Lithia Motors, Inc. (LAD) Q4 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Lithia Motors Fourth Quarter 2017 Conference Call. Management may make statements about future 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 cause actual results to differ materially from the statements made. The company discloses material risks and uncertainties in its filings with the Securities and Exchange Commission. The company urges you to carefully consider these disclosures and do not to place undue reliance on forward-looking statements. Management undertakes no duty to update any forward-looking statements, which are made as of the date of this release. Management may also discuss non-GAAP financial measures. Please refer to the text of the earnings release for a reconciliation of comparable GAAP measures. Management will provide prepared remarks and then open the call for questions. I will now introduce Bryan DeBoer, President and CEO. Mr. DeBoer, you may begin.

Good morning, and thank you for joining us today. On the call with me are Chris Holzshu, our Executive Vice President; and John North, Senior Vice President and CFO. Earlier today we reported adjusted fourth quarter earnings of $2.15 per share which marks our 29th consecutive quarter of record performance. We are excited to have added an 11th digit to our annual revenues as we exceeded $10 billion this year. We increased quarterly revenue 18% and adjusted earnings 15% over our 2016 results despite a sequentially low full year start of $17.1 million. Fueled by our mission, growth powdered by people, our organization is poised to continue its upward growth trajectory regardless of new vehicle market conditions. We expect further moderation in SAAR for 2018 in a range of 16.5 million to 17 million units. For the last several years, the hallmark of our success has been high-performing and powered entrepreneurs making decisions closest to our consumers. We have more than tripled the size of our company including purchasing of a $6 billion in annualized revenues in the past four years alone. These acquisitions are strong franchise assets that historically underperformed their earnings potential. Despite the acquired stores dilutive effects, we have maintained our strong performance in SG&A to growth and operating margins. We continue to identify, develop and challenge our leaders to capture the considerable earnings dry powder created from our value-based mergers and acquisition strategy. From an operational perspective on a same-store basis, total sales grew 3%, new vehicle sales were up 3%, retail used vehicle sales increased over 2%, F&I increased 8%. And service and parts sales were up 4%. We sold 67 used vehicles per store per month up from 66 units in the comparable period last year. In the quarter same-store certified units decreased 7%, core units increased 8% and value auto units increased 3%. Again we continue to make incremental progress towards our goal of 85 used units per store while offsetting the effect of our recent acquisitions that sell fewer than 40 units per month at the time of acquisition. We continue to see growth in our service, body, and parts business which grew 4% despite one fewer service day compared to last year which negatively impacted revenue by approximately 2%. Last month our executive team and operational group leaders assembled in Downtown Los Angeles at our new Toyota store where we reviewed and modified strategies on how to capture via over $200 million in incremental dry powder that is available to our existing store base. The resulting efforts continue to focus on customer driven topline growth while effectively managing cost. Chris will comment on some of these areas shortly. Online marketing continues to attract more customers as our same-store web traffic increased 15% in 2017 followed by another 20% gain in January. Our stores continue to deploy a variety of full service online and home delivery models tailored to their markets representing the hallmark of our entrepreneurial spirit. We emphasize the omni-channel nature of our retail offerings through personalize experiences, targeted marketing and intuitive easy-to-use websites that connect with customers in convenient and engaging ways. In the fourth quarter 2017, we completed the acquisition of Armory Chrysler Jeep Dodge Ram in Albany, New York and Crater Lake Ford Lincoln and Crater Lake Mazda in our hometown of Medford, Oregon. We also divested a small store in Eastern Washington continuing to optimize our portfolio. Our cumulative total of annualized revenue acquired and disposed in 2017 is approximately $1.7 billion. 2018 is also off to a robust start. In January, we acquired Ray Laks Honda, NY and Ray in Buffalo, New York with estimated annual revenues of $140 million. The plateauing new vehicle sales environment seems to be further accelerating the number of acquisitions available and we believe 2018 activity may exceed 2017 total. We anticipate being a significant beneficiary from the recent tax reform. Positive gain should be seen in both our existing store operations as well as new acquisition opportunities. We estimate our effective tax rate will decrease from 38% to 27% and savings are roughly 11% or an incremental $40 million in annual cash flows. Additionally, we estimate 90% of dealerships in the U.S. are structured as pass through entities which has historically meant we had a tax disadvantage to most competing acquirers. This change in our tax rate lowers the hurdle rate, we apply to our acquisitions or tax resulting in more deals meeting our disciplined annual return on equity target of 15% to 20%. Looking forward, we are updating our 2018 earnings outlook $10.50 per share which John will also elaborate on in a few moments. In summary, we remained focus on delivering the annual double-digit growth that we've accomplished for the last seven years. We see a stable operational environment, a massive amount of earnings upside available through improvement in our unseasoned stores and a more robust acquisition market. These factors coupled with the most liquidity in our history and sector-leading low leverage, gives us confident that we can continue to drive significant top and bottom line improvement. With that, I'd like to turn the call over to John.

