Lithia Motors reported its second-quarter results Wednesday, revealing an 11-percent increase in same-store used retail sales. And much of the company’s conference call to discuss Q2 financial results was spent outlining the recent DCH Auto acquisition and what it means for Lithia going forward.

And overall used retail sales were up a significant 14.3 percent for the quarter: Lithia sold 16,086 used retail vehicles in Q2, up from 14,074 sold during the same period last year.

Consequently, used-vehicle retail revenue was up a whopping 20.1 percent, coming in at $310.48 million.

Used inventory was up, as well, as days’ supply in Q2 sat at 60 days, an increase of nine days from the year-ago period.

Bryan DeBoer, president and chief executive officer, said, “We are comfortable where we are with used inventory. It’s becoming a lot easier to procure those CPO, late-model vehicles, and at lot of our stores, it is the path of least resistance to find those cars.

But he pointed out he thinks some work may be due in keeping to the company’s core product: 3- to 8-year-old cars.

“They are more diffiuclt to find, but people are trading them in,” he said. “It is quite a balance to keep our teams helping used-car managers divest those cars that are late-model and finding the core product.”

He explained keeping to this core product will help the dealer group move toward its goal of retailing 75 used retail units per-store per-month.

The DCH Integration

This used success comes on the heels of the company announcing a major acquisition. In June, Lithia announced it entered into an agreement to buy DCH Auto Group, one of the largest privately owned dealer groups in the country. This acquisition is expected to close in the fourth quarter — Oct. 1, specifically, Chris Holzshu, chief financial officer and senior vice president of Lithia, pointed out during Wednesday’s call.

The 27 DCH stores are located in New York, New Jersey and California. Lithia management shared the integration of the DCH dealer group will “open up” many more metropolitan areas to the company.

As for the brand mix, company management pointed out 82 percent of DCH’s business is made up of Japanese brands Honda and Toyota.

Company management pointed out the acquisition is one of the biggest of its kind seen in recent years.

As to how the locations of the new stores will impact seasonal performance for Lithia, DeBoer didn’t think much would change.

“Some of it’s (DCH) in the northeast, which is seasonal, and some is in Los Angeles, which is not so seasonal, so I think if you compare it to Lithia, it appears it will respond similarly to the seasons quarterly,” he shared.

As for how the company will be funding the deal valued at more than $360 million, Holzshu said that over the past 30 days, Lithia has been in discussion with its lender partners to expand its credit facility as well as obtain mortgage financing “in order to position us for the integration with DCH later this year.

“We anticipate funding the transaction through the expansion of Lithia’s current credit facility by $600 million and by incremental mortgage financing of approximately $200 million,” he said.

As with any large merger, the issue of combining teams is a lengthy process.

As announced back in June, DCH’s current management will continue to lead the DCH stores, as president George Liang will report to DeBoer.

Once the deal is finished, DCH founder Shau-Wai Lam will likely join Lithia’s board of directors.

As to why Lithia won’t be replacing the company's management, DeBoer said, “I think as we began to meet the management team of DCH, it became apparent that they run their operation and are solid in how they do that, and their culture was very similar to ours."

He went on to share Lithia management sees team integration as well within the two company’s grasp.

“The goals we have established for each other are reasonable,” he said.

But it won’t happen overnight.

Holzshu said, “It is going to be something that is transformational, and it will most likely take three to five years to fully integrate."

Also on the mind of the industry and investors is whether Lithia is in the market for any other large private dealer groups as well as whether they have seen an increase in interest in such acquisitions within the public dealer group circle.

As to whether any other large acquisitions are in the works, DeBoer said the dealer group needs time to focus on DCH integration.

“We believe that we have a confident team, and I think it is fair to say we have some work in front of us, and we need to focus on the DCH program, but we also never rule out other opportunities,” he said. “If it is a larger type of transaction, I think we will cross that bridge when we come to it.”

One aspect of Lithia’s acquisition strategy that may be attractive to potential private dealer group sellers is “the ability for us to allow dealerships and groups to act as entrepreneurs as they always have,” said DeBoer.

As seen in the DCH deal, Lithia tends to work alongside current company management during acquisitions.

DeBoer explained this atmosphere helps to bring many potential sellers to the table.

And this thinking goes into Lithia’s buying decisions, as well.

“We looked at a number of different groups. It is unique that the management teams of both companies involved know each other for a number of years, and the way we were able to quickly get on the same page in terms of what we are trying to accomplish … it was pretty natural, and I don’t think any of the discussions we have had with other groups have been so natural,” he said.

It was also implied during the call this move may open the doors for other private dealer groups looking to sell.

“I don’t know what the appetite is of all dealers, but we have been in discussion with other dealer groups, and it’s about whether it is the right timing for their planning and for their pocketbook,” DeBoer said.  “What it may show is that the opportunity to do something like this is out there, and it may spark some interest in other groups to look at exit strategies or partnership types of strategies.”