Lithia Motors, Inc.

Good morning, and welcome to the Lycia and Driveways first quarter 2022 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 the call over to Jack Everett, Director of FP&A. Please begin.

Thank you. Presenting today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President and COO, Tina Miller, Senior Vice President and CFO, and Chuck Leitz, Vice President of Driveway Finance. 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 materially differ 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 to our website, investors.lithiadriveway.com, highlighting our first 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 first quarter EPS in company history. at $11.96 per share, 103% increase over last year. Record first quarter revenues of $6.7 billion were driven by strong performance across the Lithia channel and growing contributions from driveway. The first quarter reflected the responsiveness and adaptability of our model. Elevated GPUs earned in new and used in F&I business lines, along with the increased contributions from after sales, generated $551 million in adjusted EBITDA, providing significant optionality in our plan execution. We accelerated investment in driveway and driveway finance, or DFC, while maintaining our aggressive acquisition cadence. Last quarter, we shared our updated plan to generate $50 billion in revenue and $55 to $60 in EPS by 2025, and we are excited with the progress being made. Total revenues increased 54% over last year, driven by contributions from acquired businesses. Driveway sales grew sequentially through the quarter, reaching the milestone of 1 million monthly unique visitors, or MUVs, in February, and completing 3,100 transactions in the month of March for an annual run rate of 37,000 transactions. We're really excited about our consumer thirst for driveway, and the momentum that continues to build. In the first quarter, we retailed or wholesaled 4,250 units that contributed over $120 million in revenue. We continue to target $1 billion in incremental revenue through driveway in 2022. This represents shop transactions and the subsequent retail and wholesale of sell transactions as similarly reported by our e-commerce peers. In addition, we retailed over 30,000 vehicles for approximately $1.2 billion in the quarter through our Lithia e-commerce channels. Driveway Finance achieved milestones within the quarter, originating over $100 million in loans in a month and becoming LAD's number one lender. Overall, DSC originated over 8,600 loans during Q1, and as of quarter end, the portfolio stands at over $900 million. Since announcing our plan in mid-2020, we have acquired businesses that are now contributing $11.5 billion in annualized steady state revenues, and the pipeline has never been larger. De-linking $1 of EPS production from every $1 billion in revenue in 2025 will be driven by several key factors to follow that I'd like to reiterate now. Achieving a blended 2.6% new and used vehicle U.S. market share, total vehicle GPUs returning to pre-pandemic levels, driving SG&A as a percentage of gross profit down towards 60% through increased leverage of our cost structure, acquiring a further $9 to $10 billion in annual revenues, to complete the build-out of our North American footprint of 400 to 500 locations, no further equity capital raises, meaning no further dilution of EPS, an investment grade credit rating driving decreases in borrowing costs, flexibility and headroom in capital allocation for share buybacks in the event of valuation disconnects, continued drag on DSC's profitability, due to building of CECL reserves as we scale towards a targeted 15% penetration rate. And finally, early benefits from adjacencies with higher pre-tax margins that also carry structurally lower SG&A costs. It's important to remember that contributions from new businesses and adjacencies may still be in the development stages in 2025. and will not fully reflect the magnitude of our future earnings power. Layering on the contributions of additional future aspirations at maturity, we see opportunity for each billion dollars in revenue to produce up to $2 in EPS. Key factors underlying our future state and totally within our control are as follows. Up to 20% of units are financed with DFC, and there is no longer a headwind from our recording of CECL reserves. An optimized cost structure taking SG&A as a percentage of gross profit below 50%, and finally, mature contributions from our other horizontals such as fleet, lease management, charging infrastructure, consumer insurance, and other new verticals. Foundational to our strategy is convenient proximity to the consumer and our physical infrastructure efficiently leveraging for vehicle procurement, reconditioning, and storage. The LADD network is comprised of nearly 300 locations, strategically positioned at 250 miles from 95% of the population and within 100 miles from 60% of the population. This puts us in considerably closer proximity to consumers than any other industry player. As we add density to our network, the synergistic overlay with driveway deepens, enabling faster delivery, quicker turnaround times for reconditioning, structurally lower logistics costs, a higher proportion of sales with no shipping fees, while also providing DFC with a larger base of loans to penetrate from. In addition to the previously announced Sullivan transaction, we acquired three Stellantis, Dodge, CJD stores, in Las Vegas that are expected to generate $400 million in annualized revenue and diversify our brand mix in the Las Vegas market. Total acquisition revenue completed year-to-date totals $1.1 billion. Since the announcement of our 2025 plan, we have acquired a total of $11.5 billion in annualized revenues, representing 58% of our initial goal. Additionally, we have another $1.9 billion in annualized revenue under contractor LOI. The acquisition climate remains robust, and we continue to add to our pipeline, which sits now at over $15 billion. We have not altered our return thresholds of 15% to 30% of revenue or three to seven times normalized EBITDA, and are confident in our ability to find partners excited to join us at reasonable prices. This discipline ensures we hit our after-tax return thresholds of 15% and stay below our targeted leverage of three times in a normalized earnings environment. Whether motivated by succession planning or monetization, sellers are attracted by Lithia's track record of closing deals timely and confidentially, retaining over 95% of employees