Thanks Bryan. I'd like to provide more detail on the results in the quarter. All members from this point forward will be on a same-store basis. In the quarter, new vehicle revenue increased 3%, our unit sales increased 1% better than national results which decreased 2% from the prior year. Our average selling price increased 2% compared to the fourth quarter of 2016. Gross profit for new vehicle retail was $2,182 compared to $1,910 in the fourth quarter of '16 an increase of $272. Retail used vehicle revenues increased 2% of which 3% was due to greater unit sales offset by a 1% decrease in selling prices. Our used-to-new ratio was 0.80 to 1. Gross profit per unit was $2,003 compared to $2,209 last year, a decrease of $206. Our F&I per vehicle was $1,342 compared to $1,258 last year or an increase of $84. For the vehicles we sold in the quarter, we arranged financing on 71%, total service contracts in 44% and total life time oil products in 25%. Our penetration rates decreased to 170 basis points for financing, increased 20 basis points for service contracts and increased 70 basis points for lifetime oil contract. In the fourth quarter, our funded overall gross profit per unit was $3,451 and $3,297 last year, an increase of $154 per unit. Our service volume and parts revenue increased 4% over the fourth quarter of 2016. Customer pay work increased 4%, warranty increased 4%, wholesale parts increased 1% and our body shops increased 6%. Our total gross margin was 14.8%, a decrease of 20 basis points from the same period last year. As of December 31, consolidated new vehicle inventories were plus 59, an increase of one day from a year ago. Used vehicle inventories were at a day supply of 67, an increase of 11 days. At December 31, 2017, we had approximately $280 million in cash and available credit as well as unfinanced real estate that could provide another $236 million in 60 to 90 days for an estimated total liquidity of over $0.5 billion. At the end of the fourth quarter, we were in compliance with all of our debt covenants. Our leverage EBITDA to find it's adjusted EBITDA less used interest and capital expenditures was $80 million for the fourth quarter of '17 and was $328 million for the year. Our free cash flow as we define in our investor presentation was $32 million for the fourth quarter of 2017 and was $159 million for the full year. Our net debt to EBITDA is 2.0 times, which remains among the lowest in our sector and within our targeted range of 2 to 2.5 times. As Bryan previously mentioned, our 2018 earnings outlook has been updated to adjust for the recently passed tax legislation, anticipated interest rate increases and changing consumer behaviors on the east and west coast due to limitation on deductibility of state and local taxes. We anticipate revenues at $11 billion to $11.5 billion this year and earnings per share of $10.50. Achieving our target would provide approximately 11% topline growth and a 26% growth in earnings per share. And with that I'll hand it over to Chris.

Thank you, John. We remain focused on cultivating a high performing culture to generate opportunities in our core business lines, while leveraging our cost structure. This is the foundation of our growth powered by people. As Bryan mentioned our operational leaders met last month to evaluate the opportunities across our 171 locations as we continue our relentless focus on continuous improvement. Our group leaders primary role is to inspire department managers, to capture drive powder and to achieve higher performance. We continuously realign our group leaders to best match individual strengths with the specific operational improvements targeted at each of our stores. In the past two quarters we analyzed the incremental improvement and performance at our moderately seasoned stores and have observed some plateauing between the second and third year of ownership. SAAR stabilizing in the low 70 million unit range the last three years has also made incremental improvement more gradual. The stores we acquire are strong franchise assets that historically underperformed their earnings potential. The doubling of profit is occurring on schedule with tripling and quadrupling as requiring growth and leadership, better utilization of technology and inspired teams to achieve the expected results. As we demonstrated in our investor presentation, we see opportunity for significant dry powder in each business line. More specifically new vehicle sales at acquisitions average 30% below the market share expected by our manufacturers, and 50% below our seasoned stores. In used vehicles, acquired stores average 38 cars per month or over 50 units below our seasoned performance and F&I these stores average $850 per unit compared to our seasoned store performance of $1400. Our service retention and acquisition, a measure of consumer loyalty is 20% below our seasoned store retention level. And finally acquired stores averaged nearly 90% in estimated gross profit or more than 30% higher than our seasoned stores. All of these opportunities totaled more than $200 million in earnings dry powder that we are inspiring our stores to capture by developing entrepreneurial independent leaders across the organization. This concludes our prepared remarks. We'd now like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Steven Dyer with Craig-Hallum. Please go ahead.

