Lithia Motors, Inc.

Good morning and welcome to the Lithia Motors Third Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn this call over to Mr. Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

Thank you and welcome to the Lithia Motors Third Quarter 2020 Earnings Call. Presenting today are Brian DeBoer, President and CEO, 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 reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithianvestorrelations.com, highlighting our third 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. Earlier today, we reported the highest quarterly earnings in company history at $6.89 per share, 103% increase over last year. These results were driven by strong used vehicle revenues combined with record gross profit levels and continued sequential improvements in new vehicle and service body and parts sales. In addition, we restarted our acquisition engine, closing nearly $1.5 billion in expected annualized revenues during the third quarter. We would also like to welcome all of our new partners that participated in our equity and debt offerings last month and look forward to our future growth together. Our performance this quarter demonstrates the success of our highly diversified, highly complex growth strategy that sets Lithia apart from its competitors. Our digital home solution, Driveway, coupled with our existing network of over 200 locations, allows us to meet customers on their terms throughout the entire life cycle of mobility ownership. Lithia's ability to offer both in-home and in-network solutions provides consumers experience that satisfies a broad range of customer needs with a commitment to affordability, transparency, and convenience. This omni-channel strategy led us to this historic quarter of record earnings and is solid progression towards our five-year plan of $50 billion of revenue and $50 in earnings per share. During the quarter, total revenue grew 9% and total growth profit increased 28%. New vehicle revenue, a key driver of our ability to source high-quality used vehicles and the catalyst to growth in our higher margin business lines, increased 3% for the quarter. Total use revenues increased 19%, F&I increased 18%, and service body and parts increased 6%. Chris will also be sharing same store information in just a few moments. The substantial improvements in gross profit of over $1,000 per unit compared to third quarter of 2019 are largely attributed to high level of incentives from our OEM partners and a perceived inventory shortage in the country. These record gross profit levels coupled with sequential improvements in all business lines and strategic cost-saving measures executed earlier this year allowed us to eclipse a quarter billion dollars of adjusted EBITDA in the third quarter. As consumer behavior evolves, the $2 trillion market of automotive products and services is more ripe for consolidation and disruption than ever before. Our five-year plan to achieve $50 billion in revenue focuses on the most expansive addressable market of any retailer and the $350 billion of gross profit to ensure strong profitability along the way. 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, plus the high margin F&I and aftermarket businesses, including service body and parts. Our national brand and foundation for disruption, Driveway, begins by combining our proprietary technology with the scale of our people, inventory, and network to profitably modernize the industry. As we continue to market additional digital home solutions, our teams are ready to serve not only our traditional customers, but also incremental e-commerce customers through our new offerings. During the quarter, we unveiled Driveway as our e-commerce and in-home national brand. Over the past 16 months under the Barrel.com regional brand, we reached our second functionality milestone with the launch of our in-home driveway service experience in the Northwest or Region 1. This experience allows consumers to schedule service work with free home pickup and delivery, including free loaner vehicles within a predefined geofenced area. This key differentiator in our omnichannel model allows for more than 10 times the brand impressions compared to digital used vehicle only experiences that sell a customer a vehicle once every six years. This service offering allows consumers to pay as they go, subscribe to in-home services for the lifetime that they own their vehicle, or as we like to say, have your vehicle serviced in your slippers. Earlier this month, we soft launched our third milestone, the used vehicle revenue stream. Though still in its infancy, Driveway now has over 20,000 high-quality used vehicles available for purchase and delivery anywhere in the United States. By the end of this quarter, this solution will be upgraded to provide customers with an end-to-end digital solution with functionality rivaling all other digital platforms. Our selection of scarce used vehicles spans the entire age from certified used vehicles to 20-year-old value autos. All vehicles have a seven-day return policy, free delivery within 100 miles fulfilled by our existing logistics teams, and other brand guarantees to reassure consumers of their purchase. The purchasing process is a one-price, digitally-enabled experience that will include immediate financing and in-home finance subscriptions by the end of the fourth