Lithia Motors, Inc.

Good morning and welcome to the Lithia and Driveway first quarter 2021 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 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 and Driveway first quarter 2021 earnings call. Presenting today are Brian DeBoer, President and CEO, Chris Holschuh, 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 with the investorrelations.com highlighted in our first 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 adjusted first quarter earnings in company history at $5.89 per share, a 193% increase over last year, and record revenues of $4.3 billion. These results were driven by strong operational performance across all business lines and channels, an acceleration of acquisitions, and a strengthening retail environment. During the quarter, total revenue grew 55% over last year and 52% over 2019, while total gross profit increased 55% over last year and 58% compared to 2019. As a reminder, the pandemic only impacted our first quarter 2020 results for the last two weeks of March. New vehicle revenue increased 60%, used vehicle increased 55%, F&I increased 63% and service body and parts increased 30% compared to the first quarter of 2020. Total vehicle gross profit per unit for the quarter increased to $4,392 per unit, a $692 increase over last year, driven largely by a 24% increase in new vehicle gross profit per unit. Chris will be giving our same store sales results and further color on inventory levels and their respective impact on vehicle margins in just a few moments. Earlier this month, we announced one of the largest acquisitions in the history of the automotive industry. The Suburban Collection adds $2.4 billion in annual revenues, over 2,000 team members, 34 locations, and is a key pillar of the lithium driveway footprint in our most sparse north central region three. With nearly $6.5 billion in expected annualized revenues purchased since the launch of our five-year plan in July 2020, we are considerably ahead of our expectations. The combination of elevated gross profit levels in the new and used vehicles, rapid integration of high-performing acquisitions, incremental lift from the new driveway channel, significant improvements in all business lines, and strategic cost savings measures instituted last year led us to earning over a quarter billion dollars of adjusted EBITDA in the quarter. Entering our 75th year in operations, we reflect on how our history of exponential growth, coupled with our team's ability to execute, has positioned us to pragmatically and profitably disrupt the status quo of the industry. Our multifaceted 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 enhance our digital home solutions, our lithium driveway teams are ready to serve not only our traditional customers, but incremental e-commerce customers as well. Our focus on the most expansive addressable market of any retailer in the automotive space allows us to leverage our massive competitive advantages to demonstrate that e-commerce can be highly profitable and ultimately yield the highest possible EBITDA returns in the space. The used car business lacks barriers to entry. However, success requires infrastructure, financing solutions for all customers, reconditioning expertise, and the procurement of high demand scarce vehicles to quickly achieve scale with smooth execution. All of which Lithia and driveway have established and have proven to be effective at executing on since 1946. Hopefully Dick Hyman, our former COO is listening in today as the 1946 comment was especially made for him. Building on the broadest nationwide network and multi-year design and technology development of Driveway, we are excited by our initial success and continue to enhance the most comprehensive e-commerce home solution in the automotive retail space. Our proprietary consumer applications are maturing and now ready to quickly scale across our existing network that is the broadest in the country. Now entering our second quarter with a full spectrum of offerings, Driveway is empowering consumers to simply and transparently shop, sell, and service their vehicles from the convenience of their homes. The Driveway brand was designed to attract a different and incrementally new consumer than the Lithia Channel. This is the first time in our history that we've been able to market and deliver our 77,000 vehicle inventory to the entire country under a single brand name and experience. We knew our used inventory was broader and more scarce than our competitors, and we are now realizing these advantages as evidenced in our same store and margin results. While Driveway's full spectrum offerings have only been live For a few months, our early learnings and data are showing a clear pathway for Driveway to become the brand of choice for online buying, selling, and servicing, both domestically and internationally. We are on target to achieve a run rate of 15,000 Driveway shop and sell transactions by year end. Important to note that this target does not include Driveway finance and service transactions. On our pathway towards this first volume milestone that took other e-commerce use-only competitors two to three years to reach, we are finding several interesting early trends we'd like to share with you today. First, 97.8% of our driveway customers during our first quarter were incremental and had never done business with a Lithia dealership before. Second, we are seeing that it is taking 19 minutes on average for a customer to complete a full vehicle purchase transaction online with financing included. We are also seeing that about 15% of all credit decisions are auto approved. An overwhelming majority of our consumers still need help from our driveway care center to structure their purchase, balance their credit with their desires, and get through the financing process. 43% of our sales are out of region and our average shipping distance is 732 miles with an average shipping fee of $477. Lastly, we continue to build our online reputation with an average Google review score of 4.98 stars out of five. During the first quarter, Driveway also became the first e-commerce retailer in the country to offer negotiation-free new vehicles with free in-home delivery and a seven-day money-back guarantee at a national level. Driveway's financing solutions with new vehicle leasing and captive manufacturer financing now totals 29 lenders and are available to consumers with auto approvals in a matter of seconds. This lease and finance auto approval optionality was released two quarters ahead of our previously shared plans. Driveway now offers the largest selection of negotiation-free new and used vehicles of any retailer in the country. Our new vehicle inventory represents all major brands, and our selection of used vehicles spans the entire spectrum from certified used vehicles to 20-year-old value autos. Today, consumers can purchase any vehicle accompanied with our full brand guarantees, subscribe to full ownership repair and maintenance options, and receive in-home delivery anywhere in the country. In addition, our marketing dollars have recently expanded outside the original Portland and Pittsburgh markets. As such, our driveway brand marketing is now live in Tampa Bay, Dallas, Houston, Metro New