Lithia Motors, Inc.

Good morning, and welcome to the Lithia Motors second quarter 2020 conference call. All lines have been placed on mute to prevent background noise. After the speaker's 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 second quarter 2020 earnings call. Presenting today are Brian DeBoer, President and CEO of Chris Holshue, Executive Vice President and COO, and Tina Miller, Senior Vice President and CFO. Today's discussions may include statements about future events, 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, lithiuminvestorrelations.com, highlighting our second quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Eric. Good morning and welcome, everyone. To begin, and as our local communities around the country continue to reopen and adjust, our priority remains to ensure the health and well-being of our team members, customers, and communities. We would like to thank our team members for their strength, adaptability, and encouraged they have demonstrated navigating the impacts of this pandemic. Earlier today, we reported the highest adjusted second quarter earnings in company history at $3.72 per share, a 26% increase over last year. These results were driven by strong sequential improvements throughout the quarter in all business lines, culminating with used vehicle sales increasing 23%, and returning to the year-over-year growth levels experienced pre-COVID-19. Our rapid growth continues to be powered by people and innovation, and our teams remain committed to safely meeting customers' needs through the entire ownership lifecycle while elevating the experience through affordability, transparency, and convenience. Our omni-channel strategy led us to another quarter of record earnings and a step closer to our recently shared five-year plan to eclipse $50 billion of revenue and $50 of earnings per share. During the quarter, we experienced one of the lowest monthly new vehicle SARs in history and not only maintained profitability, but achieved the strongest net income levels in our history for both May and June, with net income increasing 44% and 97% respectively over the prior year. As noted in our interim quarterly updates, the sequential improvements we recognized throughout the quarter concluded in June with total revenues decreasing 2% and total gross profit increasing 15% for the month. Our declines in revenue were offset by significant improvements in margins that Chris will speak to in just a few minutes. While we focus on executing each day, we are guided by our long-term vision and will now discuss the details of our five-year plan and the introduction of our new national digital home channel and brand. We are in an exciting time as we embark on our five-year plan to expand our presence in the over $2 trillion market of automotive products and services. Our strategy focuses on the most expansive addressable market of any retailer in the automotive space. This plan was designed to address both the full vehicle ownership lifecycle and all levels of affordability. It includes new and certified vehicle sales from 30 manufacturers, a full spectrum of non-certified used cars, and the high-margin aftermarket businesses, including service, body, and parts. Our history of exponential growth within the industry, coupled with our team's ability to execute, has positioned us with a self-generating cash engine producing over a half a billion dollars annually to pragmatically and profitably disrupt this industry. Our strategy for disruption begins by combining our proprietary technology with the scale of our people, inventory, and network to modernize the industry. As we continue to develop and bring to market our digital home solutions in the second half of the year, our teams are ready to serve not only our traditional customers, but also incremental e-commerce customers through our new national brand. The past few years of research and development on our new revenue channel and the recent acceleration of consumer demand for in-home solutions has culminated with this brand launch. Our new national brand name expresses the qualities and services that will be delivered through each of our digital home solutions. With much anticipation, we are excited to announce our new national brand name, Driveway, as the guiding light for our all-new experiences and relationships. As the foundation of our e-commerce digital home solutions, Driveway is designed to reach consumers thirsting for transparent, empowered, flexible, and simple buying and servicing experiences. Driveway pricing is completely negotiation-free, providing shopping experiences across our new vehicle, certified vehicle, used vehicle, and service body and parts revenue streams. Driveway is home enabled with the ability to deliver and service body and parts revenue streams. Driveway is home enabled with the ability to deliver anywhere in the country through our coast-to-coast and will include our own inventory of over 55,000 vehicles, providing consumer selection, in addition to leveraging 2,000 of our existing employees as customer-facing valets and behind-the-scenes specialists to fulfill the driveway experience. Our 190 existing locations will retain their local brands, while few future locations may carry the driveway name or utilize driveway in their branding messages. Over time, we expect marketing efforts from our local brands to also support the driveway national brand through the My Driveway Portal, a customer experience hub. The My Driveway Portal will allow our 5 million paying customers from our local brands, as well as new driveway brand customers, to shop, sell, and service and manage their vehicles. Simply put, in a single location, a customer can manage their vehicle ownership lifecycle from the vehicle information and maintenance history to F&I product subscriptions. Now I would like to walk through each of the consumer interaction points and revenue generation opportunities within this e-commerce strategy. Let's begin with our in-home driveway service experience that will launch later this quarter here in the Northwest. This experience will allow consumers to schedule service work with free home pickup and delivery, including loaner vehicles, within