Edited Transcript of LAD earnings conference call or presentation 22-Apr-20 2:00pm GMT

We are inspired by the diverse array of solutions our team members are developing to ensure our fellow employees, and customers are safe and receiving our services as requested. 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 2 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 countries. 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 revenue declined 5%, while total same-store gross profit declined 2%. Chris will share further details on the quarter’s performance and our response to the current environment in a few moments.

For the remaining duration of my discussion, I’ll be outlining the design of our diversified, high growth, highly complex strategy that makes Lithia so unique. Our preparation, foundational strengths and the current environment provides us the opportunity to accelerate our progress towards our aspirational goal of 5% national vehicle market share. The foundation of our strategy that we have spent years building is stable and difficult to replicate. It is built on a high-performance and result-based culture, 6 highly diversified business lines, a coast-to-coast physical network, a near limitless value-based growth plan and a strong balance sheet with regenerating cash flows. Diversification through our core business lines creates resiliency in our revenues and profits. Different than the recession over a decade ago, we are much more positioned in this less certain environment. Today, each of our 6 business lines are now being expanded and activated through in-home and digital solutions. In addition, no single manufacturer makes up more than 18% of our new vehicle product mix and we are regionally diversified with the broadest national network of any auto retailer reaching over 92% of our great country.

Our balance sheet is also the strongest in our history. With the lowest leverage in our industry and cash reserves of over $550 million, plus an additional $500 million available through our unfinanced real estate. Our capital discipline has positioned us well with no significant debt maturities until 2025, allowing us the flexibility to make strong, opportunistic decisions with our capital.

Most importantly, our culture and teams are empowered, entrepreneurial and driven to achieve high levels of performance by making decisions closest to our customers. As discussed in our preliminary earnings release last week, this uniquely positions Lithia to respond to the extremely variable market conditions thrust upon us due to the differing levels of shelter-in-place orders. Our stores and our teams are completely in tune with their customers’ needs and are making proactive decisions on their behalf at all levels.

In addition, our proprietary performance management systems and measurements interlace our cultural values to create transparency, trust and action, the catalysts for high performance. Combined with persistence and adaptability, we direct all of our attentions on what we can control, allowing us to maintain focus, remain humble and drive for better results. We see the growth and expansion of our physical network comfortably taking us halfway to our 5% goal.

Just shy of 1% national market share today, our physical network will be leveraged with digital home solutions to complete the rest of the journey. Consolidation opportunities within our industry remain plentiful, allowing us to continue to grow rapidly. Our experiences over the past several years in our stores and with our business partners have taught us that expert personnel, the right inventory, digital solutions and the physical network, all are required elements to seamlessly provide transportation solutions on a national scale.

The traditional dealer model is highly profitable. However, the current customer experience lacks the speed, ease and transparency found in other retail transactions. Digital solutions are improving consumer experiences. However, most consumers still require expert assistance to complete their purchase. Unlike most products, vehicles are highly complex, last for over a decade, involve a trade-in and financing, require maintenance and are large, making them expensive to transport. Thin unit economics, offset by high logistics costs, results in a 6 region strategy to most effectively compete and deliver profitable solutions.

With the addition of the Williams Group late last year, we are now located in all 6 regions and ready to add density to our network. Our customers’ proximity to our physical network is a key element to our design. This enables us to supply convenient and affordable touch points throughout the ownership life cycle, especially related to our 50% margin, service and associated parts businesses. Increasing our physical network to between 4 and 500 locations results in 2.5% market share and the ability for us to reach most U.S. consumers in 2 hours or less. As such, our top priority for allocating capital will continue to be expanding our network by acquiring strong new locations.

Our investments in modernization are well underway, and we expect only minimal development costs in 2020. As we continue to develop the engines to power our digital home solutions, we also work to transform the actions and behaviors to our teams within our existing network. Our people and these engines will be powering our future national brands that will overlay our 6 regions to attract the larger population of digital consumers thirsting for transparent, empowered, flexible and simple buying and servicing experiences. Sharing of best practices, new digital solutions and our support for social distancing, these actions have taken hold at an accelerated pace in our network over the past few quarters. We are providing digital shopping experiences, contactless test drives and home delivery and curbside pickup for vehicle purchases and service. Nationwide, we estimate that over 25% of our April deliveries are being completed off-site. We are well positioned as stay-at-home orders are further relaxed and ultimately removed as we continue to expand our holistic strategy to capture additional market share and exponentially grow our company.

