Lithia Motors, Inc.

Good morning and welcome to the Lithia and driveway second 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 will now like to turn the call over to Jack Everett, director of PF&A. Thank you, sir. Please begin.

Thank you and welcome to the Lithia and driveway second quarter 2021 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 discussion 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, lithiainvestorrelations.com, highlighting our second quarter results. With that, I would like to turn the call over to Brian DeVore, President and CEO.

Thank you, Jack. Good morning and welcome, everyone. Earlier today, we reported the highest adjusted second quarter earnings in company history at $11.12 per share, a 199% increase over last year, including the impact of the two recent equity offerings. Record revenues of $6 billion were driven by robust consumer demand and an acceleration of acquisitions to produce strong operational performance across all business lines and channels. During the quarter, total revenue grew 87% over 2019, while total gross profit increased 125% compared to 2019. On a same-store basis compared to 2019, we recorded a 20% increase in new vehicle revenues, 49% increase in used vehicle revenues, 39% increase in F&I income, and 3% increase in service body and parts revenues. Comparisons to 2020 can be found in the financial performance tables of our press release. Our operational teams continue to excel in procuring used vehicles, delivering impressive gross margins, and continuing to grow the business. Chris will be providing additional details on our same store sales results, inventory levels, and other operational results in a few moments. Reflecting back on the first year of our five year plan, we are considerably ahead of schedule and have the required capital to carry us to and beyond $50 in EPS and $50 billion in revenue. At $8 billion in added revenue since plan inception, we have acquired 40% of our targeted $20 billion in annualized revenues. In addition, both driveway and our core business are contributing at higher than expected levels as we enter our second year of the plan. We remain disciplined in our execution and actively focused on adjacencies, cost management, and leveraging our network to increase productivity and lower SG&A costs. Despite the cost of the acquisition integration and driveways development and expansion, our SG&A as a percentage of gross profit was 55.7% during the quarter. This level of SG&A is typical of our top quartile of locations in a pre-COVID environment. Our 50-50 plan, which is a base case, assumes mid to low 60% SG&A, though our management team is constructively focused on greater aspirations. Our past few decades have yielded $1 of EPS for every billion dollars in revenue. We believe that there is significant potential in increasing profitability and constructively changing the calculus so that $1 billion of revenue can produce more than $1 of EPS. To follow are some thoughts on just how much more than $50 in EPS can be generated from $50 billion in revenue. First, with capital raises behind us, there is no further drag on EPS from equity dilution. Second, we can leverage our underutilized network by substantially increasing the volumes that are being produced by them. In service, the magnitude increases 4x, and in sales, 2x. Improving personnel productivity by associate and consumer utilization of technology to improve and simplify experience and workflows. Next, we are in the early innings of our exploration in high margin and low cost adjacencies, such as our driveway financial FinTech, consumer insurance, and fleet management. National advertising now driving economies of scale through greater brand awareness. And lastly, an investment grade credit rating will further decrease our borrowing costs. As a reminder, our base five-year plan assumes a pre-COVID business environment, margins, and growth rates. We are not assuming that the current margin levels will continue and most likely will subside by early next year. In the recently released Fortune 500, we jumped considerably to number 231. We are particularly proud of our performance on three metrics demonstrating our proven ability to grow our top line, increase earnings, and create long-term shareholder value. We were number 12 in 10-year annual growth in revenues of 19.9%. LADD was number two in 10-year annual growth in EPS, with 43.7% growth, more than double what we achieved in revenues, demonstrating our ability to integrate and increase profitability. And finally, we were number three in 10-year total return to shareholders, reflecting a 36.7% return rate, which speaks for the ability to transform and execute. This growth continues as our current annual run rate is approximately $21 billion, as compared to $12 billion in the base year of our plan. Slide 11 of our investor presentation has been updated with our progress, and we look forward to sharing further updates as they are solidified. In May, we raised $1.3 billion in equity and $500 million in net additional debt and plan to deploy this over the next two to four quarters. Along with the cash flows generated from our existing business and future acquisitions, We have the funds necessary to execute all aspects of our five-year plan and do not expect a return to the capital equity markets aside from a transformative acquisition. Across the board, our teams are focused on execution through both channels. We continued to rapidly integrate recent acquisitions and driveway expanded offerings are attracting incremental customers who are seeking to fully transact online. Together, we generated approximately $492 million of adjusted EBITDA in the second quarter. Our unique high-growth strategy with a massive regenerating capital engine is speeding towards our goal of $50 billion in revenue and over $50 in EPS. Driveway is empowering consumers to simply and transparently shop, sell, and service their vehicles from the convenience of their home. The driveway experience is designed to attract a different and incrementally new consumer than the Lithia channel. We can now market and deliver our 57,000 vehicle inventory to the entire country under a single brand name and negotiation-free experience. Leveraging our nationwide network and driveway's broad functionality, we are excited with our endless growth possibilities. Our used inventory is broader and more scarce, addressing over four times the number of customers than the e-commerce retailers focused on selling only one to five year old used vehicles. We are now realizing these advantages as evidenced by our same store sales growth and strengthened margins. We are on target to achieve an annual run rate of 15,000 driveway shop and sell transactions in the month of December. Important to note, this target does not include driveway finance and service transactions. On our pathway towards this volume milestone that took other e-commerce use only retailers two to three years to reach, there are several interesting early trends we'd like to share with you today. Driveway generated over 350,000 monthly unique visitors in June. Driveway eclipsed the 500-unit milestone. with 550 transactions in June, only six months after launch. 