Lithia Motors, Inc.

Good morning and welcome to the Lithia and Driveways third 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 now like to turn the call over to Jack Everett, Director of FP&A. Please begin.

Thank you and welcome to the Lithia and Driveways third 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 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 gap measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our third quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Jack. Good morning and welcome, everyone. Earlier today, we reported the highest adjusted third quarter earnings in company history, at $11.21 per share, a 63% over last year's strong results. Record revenues of $6.2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses. During the quarter, total revenue grew 70%, while total gross profit increased 83%. On a same-store basis, used vehicles led our revenue growth up 40%, followed by a 22% increase in F&I income, a 7% increase in service body and parts revenues, and a relatively modest 3% decrease in new vehicle revenues. Additionally, same store gross profit increased 23%. Our operational teams executed our best-in-class used inventory procurement model to source and recondition a large volume of used vehicles in a highly cost-effective manner. Our ability to reposition vehicles within our nationwide network and our driveway procurement technology allowed for optimal inventory levels throughout the quarter. On the new vehicle side, increased GPUs more than offset the decline in volume. Chris will be providing additional details on our same-store sales, inventory levels, and operational highlights in a few moments. Through our omnichannel strategy and expanding our network by acquiring new vehicle franchises, we have rapidly increased our size and scale, further growing our significant capital engine. In the third quarter, we generated $530 million in adjusted EBITDA, greater than any full year in our history before 2019, providing us additional capital to deploy towards network expansion and driveway, while also accelerating our continued exploration into adjacencies. The robust customer demand we saw in the third quarter was driven by high levels of household savings government subsidies, lower interest rates, and increased equity in trade-ins. Elevated demand and margins are likely to be sustainable into the next few quarters due to the continued strength from these drivers, coupled with tight new vehicle supply and accelerating miles driven as consumers return to work and continue to travel using their vehicles. As our industry transitions towards electrification and more convenient and empowered mobility solutions, LADD will anticipate and adapt to execute and proactively lead this change. Our plan to reach $50 billion in revenue and exceed $50 in EPS by the year 2025, from here on referred to as our 2025 plan, was designed with these and other consumer trends in mind. Lithium driveway's full lifecycle offerings and adjacencies are evolving to respond to changing preferences. beyond the lithium driveway channels are complex, expansive, and difficult to replicate design that we have incrementally unveiled over the past 15 months. Today includes green cars, the foremost educational marketplace for sustainable vehicles, a quickly growing FinTech driveway finance, growing fleet and leasing operations, and a Canadian presence to establish the seeds for international growth longer term. We look forward to continuing to share further elements of our design and how our digital solutions can be applied to similar mobility industries and further adjacencies to create a broad-based, highly diversified, multi-sector disruptive company. Our traditional Lithia business are now evolving their offerings. Given our decentralized culture and beliefs that our stores know their local markets best, they operate as local brands with the autonomy to implement e-commerce solutions that meet their customers' needs. When designing our omni-channel strategy, careful consideration was given to the existing end-to-end digital solutions that many of our Lithia stores omni-channel offerings already utilized. While continuing to grow these Lithia experiences, Ladd established Driveway as a unique independent brand with dedicated leadership, engineering and marketing teams, developing proprietary software, and a complete life cycle of in-home experiences to attract incremental consumers to LADD. This also provided consumer solutions that are broader and lower costs than any of our used-only e-commerce retail peers. In conjunction with the acceleration of consumer demand for in-home retail experiences, we are seeing the massive benefits of having consumer optionality for both driveway and Lithia in-store and online experiences. Our initial design and early learnings from Driveway continue to guide and expand how our Lithia businesses interact with consumers. While our attentions were turned to Driveway's completely incremental revenue growth, we've been remiss in sharing that our Lithia business continues to provide digital experiences through its 300-plus local, regional, and Lithia websites. For the third quarter, these Lithia websites and associated online shopping experiences connected with 11.5 million quarterly unique visitors. These Lithia e-commerce customers accounted for 36,600 or 25% of all units retailed in the quarter and simply estimated at $5.9 billion of annualized revenues attributed to the e-commerce portion of our traditional Lithia channel. These Lithia e-commerce sales are in addition to Driveways' growing successes that we will share in just a few moments. To put this into perspective, these e-commerce sales as a percentage of monthly unique visitors represents a 0.32% or what we call a golden ratio. This performance level is similar to other established digital only used retailers. To further illustrate the strength of our omnichannel strategy, when our lab total sales are compared to unique visitors from all channels, our golden ratio is 1.46%, nearly five times more successful than our digital used-only peers. Lastly, it's important to note that we are not incurring incremental spending on our store's e-commerce tools as we are leveraging third-party vendors similar to our new vehicle franchise peers' e-branding efforts. Though we are pacing significantly ahead of our 2025 plan, we remind everyone that our revenues have experienced drag from inventory constraints and earnings are greatly inflated from vehicle margins. Finally, we are pleased to report that every channel in adjacency is considerably ahead of plan. We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible revenue and margin available to us in this market. As a reminder, the 2025 plan assumes a pre-COVID business environment, margins, and growth rates. Internally, we