To summarize, Lithia’s sound business foundation is composed of a dynamic entrepreneurial culture that attracts and retains the best talent, world-class proprietary performance management systems, a proven growth strategy, and capital discipline with regenerating cash flows. Our growing physical network composed of people, inventory and facilities, combined with our digital home solutions, completes our unique omnichannel strategy. The additional advantages of a persistent, adaptable and optimistic team with a multi-decade track record of executing together are more apparent than ever and are the catalysts for emerging from this pandemic stronger than ever. This complex strategy outlined for you today positions us to continue to lead our industry’s transformation and progress towards making our goal of 5% national market share a reality.

With that, I’d like to turn the call over to Chris.

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [4]

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Thank you, Bryan. While the situation in our nation is unprecedented, our operational leaders are living our mission of Growth Powered 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 pre-release on April 14.

For the 3 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 revenue. 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 governments. 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 vary greatly with declines between 15% and 75% other than in our most restricted states, Pennsylvania and Vermont, which had virtually no sales due to government orders.

The most 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 pre-release, we have seen restrictions on shelter-in-place policies and specific guidance for auto retailers continue to be relaxed.

Vehicle sales department saw some improvement with new vehicle sales being down less than 40%, used less than 20% and service and body parts still hovering around a decrease of 30% as our teams adjust and respond with safe, responsible business practices that provide customer solutions wherever, whenever and however they desire.

In the quarter, the new vehicle business line was down 11%. Our average selling price increased 5% and unit sales decreased 15%. Gross profit per unit increased to $2,200 compared to $2,177 last year, an increase of $23. For the past several weeks, most OEMs have announced closures of their factories through the early part of May, and our teams are incorporating those potential impacts in their plans. Despite this, our history has taught us that OEM partners will support us and aggressively incentivize vehicles in the coming months as consumers return to more normal lives.

For used vehicles, we saw gross profit per unit of $2,073 in the quarter, a decrease of 1% or $18 over last year. One large advantage we have over other used retailers are that our OEMs also provide programs or subsidies to support certified preowned vehicle sales. Our balanced inventory is comprised 90% of the less volatile used vehicles, certified preowned, core or vehicles 3 to 7 years old and value auto, vehicles older than 8 years. Due to the scarcity of these units and the OEM subsidies, we can maintain better competitive pricing and margins. The remaining 10% of our used vehicle inventory is late model conquest or vehicles less than 3 years old and less than 40,000 miles that are positioned at off brand locations. We are actively moving through those vehicles to reposition ourselves to opportunistically acquire replacement units.

Our strategy of selling deep into the used vehicle age spectrum through our core and value auto vehicles, which are 60% of our sales, are resistant to value degradation. Additionally, in weaker economic cycles, these already scarce vehicles are in higher demand as consumers move to less expensive monthly payments and more affordable products. New and used vehicle sales are supported by our experienced finance specialists that help match consumer needs with lending options at over 150 financial institutions. In the quarter, our finance and insurance business line continued the incremental improvement we have seen in the last several quarters averaging $1,557 per retail unit, an increase of $89 per unit over the prior year as consumers continue to take advantage of the product offerings available that protects their mobility investment.

We have not seen any tightening in the credit market. In fact, financial institutions and OEM captives have significantly enhanced the programs and incentives they are providing consumers with 0 payments from 90 to 180 days, 0% APR financing and $0 down as well as more competitive leasing.

Overall, new and used vehicle sales create incremental profit opportunities through the retail of additional trade-in vehicles, greater manufacturer incentives, F&I sales and future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $3,697 this quarter or an increase of $84 per unit over last year. We remain focused on the highest margin business lines, our service parts and collision centers, which in the quarter increased 1% over the prior year. These teams have made massive operational shifts to adapt to consumers being confined to their homes.