Wondering if you guys could elaborate on the self deduction comment, I guess I wouldn’t have necessarily put two and two together. But maybe what are you seeing or what do you anticipate seeing in terms of change in behavior?

We'll talk a little bit more broadly about our guidance overall. We’re going through our outlook for 2018 based on current store performance and market conditions. And certainly the tax reform is going to be accretive to us but we also anticipate like the increases in interest rates this year, we are talking about 3 to even 4 interest rate increases. I'd remind you that 1% move in interest rate is $50 million pre-tax for us or about $0.40. And then we're temporary actually there is a lot of bit on the coasts, where the majority of our sales are a limitation of the self as you mentioned. We also didn't see a lot of the benefit as it appears many of our peers had from replacement demand due to hurricane Harvey. And when we look at our current trends in the market, we're taking the opportunity to utilize some of the tax savings to invest in our team members and improve service employee benefits. So we kind of put that all together, it appears the market is stable. You know we're certainly not seeing and as Bryan mentioned an increasing start in 2018. And I think it's too soon to tell any more about what the ultimate impact might be on the coast.

I mean as it relates I guess drilling down a little bit more on the tax deductibility limitations et cetera. I mean are you expecting just overall demand softness. Are you expecting people just sort of trading down, buying less car concept what are you - I guess sort of baking in your expectations there generally?

I think it's more that we haven't seen a real acceleration and if you look at how the fourth quarter ended, I mean saw end of the quarter at 78 which was up pretty dramatically. But it appears that a lot of that was concentrated in the middle part of the U.S particularly around kind of hurricane replacement. We estimate make 200,000 to 300,000 cars were lost there. As we look at our coastal performance, that appears things are pretty steady and kind of upper 16, low 17-million-unit range and we think that some of that's a function of the fact that those are in a high state income tax locations that might be affected. So I wouldn’t say that we've seen a big shift. I think it's more that we saw pretty consistent performance in the quarter. But it appears that underline demand is a little softer than it might have indicated in Q4, based on some of that hurricane replacements.

And then question on acquisitions you guys look like FTC okayed some - what appear to be acquisitions yesterday announcing that - you press released anything you can say about that?

Steve, this Bryan. We share forward for more feature M&A announcements. Hopefully, we'll be able to help that achieve our 10, 15 annual target. However, as usual we don't announce our stores or groups until we've actually completed the deals. So stay tuned. Hopefully, we'll have something in the coming periods.

Our next question comes from line of Bret Jordan with Jefferies. Please I have your question.

On a used car mix, I think you said the CPI or the newer used cars were down while core and value were up. Was that something that was strategic or are you seeing a shift with new vehicle incentives taking away some of that younger vehicles demand?

This is Bryan. I think when we when we think back about how far pass new vehicle sort of drives the supply chain for its certified core and value, what we started to see almost a year ago was certified was starting to fill the pipeline. So we were able to grow that certified business. Now the core product is starting to fill up as well which is wonderful because that's a lower class vehicle that we make similar deal average on. So we make a higher margin on those vehicles which we’re excited about. The other thing is, we strategically focus most of our attention on core because if you recall, our value outlook which is our highest margin in the lowest cost vehicle is how we get those is through trade-ins on core product. Lastly, it's a lot less likely when you sell core and value auto vehicles that you're going to be cannibalizing new like you do uncertified which can be difficult. So we always are preferential to core for that single reason.

And I guess given the extra day or loss of a day, you would have whatever 5 plus parts and service business, is there anything are we seeing any volatility and we're seeing an improvement in service demand with the return of weather and some of the northern markets. Can you talk to us maybe the early part of 18 what we see are trajectory in that?

Our services and parts were pleased with because we're seeing that customer pay continue to grow. It's up 4% in the quarter. If you remember we went through, I believe over a dozen quarters of warranty increases in the double-digit range. So, there's always that fear that when the warranty goes away that you're not going to be able to replace it with customer paid, but demand is strong for our consumers. We focus as Chris said on retaining those customers throughout the lifecycle. And fortunately the mechanical beasts that have tendencies to break, so that customers pay up 4% when warranty was also only up 4%. We're excited about what we're seeing. And obviously that dry powder that we build in our new acquisitions. There's always a lot of opportunity to reinvent ourselves in the way that we go to market with our customers to continue to attract clientele back to.

Our next question comes one of Chris Bottiglieri with Wolfe Research. Please go ahead with your question.

Two-part question, on new there was pretty exceptional performance on the gross power per unit last, let say your luxury EBIT went up as well. Wonder if there is any connection there and to what extent you think a sustainable though is like stair-steps driven or something else that maybe is more temporary in nature?

