Good morning, and welcome to the Lithia Motors First Quarter 2020 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

Thank you, and welcome to the Lithia Motors first quarter 2020 earnings call. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO. Today’s discussions may include statements about futures events, including the duration and contemplated impact of the COVID-19 pandemic, financial projections and expectations about the company’s products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today’s press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Eric. Good morning and welcome, everyone. Before discussing our Q1 earnings results, I wanted to take a moment to express our empathy and thoughts for those directly affected by the COVID-19 pandemic and the disruption it has brought to our society and economy. During this time, our priority is to ensure the health and well-being of our team members, customers, and communities. Providing reliable transportation to support our customers, emergency workers, and everyday heroes in this pandemic has required us to further adapt and shift to ensure these essential services are available. Each area of our country is being impacted differently by stay-at-home and shelter-in-place orders as state's counties and cities have and will all respond in unique ways as we navigate out of this challenge. Currently, 95% of our markets are impacted by shelter-in-place orders. With 100% of our service departments open and 95% of our sales department open at varying levels nationwide. We are inspired by the diverse array of solutions our team members are developing to ensure our fellow employees and customers are safe and using our services as required. Earlier today, we reported adjusted first quarter earnings of $2.01 per share. These results were driven by our strong January and February performance with same-store new vehicle revenues increasing 4%, used vehicle revenues increasing 22%, F&I increasing 18%, and service body and parts increasing 6% for that two-month period. This robust start to the year was offset in the quarter by a significant decline in the second half of March as shelter-in-place policies were enacted across most of the country. For the full month of March, same-store new vehicle sales declined 33%, used vehicle sales declined 27%. F&I declined 29% and service, body and parts declined 9%. As a result for the quarter, total same-store…

Thank you, Brian. While the situation in our nation is unprecedented. Our operational leaders are living our mission of growth power by people by focusing on what they can control and identifying the levers they can pull to persevere in this environment. Our stores continue to follow CDC guidelines and local government directives while implementing strong safety measures for our customers and employees. With that, I’d like to discuss our same-store quarterly results, as well as trends in the first quarter and what we have seen since our prerelease on April 14. For the three months ended March 31, total same-store results were down 5% led by an 11% decrease in new vehicle sales, a 3% increase in used vehicle sales, a 1% decrease in F&I revenue, and a 1% increase in service, body and parts revenues. As shared last week, shelter-in-place policies have caused varying levels of business interruption across our network depending on the timing and the restrictive nature of the orders posted by local government. Specifically, during the second half of March when shelter-in-place policies were enacted, vehicle unit sales declined approximately 50% with new and used vehicle sales responding similarly. Vehicle sales in our stores varied greatly with declines between 15% and 75% other than our most restricted state Pennsylvania and Vermont, which had virtually no sales due to government orders. The more stable states were Montana and Texas with little year-over-year change. Service volume and part sales in the second half of March declined approximately 30%. Our State performance during the same period had declines in service varying between 10% to 50% with Nevada and Texas remaining the strongest at the lower end of the range and the Northeast towards the upper end of this range where the strictest shelter-in-place orders remain. Since last week's…

Thank you, Chris. Late last year, we took action to strengthen our balance sheet to support the company's future growth plans. We raised $400 million through issuing senior notes while modifying our $2.8 billion syndicated credit facility with a maturity expansion to 2025, increased maximum allowable leverage ratio to 5.75 times, and reduced interest rates across the various lines. This financial position coupled with no material debt maturities over the next four years over $1 billion in cash available credit and unfinanced real estate, and three turns of headroom on our leverage covenant have positioned as well. As of March 31, our adjusted leverage ratio which treats floor plan, used vehicle and service motor financing as operating expenses calculated as net debt-to-adjusted EBITDA was 2.2 times. During the quarter, we generated 39 million in free cash flow, which was reduced by 41 million in capital expenditures. Additionally, we completed 48 million of opportunistic share repurchases representing approximately 2.4% of our outstanding shares. We have approximately 188 million in remaining availability under our existing share repurchase authorization. Earlier this morning, we announced a dividend of $0.30 per share consistent with our prior quarterly dividend. Our capital allocation priorities, which support our diversified high-growth strategy, remain unchanged. We target 65% investment in acquisition, 25% internal investment including capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share purchases. In light of the uncertainty with the current situation we have taken defensive measures to conserve cash in the second quarter. As mentioned in our preliminary earnings release, all acquisitions have been deferred to the second half of the year and will be restructured to preserve the strength of our balance sheet. Additionally, we have terminated or deferred approximately 65 million in planned capital expenditures and suspended…

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

Good morning, guys. Can you provide some color on the pipeline for acquisition? Your appetite to close on these deals and the flexibility you would have to adjust pricing?