Our home digital efforts that began in Pennsylvania and have become an incubator for sharing both digital and manual best practices in all departments has been a catalyst for new ways to support our consumers. The demand for — from consumers for all of our stores to offer home solutions has created a mindset shift in our team that we expected to be one of the more difficult parts of our strategic transformation. As of this week, approximately 75% of our network is performing home service solutions by actively picking up vehicles to and from our consumers’ homes. Combined with our online vehicle sales and used vehicle purchases, our at-home digital solutions position our company to leverage our growing network, which now has the largest reach in the industry.

Our facilities, inventory and people are ready to deliver our online in-dealership and in-home solutions to nontraditional auto consumers that we previously may not have appealed to. Our culture and world-class performance management systems have enabled our teams to be nimble and responsible to this rapidly changing environment. Store leaders have taken prudent and decisive cost-saving measures in personnel and advertising expenses, which is comprised of 75% of our SG&A.

Our marketing teams are identifying the advertising channels and messages that provide the most efficient investment on our advertising dollars. Overall, we expect store advertising spend to reduce 20% to 30%. Additionally, we’d like to thank our vendor partners who have provided additional support in the form of fee concessions for the next several months. Our teams have reduced our staffing levels by approximately 40% through the elimination of positions and by furloughing our performing team members that we hope return to work soon. To financially support furloughed employees who are impacted by COVID-19, we are providing additional financial benefits starting with up to an additional 2 weeks of paid time off, paid benefit premiums and adjusted compensation plans for active employees that recognize their contribution in this unique operating environment.

In summary, our teams continue to adapt and operate in the ways that best match each of their local markets and the ever-changing consumer desires. The insights provided by our world-class performance management system allow our teams to be nimble and responsive to the changing environment. We are innovating and improving the consumer experience through incremental and pragmatic modernization and are poised for the shelter-in-place orders to be lifted and the economy to reopen. Our team’s ability to achieve high performance in any environment continues to be the foundation as we remain focused on our longer-term goal of 5% national market share.

With that, I’d like to turn the call over to Tina.

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Tina H. Miller, Lithia Motors, Inc. – Senior VP & CFO [5]

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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 extension to 2025, increased maximum allowable leverage ratio to 5.75x and reduced interest rates across the various lines. This financial position, coupled with no material debt maturities over the next 4 years, over $1 billion in cash, available credit and unfinanced real estate and 3 turns of headroom on our leverage covenants have positioned us 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 2.2x. During the quarter, we generated $39 million in free cash flows, 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 acquisitions, 25% internal investments, including capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases.

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 share repurchases at this time. We are monitoring this constantly changing environment and have modeled sensitivity for new vehicle SAAR ranging from 12 million to 15 million units. Ultimately, we believe the SAAR level in the coming months and for full year 2020 will be dependent on how and when shelter-in-place orders are lifted as well as additional future government stimulus programs. Additionally, we believe the used vehicle market will decline less than new. And when consumers are able to move more freely, our service, body and parts business will return to normal levels fairly quickly. Whatever the outcome these sensitivity insights and the associated actions derive will enable us to adapt and respond to this changing environment.

Reflecting back to 2008 and 2009, our resiliency was highlighted when we remained profitable and cash flow positive throughout this historic trough. During that period, new vehicle sales were down over 50%, used vehicle sales decreased 20% and service volume parts declined 5%. This period illustrates the inherent strength of our business model during a severe economic downturn. Fundamentally, the diversity in our 6 revenue streams, growth plans, variable cost structure and continued consumer innovation allow us to be responsive in any economic environment and position us well as we continue to drive toward our aspirational goal of 5% national market share.

This concludes our prepared remarks. We would now like to open up the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [2]

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So Bryan, can you provide some color on the pipeline for acquisition, your appetite to close on these deals have the flexibility you would have to adjust price?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [3]

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Sure, Rick. This is Bryan. 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 2 of the deals. And then gained what’s called an American put-call option, which means that we have the right to buy the real estate in 3 to 5 years for the then determinable price, and we can do it any time 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 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 dates or possibly even beyond that in the event that earnings quality hasn’t improved. There are chances that if earnings quality doesn’t improve, then we would actually renegotiate the transaction in terms of the goodwill amounts as well.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [4]

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That’s helpful. The headcount reductions that Chris referred to, 40%. When sales do recover that 12 million to 15 million unit range that you’ve discussed. How much of that headcount would you think would come back? And how much is permanent reduction?

