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 future events, including the duration and anticipated 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, 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 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 states, counties, and cities 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 departments 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 revenue declined by 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 strength, and the current environment provide 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, six 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. Unlike in the recession over a decade ago, we are much better positioned in this uncertain environment. Today, each of our six business lines is being expanded and activated through in-home and digital solutions. Additionally, 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 their 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 catalyst for high performance. Combined with persistence and adaptability, we direct all of our attention 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 are essential 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 trade-ins and financing, require maintenance, and are large, making them expensive to transport. Thin unit economics offset by high logistics costs result in a six-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 six regions and ready to add density to our network. Our customer's proximity to our physical network is a key element to our design. This enables us to supply convenient and affordable touchpoints throughout the ownership life cycle, especially related to our 50% margin service and associated parts businesses. Increasing our physical network to between 400 and 500 locations results in 2.5% market share and the ability for us to reach most U.S. consumers in two 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 of our teams within our existing network. Our people and these engines will be powering our future national brands that will overlay our six regions to attract a larger population of digital consumers thirsting for transparent, empowered, flexible, and simple buying and servicing experiences. Through the 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, 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 talents, 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 omni-channel 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.

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 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 in 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 pre-release, we have seen restrictions on shelter-in-place policies and specific guidance for auto retailers continue to be relaxed. The vehicle sales department saw some improvement, with new vehicle sales being down less than 40%, used less than 20%, and service, body, and 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 into 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 life. 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 is that our OEMs also provide programs or subsidies to support certified pre-owned vehicle sales. Our balanced inventory comprised 90% of the less volatile vehicles, certified pre-owned, core vehicles three to seven years old, and value autos, vehicles older than eight years. Due to the scarcity in these units and the OEM subsidies, we can maintain better competitive pricing and margins. The remaining 10% of our used vehicle inventory consists of late-model conquest vehicles, which are less than three years old and have less than 40,000 miles, 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 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 in more affordable products. New and used vehicle sales are supported by our experienced finance specialists that help mass consumer needs with lending options at over 150 financial institutions. In the quarter, our finance and insurance business lines 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 protect their mobility investments. 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, including zero payments for 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 offer, additional trading vehicles, greater manufacturing 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 incubated for sharing both digital and manual best practices in all departments have been a catalyst for new ways to support our consumers. The demand 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 in this rapidly changing environment. Store leaders have taken prudent and decisive cost-saving measures in personnel and advertising expenses, which comprise 75% of our SG&A. Our marketing teams are identifying the advertising channels and messages that provide the most efficient investment of our advertising dollars. Overall, we expect store advertising spending to reduce by 20% to 30%. Additionally, we would 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 will return to work soon. To financially support furloughed employees who were impacted by COVID-19, we are providing additional financial benefits starting with up to an additional two 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 ways that best match each of their local market and the ever-changing consumer desires. The insight provided by our world-class performance management system allows our teams to be nimble and responsive to the changing environment. We are innovating and improving the consumer experience through incremental and pragmatic monetization and are poised for the lifting of the shelter-in-place orders and the reopening of the economy. 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.

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, increasing the maximum allowable leverage ratio to 5.75 times and reducing interest rates across the various lines. This financial position, coupled with no material debt maturities over the next four years and over $1 billion in cash available credit and unfinanced real estate, and three turns of headroom on our leverage covenant, 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 2.2 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 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 the 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 very quickly. Whatever the outcome, these sensitivity insights and the associated actions derived 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, it’s the diversity in our six revenue streams, growth plans, variable cost structure, and continued consumer innovation that allows us to be responsive in any economic environment and positions 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 for questions.

Thank you. Our first question comes from Rick Nelson with Stephens. Please go ahead 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 Bryan. Good morning, everyone. Let’s begin with that we have a total of 14 deals under contract. We had previously renegotiated one of those that took us down to 13 deals, but we’ve since signed another, so we're back to 14 in total. The way that all deals have been restructured is our preference to own real estate is important. We currently own 87% of our real estate. Our issue in an environment like this is 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 what's called an American 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 at any time on most deals within that period. So we can pick and choose. This allows us to still own the real estate, but it defers half of the leverage until a later period of time, which is great. We were also able to lease those properties 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 earnings 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 a permanent reduction?