Sure Rick. This is Brian. Good morning everyone. Let’s begin with that we have a total of 14 deals under contract. We had actually previously renegotiated one of those that took us down to 13, but we’ve since signed another, so we're back to 14 in total. And the way that all deals have been restructured are, our preference to own real estate is important. We currently own 87% of our real estate. Our issue is in an environment like this that it affects our leverage the same as goodwill dollars. So, we kicked the real estate out of all but two of the deals, and then gained a what’s called an American call option which means that we have the right to buy the real estate in 3 years to 5 years for the then determinable price and we can do it anytime on most deals within that period. So we can pick and choose. To be able to still own the real estate, but that allows us to defer half of the leverage until a later period of time which is great. We were also able to lease those properties then at highly competitive cap rates of between 4% and 4.5% and the delta between what we typically use as cap rates of 6% will be used to help offset earnings, which is a small amount, approximately 5% to 10% allowance for earnings declines in the goodwill number that we’re paying. However, the delay is caused, as Tina mentioned, because we need to verify earnings quality that they’re within that 90% to 95% earnings level of what they were pre-COVID-19. So, those earnings quality verifications will determine the second half closing date or possibly even beyond that in the event that earnings quality hasn’t improved. There are chances that if earning quality doesn't improve then we would actually renegotiate the transaction in terms of the goodwill amount as well.

Thanks, that’s helpful. The headcount reductions that Chris referred to 40%, how – when sales do recover that, you know $12 million to $15 million, you know, the range that you've discussed. How much of that headcount would you think would come back? And how much is permanent reduction?

Hi Rick, this is Chris. So, the second half of your question, which is about how much is permanent would be about 50% of that we feel like was permanent. As you remember, coming off of Q4, we were talking about kind of a rightsizing effort to kind of regroup at each one of our stores and go back to the foundation of the productivity metrics that we’ve had since really the last recession and the tool that we’ve used to manage since that time are still well in place and we anticipate, you know, that we’re going to continue to follow that through now as we move forward. The decisions are made on the local level, so each one of our general managers are making the decisions based on the volume that they’re seeing. As you can imagine, the recovery is different state-by-state and really local market by local market based on the shelter-in-place orders. And so, we’re just going to continue to manage the volume and bring back our staff as quickly as we can, but based on the production levels that we have and based on volume.

Chris, can you put that in a dollar terms both the permanent reductions that you’re seeing?

Yes, Rick. If I just went off the quarter and we look at our overall SG&A 75% of that is made up of two line items, its personnel and advertising. And so, in the quarter, we were just looking at Q4 as an example. I’d say it’s around 50 million in permanent cuts in the quarter. So, you know, depending on what happens with volume and what happens with, you know, their variable comp levels, we just have to play it out as we move forward into Q2 and Q3.

Okay, got you. And finally, if I could ask how you see consumer behavior on the other side of this COVID situation and how you see operations changing to that changed consumer behavior?

Rick, back to Bryan. We – I think this is obviously unprecedented and obviously our business will be determined in our future based upon the stay at home order being relaxed or removed. It’s surprising that the departments are responding today a little bit differently and let me just quickly talk about that and then I'll talk about what we foresee in the future of how consumers behaviors ultimately may or may not change, okay? I think when we think about our volumes today, what we are noticing is that in the vehicle departments, for some reason, that seems to be coming back quicker. If you notice on the pre-release, we were down about 50% in that early April period, late March period and we’ve seen in new vehicles that recovered to only down 40%. Used vehicle has recovered a fair amount though, meaning that it seems like consumers are more adapt to either downsize on car which is probably the most likely scenario, meaning that they’re not sure about their employment status and they’re not sure what they should do, so they should cut their expenses. So, we saw that move from down 50% in the late March to early April period to the last seven days being only down 19%, which is a pretty good shift. Now, on the service and parts side, it’s really stabilized at that 30% and we really believe that because we’re not offering maintenance specials and those other types of services even though we’re picking up cars and peoples home, we haven't seen the big shift yet back to our service departments and we think that is something that people can easily differ, okay? And its small amounts of money typically that we think that as soon as those stay at home orders…

Thanks. That’s very helpful. Good luck as we push forward here.

Thanks Rick.

Our next question is from the line of Rajat Gupta with JPMorgan. Please proceed with your question.

Hi, good morning and thanks for taking my questions.

Hi, Rajat.

Just have a question on, you know, the – on the online delivery, you know, both for sales and for services work, could you give us a sense of the margin profile, how that’s different, you know, for the service related work? And then, you know, just on the unit deliveries, could you give us a sense of, you know, what the unit economics look like for those, I mean given, you know, there has really been an uptick in volume there, you know, like both from a gross profit perspective and SG&A for unit perspective, if you could get a sense there? And I have a follow-up, thanks.