Chris, this is John and I would be pointing out if you look at our margin and you can really see this when you when you drill into new and use. We do a portion internally our ounce of reconditioning work and I certainly think the performance in the fourth quarter was pretty powerful that we've seen in the year. But we also had to readjust or reallocate some of our internal reconditioning. I think you see a shift between new and used as a result of that. We also had a small recapture of LIFO from earlier in 2017 that also boosted the margin in the quarter. So I think if you look at the full year run rate, you’ll see that we're in kind of the high five range and I think that’s a pretty good estimate to use going forward, based on our outlook. And I think, obviously as we always say, looking at total deal average which is new in use and had together, it is really the best way to think about the business because that's to normalize for changes in trade and valuation and F&I performance well part of the mix the stores think about. So, I think you need to consider all those factors when you look at the fourth quarter performance.

I think you just quantified some of it in terms of reconditioning and stuff like that, but to what extent you take the fall off in GPU, like it's been a lot your peers have starting other lower volume and lower GPU. Just want to get a sense for what's strategic sacrificing GPU to drive volume, what's market factors and maybe if you could just comment on the higher DSI, like anything that you're seeing there, back to be driving this if it's like regional nature, certain factors that are driving some of this, may be helpful?

The biggest decline we saw GPU is within our luxury segment and it really appears that a lot of that's a function of service loners. Our stores are pushing us programs pretty aggressively. They do trigger a lot of the manufacturers, they're particularly in a couple of German OEMs and the GMs manage those programs pretty efficiently. But they then have a supplier use cars needs to work through and a significant amount of our certified vehicles are actually sold as a function of that. What we saw in 2017 is that, they've taken a little less GP on the front end to continue those programs and move through. It appears that they're managing and very healthy, but it is - obviously been able to front end more similar what we see on the new vehicle side. So I think that's the biggest driver that we've seen. In terms of day supplier rate a well of bit, it appears that a lot of that concentrated in our lesser division as we've drilled into kind of that group. And I think that's really a function of the fast selling new vehicle sales environment for us trying to figure out how to really aggressively attack the market. You have to have vehicles to grow that part of the business. And you know from our perspective that's a good trade off if they can bring in some additional unit volume.

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

Like to ask you about region, an area of strength at which time in particular, I'd be interested in how downtown L.A. Auto Group performing relative to your expectations and any commentary on DCH that would also be helpful?

Real quickly, same store revenues, let me just give you the top five states for us, California was up 5%, New Jersey and New York were both flat, Oregon was up 3%, and Texas was up 5%. It was surprising there was a pretty balanced mix, there is really no double digit gains or losses like we've seen in the past. It was really nice to see Texas finally have some positive momentum especially when we weren't in the storm affected areas of Texas. So we're pleased to see that. If we move to the southwest in Downtown L.A., EY and his team have really taken hold and they are really driving profitability which is wonderful to see. Their volumes are growing which is great. We moved into the New Toronto store in late November. I believe they were top 10 in the country in terms of sales and they'd never been at those sales volumes before. The Mercedes stores doing wonderfully as our - are the rest of the store. So we're pretty excited of what's happening down there. In terms of DCH as you recall they were about 1.5% pre-tax margin when we combined and we quickly were able to get them into the 2.5% to 3% margins. But over the last year, it has plateaued and I think Chris spoke a little bit to that idea that when people move from a 1.5 to 3, they are excited about it like we are, okay and that level of performance is what gets us to our ROE targets. So we’re very pleased with where we sit today. But many of the stores now have to reinvent themselves and find new ways to go to market by challenging their personnel to get out of their comfort zone, to push a little further to figure out how to do more with less to some extent? And how to control expenses, while growing our volume. So if you if we think about most acquisitions or we always look at the idea that conquest used vehicle sales and value auto sales are something that most new car dealers don’t plan, okay. That's taken hold in many of the DCH stores, but not all of them. As well as, the ideas of not just being a warranty claim center and service, but being a one stop low cost and quick service experience is an important part of the mix and it takes time to get that all into place. So we're looking forward to DCH as well as many other stories to now step forward and break through that plateauing that can occur in year two or three.

The acquisition environment is really heating up and if you could come out of the multiples and seller expectations which, what you're seeing there?