quarter. Our data science shows us that although consumers will have the option to purchase and finance their vehicles fully online, the complexity of their own financeability and desires will usually require the assistance of our driveway care center and network. Our VCEs, or Virtual Centers of Excellence, include our finance specialists from our existing network behind the scenes as partners with our driveway care centers to provide solutions and expertise for customers who are unable to be automatically approved. These experts are using their relationship with over 150 lenders throughout the United States to structure the consumer's transactions in the way that they can be approved. Though we look forward to the days when our automation and APIs can solve for a larger portion of consumers, our history and science tells us that this will move slowly. In the interim, our VCEs greatly expand our ability to finance two to three times more consumers than other digital competitors. Lastly, our new vehicle revenue stream, which will include an industry-first seven-day return policy, will launch early next year and will add another approximately 30,000 vehicles to the driveway online selection. With over 200 existing reconditioning and vehicle storage locations, 500 inventory procurement specialists, and 8,000 associates that currently perform in a negotiation-free environment, we are competitively positioned to support the driveway national brand. In addition, our 5 million paying customers will soon have access to the My Driveway portal, a customer experience hub. Simply put, the My Driveway portal will allow consumers to shop, sell, service, and manage their vehicles. In this single location, a customer can control their vehicle ownership lifecycle from vehicle information, scheduling in-home or in-network service, viewing their maintenance history and F&I product subscriptions, and even more. By constructing the portals under the driveway URL, organic search and marketing dollars will be much more effective than any current or future competitor. The combination of driveways difficult to replicate offerings allows consumers to complete all of their vehicle ownership experience in the convenience of their own homes, and if they choose, never set foot in a traditional dealership again. The foundation to our omnichannel plan is the growth and expansion of our physical network. With no company having over 1.5% of the $2 trillion market, the opportunities for consolidation within our industry remain plentiful and our pipeline remains full. Our plan models acquiring approximately $4 billion in revenue annually over the next five years. This highly fragmented market has allowed us to consistently invest in increasing the reach and the density of our physical network by acquiring strong assets. Building our network with new vehicle locations positions Lithia and Driveway to leverage massive competitive advantages over used-only retailers. These advantages include upstream procurement of new and certified vehicle trade-ins, a more distributed reconditioning network that eliminates logistics costs and is closer to the customer, and access to the highest margin service body and parts businesses, all at a relative network cost similar to used-only retailers. We've added a new comparative slide on page 16 of our investor deck that illustrates the cost of our network relative to revenue and gross profit, as well as our current utilization rates. With more than $2 billion in cash and available credit, unfinanced real estate that can add an additional $225 million in liquidity, over $700 million in EBITDA production annually, and an adjusted leverage ratio of approximately two times, we are well positioned for accelerated growth. Assuming an average equity investment of approximately 25% of revenues, Our available liquidity and annual free cash flows could add $8 billion in revenues or more than 50% growth. During the quarter, we completed the acquisition of San Francisco BMW, the 10-store John Eagle Auto Group in Texas, and a CJDR store in Knoxville, Tennessee. In addition, earlier this month, we completed the acquisition of Latham Ford in Albany, New York, These acquisitions are anticipated to generate $1.5 billion in annualized steady state revenues. For the year, this brings our total network expansion to $1.75 billion and expands our density in key geographic areas. We continue to seek acquisitions to improve our reach, more conveniently serve our customers, and grow our highest margin business lines. Our customers' proximity to our physical network is a key element of our growth strategy and design as it enables us to supply convenient touchpoints throughout the ownership lifecycle. We have approximately $2 billion of revenue under definitive purchase agreement that are expected to close during the quarter. In addition, we have approximately $3 billion under LOI that are expected to close in early 2021 for a total of $5 billion more. Coming off our highest earnings in company history and more than doubling our quarterly earnings over the prior year, we remain humble, never quite satisfied, and acutely focused on our growth aspirations. Our diversified high-growth business strategy is highly complex and difficult to replicate. Our growing network composed of our people, inventory, and physical network, combined with our driveway digital home