Sure, Rajat. This is Bryan. I’m going to take the service components of it and then I’m going to give the unit components on vehicle sales to Chris. We began in-home service at pickup and delivery Q3, Q4. It was part of our Pittsburgh initiatives and some stuff in the northwest was going on. We began to build what’s called op-codes, okay, or operational codes, which is how we price our products in service and parts to our consumers. We believe at that time that there could be a premium paid to buy consumers for home service and delivery. So, we built two different op-code models. We've always had in-dealership, but we built this in-home and it was somewhat being utilized by a handful of stores I would say. Today, it’s being utilized by over three quarters of our stores. The difference is that today, we’re not charging any premium for using in-home delivery and pick-up in service because it's our duty to our consumers to keep their cars running most importantly, but it’s also our duties to keep our technicians turning wrenches and I think that’s kind of the difference today. We believe that as we move past COIVD-19 and consumers have a choice again where they mentally will decide I want to pay a little less, so I’m going to go into the dealership which can take a little bit of time, usually 30 minutes to an hour to get their primary make maintenance done of lifetime oil, right, but we believe that there is massive margin differences between in-home and in-dealership and I think how we originally thought about it was lower priced items, you may have a 50% margin premium; and higher priced items, it may only be 10% to 20% premium. And an example probably…

You bet, Rajat, Chris. You know as Bryan mentioned in his prepared remarks, about 25% of our deliveries coming into April now has been really at home, at place of business or curbside deliveries. And I think what we’ve really talked about on kind of moving forward with our digital solutions was this idea that someday we were going to be able to complete a transaction online and deliver the vehicle to a consumer's home. Because of the current pandemic, I think that we were actually accelerating quickly the mind shift of our people that this is real and this is now and we’re pretty…

[Indiscernible].

Yes, very much so and I think we’re really excited about kind of the way things are moving forward and the ideas that people have about not just about the environment that we live in today, but what is going to be like in June, July, August and next year with the ability to both deliver vehicles in our brick-and-mortar stores because a lot of customers that come in whether they don't know what they're looking to acquire, they don’t know the kind of vehicle that they want for their family or they have some financial issues. As we’ve said before, you know, our average consumer has $5,100 of negative equity that they’re working to, you know, leverage our finance specialists to help them find the right solutions for them. And so, you know, as far as economics are concerned, the short-term, I’d say that they are pretty much the same. We’re not – we don't have a data set that’s large enough to compare the two yet, but we’re going to continue to monitor that and make sure that we show up the right way for the consumers to deliver vehicles that they want, you know, at the right margin, both with the vehicle transaction and with the F&I products that, you know, we attach to the sale.

Got it. That makes sense. But it’s like if I – just to sum it up I mean in terms of the overall EBITDA drop through say like EBITDA per unit or something like that, I mean is that ultimately going to be higher once pots-COVID-19, you know, with online channels?

Rajat, this is back to Bryan. Hey, I think that long term as you think of the omni-channel solution, part of our logic is that digital home solutions do – are more organized. Consumers do most of the work themselves and as we begin to digitize the financing element, which is a lot of what we pay for today as expertise, not for negotiations of price, it’s for negotiations of deal structuring to be able to get it financed by the 150 lenders that we have. So, I believe that as the two channels grow and develop, our traditional channel, those experts, will be able to produce a lot more with what they – what resources they have meaning that salespeople will most likely move from 11 sales people and I think Chris' numbers of our staffing reductions for furlough are to bring people back at a rate of 15 sales per salesperson, right, which is a 30% improvement in productivity long-term and that gets pushed through the model in different ways and that with not a lot of digital help in most of our stores, that’s a lot of manual help, okay. So, I think as we think about the two omni-channel strategies, we should be able to improve productivity and our traditional resources, as well as to support staff for the digital home solutions to be able to drive our SG&A down beyond what we’ve already mentioned, which we've always been striving to be in the low-to-mid 65% range, right, 60% range in our traditional model. So, I think if we think out three, five, seven, 10 years, as the two channels began to develop together and you begin to find those efficiencies in marketing and personnel costs and inventory procurement and inventory pricing, those SG&A drop can be larger than that over time as the two models come together.

Got it. That’s super helpful. I’ll pass it on and jump back in queue. Thank you.

Thanks, Rajat.

The next question is from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your question.

Great. Thanks guys for taking my questions.

Thanks, Ryan.

Just a follow-on on that recent question and so with the permanent staffing reduction, can you clarify was that $15 million or $50 million in per quarter savings? And then, secondly on that do you think you have to backfill any of that? Or is that kind of permanent savings as you look towards kind of the future model with more technology?