Well, you stated that there's no question that it's heating up and it's heating up at a pace that's followed by pricing, that continues to come into line with what is more typical of our expectations. So I would say that, our opportunities are full and we're able to pick and choose pretty closely to be able to take advantage, and most likely be able to gain revenues of similar levels to what 2017. And if all goes well maybe we'll exceed it by a fair amount. We also in the prepared remarks, I commented on it but the idea that our tax structure now doesn't put us at a competitive disadvantage where we used to be. So we actually are able to pay about 15% more which in theory if you think about that that's almost a full turn when you look at future earnings, while still maintaining the same discipline ROEs that Lithia has always enjoyed to be able to create deals. So I would leave you with this. We have the people, we have the model to be able to add at a more rapid rate. Plus, we have the liquidity of somewhere $500 million and if you calculate our 10 to 20% of revenue purchase price that we typically pay all end for goodwill and working capital, that gets you to about a $2.5 billion to $5 billion of dry powder able to be utilized buy store. So we really think that we're positioned nicely to be able to continue to grow as far as the market stabilizes.

And just to be clear on the guidance $10.50 estimate that does not include future acquisitions that would be accretive to that?

This is Bryan again on that Rick. Acquisitions that are not transformative are included in the 10.50, so we may need that by stores to achieve the $10.50. Now a transformative acquisition like a DCH or larger, we would obviously be readjusting things.

Our next question comes from line of James Albertine with Consumer Edge. Please go ahead.

Bryan on that last point you just made, is that a change to how you've done in the past or is that always been then the case, acquisitions that are not transformative are included in guidance?

So last quarter we announced that our acquisitions, typical acquisitions staple diet as we called it, will be included in our annual forecast. So when we moved to annual forecasting, we made the decision that that could come from internal growth or it can come from external growth. And knowing that the market is flat to negative, we always knew that we could either get it from one or the other and if we were a little short, we hope to make it up in acquisitions and it's all a little ahead, then we can be a little bit more reserved in how we approach acquisitions.

So to be clear December you announced two in the release today, December and one in January are they both in the 1050?

Yes.

Really quickly parts and service, I know you lost a day, year-over-year, I think is what you said and margins were down a little bit year-over-year. Can you help us kind of cut through sort of with that mix driven pressure or if there's something else going on there and how we think about modeling that for 2018?

So as you recall, we were up 4% in revenue in all our part service and body shop work. And about 2%, it would have been around 6% if we had that extra day. So I think that's always relative to look at. In terms of margins, it typically is a mix between the new and used - the service which is a 65%, 70% margin business whereas part's is only a 30% business and that's typically where the mix comes in. We aren't seeing any degradation of margin within those departments. It's more that parts would have become a bigger part of the mix rather than any other type of behavior.

Last one for me is it more a strategic question. If we would just think about it, very high level very broadly, if new vehicle sales the SAAR underperformed your expectations and used vehicles sales outperformed your expectations, net-net would you see -would you expect to outperform your guidance as it stands today or underperform?

I think it would be closer to neutral. Because I believe that our margins are somewhat similar. The new vehicle also has a service business so it has a longer tail on it than used vehicles. So I think in the short term it maybe attach more beneficial for used to be better, but long term I think new would balance it out because of the tail of in-service and parts being more robust.

And then to follow that line of thought to the degree that you're outperforming on M&A, that helps to offset the long term loss of service, I would think right because there's more low hanging fruits from those deals?

That’s 100% accurate. I mean we are value based investors and typically the stores that we buy take three to five years to get them to a seasoned level. And typically they're performing at somewhere between a quarter and a half the profit potential. So all of those factors come into play when we're looking at buying and how we operate and then obviously 12 months later, they start to roll into our same store sales numbers which helps to keep that number pretty stable.

Our next question comes from the line of [indiscernible] with KeyBanc. Please go ahead with your question.

Question for you around your guidance revenue outlook does not appear to have changed much but your pre-tax income appears to be lower than before about 6%. If you exclude the higher interest rate impact, can you talk a little bit about the areas of weakness you anticipate perhaps the front end gross profit for you would it make a personal service margin or perhaps SG&A price leverage. You're seeing headwinds today that you weren't seeing three, four months ago. If you could just offer a little more color around these specifics there?

We’ve obviously taking a look at the map that you guys have put together and you know I think to start with the one, that kind of disconnect out of the gate that we have you thought you were modeling things was, our full year tax rate is higher as a function of our apportionment of California. So as you were using kind of mid 30%, 37%, 38% rate and we were anticipating something north of 40 just given the concentration that we had there. So rather the gate, if you do the math I think we were significantly below where you were at 11.25, I was more like 11.07, something like that. Like I said, more of a $0.40 with every increase in rates just on new car flooring. So from our perspective, I think we're anticipating something pretty similar to how we exited Q4 in terms of performance. We're tempering that a little bit with the interest rate increases that we're seeing which appear they're going to be lot more robust than we had thought maybe 60, 90 days ago a little bit of tax cut. I know CPI was up 3.10% this morning in the month, which is more severe than it's been recently. And then again as we mentioned on the call earlier, we are looking at increases on employee benefit and reinvesting part of it and almost important team members. So I think those are the biggest drivers. Clearly we're seeing some moderation as Bryan mentioned with DCH, but it's not really degradation, it's just taking the current trend and warmer that we think we can reach that just to make sure that we're going to deliver the same safety.

