Lithia Motors Inc (NYSE:LAD) Q4 2017 Earnings Conference Call - Final Transcript

Feb 14, 2018 • 10:00 am ET

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Lithia Motors Inc (NYSE:LAD) Q4 2017 Earnings Conference Call - Final Transcript

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Presentation
Executive
Bryan DeBoer

We continue to see growth in our service, body, and parts business, which grew 4% despite one fewer service day compared to last year, which negatively impacted revenue by approximately 2%. Last month, our executive team and operational group leaders assembled in Downtown Los Angeles at our new Toyota store where we reviewed and modified strategies on how to capture the over $200 million in incremental dry powder that is available to our existing store base.

The resulting efforts continue to focus on customer-driven topline growth while effectively managing cost. Chris will comment on some of these areas shortly. Online marketing continues to attract more customers as our same-store Web traffic increased 15% in 2017 followed by another 20% gain in January.

Our stores continue to deploy a variety of full-service online and home delivery models tailored to their markets, representing the hallmark of our entrepreneurial spirit. We emphasize the omni-channel nature of our retail offerings through personalized experiences, targeted marketing and intuitive easy-to-use websites that connect with customers in convenient and engaging ways.

In the fourth quarter of 2017, we completed the acquisition of Armory Chrysler Jeep Dodge Ram in Albany, New York and Crater Lake Ford Lincoln and Crater Lake Mazda in our hometown of Medford, Oregon. We also divested a small store in Eastern Washington, continuing to optimize our portfolio.

Our cumulative total of annualized revenue acquired and disposed of in 2017 is approximately $1.7 billion. 2018 is also off to a robust start. In January, we acquired Ray Laks Honda and Acura in Buffalo, New York with estimated annual revenues of $140 million.

The plateauing new vehicle sales environment seems to be further accelerating the number of acquisitions available and we believe 2018 activity may exceed 2017 total. We anticipate being a significant beneficiary from the recent tax reform. Positive gains should be seen in both our existing store operations as well as new acquisition opportunities. We estimate our effective tax rate will decrease from 38% to 27% and savings of roughly 11% or an incremental $40 million in annual cash flows.

Additionally, we estimate 90% of dealerships in the US are structured as pass-through entities, which has historically meant we had a tax disadvantage to most competing acquirers. This change in our tax rate lowers the hurdle rate we apply to our acquisitions forecast resulting in more deals meeting our disciplined annual return on equity target of 15% to 20%.

Looking forward, we are updating our 2018 earnings outlook to $10.50 per share, which John will also elaborate on in a few moments.

In summary, we remain focused on delivering the annual double-digit growth that we've accomplished for the last seven years. We see a stable operational environment, a massive amount of earnings upside available through improvement in our unseasoned stores and a more robust acquisition market. These factors coupled with the most liquidity in our history and sector-leading low leverage gives us confidence that we can continue to drive significant top and bottom line