Yes, Ryan. Hi, this is Chris. So, I guess to try to quantify it, in the quarter, you know, we have about $350 million in SG&A, and as we’ve said, about 75% of that or about $250 million of that is coming from our personnel and advertising. So, you know, if you look at the total cost reductions that we have in those two line items it was about 100 million steady state. Now, we didn’t see any of that come in, in the first quarter because even when we started to make our termination of our underperformers and then furloughing of our performers, we also provided PTO and payouts along that period of time that went into early April. And so, we’ve kind of got that piece of the expense behind us, but going forward, what we’re going to do is, you know, the 50% of – the 40% I guess or the 3,000 employees that we have right now on furlough, we will be bringing those back as volume dictates as the markets recover and we’ve already started that and we’ve seen some great things happening. One of our most restrictive states or the most restrictive state that we have is Pennsylvania and just yesterday, they were able to start doing online sales again. So, you know, we anticipate bringing salespeople back in those environments and we’ll continue to monitor each local market with each leader to make sure to what Bryan said is when we recover out of this, we have what we hope are productivity levels than we haven't seen in a very long time.

Good. Then shifting over, so can you update us on your partnership with Shift and how that business has fared in this environment over the last few weeks or month versus compare that to Lithia’s omni-channel strategy and your at-home deliveries and then versus kind of in-store, anyway you can quantify kind of those and any commentary?

Sure, Ryan. I think first and foremost, in my prepared remarks, I discussed the idea of partnerships. One thing that we know for sure is the sharing of best practices between our two companies has allowed us to see that there is consumer demand, massive amount of consumer demand for transparency, simplicity and in-home sales, and I think that reaffirmed our belief pre-partnership with Shift that we needed to provide those solutions i.e., is why we now are working on our Baierl, Northeast and Northwest solutions to be able to provide those things to our consumers as well. I think where we’re going to be moving and I mentioned it a little bit briefly was this idea of national brands that are wholly Lithia owned and operated, but they are supported by the engines that we’re building in Baierl, but they'll be skinned and the customer interfaces will all be transparent, simple, much like a ship model, okay. We obviously won't be competing in the same markets and we support them in a few markets still and that partnership is still collaborative, but I think most importantly, we believe that the ability to leverage our entire network, which is people inventory and facilities, needed to be done with our own digital solutions because we needed to learn how consumers are behaving and how that 50% of the population that today were not really attracting behaved, and I think our initial work in Pennsylvania, in New Jersey and in the Northwest whether its services sale are teaching us that that is the right decision and I think maybe even to share just a little bit of what we have in mind it is Earth Day today. One of the brands, and I would say, one of the minor brands that we’re developing is www.greencar.com], okay. We’ve controlled that through good period of time. We also have controlled Organ Green Car, as well as Vermont Green Car, which allows us to deploy consumer identical brands – identifiable brand in the sustainable space with transparent, simple, easy buying home solutions in a pretty rapid rate, okay. We will also have a national brand that’s a more holistic appeal to the general population that we’ll be announcing later this year, but the same buy from home, sell from home and service from home solutions will be powering all of those skins at somewhat different levels because our green car, as well as the future national holistic brand will be powered as a one-priced model whereas our existing stores today are more of a low haggle type of model. Hopefully, that adds enough color, Ryan, for you, so you understand the basic strategy?

Yes, that’s fantastic. One more question for me, then I’ll turn it over. So used vehicle residual values have fallen off pretty substantially at auction, has that flowed through to retail pricing? And then secondly on that, you guys commented kind of on the 90/10 split on your inventory to the more scarce categories, maybe comment, you know, maybe between those two buckets what you’ve see on pricing as well? Thanks and good luck.

Sure, Ryan. This is Bryan again. I think on used valuations and pricing, it’s a misnomer as what you're seeing on Manheim data or other auction data, as well as sales pricing because I think it’s a knee-jerk reaction. The main reason the price, we believe, has dropped and it won't stabilize down there yet is because the – what sellers are asking, which is called aligned amount at the auction, is still too high, meaning that the auction sell-through rate is at 20%, meaning only two out of 10 cars are selling is because the sellers are not willing to take that price because they know that this is all dependent upon stay-at-home orders being relaxed and I think once we see stay-at-home orders being relaxed, we’ll see the actual impact of what the used car market is. Now, we do have a playbook from 2001, a little bit and most importantly 2008 and 2009 were gas guzzlers definitely got hit really hard and late-model gas guzzlers got hit the hardest, okay, that’s a gain that Lithia Motors doesn't plan and we focus our attentions on co-product and that's how we get our trade-ins for value and that 70% of our sales, 70% plus of our sales, which is pretty stable inventory. So I think if you look – if there does end up being some stabilization of declines in valuations, I believe that we’re positioned nicely and that was the 10% of our inventory that is truly conquest vehicles, meaning its off brand from we sell new, okay, and its one to three-year-old vehicles and that’s going to be the most volatile because those stores have to compete much like the independent used car retailers that have to compete now against the incentives and the subsidies that our manufacturers are going to give us on certified car. So, I think Chris' efforts are try to reposition as many as the 10% of the cars into light brand, meaning move the [Toyota’s to Toyota] stores, move the Dodge's, to Dodge stores and certify those products because then they'll be – they’ll qualify for subsidies and financing, the rebates, the 0% APRs and all the other 90-day deferral to payments and those type of things that manufacture subsidies will be providing that independence won't have and we won't have if we have those cars located in off-brand car stores.