This is Chris. Just adding on to what John was talking about as well, as you know our philosophy is remains the same which is to look at the current store performance that we have to set the expectations that we have for the remainder of the year. But we acquired 6 billion in revenue over the last four years which means as Bryan talked about not all the stores are going to be seasoned in 2018 and just kind of person from things that we look at as far as opportunities to get us there $200 million in earnings dry powder, our cohort of acquisitions that we did in ‘14 which included DCH which was one of the largest acquisition years that we had in history, outperforming at a metric we look at internally which is net to gross which is about 14%, whereas seasoned stores are doing north of 25%, 26%. And I think it may translate at on a leverage basis over to SG&A its something like you know they're doing in the high 70s, where our seasoned stores are doing in the low 60s. So what we want to definitely talk about our outlook for 2018, I think based on the level of acquisitions that we have when you look behind ‘18 and you start looking about integration of stores and getting them closer our seasoned levels and we're spending time and energy with our teams on -- there's going to be a lot of upside potential without the acquisition in the outer year. And so I hope you balance that in the outlook that you have in our guidance in the future.

And then one other question for you around Texas, your exposure in Texas as you mentioned are not as impacted as some of the other Harvey hurricane, can you talk about Texas conditions and overall energy markets excluding the replacement demand? Are you seeing potential maybe a little bit of recovery, giving easy over your comps Texas or at least stabilization are the declines over, should we anticipate a little bit of a better outlook in that region?

This is Bryan. So Texas makes up about 12%, 13% of our revenue. And as I've said, it was it was up about 5% in revenue. We have a few stores in Corpus Christi which didn't get the brunt of the floods. It did get a little bit of wind damage, but we were back in business within hours rather than days. We didn't have total losses on cars. So we didn't see big spikes there. The majority of our business that we own in Texas is in the Permian basin which is oil country. We are seeing stabilization there which is exciting finally. Our stores there are doing a much better job in capturing not only the new vehicle market, but expanding into used vehicles. They've also become very customer centric in their service and parts business which is allowing them to become a more rounded business entities, in fact our profitability in Texas though was up 5% in revenue. We were up over 35% in net profit in Texas. And it's because of that well-rounded approach we've seen that over t he last few quarters where they were flat in revenues, but we were still making gains in profitability. And I think that maturity and seasoning of stores and leadership to be able to capture the market in meet our consumer's demands in a more effective way.

And our next question comes from the line of John Murphy with Bank of America. Please go ahead with your question.

First question on acquisitions, I mean I understand that your tax rate makes acquisitions a little bit more attractive, but it sounds like sellers are a little bit more willing and willing accept you know slightly more reasonable prices. I'm just curious why that's occurring in the market? And then also on acquisitions you know are there any transformative deals out there or are in the pipeline that you sort have talked to or if there are any that are sort of on the horizon for you that you’re thinking of…

Let me new start with your second question, I think transformative deals are far and few between. We do believe that those can happen in the future. We don't believe that there are in the immediate future. What we're finding is these billion dollars or less groups as well as our stake of guide of $100 million stores, those type of things are very prevalent. And I think the key drivers it appears, okay are - but now tax codes have changed a little bit. They believe it's the right time to exit, they may have been on the market for quarters or even years at certain pricing and there's not a lot of buyers out there. And I think the biggest fundamental competitor that we had over the last three years were VC firms. And now the VC firms most of them have been in the business for somewhere in the four to seven year range which is typically their life cycle. They're now exiting in certain cases which I believe is flooding some of the market and creating a greater supply which is creating different dynamics for us to be able to be really the only buyers when a lot of times, that was who we were competing with. And fortunately, they typically bought cash flows. So they bought a lot of, what we would call, toxic assets at times, while they also bought some strong assets. Typically the strong assets that they bought were performing at a very high level. Whereas we typically only buy very strong assets or franchises, the six majors in main line franchises as well as the three primary luxuries that underperform, okay, which allows us to buy them at attractive ROEs. We are now with a lot of that competition out there, we believe that the market is pretty ripe. And as I started, our pipeline is full and we believe that it can become even more full as we look at greater flattening and that three years historic earnings outlook starting to decline a little bit with some of those sellers to be able to really attract new partners that want to join our team.