solution, completes our unique omnichannel strategy. Our mission of growth powered by people and our values of improving constantly and taking personal ownership are the driving forces behind our ability to outperform and compete in any environment. This strategy and culture positions us to continue to lead our industry's transformation and progress us towards our five-year plan of $50 billion in revenue and $50 in EPS. With that, I'd like to turn the call over to Chris. Thank you, Brian. As we enter the final months of 2020 and reflect on the strongest quarter in our company's history, our store leaders continue to challenge their teams to exceed customer expectations, increase market share, and improve profitability. The demand from consumers for transparent in-home solutions has shifted the mindset of our teams and accelerated the adoption of driveway, and driveway type services throughout our network. The following discussion about our quarterly results is on a same store basis. For the three months ended September 30, 2020, total same store sales increased 1% driven by a 4% decrease in new vehicle sales, an 11% increase in used vehicle sales, a 7% increase in F&I revenue, and a 3% decrease in service body and parts revenue. As previously reported, we have seen continued sequential improvements each quarter as our leaders have adjusted to the impacts in their local markets and focused on providing safe, convenient transportation solutions to our customers. The new vehicle business line was down 4% for the quarter, but improved to an increase of 6% for the month of September. Our average selling price increased 6%, and unit sales decreased 10%. Gross profit per unit increased to $3,022, compared to $2,079 last year, a $943 increase, or up 45%. Total new vehicle gross profit per unit, including F&I, was $4,778, an increase of $1,116 per unit, or 31%. At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with an 11% margin, similar selling cost per unit as used vehicles, and inventory carrying costs that are subsidized by our manufacturer partners. For used vehicles, we saw an 11% increase in revenues for the quarter. Gross profit per unit for the quarter was $2,971, an increase of 30%, or $685 over last year. Total used vehicle gross profit per unit, including F&I, was $4,606, an increase of $1,278, or up 38%. As Brian mentioned earlier, our strategy of selling deep into the used vehicle age spectrum and our ability to procure the right scarce vehicles remains the catalyst for the future success and growth of our existing network and driveway. New and used vehicle sales are supported by our experienced finance specialists that continue to find better ways to match the complexity of a consumer's financial position with lending options at over 150 financial institutions. In the quarter, our finance and insurance business line showed substantial improvements, averaging $1,617 per retail unit compared to $1,473 the prior year, an increase of $144 per unit as consumers continue to take advantage of the product offerings available to protect their mobility investment. Overall, new and used vehicle sales create incremental profit opportunities through the resale of additional trade-in vehicles, greater manufacturer incentives, F&I sales, and the future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $4,690 this quarter, an increase of $1,027 per unit, or over 28% over the last year. Our stores remain focused on the highest margin business lines, our service, body, and parts, which decreased 3% over the prior year and improved to an increase of 2% in September. As Brian previously mentioned, our service body and parts business see millions of paying customers and brand impressions annually that generate over 50% margins and remain a huge competitive advantage for Lithia. The decisive cost savings measures taken earlier in the year continue to take hold and are expected to continue into 2021. Combined with the increases we saw in new and used gross profit margins, same store adjusted estimated gross profit was down to 59.1% in the quarter, an improvement of 910 basis points over the prior year. The SG&A opportunities ahead provide significant earnings opportunities as we look to our highest performing stores that consistently maintain an SG&A to gross profit metric at these levels. In addition, opportunity to leverage our existing cost structure will continue as our digital home solutions driveway creates additional incremental sales and leverage in our existing network of locations. This strategy allows us to properly modernize the consumer experience. In summary, our teams continue to meet the ever-evolving preferences of consumers wherever, whenever, and however they desire. As each store's teams begin the process of setting their individual annual operating plans, or AOPs, the information provided by our data science continues to allow them to be nimble and responsive to the changing environment and the opportunities available to continuously improve. We are innovating and meeting consumers' increasing digital in-home expectations through incremental and pragmatic modernization and are poised for continued growth in 2021 and beyond. Our ability to achieve high performance in any environment continues to be the foundation of our culture as we remain focused on our longer-term goals. With that, I'd like to turn the call over to Tina.