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

Great. Thanks for taking the question. You know you gave us a nice color there around the trends in March and how they’ve trended here over the past seven days in April. Any reasons to think that, you know, we have a trough to-date or going forward?

Well, Armintas, this is Bryan. I would say in vehicle sales, there's no chance that it will trough again unless there's a relapse or something in COVID-19 and the states get more strict because we’re already seeing relaxation of stay-at-home orders and early indications are we’re plus 10 week over week in new; we’re plus 30 week over week in used. Fixed operation is a misnomer. Its behaving more like what happened in 2001 with 9/11 where people were so glued to the TV and they were staying at home for that, what, four days between that Monday and Thursday when we were all uncertain because the air travel had been suspended and the skies were closed and we were just waiting for the next shoe to drop. I think that this is more similar to that because we’re going on now what, five weeks, six weeks, and it is stay-at-home, which means a lot of consumers aren’t driving their cars, so it’s not front and center in their minds that they need to repair their cars or they need to maintain their cars, and I think the moment that they get back in their cars at a repetitious level, not just going to the grocery store, that should come back pretty rapidly and we did actually see it almost like spiked in and bottomed out at about a minus 40 and then it came back to the minus 30, which we were really pleased to see. So I think we are trough in fixed operations as well and I think as soon as, you know, states start to begin to reopen and most states are talking about, you know, late April, early May, you know, and I think a few have pushed it now into mid-to-late May.

Yes. And then to piggyback off the last question a little bit, you know, gross profit per unit, you know, first quarter not as a significant impact, you know, given the late March impact, but, you know, how do we think about gross profit per unit here into the second and third quarter both on new and used given the potential challenges around used car prices?

Sure, Armintas. I think you could go back and look at 2008, 2009 and 2010 and see what happens and it looks like you got to remember that we’re a subsidized business by our manufacturers and unless its massive swings in market valuations or consumer behaviors, the market swings are going to be taking out with incentives and that’s on both certified product, which is that most volatile use, as well as new vehicles. So, we’re – we think we’re pretty nicely positioned because we think that as soon as the stay-at-home orders are relaxed, we’ll get massive, you know, incentives from our manufacturers on new cars and we already saw that on the domestics that started four weeks ago. I mean we got zero percent 84 months with multiple manufacturers, which is massive amount of savings for the consumers. I think what we prefer not to have happen is, even though it's an election year, we’re pretty confident like a cash for clunkers. There’s going to be additional stimulus and that cost, I believe, the federal and state governments around $1 billion last time and that was a pretty good GDP boost. So, I got to think that a cash for clunkers will most likely happen. We’re hoping it happens in Q3, Q4 time frame because I think that the incentives will carry us through the next three to six months pretty nicely because even with the shutting off the – of our plan for that month period of time by most manufacturers, I think that incentives will clear out that pipeline nicely where margins can stabilize to some extent and I think if you look at used, that’s going to be our innate ability to be able to adapt to whatever happens with used car pricing, and I think the biggest exposure is really in those late-model cars where we have 10% and – you know and I think a lot of independence, a lot of time to have 60%, 70% of their inventory in that bucket.

Great. Well, appreciate taking the question.

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

Good morning everybody. Just wanted to follow-up on Armintas’ sort of line of question on the inventory and the help you’re getting from the OEMs. Is there anything else that the OEMs are kind of pitching on in the interim on the floor plan financing or other sort of activities to help out the dealers and the distribution channel because we hear from them that they’re big concerned on restart distribution channel might not be and as good a shape as it was going into it. So just curious if there’s anything – any other actions you’re seeing from auto makers to help in these tough times?

Yes, John. I mean I think the short answer is absolutely there’s a ton of support that we’re getting from the OEMs right now, including, you know, special incentives right now on floor plan, our stair-step programs for most OEMs have gone to flat dollar amount, meaning that you don't have to hit the objects. They’re just giving you x amount per car. You know Bryan mentioned a lot of the things that we’re doing the retail side, you know, with zero dollar down, the 0% APR, the 90 to 180 days to first payment. We just saw yesterday a launch with one of our finance partners that they went to used vehicle, 0% for 48 months. So, there’s a lot of activity happening right now, but we think that's just the beginning because right now where inventories are at, you know, production hasn't started, when they start to ramp up again, and usually, once the ramp up starts, it takes about 30 days for a vehicle to get completed on the production line and make it one of our stores. We really think and anticipate that we’re going to see an accelerated amount of incentives come in for our new car inventory and also our CPO vehicles as we talked about earlier. So, we do have a lot of support right now and we’re looking forward to more.