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [5]

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Yes. 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 already talking about kind of a rightsizing effort to kind of regroup in 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 tools that we’ve used to manage since that time are still well in place. And we anticipate 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 volumes that they’re seeing. As you can imagine, the recovery is different state-by-state and really local market by local market based on 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.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [6]

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

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [7]

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Yes, Rick. If I just went off the quarter and we look at our overall SG&A, 75% of that is made up of 2 line items, it’s personnel and advertising. And so in the quarter, if we were just looking at Q4 as an example, I’d say it’s around $50 million in permanent cuts in the quarter. So depending on what happens with volume and what happens with their variable comp level, we’d just have to play it out as we move forward into Q2 and Q3.

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Nels Richard Nelson, Stephens Inc., Research Division – MD [8]

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

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [9]

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Rick, back to Bryan. I think this is obviously unprecedented. And obviously, our business will be determined in our future based upon the stay-at-home orders 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 department, for some reason, that seems to be coming back quicker. If you noticed 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 vehicles has recovered a fair amount, though, meaning that it seems like consumers are more adept 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 7 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 from people’s homes, we haven’t seen the big shift yet back to our service departments. And we think that is something that people can easily defer, okay? And it’s small amounts of money, typically, that we think that as soon as those stay at home orders are lifted, that should become — come back as well.

Now I would also say this, longer term, in terms of the consumers’ behaviors, we believe, and we began this venture, what, 2 to 3 years ago on digital home solutions, that this is a wave in that we believe that about half of the consumers today would really prefer to be able to buy cars in the comfort of their own home. We are seeing, though, that there is still many of the consumers, and we’ve narrowed it down, that we think that about 20% of the consumers have the ability to buy the car, put the money down that they want, achieve the payments that they want and finance the car with their disequity situations by doing it digitally and doing it all from home without human interaction, okay? The other 80%, we really believe, even though they want to, that’s the biggest impediment, not the desire. But consumers just don’t have the abilities, a lot of times, to be able to understand the disequity in their car, to get rid of their trade and then find a finance source that meets all of that criteria. That’s what Lithia Motors does. That’s what our 500 or plus specialists in finance do and what George and our IT teams are starting to digitize and crack the code on, that I think will help respond to that big demand from consumers that have always wanted to do that. They just haven’t had the ability to do that. So I do believe that there will be higher propensity to, one, socially distance in both service and sales, but I also believe that the abilities for consumers to do it fully digitally, I think, is a misnomer because I think it’s more about, “I want to do it in the comfort of my own home, the way that I want to do it, and I want it to be transparent,” and I think you can do that both manually and digitally.

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Operator [10]

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

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Rajat Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [11]

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

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [12]

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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 by consumers for home service and delivery. So we built 2 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 3/4 of our stores. The difference is that today, we’re not charging any premium for using in-home delivery and pickup in service because it’s our duties 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 COVID-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 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 would be on an oil change, which we typically charge, whether it’s import, domestic or luxury, somewhere between $30 and $50 for an oil change, we believe that it could easily be a $30 oil change could easily be $50, maybe even $60. And in the high line store, when it’s $50, you could probably charge $100. So there is a massive difference for that for the delivery. Our technology now, within our Baierl solutions, are already doing geo fencing. So we already know that we’ll pick up your car within 45-minute drive and the cost of that is x, $10, okay, a half of an hour or something like that, and we got to do it twice. This is what the cost of labor is. So that will be utilized, and it’s already being utilized manually in most of our markets to be able to determine whether it makes sense.

Now on the opposite side is that $1,000 service that’s a breakage or something like that, typically, we — I don’t believe that we’re going to get $2,000 for that service, and I don’t know that, that would be equitable and fair to the consumer, but I think $1,100 or $1,200 is something that’s reasonable. So there’s where we really get into that 10% to 50% higher-margin than what we currently do on in dealership. Chris, do you want to take the unit economics?

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [13]

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You bet, Rajat, Chris. As Bryan mentioned in his prepared remarks, about 25% of our deliveries coming into April now have 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 with 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 elegant in this.

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [14]

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[Weren’t we], Chris?