Hi Rick, this is Chris. The second half of your question, which is about how much is permanent, would be about 50% of that we feel like is permanent. As you remember, coming off of Q4, we were talking about a rightsizing effort to regroup at each 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. Anticipating that we’re going to continue to follow that through 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. We’re just going to continue to manage the volume and bring back our staff as quickly as we can based on the production levels that we have and the current volume.

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

Yes, Rick. If I just went off the quarter and we looked at our overall SG&A, 75% of that is made up of two line items: personnel and advertising. In the quarter, we were 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 with, you know, the 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 think this is obviously unprecedented, and obviously our business will depend on how the stay-at-home order is 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 consumer behaviors ultimately may or may not change. 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 sales have recovered a fair amount, meaning that it seems like consumers are more adapted to either downsizing on a 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. We saw that move from being 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. On the service and parts side, it’s really stabilized at that 30%, and we believe that we’re not offering maintenance specials and those other types of services even though we’re picking up cars and delivering them to people's homes. We haven't seen the big shift back to our service departments and we think maintenance is something that people can easily defer. It’s typically small amounts of money that we think will come back quickly as soon as those stay-at-home orders are lifted. Longer term, in terms of consumer behaviors, we believe and began this venture about two to three years ago on digital home solutions that this is a way to appeal to consumers wanting the ability to buy cars in the comfort of their own home. We see that about 20% of consumers have the ability to buy the car, achieve the payment they want, and finance the car digitally and from home without human interaction. The other 80% still require expert assistance to manage the complexities of their finance and trade-in situations, which is what Lithia Motors, with our specialists, is working to digitize effectively. We believe that consumers will prefer socially-distanced experiences in both service and sales, but I think it's more about allowing consumers to do things in the comfort of their own home, transparently, and we can do that both manually and digitally.

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 the online delivery, both for sales 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 on the unit deliveries, could you give us a sense of what the unit economics look like for those, given there has really been an uptick in volume there, both from a gross profit perspective and SG&A for unit perspective, if you could provide that sense?

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, pickup, and delivery in Q3 and Q4. It was part of our Pittsburgh initiatives and some projects in the northwest. We began to build what's called op-codes, operational codes, which are how we price our products in service and parts to our consumers. We believed at that time that there could be a premium paid for consumers for home service and delivery. So, we built two different op-code models. We have always had in-dealership pricing, but we built this in-home and it was being utilized by a handful of stores, I'd 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 pickup in service because it's our duty to our consumers to keep their cars running, most importantly, but it’s also our duty 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 time, usually 30 minutes to 1 hour to get their primary maintenance done, but we believe that there are massive margin differences between in-home and in-dealership service and how we originally thought about it was lower priced items may have a 50% margin premium, whereas higher priced items may only be 10% to 20% premium. An example probably would be on an oil change that we typically charge whether it’s import, domestic, or luxury somewhere between $30 and $50. We believe that it could easily be a $30 oil change, going to $50 or even $60, while in a higher line store, when it's $50, you probably charge $100. So, there’s a considerable difference for the delivery. Our technology within our Baierl solutions is already doing geo-fencing, meaning we know we’ll pick up your car within a 45-minute drive and the cost of that is x, $10. We have to do it twice, which is the labor cost, and we’ve got to figure that out. So that’s what the cost is. Chris, do you want to take the unit economics?