a predefined geofenced area. This service is a key differentiator in our model, as it allows for over ten times the brand impressions compared to digital experiences that only sell a customer a vehicle once every five to six years. This revenue stream will include premium-level pricing and allow the consumers to subscribe to services for the lifetime that they own their vehicle. The next consumer interaction point is our used vehicle revenue stream, which has two components, inventory procurement and vehicle sales. The inventory procurement component expands our five channels of procurement and is key to generating incremental vehicle sales through our e-commerce platform. Our procurement technology, which was deployed in the third quarter of 2019, included the key components of geo-fencing, workflow management, and scheduling that are the engines for the other home digital solutions. This selling experience and structure of the impending other components can be seen live today on driveway.com. The used vehicle sales experience is also coming to market in the fourth quarter and will be a one-price, digitally-enabled experience that will include immediate financing and a massive selection of vehicles that can be delivered anywhere in the country. Our selection will include the entire spectrum of used vehicles, from certified vehicles to 20-year-old value autos. All vehicles will include a seven-day return policy and other brand guarantees to reassure consumers of their purchase and include home delivery fulfilled by our existing logistics network. Lastly, our new vehicle revenue stream will launch early next year as we continue to perfect the digital integration of manufacturer rebates, leasing options, and other variables unique to new vehicles. All of our business lines offered through Driveway will leverage our Virtual Centers of Excellence, or VCEs, to provide a helping hand behind the scenes for buyers that need support along the way. Our VCEs include finance and sales managers to assist in financing the more complex transactions, use vehicle specialists to value the few one-off vehicles that our AI is unable to value, and service advisors to offer customer support on pricing for the more complex repairs generated from upsell opportunities for their service work. Though not assumed in our model, which can be found on page 11 of our updated investor presentation, we believe that there is opportunity for margin expansion, and considerable SG&A reduction as we further leverage our extremely profitable network. With that, we look forward to sharing further details on Driveway over the coming months as each component becomes a reality. The foundation to our omnichannel plan is the growth and expansion of our physical network. Having the ability for consumers to conveniently access all of our businesses is a competitive advantage to ensuring a highly profitable digital experience across the United States. 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 lifecycle, especially related to our highest margin service and associated parts solutions. Increasing our physical network to approximately 400 locations in six regions gives us the ability to reach over 90% of U.S. consumers in two hours or less. As such, our top priority for allocating capital will continue to be accretively expanding our network by acquiring strong new locations. With less than 1% of the $2 trillion market, our physical network will be leveraged through Driveway and continuing to grow our core business, allowing consumers to create the experience that they desire. The opportunities for consolidation within our industry remain plentiful, and our pipeline for acquisitions remains full. Our plan models acquiring approximately $4 billion in revenues annually over the next five years, This highly fragmented market has allowed us to consistently invest in increasing the reach and density of our physical network by acquiring strong assets. For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after-tax return of over 25% annually. After a strong sequential recovery throughout the second quarter, we renegotiated and restarted acquisitions in the latter half of the year. We have completed three acquisitions thus far, Smolas, Chrysler, Dodge, Jeep, Ram, and Nissan in Bend, Oregon, and Ladin, Subaru, and Thousand Oaks, California. These locations increase our revenues by $160 million annually while further improving density within our northwest and southwest regions. including the addition of two Lexus stores acquired earlier this year, this brings our total network expansion to $320 million thus far in 2020. With more than a billion dollars in cash and available credit, on finance real estate that can add an additional $250 million in liquidity, over $500 million in EBITDA production annually, and an adjusted leverage ratio below two times, we are poised for accelerated growth. Assuming an average equity investment of approximately 20% of revenues, our available liquidity and annual pre-cast flows could add another $7 billion in revenue or more than 50% growth. In just a few minutes, Tina will discuss additional avenues of liquidity to expand our robust and disciplined capital strategy to support our strategic goals. Despite reporting our highest adjusted earnings in company history, we're just getting started. Our company and all of our team members live our mission of growth powered by people and the corresponding value to improve constantly. As such, we remain humble and never quite satisfied, as we are tenaciously committed to improve, grow, and find new opportunities. To summarize, our diversified, high-growth business strategy is highly complex and has been built despite the considerable barriers to entry in new vehicles, making it difficult, if not impossible, to replicate. Our industry remains ripe for considerable consolidation and is thirsting for modernization. Our growing network composed of our people, inventory, and physical network, combined with our driveway digital home solutions, completes our unique omni-channel strategy. The advantages of a responsive and adaptable team with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment. This strategy positions us to continue