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [15]

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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 it’s 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 said before, our average consumer has $5,100 in negative equity that they’re working to leverage our finance specialists to help them find the right solutions for them. And so as far as economics are concerned, short term, I’d say that they’re pretty much the same. We’re not — we don’t have a data set that’s large enough to compare the 2 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 at the right margins, both with the vehicle transaction and with the F&I products that we attach to the sale.

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Rajat Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [16]

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Got it. That makes sense. But 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 — post COVID-19 with the online channels?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [17]

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Rajat, this is back to Bryan. Hey, I think that, long term, as you think of the omnichannel 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 is 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 2 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 salespeople. And I think Chris’ numbers of our staffing reductions for furlough are to bring people back at a rate at 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’s 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 2 omnichannel strategies, we should be able to improve productivity in our digital — in our traditional resources as well as the 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 3, 5, 7, 10 years, as the 2 channels begin to develop together and you begin to find those efficiencies in marketing and personnel costs and inventory procurement and inventory pricing, those SG&A drops can be larger than that over time as the 2 models come together.

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Operator [18]

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

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [19]

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Great. Just a follow-on on that recent question. And so with the permanent staffing reduction, can you clarify, was that 15 — 1-5 or 5-0 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?

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [20]

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Yes, Ryan, this is Chris. So I guess to try to quantify it, in the quarter, 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 if you look at the total cost reductions that we have in those 2 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 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. I mean we’ve seen some great things happen in 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 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 then that we haven’t seen in a very long time.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [21]

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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 omnichannel strategy and your at-home deliveries and then versus kind of in-store? Any way you can quantify kind of those and any commentary?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [22]

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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 2 companies has allowed us to see that there is consumer demand, massive amounts of consumer demand for transparency, simplicity and in-home sales. And I think that, that reaffirmed our belief pre partnership with Shift that we needed to provide those solutions, i.e., that’s 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’re 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 Shift 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 works in Pennsylvania, in New Jersey and in the Northwest, whether it’s service or 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 (sic) [www.greencars.com], okay? We’ve controlled that for a good period of time. We also have controlled Oregon Green Car as well as Vermont Green Car, which allows us to deploy consumer-identical brands — identifiable brands in a sustainable phase 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, we’ll be powering all of those skins at somewhat differing levels because our green car as well as the future national holistic brand will be powered as a one-price 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.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [23]

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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 maybe between those 2 buckets what you’ve seen on pricing as well.

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [24]

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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 a lined amount at the auction, is still too high, meaning that the auction sell-through rates at 20%, meaning only 2 out of 10 cars are selling. It’s 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 to what the used car market is.

Now we do have a playbook from 2001, a little bit. And most importantly, 2008 and 2009, where gas guzzlers definitely got hit really hard and late-model gas guzzlers got hit the hardest, okay, that’s the game that Lithia Motors doesn’t play in. I mean we focus our attentions on core product, and that’s how we get our trade-ins for value. And that’s 70% of our sales, 70-plus percent 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 it’s off-brand from what we sell new, okay? And it’s 1- to 3-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 cars.

So I think Chris’ efforts are try to reposition as many of the 10% of the cars into like brand, meaning move the Tatas to Tata stores, move the Dodges 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 payments and those type of things that manufacturer subsidies will be providing that independents won’t have, and we won’t have, if we have those cars located in off-brand stores.

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Operator [25]

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Our next question is from the line of Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [26]

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You gave us some nice color there around the trends in March and how they’ve trended here the past 7 days in April. Any reasons to think that we haven’t troughed to date or going forward?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [27]

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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. It’s 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, 4 days between that Monday and Thursday? When we were all uncertain because 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, 5 weeks, 6 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 and then bottomed out at about a minus 40 and then 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 states start to begin to reopen, and most states are talking about late April, early May. And I think a few have pushed it now into mid- to late May.

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Armintas Sinkevicius, Morgan Stanley, Research Division – Associate [28]

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Yes. And then to piggyback off the last question a little bit. Gross profit per unit, first quarter not as a significant impact given the late March impact, but 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?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [29]

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Sure, Armintas. I think you could go back and look at 2008, ’09 and ’10 and see what happens. And it looked like — you got to remember that we’re a subsidized business by our manufacturers. And unless it’s 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 products, 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 incentives from our manufacturers on new cars, and we already saw that on the domestics that started 4 weeks ago. I mean we got 0%, 84 months with multiple manufacturers, which is massive amounts of savings for the consumers.