view the 2025 plan as a base case, and our leaders are focused on taking our execution to the next level and de-linking $1 billion of revenue to produce more than $1 of EPS. Key drivers of this are no further equity capital raises, meaning no further dilution to EPS, leveraging our underutilized network to support a two to three times increase in vehicle sales, and a four times increase in parts and service sales through the existing network. Further improvements in personnel productivity, economies of scale and marketing from national brand awareness, an investment grade credit rating to reduce borrowing costs, and most importantly, further adjacencies with higher margins and structurally lower SG&A costs. The adjacency we're furthest along with is driveway finance, or DFC, that has experienced rapid growth since expanding in spring of 2020. During the quarter, DSC originated 6,200 loans and now has a portfolio of $530 million. We are planning to enter the ABS term market by the end of the year, which will allow us to quickly and profitably scale future consumer offering and lending volumes. Important to note is that a loan originated with driveway finance earns three times the amount earned when we arrange financing with a third party lender on a fully discounted basis. We believe that driveway finance can penetrate 20% of our financed retail unit sales. This percentage is lower than used only peers finance companies as subvented leases and finance contracts with our manufacturer captives will always account for a sizable portion of our new and certified businesses. The front-loading of our M&A provides a larger base for driveway finance to draw from and increases the potential contribution above what our current 2025 plan includes. We are excited about the continued growth of driveway and the interest and engagement it's seeing from our consumers. Driveway generated over 530,000 monthly unique visitors in September, a 68% increase over June. 96% of our customers were incremental and had never transacted with Lithia or Driveway before. Monthly shop transactions increased 86% during the quarter. Strong Google and Facebook reviews and a net promoter score of 90 indicate Driveway is building an online reputation for exceeding consumer expectations for a fully digital, frictionless experience. We recently launched Driveway Marketing in Las Vegas and Phoenix our ninth and tenth markets. Continued improvement in our existing markets improved our overall driveway golden ratio, even with the early dilution from these two new markets. We anticipate entering further new markets soon and remain on pace to expand the nationwide marketing by the end of next year. To support consumer demand, we accelerated the opening of our third driveway care center in Dallas, which occurred in September. In addition, we have ramped hiring at all three time zones care centers and believe we are well positioned to support the increased volume of traffic we expect to see in the coming months. Driveway is on track for its 2021 target of 15,000 annual transaction run rate exiting December. Looking forward to 22, we are forecasting 40,000 transactions with a 2.2 to 1 sell to shop ratio. Driveways dedicated management, operation, engineering, and marketing teams are continuously testing and learning as they enhance the driveway website and consumer experiences, recently deploying another powerful new feature. Driveway now offers consumers the ability to sort by distance. This enables consumers to see which vehicles are in the closest proximity to them and delivered the fastest with the lowest or no shipping fee. This new feature will decrease delivery times and increase our golden ratio. Viewing our dealerships omni-channel tools and driveway together, we are well positioned to retain our existing dealership customers by interacting with them in new ways that are aligned with their ever-evolving preferences. Additionally, we believe our digital infrastructure will enable us to conquest market share from competitors that lack the resources to invest in technologies and or nationwide network or choose not to commit to a transparent, empowered, negotiation-free experiences to effectively attract incremental customers. Acquisition growth, the backbone of our strategy, continues to expand our physical network to support all of our business lines, whether in-store or in-home. In our future state, we expect our optimal physical network to be approximately 500 stores across the US, placing us within 100 miles of all US consumers. This enables us to offer timely, convenient, and affordable in-home solutions while realizing the economies of scale that will come from a nationwide footprint and brand. While several large deals were announced recently, the automotive retail industry remains highly fragmented and unconsolidated, with the market share of the 10 largest groups at only about 10%. We have nearly $1.5 billion in annual revenue commitments, as well as over $12 billion in the pipeline, which excludes our peers' large transactions. We remain confident in our ability to find deals that best fit our regional network strategy and are priced at our disciplined 15% to 30% of revenues and three to seven times EBITDA. This ensures we meet our after-tax return threshold of 15% in a post-pandemic profit environment. Lithium and driveway are known in the industry as the buyer of choice, obtaining manufacturer approval, timely and certain closing of transactions, and retaining over 95% of the employees. During the quarter, we completed acquisitions that are expected to generate $1.7 billion in annualized revenues, And year to date, we have completed $6.2 billion. Included in the total, we made our first international acquisition partnering with Pfaff Automotive in Canada. With a strong presence in Toronto, Canada's largest market, we are excited to have Chris Pfaff and his high-performing team join us. In addition to its stores, Pfaff operates a leasing business, furthering our learnings of synergistic adjacencies. We also expanded our U.S. footprint, particularly in the Southeast Region 6, entering the Atlanta, Georgia, and Mobile, Alabama markets. In closing, we are acutely focused on executing our omnichannel strategy designed to continue our track record of earnings and revenue growth for decades to come. Though our plan may seem complex, our fast-moving and hyper-proactive team with multiple decades working together is ready for any challenge or competitor. We have grown exponentially while maintaining industry low leverage of around two times for nearly a decade. With our various channels meeting customers wherever, whenever, however they desire, we are well positioned to gain share, outperform the market, and exceed our 2025 plan. With that, I'd like to turn the call over to Chris. Thank you, Brian.