Chris, one other little things that were doing too, a number of manufacturers are now paying us to go to consumers home to pick up their service vehicle. So, we’re getting either Uber Payment, Lyft payments or if we do it ourselves, which is probably the better way to do it because typically we just drop off a loaner car to the consumer’s home that we’re getting that as well and I think there's a lot of creativity around that that I think will continue to happen and I know Chris and our teams are working diligently on the reporting around these op-codes and making sure that post-COVID-19 that our behaviors on home digital solution remains in the minds of not only consumers, but remains in the minds of our employees to ensure that they stay true to our strategy of achieving that omni-channel and that 5% market share, which I believe that that transparent home solution is going to be what takes us there and I think we all believe that as a company.

But it’s also fair to say that – I think that I’m just curious if you agree with this that the relationship and the actions you’re taking now are very different than what you saw in the 2008, 2009 downturn obviously it was different circumstances here, but the partnership and the willingness to work with you as a distribution partner, it seems to be quite a bit different than back then, is that a fair statement?

I think that’s definitely a fair statement. I think Lithia Motors has always been a company that is collaborative and really believe that it’s our duty to make sure our manufacturers love us, okay. Now, we do go through times occasionally where we challenge each other, but that is something that we've always looked at and I think most importantly, from Lithia’s standpoint, we’re way more diversified. So, we were 73% domestic going into the last recession and almost 90% of that was General Motors and Chrysler that if you recall went bankrupt. So our management team has been through this. We've restructured the company where we’re highly diversified. We now have a footprint across the entire country and the people sitting in this room have been together since 2005, and you know, and I think are prepared and we knew we were late cycle. We didn't realize that the late cycle would come so quickly. We do believe that the market will recover and this may take – you know this may prevent a deeper recession because it hit so hard and so fast, you know, and I think it's going to be a fun period over the next 90 days to be able to continue to pull the levers that Lithia has created and developed to maximize our opportunities to get to that 5%.

It’s helpful. And then, on the parts and service side, it sounds like you’re not seeing the sequential recovery yet, but, you know, when things open up its fair to think that there will be a snap back. You know when you think about the capacity in your service base as we think about maybe the third and fourth quarter as a reasonable timeframe, you know, let’s say same-store sales were up 10% to 20%, is that something that your service base would have the capacity to handle? I mean what would be sort of a governing limit on your human capacity and installed bay capacity as we think about that snap back? Or what, you know you could handle on a same-store increase basis?

Sure, John. This is Bryan. That’s a great insight because our facility capacity is greater than 50%, meaning that we’re only running at like 47%. In pre-COVID days, we were only running at that, meaning that we have the facilities to be able to double our volume and then still could extent hours to get even more out of that capacity and you hit on the true realization as how many people do we need and if there is pent up demand, how much could we actually produce? If you remember, pre-COVID-19, we were running at mid-to-high single-digits same-store sales rates. I think that there’s no question that our people have been sitting on – in their couches watching TV and stuff and are ready to go and confirm rent is faster. But I don't believe that much more than – if we look at that – we've had quarters that have pushed 10%. I believe there’s another 10% potential that you could, through your existing labor force, be able to increase business. So that gets you to what a plus 20, to be able to cover that pent-up demand for some period of time and I think Lithia is pretty responsive and our HR teams are pretty good at attracting talents. So there's a chance that we could also hire talent and show what we did for our employees during the downturn to be able to – you know to conquest people into our organization in the event that we believe that could be stabilized as well by expanding our market share with home service. So I guess it’s a – that's a little bit of a variable answer, but I think 10%, no doubt. 20% is possible and with additional hiring possibly even beyond that.

Great. And then just lastly, when you talked about the M&A and not necessarily really re-pricing deals, but kind of re-working the cap structure of the acquisition, you know, your stock has been re-priced pretty aggressively in a pretty negative way. I'm just curious when you look at your stock and maybe even other – the public groups, you could say the whole group has been re-priced, yet you're not taking this opportunity to re-price the deals. I'm just curious, you know, why think that that's – I mean, you know, the right track to take? And then, I guess maybe also when you think about cap allocation, you know, you’re looking at these 14 deals in the pipeline, would you maybe be better served just in the near term and maybe even in the next year to two or find back your own stock if you can't re-price those deals to where your own stock is? It just seems unfair to yourself, given what – you know what’s happened with the re-pricing of your assets in the public market there might be an opportunity?