York and New Jersey, Los Angeles, Riverside, Oxnard, Des Moines, and the surrounding markets. With these recent market launches, the driveway brand message is now reaching over 67 million individuals, or 21% of the population, a 16-fold increase over our two initial launch markets. As we continue to perfect our execution in these markets, Our innovation and product teams are working relentlessly on improving the driveway experience. Driveway receives continuous enhancements that will be released every two weeks throughout the year and is on its way to becoming the e-commerce leader of automotive retail. During the quarter, Lab FinTech Arm, Driveway Finance Corporation, originated over 1,000 loans per month across the channels. We continue to see Driveways FinTech platform elevating the experience for consumers with the ability to capture up to 20% of all vehicle sales transactions, further differentiating LAD and profitability. Today, our team of 110 driveway engineers and data scientists have developed a suite of consumer solutions and functionality that provides the first complete end-to-end digital ownership experience spanning the full vehicle ownership lifecycle. In addition, our exclusive driveway care center and inventory procurement teams are growing rapidly to mirror the exponential growth in consumer demand. 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 business lines and for us to store and recondition vehicles closer to them ensures a highly profitable digital experience across the United States. The opportunities for rapid consolidation within our industry remain plentiful, and our acquisition pipeline remains full. For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after-tax return of over 25% annually. During the quarter, we completed the acquisition of the Fields Auto Group in the Greater Orlando Market, the Fink Auto Group in Tampa, Florida area, and Avondale Nissan in Phoenix, Arizona. We also opened a previously awarded Infinity location in downtown Los Angeles. As mentioned earlier, we completed the acquisition of the Suburban Collection in the Detroit, Michigan area earlier this month, adding a massive platform of 34 locations to our north central region. Combined, these acquisitions strengthened our strategic network density in regions two, three, and six, and are anticipated to generate nearly $3.1 billion in annualized steady state revenues. Since launching our five-year plan nine months ago, this brings our total network expansion to over $6.5 billion adding more than $4 in future annualized EPS. Important to note that the consolidation of the largest retail segment in the country can be accomplished in a highly accretive way, and these cash flow positive businesses further add to our massive capital engine. We are in the most active consolidation environment that we have seen in the last two decades. Even with the pace being well ahead of schedule, we continue to replenish the more than $3 billion in revenue still under LOI and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our disciplined hurdle rates. As such, we are expecting our network expansion in 2021 to far exceed our record levels achieved last year as we seek to continue improving our network density, especially in the central and southeastern regions. As our top priority for allocating capital continues to be to accretively expand our network with new vehicle locations, it is important to highlight the competitive advantages and points of differentiation for Lithium Driveway's network growth strategy. First, new vehicle franchises create an accretive growth model with a self-generating profit engine of nearly $1 billion of EBITDA annually. Second, network costs are considerably lower investment when compared to any new entrance into the industry. Please refer to slide 16 of our investor presentation to learn more about our network costs and utilization rates relative to our competition. High ticket new vehicle margins are quite strong at 10% and the carrying costs are subsidized by our manufacturer partners. Upstream procurement from new and certified vehicle trade-ins have more attractive valuations than direct from consumer or auction purchases. Fifth, affordable offerings at all levels allows the customers to remain in the Lithia and driveway ecosystem their entire lives with vehicles and services that match a full spectrum of income and credit levels that change over time. A sophisticated reconditioning network with specialized diagnostic equipment located closest to the customer to eliminate any logistics costs. These reconditioning centers are also utilized for the industry's highest or 50% margin service body and parts businesses. These businesses bring 10 times the consumer lifecycle touchpoints as compared to used vehicle only retailers and allow for substantially lower marketing costs per vehicle sold. Captive leasing through our OEM affiliated partners provides new vehicles with attractive competitively priced monthly payments when compared to one to three year old used vehicles. additional financing support from our manufacturer partners through rate subvention with their captive financing arm, and new vehicle incentives or rebates that allow for the highest level of financeability and absorption of negative equity plus lower down payments for our consumers. Tenth, a diverse upstream offering of zero-emission products and supporting repair and maintenance services through manufacturer partners' product lines. Also, leading advocacy for lower and zero emission vehicle ownership with a comprehensive resource center providing education on vehicles, incentives, charging infrastructure, ownership, affordability guides, and a sustainable vehicle marketplace through green cars. Lastly, New vehicle franchises create loaner and fleet management opportunities to build a factory-like used vehicle inventory pipeline. As our nationwide network continues to grow in each of our six regions, we continue to target a 100-mile reach to allow for convenient, affordable, and timely consumer servicing experiences during and after the purchase of their vehicle. As a reminder, infrastructure costs for delivering the driveway e-commerce experience are zero, as it resides in the underutilized capacity of our growing network. Key to our design three years ago was allowing the flexibility to adjust our investments between channels and multiple business lines to align with consumer demand, whether any economic cycle compete with any future competitor, and expand our cash engines to expand into further adjacencies. These combined with our many competitive advantages strongly position us to achieve our five-year plan and pave the way to even greater aspirations. In closing, our first quarter results doubled the previous highest first quarter earnings in our history as we live our mission of growth powered by people. We continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities. 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. With our technology poised for rapid scalability across our existing and future network, We are positioned to as quickly as possible lead Lithia and Driveways progress towards $50 billion in revenue and $50 of EPS, the first leg of our journey. With that, I'll turn the call over to Chris.