to lead our industry's transformation and progress towards making our five-year plan of $50 billion in revenue and $50 EPS a reality. With that, I'd like to turn the call over to Chris. Thank you, Brian. I want to start by recognizing our operational leaders who have lived our mission of growth powered by people, and focusing on what they can control and identifying the levers that allowed them to persevere through these unprecedented times. Our team's ability to be agile and nimble led us to solutions that continue to meet our customer needs safely and conveniently, resulting in one of the most profitable quarters in the company's history. With that, I'd like to discuss our same-store quarterly results. For the three months ended June 30, 2020, total same-store sales were down 18%, led by a 24% decrease in new vehicle sales a 1% increase in used vehicle sales, a 7% decrease in F&I revenue, and 21% decrease in service body and parts revenues. As previously reported, results improved throughout the quarter with total same-store sales improving for June to a decrease of only 6% compared to the prior year. The new vehicle business line was down 24% for the entire quarter but improved to a decrease of 13% for the month of June. For the quarter, our average selling price increased 5%, and unit sales decreased 27%. Gross profit per unit increased to $2,625 compared to $2,095 last year, a $530 increase, or 25%. Total new vehicle gross profit per unit, including F&I, was $4,291, an increase of $685 per unit, or 19%. At approximately $4,300 of gross profit per unit, new vehicles remain highly profitable with a 10.5% margin, similar selling costs per unit as used vehicles, and inventory carrying costs that are subsidized by our manufacturer partners. Our OEMs have reopened their factories and adjusted plans to avoid any significant disruption in the availability of new vehicle inventories. As of right now, our stores are positioned with the inventory necessary to meet the increased demand that we were seeing throughout the network. For used vehicles, we saw a 22% increase in revenues for June and a 1% increase for the quarter. Gross profit per unit for the quarter was $2,243, an increase of 2%, or $48, over last year. Total used vehicle gross profit per unit, including F&I, was $3,774, an increase of $185, or 5%. Our strategy of selling deep into the used vehicle age spectrum through our high-margin core value and value auto vehicles provided us with inventory that have valuations resistant to short-term market fluctuations. In addition, our ability to procure the right scarce vehicles through the five different channels is the catalyst for the future success and growth of driveways. Additionally, in weaker economic times, these already scarce vehicles are in high demand as consumers move to less expensive monthly payments and more affordable product options. New and used vehicle sales are supported by our experienced finance specialists that help match the complexity of a consumer's financial position with the lending options at over 150 financial institutions. In the quarter, our finance and insurance business line showed massive improvements, averaging $1,590 per retail unit, compared to $1,454, an increase of $136 per unit over the prior year, as consumers continue to take advantage of the product offerings available that protect their mobility investments, as well as the record incentives from our OEM partners and historical low interest rates offers. Overall, new and used vehicle sales create incremental profit opportunities through the resale of additional training vehicles, greater manufacturer incentives, F&I sales, and future service and parts work. We continue to monitor this through the growth of our gross profit per unit, which was $4,030 this quarter, an increase of $412 per unit, or 11% over last year. As a result of the accelerated demand seen in the second half of the quarter, total gross profit per unit improved to $4,418 for June. In addition, our stores remain focused on the highest margin business lines, our service body and parts, which decreased 21% over the prior year, but down only 4% in June. Our service body and parts business capture over 5 million paying consumers and brand impressions annually, generating over 50% margin, and this remains a huge competitive advantage at Lithia. The increasing demand from consumers asking our stores to offer home solutions has shifted the mindset of our teams, and has accelerated the ability to leverage our digital home solutions. Combined with online vehicle sales, used vehicle inventory purchases, and at-home service solutions, the driveway launch positions our company to leverage our growing network, which 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. Store leaders continue to take prudent and decisive cost savings measures in personnel and advertising expenses, which comprise approximately 75% of our SG&A. These actions led to significant sequential improvements throughout the quarter. Same store adjusted SG&A to gross profit was down to 64.8% in the quarter, an improvement of 480 basis points over the prior year. To reinforce the SG&A opportunities we have ahead, For the month of June, our company SG Native gross profit improved 57.4%. While our high-performing stores consistently maintain SG Native gross profit metrics at these levels, significant leverage in the cost structure is attainable as we maintain discipline and look to our e-commerce and digital home solutions to provide incremental sales with lower delivery costs. In summary, our teams continue to adapt and operate in ways that best match each of their local markets and meet the needs of our evolving consumers wherever, whenever, and however they desire. With the information provided by our data science, our teams are nimble and responsible to the changing environment. We are innovating and improving the consumer experience through our incremental and pragmatic modernization and are poised for the growth in the back half of the year. Our team's ability to achieve high performance in any environment continues to be the foundation as we remain focused on our longer-term goals. With that, I'd like to turn the call over to Tina.