Sure. I mean and those are great insights and the same things that we’ve been thinking about and adjusting to. So remember, on the 14 deals, they are highly accretive, okay. We have [$515 million] of cash sitting there ready to be deployed. Like you said, it could be used on stock buyback, which we bought back 2.5% of our float through the first quarter, okay. It came back a little bit. We always put preferential treatment into acquisitions and we’ve actually looked at it, but we believe that because our strategy and the way that we’re going to be able to be hyper-constructive in our future is to get the 5% market share and to get into those fixed homes. Meaning that we can throw our rate around in terms of our consumer offerings, our affordability and inconvenience to our consumers when we get to that 5% market share, but we don't have the ability today with our inventory to be able to provide the selection and the convenience because of proximity, to get the things, the services and parts and service and in sales quickly enough to the consumers to be convenient enough. So – and I think that’s why we prioritize M&A over share buyback, okay. And if you think about why would Lithia Motors want to continue on M&A strategy in this environment when their stock prices dropped and ultimately their PE is lower, it's because our cost of capital is still 4%, 4.5%, okay, which, what Eric, almost $400 million of that is on a credit line that’s LIBOR based that just dropped 80 basis points. So, every one of the acquisitions is accretive out of the blocks. If you think about why would we not be renegotiating the goodwill portion, we may, okay. Remember earnings quality has been renegotiated into the majority of those transactions and the earnings quality has to be there for us to be able to do those deals and that’s the lever and mechanism that we will be using to push deals out in the event that the earnings quality isn't there. If the earnings quality is there then they’re going to be as accretive as they were initially and we go back to Lithia’s track record of we’re 80% success rate plus in terms of getting somewhere between 10% to 20% return on our investments over a short period at time and our over a five year period of time is a 25% after tax return on those investments. So, I think what we know is acquisitions are a gift that keep on giving, which share buybacks only give once and ultimately don't take us one step closer to that 5% market share and beyond that we know that the industry is ripe for consolidation and it can be achieved with the support of our manufacturer partners and developing a well-designed strategy much like what I just spoke to, to be able to execute on.

Thank you very much.

Thank you. Our next question comes from the line of David Whiston with Morningstar. Please proceed with your question.

Thanks, good morning. First, I think any shareholder would be wondering it’s great to maintain your dividend, but are you really confident you can maintain it for the rest of the year or is it just the wait and see dynamic right now?

Sure David. This is Bryan. I think when we think about our dividend we set a range between I believe it’s 8% and 25% of our cash flows and we were sitting at the lower end of that going into the COVID-19 crisis, which means that we have a lot of cash flow adjustments that can occur. We also try to look out for quarters in setting that so it’s stable when we do that. We will revisit in Q2, Q3, and Q4 just like we always do to be able to determine whether we move up or whether we move down.

Okay, that’s helpful. And in terms of vehicles right now they’re coming off lease, are the OEMs basically saying the customers we don't want to buy them back at all keep it for another four or five months, no payment or do they still want to take the vehicle back?

David, this is Bryan again. I think this is just a business decision and a customer centric decision from the OEMs. They’ve always allowed – most OEMs have always allowed, other captives have allowed consumers to defer the lease end for some period of time. Typically it’s 90 days. I think manufacturers are smart in using the fact that consumers may be don't want to make that decision when things are uncertain, but more importantly it allows them to adjust when they take back vehicles. So, they can play the market the best they possibly can in terms of their used car value on the lease and value.

And somewhat related would be just the consumer right now that either digitally or where allowed is coming in store, are they someone who, you mentioned earlier that it sounds like people are trading now more in the used, are the buyers right now, it’s really just more people really, really needs a vehicle to do something and there’s not very much of like say a really wealthy customer just looking for a great deal?

David, Bryan again. I think that the people coming in today are the people that need a vehicle. I think there are also – they are starting to be that element of larceny in the consumer that they believe that may be COVID-19 isn’t as bad as what everyone things and I better take advantage of the incentives while I can. Okay. We also have a big advantage coming out of COVID-19 remember where seasonality is, okay. We’re going into Q2 and Q3 which are the most robust selling seasons. The weather is going to be getting better so behaviors of consumers are going to become more positive. There is an advantage than what we had going into late 2007 and 2008 when we were going into those winter periods, as well as 9/11 that I think can help us okay. So maybe just a matter of thought there.

David one add-on to that is just that our web traffic is up 22% right now and over year-over-year, now our lead traffic is down 10%, but that 10% decline compared to our vehicles are at I think is a very positive sign that we are seeing active consumers again moving further into that digital experience in that process a little further and you hope to see that transition the sales here in the coming month.

Okay. And the last question is on M&A. The [14%] or the 14 deals do you expect all of those to still close in the second half of 2020 or is that also beyond 2020 and once those deals are processed are you expecting given just the downturn likely recession that a lot of sellers or people who are about to go into the marketplace as a seller this year and now just going to back out till 2021 or even 2022?