and becoming part of our industry's future. With the benefit of the elevated earnings environment, businesses acquired since the launch of the 2025 plan have contributed $875 million in adjusted EBITDA, adding considerable fuel to our capital engine. Now, turning to driveway. Our investments over the past three years in personnel, software, and logistics layered over the physical network of our Lithia channel have created an innovative consumer-centric platform that is finding a receptive audience and scaling rapidly. Driveway now offers the largest selection of negotiation-free new and used vehicles, deliverable anywhere in the country. Different than our traditional or e-commerce peers, our new vehicle inventory represents all major brands, and selection of used vehicles ranges from certified used vehicles to 20-year-old value autos. These offerings were designed to attract a full spectrum of consumer affordability and full lifecycle of after-sales experiences, creating the largest TAM of any single company in personal mobility. Considering our growing physical network of over 1,100 associates distributed across North America focused on procuring used vehicles, our design is quite difficult to replicate or compete with. In the first quarter, over 97% of driveway transactions were incremental with consumers we had never transacted with in the past 15 years, and the average shipping distance approximately 920 miles. Amidst this growth, our average Google review was 4.6 stars, driven by our focus on building the business sustainably and earning consumer trust for the entire vehicle ownership lifecycle. So far in 2022, we have opened 17 new markets and now directly reached 29% of the U.S. population with targeted local advertising. Recently, we also expanded our marketing spend to include the March Madness basketball tournament and our upcoming sponsorship of the iHeart Radio Music Awards. These strategic investments have driven meaningful additional traffic while still improving our conversion rates. As we continue to expand our nationwide campaigns throughout the year, we reinforce our view that driveway is well on its way to becoming the dominant profitable e-commerce online retailer. Our engineering teams have also continued to innovate. Earlier this quarter, we launched our first in market proprietary new vehicle shopping experience. Consumers now have all the transparent and convenient driveway used vehicle functionality that they've come to love on used vehicles now on new vehicles too. Expanded functionality for new includes the convenience of seeing all applicable incentives and rebates factored into pricing upfront along with instant online financing approvals. These new features have meaningfully improved our conversion rate and increased the volume of new vehicles sold. Doing the coding ourselves means we can deploy continuous enhancements, plus nimbly and proactively respond to consumer feedback and trends. In March, we announced our collaboration with US Bank to offer real-time payments to consumers selling their vehicles, making Driveway the first online platform to offer this exciting new functionality. Instead of waiting several days for checks to clear, funds are deposited into the bank account instantly before the vehicle even leaves their driveway. Increased efficiency in our care centers, fine tuning of our finance algorithms, and the deployment of our new vehicle offerings drove the first quarter's considerable outperformance. In the context of tight inventories and seasonality, the sequential growth being realized is even more impressive. We are more confident than ever that we will exceed our 2022 target of 40,000 transactions that was established only two short quarters ago. Turning to sustainable vehicles, we have seen significant consumer demand for highly competitive new vehicles being launched by our OEM partners. In our conversations with our OEM partners, they view the dealer as an integral part of the sales experience, their communities, and throughout the ownership lifecycle. In addition to our advocacy of sustainable vehicles on green cars and in the Lithia Channel, we are actively investing in our physical footprint and installing charging stations. With over 600 installed to date, we can effectively sell, service, and charge electric vehicles. Web traffic to green cars has significantly increased, with 260,000 MUVs in March. We also recently powered up Green Cars Marketplace with driveway shop and sell technology. Organic traffic grew faster than paid search, and education derives 80% of the MUVs. Assigning all marketing costs to the 20% of unique visitors that are Green Cars Marketplace still results in the lowest cost per MUV of any of our channels. Consumers interested in zero or low emission vehicles can now easily jump from educational offerings directly to LAD's largest sustainable inventory, seamlessly accessing the convenience and transparency of the driveway experiences. As our most mature adjacency, DFC has become an integral part of our strategy, transforming the margin profile of our business. It is important to reiterate DSC's position as a top-of-funnel captive lender for the quickly growing Ladd customer base. Chuck Leitz will be providing information on DSC and our first detailed guidance on the business in just a few moments. In closing, Ladd's 2025 plan is well underway and our future is clearer than ever. Our massive competitive advantages, difficult-to-replicate optionality, and synergistic design across adjacencies has positioned us as the consumer choice for complete ownership lifecycle experiences. Please spend some time on our newly revised investor presentation and our new slide six that illustrates the design, timing, and drivers of our current and future verticals and horizontal adjacencies. The incremental free cash flows we are earning allow us to accelerate our plan and transformation while also providing for near-term shareholder return. Lastly, we manage our business for the long term, remain nimble and aware while not being distracted by the supply levels, monthly price changes, or factors outside of our immediate control. Some believed our 2025 plan was ambitious when announced 21 months ago, reflecting now at the first third of the initial timeline, and we are considerably ahead of that plan. Today, we look beyond 2025 to meaningfully positioning Lithia driveway and green cars as the dominant leader in auto, the largest retail sector in the country. With that, I'd like to turn the call over to Chuck.