You bet, Rajat, Chris. As Bryan mentioned in his prepared remarks, about 25% of our deliveries coming into April have been at home, at place of business, or curbside deliveries. I think what we’ve talked about moving forward with our digital solutions was this idea that someday we'd be able to complete a transaction online and deliver the vehicle to a consumer's home. Because of the current pandemic, we think we are actually accelerating quickly the mindset of our people that this is real and this is now, and we’re pretty excited about how things are moving forward and the ideas that people have about not just the environment we live in today, but what is it 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 many customers that come in may not know what they're looking for, may not know what kind of vehicle they want for their family or have some financial issues. As we’ve said before, our average consumer has about $5,100 in negative equity, which they’re leveraging our finance specialists to help them find the right solutions. As far as economics are concerned, in the short term, I’d say they are generally the same. We don’t have a data set large enough to compare the two yet, but we’re going to continue to monitor that and ensure that we show up the right way for the consumers to deliver vehicles that they want at the right margin, both with the vehicle transaction and the F&I products that we attach to the sale.

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

Rajat, this is back to Bryan. I think that long term, as you think of the omni-channel solution, our logic is that digital home solutions 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, but for deal structuring to get it financed by the 150 lenders we have. I believe that as the two channels grow and develop, our traditional channels, those experts, will be able to produce a lot more with what they have, meaning that salespeople will most likely move from 11 salespeople, and I think Chris' numbers of our staffing reductions for furlough are looking to bring people back at a rate of 15 sales per salesperson, right, which is a 30% improvement in productivity long-term. That gets pushed through the model in different ways, and with not a lot of digital help in most of our stores, that’s a lot of manual help. 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 have always been striving to be in the low-to-mid 65% range, right, the 60% range in our traditional model. If we think out three, five, seven, or ten years, as the two channels develop together and find efficiencies in marketing, personnel costs, inventory procurement, and inventory pricing, those SG&A drops 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. With the permanent staffing reduction, can you clarify whether that’s $15 million or $50 million in quarterly savings? And then, do you think you have to backfill any of that? Or is that kind of permanent savings as you look towards the future model with more technology?

Yes, Ryan. Hi, this is Chris. So, I guess 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. 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 during the first quarter because even when we started to make our termination of our underperformers and furloughing of our performing team members, we also provided PTO and payouts during that period of time that went into early April. We’ve got that piece of the expense behind us, but going forward, the 40% or the 3,000 employees that we have now on furlough, we will be bringing those back as volume dictates, as the markets recover, and we’ve already started that. We’ve seen some great things happening; one of our most restrictive states, Pennsylvania, can now process online sales again. We’ll continue to monitor each local market with our leaders to ensure that when we recover, we have productivity levels that we haven't seen in a very long time.

Good. Then shifting over, 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 it to Lithia’s omni-channel strategy and your at-home deliveries and then versus kind of in store, anyway you can quantify 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 demand—for transparency, simplicity, and in-home sales. This reaffirmed our belief pre-partnership with Shift that we needed to provide those solutions, which is why we now are working on our Baierl, Northeast, and Northwest solutions to provide those to our consumers as well. I think where we’re going to be moving, and I mentioned it briefly, is this idea of national brands that are wholly Lithia-owned and operated, supported by the engines we’re building in Baierl. They will be skinned, and the customer interfaces will all be transparent, simple, much like the Shift model. 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, 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 were behaving—what the 50% of the population that we weren’t attracting did. Our initial work in Pennsylvania, in New Jersey, and in the Northwest, whether it’s in services or sales are teaching us that that is the right decision. One of the brands we’re developing, for instance, is greencar.com, which we have controlled through a good period of time. We also have controlled Vermont Green Car and Organ Green Car, which allows us to deploy consumer-identifiable brands in the sustainable space with transparent, simple, easy buying home solutions at a pretty rapid rate. We’ll 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. 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 to understand the basic strategy.

Yes, that’s fantastic. One more question from me, then I’ll turn it over. Used vehicle residual values have fallen off pretty substantially at auction. Has that flowed through to retail pricing? And then secondly, you guys commented on the 90/10 split on your inventory to the more scarce categories, maybe comment on the prices you’ve seen in those two buckets? Thanks and good luck.