Great questions. I think the answer to that on the 14 deals is it is earnings depend. Okay, and then if they don't get the earnings are they willing to adjust their goodwill to some things that is appropriately balancing what they’re earnings are reflecting. So, I think that answers the question one. I believe that a lot of the M&A activity is in new areas of the country where we don't have a massive footprint that have been hit less than other states. So that’s a positive thing that most likely those will occur. Okay. I will also say this the pipeline is still full of deals that are not under contract that are very attractive, they are going to be lucrative for Lithia Motors and I believe that that will continue. Now, when COVID-19 stay-at-home orders began to be implemented in State, we did have a 1 week to 3 week gap where consumers seem to just fade off. It’s like, well I'm not going to put my business on the line here yet, okay. We are starting to see some activity again in the States where they are starting to see recovery or relaxation of those orders, and I don't think that the formula changes for Lithia Motors that we typically buy underperforming strong assets that are typically less capitalized than others, the PPP loans probably help defer some of that, but it also may have given a catalyst, which we’ve now heard that twice. Can I keep my own PPP money and it’s like absolutely the closing won’t be for 90 to 180 days depending on your earnings, so in that something that is additional goodwill to them. I think what we saw in the last recession and what we really expect to happen on what we would call more distress selling. I don't believe that distress selling occurs. I believe that distress sellers ask too much and in a time like this they come within our very strict ROE expectations as Lithia Motors and we can finally buy them for something that we would have always bought them for, but they haven't been able to accept that.

Okay, thank you.

Our next question is from the line of Bret Jordan with Jefferies. Please proceed with your question.

Good morning. This is Mark Jordan on for Bret. Just to have a quick question on the outlook for certain independent markets and I guess specifically Texas, which is known as being stable in the quarter, you know given the current environment how do you see those markets performing going forward?

Sure Mark, this is Bryan. I think most importantly it’s surprising what’s happening in Texas because oil prices are at negative dollars per barrel and even when COVID-19 hit the barrel prices were in the mid, what $20 range, we expected that it was going to be pretty hard hit and if you remember in 2008, 2009, 2010 after the $4 gas prices plummeted the advantage that we had as Lithia Motors was the fact that our technicians who were out fixing pump jacks, came back to us and took their $20 to $25 an hour playback instead of $50 to $75 in the oil field. So, we have the ability to rehire those, people would speak well to the possibility of having service in part pent-up demand from this 45 to 60 day period. So, I really believe that in Texas, on the server side we should be good. I think on the sales side, Lithia Motors last time going into the recession, our operators in Texas where what I would call mediocre and I love you all out there in Texas okay, in terms of their used car operations like they were such good new car dealers that they couldn't respond to the downgrade that consumers were asking for. Today, our Texas operations are much better in their used car businesses, which helped offset that idea of economic decline where people are having to have $200 payment on their vehicles rather than $500 payments on their vehicles.

Okay great. In relation to the used car environment, do you have any read on the maybe the current health of independent used dealers?

No. We don’t really have a big look on that. I did see something on one of the large digital independence that I think has been running in the high 80% to 90% of same store used car sales and they indicated that their most recent weeks are down around 20%, which is about the same as what Lithia Motors has been done and if you remember Lithia Motors same store sales rates have been in the 15% range in used cars rather than in the plus 80% range. So, it seems like that delta difference of – in our delta is 40%, 35% and the delta of the other is over 100% change in business activity and I think when you think about independence and you’re looking at that kind of run rate you build your inventories. You build your personal, you build your marketing budgets and your infrastructure and related costs to be up 80% as well and I think that delta of us only being down 40 only for a brief period of time are down 20 only for a brief period of time. I think bodes nicely that Lithia has found that mix between digital home solutions, as well as a physical network to be able to accomplish good results.

Okay, great. Thank you very much.

Your next question is a follow-up from the line of Rajat Gupta with JPMorgan.

Hi, sorry, just one last follow-up here. On the credit side, you talked about like things remaining healthy there. You know with the customer base, maybe slightly shipping based on across the credit spectrum like do you see any shifts in the GPU levels there in the near term or should that stay pretty healthy at the current levels? That will be all, thanks.

This is Chris. I mean ultimately like we said in our prepared remarks, we aren’t seeing any shift right now and consumers have any ability to get financed and as far as GPUs are concerned we haven’t seen a shift there either in our new car volume, used car volumes or in our F&I products, so, so far everything is remaining pretty stable.

Great. Thanks.

Thanks Rajat.

Thank you. I will turn the call back to Bryan for his closing remarks.

Thank you everyone for joining us today. We hope each of you remain healthy and safe. Okay and we look forward to updating you again on our second quarter results in July. Bye-bye.

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