because they are trying to push a percentage rather than the overall gross that Sid spoke to, which is ultimately what drives net profit. So we are always pretty delicate and make sure it's their idea in the stores rather than our idea. So we really plant the seeds and then hopefully they will take up the watering and the fertilizing and those type of things to really grow that ability to lease vehicles. So it can take some time.

It's really just a mindset change, you don't need to do a lot of IT dollars spending to do this, right?

No. In terms of the IT dollars spending, [Advantage] [ph], the product is that the DCH stores are using. So some of the Lithia stores may turn to them because it's a very cohesive, transparent system for the consumer. But also we have ELEAD and we have CDK, which is ADP, that have solutions as well. It's a couple of hundred dollars a month if we choose to add it in our ELEAD stores on to our existing CRM system. So it's a low-cost adventure to be able to add the technology component if a store may or may not have it.

And just one quick question on used to new ratio. Longer-term, can that get back to you 0.8 or even 1:1?

I believe that in the Lithia stores that the idea of a greater than 1:1, used to new is totally doable. But remember within the next, what three quarters, the DCH stores will be rolling into same-store sales. So the DCH stores will help us to get closer to the 75 units per store which we will probably end up raising that target at some point because of that. But it also hurts us when it comes to the new to used ratio.

Thank you. That is all the time we have for questions. I would like to turn the floor back over to management for any additional or closing remarks.

Thank you everyone for joining us today and we look forward to updating you again in April on Q1. Bye, bye.