Sure, Ryan. This is Bryan again. I think on used valuations and pricing, it’s a misnomer regarding what you’re seeing on Manheim data or other auction data, as well as sales pricing. The main reason the price has dropped, and it won't stabilize yet, is that sellers are asking too high, meaning that the auction sell-through rate is at 20%, meaning only two out of ten cars are selling because the sellers are not willing to accept that price, knowing that this is all dependent upon stay-at-home orders being relaxed. Once we see those orders relaxed, we’ll see the actual impact of the used car market. We have a playbook from 2001 and, most importantly, 2008 and 2009. Gas guzzlers definitely got hit hard and late-model gas guzzlers got hit hardest, which is a gain that Lithia Motors doesn't plan for. We focus our attention on co-products and how we get our trade-ins for value, so 70% of our sales—70% plus—are pretty stable inventory. If there does end up being some stabilization of declines in valuations, I believe we’re positioned nicely with 10% of our inventory being late-model conquest vehicles, meaning they’re off-brand from what we sell new and those can be the most volatile. Those stores have to compete against the incentives and the subsidies that our manufacturers are going to give us on certified vehicles. Chris' efforts are to reposition as many of the 10% of the cars into like brands, meaning moving the Toyotas to Toyota stores, Dodges to Dodge stores, and certifying those products, because then they'll qualify for subsidies, financing, the rebates, the 0% APRs, and those 90-day deferrals that manufacturers will provide, advantages that independents won't have if we have those cars located in off-brand 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 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 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 with COVID-19 and the states get more strict. We’re already seeing relaxation of stay-at-home orders, and early indications are we’ve seen a plus 10% week-over-week increase in new vehicle sales; we’re up plus 30% week-over-week in used vehicles. Fixed operations is a misnomer. It’s behaving more like what happened in 2001 with 9/11, where people were glued to TVs and staying at home for a few days, waiting for the next shoe to drop. I think that this is similar because we’re going on what, five weeks, six weeks of 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 or maintain them. I believe as soon as they get back in their cars repetitively, not just to go to the grocery store, that should come back quickly. We saw it spike, bottom out at about a minus 40% then come back to minus 30%, which we were truly pleased to see. So, I think we are at a trough in fixed operations as well, and as states start to reopen—most are talking about late April or early May, with some pushing it into mid-to-late May—we’ll see that come back.

Yes. And then to piggyback off the last question, gross profit per unit: In the first quarter, there isn’t a significant impact given the late March impact, but how do we think about gross profit per unit here into the second and third quarters, 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. You have to remember that we’re a subsidized business by our manufacturers, and unless there are massive shifts in market valuations or consumer behaviors, market swings will be taken out with incentives that are on both certified products and new vehicles. We think we’re nicely positioned because we believe that as soon as stay-at-home orders are relaxed, we’ll get massive incentives from our manufacturers on new cars. We've already seen that on domestics that started four weeks ago—we got 0% for 84 months across multiple manufacturers, which is a substantial amount of savings for consumers. We prefer not to have what happened last time, even though it's an election year; we're pretty confident like a ‘cash for clunkers’ will likely happen this year. That cash for clunkers cost the federal and state governments around $1 billion last time, providing a pretty good GDP boost. We think a cash for clunkers may happen in Q3 or Q4 because we believe the incentives will carry us through the next three to six months nicely. Even with factory shutdowns, I think that incentives will smoothly clear out that pipeline nicely and stabilize margins. Used values will be our innate ability to adapt to whatever happens with pricing, and our biggest exposure is truly in the late-model cars where we have about 10%. Most independents will have 60% to 70% of their inventory in that category.

Great. Well, appreciate you taking the question.

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

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

Yes, John. The short answer is absolutely. There’s a ton of support we’re getting from the OEMs right now, including special incentives on floor plan and stair-step programs that have gone to a flat dollar amount, meaning that you do not have to hit the objectives. They’re just giving you a set amount per car. Bryan mentioned a lot of the things that we’re doing on the retail side, such as 0% down, the 0% APR, and the 90 to 180-day first payment options. We saw yesterday a launch with one of our finance partners that they went to used vehicles with 0% for 48 months. There’s a lot of activity happening right now, but we think that's just the beginning because right now, inventories are at an all-time low. When production ramps up again, we anticipate an accelerated amount of incentives for our new car inventory and our CPO vehicles.