I think what we prefer not to have happened 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 troughed, 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 3 to 6 months pretty nicely. Because even with the shutting of our plants 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 I think a lot of independents, a lot of times have 60%, 70% of their inventory in that bucket.

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Operator [30]

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Our next question is from the line of John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [31]

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Just wanted to follow-up on Armintas’ sort of line of questioning 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 floor plan financing or other sort of activities to help out the dealers in the distribution channel? Because we hear from them that they’re a bit concerned on restart distribution channel, might not be in as good a shape as it was going into it. So just curious if there’s any other actions you’re seeing from automakers to help play in these tough times?

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [32]

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Yes. Hey, 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 special incentives right now on floor plan. Our stair-step programs for most OEMs have gone to flat dollar amounts, meaning that you don’t have to hit the objectives. They’re just giving you x amount per car. Bryan mentioned a lot of the things that they’re doing on the retail side, with their $0 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 vehicles, 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, 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 to 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.

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [33]

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Chris, one other little thing that they were doing, too, a number of manufacturers are now paying us to go to consumers’ homes to pick up their service vehicle. So we’re getting either Uber payments, 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, and 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 solutions remains in the minds of not only our consumers but remains in the minds of our employees, to ensure that they stay true to our strategy of achieving that omnichannel 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.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [34]

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Right. But it’s also fair to say that — I think that — and I’m just curious if you agree with this, that the relationship and the actions they’re taking now are very different than what you saw in the ’08, ’09 downturn. Obviously, there’s different circumstances here, but the partnership and the willingness to work with you as a distribution partner seems to be quite a bit different than back then. Is that a fair statement?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [35]

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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 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 — this may prevent a deeper recession because it hits so hard and so fast. 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%.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [36]

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Okay. That’s helpful. And then on the parts and service side, sounds like you’re not seeing the sequential recovery yet. But when things open up, it’s fair to think that there’ll be a snapback. When you think about the capacity in your service base, as we think about maybe the third and fourth quarter as a reasonable time frame, let’s say, same-store sales were up 10% to 20%. Is that something that your service base would have the capacity to handle? And what would be sort of a governing limit on your human capacity and installed bay capacity as we think about that snapback on what you could handle on a same-store increase basis?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [37]

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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 facility to be able to double our volume and then still could extend hours to get even more out of that capacity, and you hit on the true realization of 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-digit same-store sales rates. I think that there’s no question that our people have been sitting on their couches, watching TV and stuff and are ready to go when concern on rent is faster. But I don’t believe that much more than — if we look at it, we’ve had some 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 talent. 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 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 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.

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John Joseph Murphy, BofA Merrill Lynch, Research Division – MD and Lead United States Auto Analyst [38]

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Great. And then just lastly, when you talk about the M&A and not necessarily really repricing deals but kind of reworking the cap structure of the acquisition. Your stock has been repriced pretty aggressively and 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 repriced, yet you’re not taking this opportunity to reprice these deals.

I’m just curious why you think that, that’s — I mean, the right tack to take. And then I guess maybe also when you think about cap allocation, you’re looking at these 14 deals in the pipeline, wouldn’t you maybe be better served just in the near-term and maybe even in the next year to 2 of buying back your own stock if you can’t reprice those deals to where your own stock is. It just seems unfair to yourself, given what’s happened with the repricing of on the public market, there might be an opportunity?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [39]

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Yes, sure. Those are great insights. And then the same things that we’ve been thinking about and adjusting to. So remember, on the 14 deals, they’re all highly accretive, okay? We have $550 million of cash sitting there, ready to be deployed, like you said, 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 that. 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 6 zones, meaning that we can throw our weight around in terms of our consumer offerings, our affordability and convenience 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 in 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 the credit line? That LIBOR base, it just dropped to 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 then and mechanism that we’ll 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 at 80% success rate plus in terms of getting somewhere between 10% to 20% return on our investments over a short-term period of time. And our over 5-year period of time, it’s a 25% after-tax return on those investments. So I think what we know is acquisitions are the gift that keep on giving, which share buybacks only give once and ultimately don’t take us 1 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.