98% of our driveway customers during our second quarter were incremental and have never done business with Lithia or driveway before. 95% of our dealership network is actively participating in driveway with reconditioning, logistics, transaction fulfillment, inventory procurement, and last mile delivery. We continue to build on our online reputation with an average Google review score of 4.98 stars out of five. In addition, our Driveway Google domain authority score, which ranks online search, is now a 57, which is higher than all three used-only e-commerce competitors who have also been in operation for significantly longer than Driveway. Driveway receives continuous enhancements that are released every two weeks throughout the year, and we recently launched three powerful new features. First, customers can now shop and filter our nationwide inventory by price or monthly payment. Remember that over 80% of customers purchase a vehicle based on monthly payment, and this provides upfront transparency and allows customers to focus their search. Second, Driveway now offers a budget and payment calculator. Once a customer has selected a vehicle and obtained a trade-in value, the calculator allows them to adjust down payment and term to see how these affect their monthly payments. Finally, prior to submitting a credit application, our instant AI financing feedback tool informs consumers of the likelihood their credit will be approved based on their identified down payment, loan term, and credit profile. The tool provides customers with the opportunity to modify key terms to increase their likelihood, providing them with the confidence that they will be approved prior to running a formal credit check. This predictive indicator is essential to improving the consumer's progress through a technology happy path and our care associate's productivity levels. While our entire inventory is available nationwide, we are currently reaching approximately 25% of the population with driveway advertising, though we are far from saturating these markets. We are targeting our marketing dollars and believe that our omnichannel offerings enable us to scale on a cost-effective and highly competitive basis. We continue to measure the impact of both our own and e-commerce competitors' marketing dollars using what we call the golden ratio, the relationship between monthly unique visitors and completed sales. Our decision to expand driveway advertising to additional markets will be based on achieving certain golden ratio levels and we expect the next level of scaling to occur by the end of this year. This is expected to be the final increase in marketing needed to fully assess and most effectively deploy nationwide marketing. We anticipate nationwide marketing occurring in the second half of 2022, allowing considerably more time for all markets to season prior to completion of our five-year plan. Today, our team of driveway engineers, data scientists, procurement specialists, care center associates, and driveway finance associates number over 300 and are growing rapidly to mirror the exponential growth in consumer demand. We have developed a suite of consumer solutions and functionality that provide the first complete end-to-end digital ownership experience, spanning the full vehicle ownership lifecycle. The foundation of our omnichannel plan is the growth, expansion, and leveraging of our physical network to provide consumers convenient access to all of our business lines in-store, in-home, through driveway. Our highly fragmented industry provides ample opportunity to grow and accretively invest in increasing the reach and density of our physical network. For decades, we have demonstrated the ability to successfully purchase and integrate acquisitions with an over 80% success rate of exceeding our 15% return threshold and actual after-tax returns averaging 25%. During the quarter, we completed acquisitions which are expected to generate $3.7 billion in annualized revenues, and year-to-date we have acquired $4.4 billion. We expanded our national footprint, entering the Detroit, Las Vegas, and Jackson, Mississippi markets, substantially increasing our density and reach in North Central Region 3, Southwest Region 2, and Southeast Region 6. It's important to note that automotive, the largest retail segment in the country, remains totally unconsolidated. We believe consolidation can be accomplished in a highly accretive way and these cash flow positive businesses can further add to our massive cash engine and consumer offerings. Our pipeline for acquisitions remains full and we are focused on continuing to improve the density of our network to ensure a full and convenient lifetime of consumer experiences. Despite a slightly more competitive environment, we continue to successfully target after-tax returns of 15% plus, investments of 15% to 30% of revenues, and three to seven times EBITDA. The higher end of the range is reserved for targets located in key markets that strategically increase our network density, and the lower end of our range is paid when density is already achieved. Even with our pace being well ahead of schedule, we continue to replenish our more than $2 billion under LOI and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our return thresholds. As such, we are expecting the acquisition cadence for the remainder of 2021 to remain strong as we build out our network within the United States and potentially internationally with a focus on English-speaking countries. 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 service experiences during and after the purchase of their vehicles. As a reminder, infrastructure costs for delivering a driveway e-commerce experience are zero as they reside in the underutilized capacity of our growing network. Key to our design three years ago was allowing for the flexibility to adjust investments between channels and multiple business lines to align with consumer demand, weather any economic cycle, compete with any future competitor, and grow our cash engine to expand into further adjacencies. These, combined with our many other competitive advantages, strongly position us to gain a meaningful portion of the market and lead our industry's continued transformation. In closing, we continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities. The advantages of our 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 lead Lithia and Driveways progress towards $50 billion in revenue to produce more than $50 of EPS, the first leg of our journey. With that, I'd like to turn the call over to Chris.