Chris, one other thing I’ll add is a number of manufacturers are now paying us to go to consumers' homes to pick up their service vehicles. We’re getting either Uber payments, Lyft payments, or if we do it ourselves, which is probably the better way to do it, we drop off a loaner car to the consumer’s home. I think there's a lot of creativity around that that 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, behaviors in home digital solutions stick in the minds of not only consumers but our employees, to ensure that they stay true to our strategy of achieving that omni-channel and 5% market share.

But it’s also fair to say that the relationship and actions you’re taking now are very different than what you saw in the 2008, 2009 downturn. What you went through illustrates different circumstances here, but the partnership and willingness to work with you as a distribution partner seems to be quite different than back then, is that a fair statement?

That’s definitely a fair statement. I think Lithia Motors has always been a company that is collaborative and really believes that it’s our duty to make sure our manufacturers love us. Occasionally, we do go through times where we challenge each other, but that is something we've always prioritized. I think most importantly, from Lithia’s standpoint, we’re way more diversified. We were 73% domestic going into the last recession and almost 90% of that was General Motors and Chrysler, which, if you recall, went bankrupt. Our management team has been through this. We've restructured the company to be highly diversified. We now have a footprint across the entire country, and the people sitting here have been with us since 2005, prepared. We knew we were late cycle, and we didn't realize it would come so quickly. We do believe the market will recover and it may prevent a deeper recession because it hit so hard and so fast. It’s going to be a fun period over the next 90 days to optimize our opportunities to achieve that 5% market share.

It’s helpful. On the parts and service side, it sounds like you’re not seeing the sequential recovery yet, but when things open up, it’s fair to think that there will be a snap-back. When you think about capacity in your service base as we think about maybe the third and fourth quarter as a reasonable timeframe, let’s say same-store sales were up 10% to 20%, is that something that your service base would have the capacity to handle? What would be a governing limit on your human capacity and installed bay capacity as we think about that snap-back? Or what could you handle on a same-store 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 about 47%. In pre-COVID days, we were only running at that capacity, meaning we have the facilities to double our volume and still extend hours to get even more out of that capacity. You hit on the true realization: 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 in same-store sales rates. I think there’s no doubt that our people have been sitting on their couches watching TV and they are ready to confirm rent quicker. But I don't believe more than—if we look at that—we've had quarters that have pushed 10%. I believe there’s another potential 10% that, through our existing labor force, can cover the pent-up demand quickly. Thus, getting to the potential of what could be a plus 20%. We could attract talent to expand service with home solutions. Our HR teams are capable of bringing in talent, showing our employees what we did during the downturn, allowing us to conquest people into our organization in the event we stabilize.

Great. And then, just lastly, when you talked about M&A and not necessarily re-pricing deals, given that your stock has been re-priced pretty aggressively in a negative way, I’m curious why you think it’s the right path. Would you maybe be better served just in the near-term to find back your own stock if you can't re-price those deals to where your stocks are? It seems unfair to yourself, given what’s happened with the re-pricing of your assets in the public market. There might be an opportunity.

Those are great insights and align with what we’re thinking. Remember, on the 14 deals, they are highly accretive. We have $515 million in cash ready to deploy. We could consider share buybacks; we've bought back 2.5% of our float through the first quarter, and our initiatives may bounce back positively. What we believe today is our primary focus is M&A over share buybacks if it is case by case. Each of those acquisitions is accretive upon closure and we’re always looking closely at our strategy. Remember, for all acquisitions, we typically buy underperforming strong assets, less capitalized than others, but the pipeline necessarily remains intact. The engagement of COVID-19 pushed potential sellers to reconsider their valuations but not a complete cessation. It may change some factors of timing but really we think we have a lucrative pipeline for Lithia Motors, even if taking time to close for proper confirmation.