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Operator [40]

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

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David Whiston, Morningstar Inc., Research Division – Strategist [41]

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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 that just a wait-and-see dynamic right now?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [42]

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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 4 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.

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David Whiston, Morningstar Inc., Research Division – Strategist [43]

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Okay. That’s helpful. And in terms of vehicles right now that are coming off lease, are the OEMs basically saying that customers — we don’t want to buy them back at all and keep it for another 4, 5 months, no payment? Or do they still want to take the vehicle back?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [44]

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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 or their 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 maybe 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-end value.

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David Whiston, Morningstar Inc., Research Division – Strategist [45]

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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, it sounds like people are trading down more in the used. Are the buyers right now — it’s merely just more people really, really needs a vehicle to do something, and there’s not very much of, like, say, a really wealthy customer is just looking for a great deal?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [46]

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David, Bryan again. I think that the people coming in today are the people that need a vehicle. I think they’re also — they’re starting to be that element of larceny in the consumer that they believe that maybe COVID-19 isn’t as bad as what everyone thinks, 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 the consumers are going to become more positive. There is an advantage than what we had going into late ’07 and ’08, when we were going into those winter periods as well as 9/11 that I think can help us, okay? So maybe just some matter of thoughts there.

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [47]

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David, 1 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 about 10%, but that 10% decline compared to where vehicles are at, I think, is a very positive sign that we are seeing active consumers again moving further into that digital experience and that process a little further. And we hope to see that transition to sales here in the coming months.

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David Whiston, Morningstar Inc., Research Division – Strategist [48]

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Okay. And the last question is on M&A. The 14 — first of all, the 14 deals, do you expect all of those to still close in the second half of ’20? Or is that also beyond ’20? And even once those deals are processed, are you expecting, given just the downturn and a likely recession, that a lot of sellers or people who are about to go into the marketplace as a seller this year are now just going to back out until 2021 or even ’22?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [49]

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Great questions. I think the answer to that on the 14 deals is it’s earnings dependent, okay? And then if they don’t get the earnings, are they willing to adjust their goodwill to something that is appropriately balancing what their earnings are reflecting? So I think that answers 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 are — 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’re 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 1:3 month-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’re 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 helped defer some of that, but it also may have given a catalyst, which we’ve now heard that twice. But 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 — and that’s 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 distressed selling. I don’t believe that distressed selling occurs. I believe that distressed 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.

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Operator [50]

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

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Mark David Jordan, Jefferies LLC, Research Division – Equity Associate [51]

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This is Mark Jordan on for Bret. Just have a quick question on the outlook for certain energy-dependent markets and, I guess, specifically, Texas, which was not as being stable in the quarter. Given the current environment, how do you see those markets performing going forward?

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [52]

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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, what — 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 payback instead of $50 to $75 in the oilfield. So we have the ability to rehire those people, which speaks well to the possibility of having service and parts, pent-up demand from this 45- to 60-day period.

So I really believe that in Texas, on the service side, we should be good. I think on the sales side, Lithia Motors last time going into the recession, our operators in Texas were 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 helps offset that idea of economic decline where people are having to have $200 payment on their vehicles rather than $500 payments on their vehicles.

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Mark David Jordan, Jefferies LLC, Research Division – Equity Associate [53]

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

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [54]

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No. We don’t really have a big look on that. I did see something on one of the large digital independents that I think has been running in the high 80% to 90 percentile 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 down. 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 — our delta is 40%, 35%. And the delta, the other is over 100% change in business activity.

And I think when you think about independents and you’re looking at that kind of run rate, you build your inventories, you build your personnel, 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.

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Operator [55]

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

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Rajat Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [56]

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Sorry, just 1 last follow-up here. On the credit side, you talked about like things remaining healthy there. With the customer base maybe slightly shifting based on your — across the credit spectrum, like do you see any shifts in the GPU levels here in the near term? Or should that stay pretty healthy at the current levels? That will be all.

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Christopher S. Holzshu, Lithia Motors, Inc. – COO & Secretary [57]

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Yes, this is Chris. I mean, ultimately, like we said in our prepared remarks, we aren’t seeing any shifts right now, and consumers have the 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.

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Operator [58]

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

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Bryan B. DeBoer, Lithia Motors, Inc. – CEO, President & Director [59]

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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.

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Operator [60]

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