I mean, do you think the automakers are going to view these VCs in the future because I mean, they must have had GMs or owner operators that were allowing them to get these approvals because they wouldn't get approvals on their own. So I mean, do you think that all of a sudden that - not all of a sudden, the automakers might be even more skeptical of these guys that are coming in and out and almost essentially trading these dealers which is exactly what they don’t want.

I think that's a fair assessment of how they would view VCs or any consolidator. I think, again, we look at ourselves as totally different. We're greenfield growth engine type of company. We're trying to add value to the relationship with the manufacturer so they want us to buy stores and they know that we'll be the owner of the store in perpetuity. And I don't mean to generalize when I talk about VCs because many of them have wonderful operators and have some strategy similar to ours where they're looking for good assets. But typically, they do buy cash flows, and then they look for an exit point when those cash flows are better than when they bought them. And I think that is the model of the VC. And I think from a manufacturer's perspective that probably in the future won't be quite as sought after. But to be fair, the exiting of those stores so far hasn't really taken place despite there being a lot of marketability of those companies or portions of those companies. There's not many buyers for them because when you pay as much as many of them did to get revenues, they also made it really sale proof to some extent to be able to ever exit. So we'll have to see how that plays out. But I think your assumptions regarding outlook from the manufacturers, it's probably somewhat valid.

And then a second question around [SAAR]. I mean, are you actually seeing anything occur in the SAAR space as far as showroom traffic or customers desire to maybe delay purchases? And also on this tax reform, on the SAAR basis, I know this is very basic question, but we don't have a lot of companies like this. Are you paying a higher tax rate in the SAAR states in your dealership than you are in your non-SAAR states? And does that have a sort of an impact on your aggregate - your tax rate which seems to be a little bit higher than we were expecting?

I'll take the tax question and maybe let Bryan give you the color on kind of the trends we're seeing. We have portion our income based on revenue in most state. We do have a high concentration of revenue in the coastal areas that tend to have a higher state tax drag. And so that's how we came with the 27% its spread across. And you'll see we are going to buy more stuff in the coast. It's likely our rate will continue to skew up because in many of those states they are seeing rate around 9% even 10%. So that's kind of what's driving the tax behavior there. And the tax regime has not really changed. It's just more about how much revenue in particular state.

John, additionally over 35% of our business is in California and Oregon, which as John spoke to are some of the highest tax rates in the country. So that goes into that apportionment, but in terms of the consumer behaviors, so far we're not seeing the impact of that now. Now I will say this -- the impact hasn't taken hold because it's -- what 14 months away until they have to pay their tax bill, and it's probably two months away until they have to pay estimated, if they pay estimated. So I think those are when realization starts to take hold and we should be able to give you some more color in April.

And then just on the used target of 85 cars sold per store. I was just curious what is your best performing store doing at this point and what sort of like the average or the median and what's the worst? So we can just kind of sort of an understanding of how much potential improvement there is on the focus on used?

I love used cars. I don't mind answering this question anytime you need it. So, when we buy stores, they average 38 units, okay. So our brand right now on same store is 67 units or about 75% higher than that. Our season stores, which we consider about 35 of our stores seasoned or about 20% of our total store base today. So just under 100 units and our best stores, which again credit to our Founders Cup winner which is our number one store in the company, Jim out in Boise Idaho sold. I believe 2,475 units or about 200 units a month, which was a driver of not only their used car business, but also their new car business because when you are able to turn your used cars, you can be more competitive on what you value used vehicle at, plus it generates lots of reconditioning and service and so many other wonderful things happen. We also have another two stores that sell in around those 200 units per month out of New Jersey and in California. And to be fair I think many of our stores are starting to see that those opportunities are not fictitious. That they are realities. We have a gentleman in Salem, Oregon that sells 40 Volkswagen a month, has become a partner in Lithium Partners Groups this year. J. J. Hansaker, she sold 1,780 I think used car last year. And only sold 550 new cars. So if you look at 3.5 to 1 used to new ratio, it's about your people believing that they can stock all conquest models not just Volkswagen or not just Ford like Jim Sterk store in Boise or not Honda like a Barbie store out in Paramus Honda. Okay, it's that they can expand their reach and there really is no limit to what the upside is and that's why that 85 units, our seasoned stores do more than that. So we believe that's realistic and a year and half ago we moved it from 75 to 85 because we know our assets that buy are in great location are strong and the people are growing and learning about the opportunities in each of the four department.

That's also very helpful. Just one real last one quick. On part and services, I understand sort of mix made the press margin a little bit, but I mean on a same store basis gross and parts and service was 47.2, but the total was only 46. So it seems like there are some real stinkers in the acquisition, you acquired revenue. I am just curious is there anything kind of stands out on the acquired stores where there could be a real improve in part and service margin. I mean that's one factor you didn’t talk about in sort of the season stores versus the acquire stores and what their relative benefit could be?