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 wonder, it’s great you’re maintaining your dividend, but are you really confident you can maintain it for the rest of the year or is it just a wait-and-see dynamic right now?

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

Okay, that’s helpful. And in terms of vehicles right now coming off lease, are the OEMs basically saying the customers, we don’t want to buy them back at all and keep them for another four to five months without payment or do they still want to take the vehicle back?

David, this is Bryan again. This is just a business and customer-centric decision from the OEMs. They’ve always allowed, most OEMs have allowed, other captives to defer the lease end for some time. Typically, it’s for 90 days. Manufacturers know consumers may not want to make decisions now; it allows them to adjust how they take back vehicles. It is a smart move to manage the market's used vehicle values.

And somewhat related would be just the consumers right now who are either digitally or where allowed are coming in store? Are they really just more people who really need a vehicle to do something? There’s not really a wealthy customer just looking for a great deal?

David, Bryan again. I think the people coming in today are those that need a vehicle. Additionally, there’s also an element of opportunism, where consumers feel COVID-19 isn’t as bad as expected; this creates an opportunity to take advantage of the incentives while available. Our advantage exiting COVID-19 is seasonality; we’re heading into Q2 and Q3, the most robust selling seasons. Improved weather will boost consumer sentiment positively. This strengthens our previous downturns before.

David, one thing to add is that our web traffic is up 22% right now over year-over-year; however, while lead traffic declined 10%, that decline, compared to our vehicles improving, is a positive sign that we’re seeing active consumers again moving closer into this digital experience and process.

Okay. And the last question is on M&A. The 14 deals, do you expect all of those to still close in the second half of 2020 or is that beyond 2020? Once those deals are processed, are you expecting given the downturn that a lot of sellers are going to back out of the marketplace until 2021 or even 2022?

Great questions. I think the answer to that on the 14 deals is it’s earnings dependent. If they don’t meet the earnings quality standards, then they’ll ask the goodwill to reflect appropriately. I think most of the M&A activity is in new regions where we don’t have a massive footprint and have been hit less hard than other states, making it more likely those will occur. Also, the pipeline remains full of deals that are not under contract and are highly attractive and lucrative for Lithia Motors. At the beginning of the COVID-19 impact, we saw a brief period where consumers faded off; sellers wanted to wait before making commitments. We’re starting to see activity increase in states that are seeing recovery or lifting restrictions. I don’t believe distress selling occurs because we do not focus on forced sellers. Instead, we focus on pricing and appropriate goodwill expectations that we hope will remain constant.

Okay, thank you.

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 a quick question on the outlook for certain independent markets, specifically Texas, known for being stable in the quarter. 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. Even when COVID-19 hit, prices were approximately in the $20 range; we expected a significant hit. If you remember in 2008, 2009, 2010 post-oil price rise, our position benefitted greatly. Those technicians who were out in the field fixing pump jacks came to us, offering their working capabilities at a fraction of their prior incomes. We have the potential to rehire those individuals, which could support service demand owing to the pent-up needs from this 45 to 60-day period. So I believe Texas looks strong for the service side. On the sales side, Lithia Motors while approaching the last recession had mediocre operators, but today our Texas operations show a marked improvement in their used car sector, which could help offset demand declines where consumers need to prioritize lower car payments.

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

No, we don’t have a significant read on that. However, one of the large digital independents indicated that they have been running high with same-store sales in the 80% to 90% range and they’ve seen declines around 20%. This aligns with our experience where we have been down in the 15% range, a much less steep decline compared to others. This delta means that our inventories and personnel metrics are effectively adapted to respond to demand better.

Thank you. Our 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. With the customer base shifting 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?

This is Chris. I mean ultimately, like we said in our prepared remarks, we aren’t seeing any shift right now with consumers having 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 far, everything is remaining 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. 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.