I love the stinker's comments because that is how we look at stink initially. And it's funny how even their teams that were in those stinker store, now they do wonderful. So it just takes a little bit while to get this. So when you look at margins, there are two things to look at. One is pricing as to how do they price their vehicles? How they price their labor work? We have something that we call metric pricing that we typically introduced early in the process which is a way to price our services at a competitive level on quick service or maintenance work where we may only be charging some lower labor rate to be able to attract and compete with the Jiffy Lubes and the Pep Boys and the other companies. And on higher price items where we're pretty much the only offer of that service because we have the technology to do it but the labor rates adjust, so we price - that can increase margins. So I think a typical store if you look at the service and parts - they're service business, it's typically in the high 60s. And after a period of time it would move into the low 70s. That's not huge move. The biggest moves are when you get the blend of service and parts. And parts has similar what we call grid pricing with small parts will have high margin and large parts that are expensive have a lower margin because they have a higher cost point and we still have to handle those things and so on and so on. But the biggest thing that we see is expansion of our customer base. And we do that because we're able to grow the relationship into commodities. So we sell tires, we sell batteries, we sell wipers, we sell all the other things that go along with the service experience, not just do warranty or not fix broken cars. We provide greater service, and that comes with what I would call the world-class facilities that integrate the customer into the service experience whether it's us going getting vehicles in their homes or whether they're coming into our dealership, we can provide more value. So margin is a miss number in service and parts, I would say that. What's important is can you grow your highest margin business, and whether it's 46% or 48%, isn't how we focus on it. And as Chris said, when we buy stores, the retention of the consumers is about 25% worse than what is average within that manufacturer. Our season stores are about 15% to 18% better than what's average. That's just topline peer growth, and those 60% or 70% growth margins in service blended with parts to get us 46% to 47% is what drives the profitability improvement because service and parts have stabled. It's easy to predict, it's easy to manage your expenses and plan your expenses to be able to generate net profit. So in that case, units and operations over a 3 to 5 year period do achieve.

Our next question comes from the line of David Whiston with Morningstar. Please go ahead with your question.

Wanted to go back to the question on new vehicle GPU, John, because I do get that you want to look at all three areas of the business, but I guess I wasn't totally clear what drove a really good performance on the new side.

I think the way to look at it is the performance in new cars was pretty consistent. We typically have a little bit of a margin improvement in the fourth quarter because you tend to skew a bit more to luxury. I think if you look back historically, you've seen those uptick. The full year margin I think on the 12 month basis came in at 5.8 to 5.9, and I think that's a pretty good kind of outlook for us going forward.

And very curious about given your FCA exposure, the new ramp truck really got a lot of great chatter at the Detroit show. Really seems they took it up a couple of knocks they'll go head to head with the other three brands in that segment. So I'm just curious, and you guys are on the dealer account too, what are the dealers talking and what are your ramp customers talking about? Are they really, if they get their hands on this truck?

We are excited about the truck too and everything that we were back from the different shows around the country. It was pretty well received by the consumers. We don't have any data on that yet because the truck really hasn't hit the ground in our showrooms. But it does look like there's a miss of demand and deposits coming in but that's pretty typical with most product changeover. So hopefully we'll be able to give you some good color on that in April and then probably again in July once we have our pipelines follow those ramps.

And just one more question related to acquisition. Geographically, you don't have any presents and forward in the southeast and you're expanding into the smaller northeast markets. I was just curious is there a big different in real estate cost between those two areas?

So you're right. We don't have a footprint in the southeast. We're looking to expand into the southeast. I think round out our national footprint and be able to take some of our innovations and initiatives across the nation someday. But like we've always talked about when we go into a new area we want local people. So I think it's going to be the right fit with the right smaller midsize group that can take us into the air. I think if you think about the worst cast I think the benefits that we've seen in the stores that we've been able to look at in the southeast, it looks like that the performance on the topline greatly outweighs the real estate costs are fixed expenses. We do have a distinct advantage once you get outside of the New York metropolitan area in the northeast that real estate costs are extremely attractive. Okay. And I think that's you know that is something that our traditional model of exclusive market typically gets the benefit. So we will continue to be able to hopefully provide information and we'll be able as we can delineate the differences between the Southeast Northeast and other parts of the country.

Thank you. Ladies and gentlemen this concludes the question-and-answer session. We’d like to turn the floor back to management for closing comments.

Thank you everyone for joining us today. We look forward to talking to you again in April.