Lithia Motors, Inc.

Good morning and welcome to the Lithia and Driveway second quarter 2022 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 Amit Marwaha, Director of Investor Relations. Please begin.

Thank you. Presenting today are Brian DeBoer, President and CEO, Tina Miller, Senior Vice President and CFO, Chuck Leitz, Vice President of Driveway Finance, Chris Holshue, Executive Vice President and COO, is traveling in Canada with the FAF team. 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 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 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 to our website, investors.lithiadriveway.com, highlighting our second quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thanks Amit and welcome to the team. Good morning everyone. Thank you for joining us today and we look forward to updating you on business growth and substantial progress towards our 2025 strategic plan. Earlier we reported second quarter adjusted earnings per share of $12.43, adjusted for foreign currency, or a 12% increase compared to $11.12 per diluted share in the same period of 2021. We grew revenues to $7.2 billion, a 21% increase year over year, driven by continued performance of our Lithia stores, driveway, and contributions from our newly acquired stores. Our second quarter results reaffirm our ability to leverage the value of our network to expand market share. Customers have the option of visiting our Lithia stores and their websites, or accessing our e-commerce channels of driveway and green cars, improving our ability to drive efficiencies in our operations. We continue to see elevated GPUs with slight normalization in used vehicles this quarter. Combined with our strong performance in after sales, we generated over $558 million in adjusted EBITDA in the quarter. With the continued strong performance, our investments in driveway and driveway finance were accelerated. We remain on track to hit our $50 billion in revenue and $55 to $60 in EPS by 2025. Despite the recent volatility in capital markets and concerns around the impact of macroeconomic uncertainty, we're confident about our ability to deliver on our outlook. Now, onto a few highlights from the quarter. Total revenue increased 21% year over year, driven by growth across all our segments with all channels performing strongly and successfully navigating market dynamics. On a same-store basis, total revenues and gross profit were down slightly, driven by continued new vehicle inventory availability issues. Our teams navigated the current vehicle supply environment by maintaining strong vehicle gross profits per unit and growing volumes. Total vehicle gross profit per unit increased by 14.7%, and our same store used to new ratio was 1.3 to one in the quarter. In addition, we sold 90 used vehicles per month per location, quickly approaching our 100 unit goal. We ended the quarter with new and used vehicle day supply of 32 and 62 days, up 39% and 5% year over year respectively. Driveway received 2.3 million monthly unique visitors or MUVs in the month of June, In the second quarter, Driveway retailed or wholesaled over 12,000 units that contributed over $233 million or 3% to our total revenue. We are on track to achieve our target $1 billion in incremental revenue through Driveway for the year. This represents shop transactions and subsequent retail and wholesale sale transactions similar with what is reported by our e-commerce peers. In the quarter, Lithian Driveway combined retailed nearly 32,000 vehicles where our customers interacted with us using one of our many e-commerce tools. Representing approximately $1.3 billion, our integration of optionality in our e-commerce tools allows us to serve a diverse and evolving set of customer interests. Driveway Finance also continued to grow. originating over 14,500 loans, totaling 483 million in the second quarter. As of the end of June, the portfolio was nearly 1.3 billion. Finally, acquisitions for the first half of 22 totaled 2.1 billion in annualized revenues acquired. Our team has done a tremendous job generating value and developing a track record of integrating acquisitions the past couple of years. We've also managed to launch DFC, a flourishing captive financing division, and driveway and green cars, e-commerce offerings that continue to gain momentum. We are well positioned to continue generating value across our entire network and all business lines. Historically, our company has operated with $1 billion in revenues, generating $1 of EPS. The design and execution of our 2025 plan in a normalized market will improve this ratio to $1 billion in revenues, generating up to $1.20 in EPS. The 10 assumptions behind our guidance can be divided into three distinct groups to follow. Starting with efficiency and operating leverage, we assume, achieving a blended market share of 2.6% in the U.S. across new and used vehicles. Total vehicle GPUs returning to pre-pandemic levels were around $2,100 per vehicle. Lowering SG&A as a percentage of gross profit towards 60% through operational improvements resulting in greater efficiency across our footprint. Secondly, our expansion plans target acquiring an incremental $9 to $10 billion in annual revenue to complete the build out of our North American footprint of four to 500 locations. Integrating driveway into an omni-channel solution and reaching profitability. Continued headwinds around DFC's profitability due to building CECL reserves as we scale towards a 15% penetration rate on our loan portfolio. Contributions from adjacencies with higher pre-tax margins and operating leverage resulting in a lower base of SG&A related expenses. Lastly, we model the following around financial discipline and capital management. No further equity capital raises, removing the overhang of dilution to earnings. An investment grade credit rating, translating into lower cost of capital. Flexibility and headroom in our capital allocation plan to allow for opportunistic share buybacks, taking advantage of divergences in valuation. I want to remind everyone that in addition to our strategy of growing through acquisitions, our strategy incorporates new businesses and adjacencies that will continue to expand our value creation well beyond our 2025 targets. We believe the growth in our business beyond the 2025 plan, with the full execution of our vision and a steady state, we could produce up to $2 per share in earnings for every $1 billion in revenue. To put some context behind this statement, we assume the following. Driveway and green cars generating 15 to 20% of our total revenue. Up to 20% of all vehicles sold by Lithia and driveway will be financed through DFC, building out our complimentary profit stream without any additional spend to acquire customers. We also assume penetration rates for our used and new vehicles are at 40% and 10% respectively. Contributions from adjacent business lines requiring relatively small amounts of capital. This includes fleet and lease management, charging infrastructure for electric vehicles, consumer insurance, and business lines that leverage our network of stores, proprietary software, and regional footprints. With the scale of our revenue and previous adjacencies, we expect SG&A will be below 50% of gross profits. The framework we have presented above is designed with the ultimate goal of developing the most diversified vehicle transportation organization with simple, convenient customer experiences, fully leveraging the value of our network and infrastructure. I would like to shift the discussion to our network development or M&A strategy and provide an update on our progress acquiring and integrating new stores within the Lithia and driveway family. Before we dive into the details, I want to step back and review the key attributes of our strategy. First, we look at locations that build out our network to achieve a target of being within 100 miles of the consumer, allowing us to conveniently reach and serve large pools of customers for their full ownership lifecycle and efficiently utilize our network for vehicle distribution, restoration, and warehousing. Today, our network is made up of approximately 300 locations within 250 miles of 95% of the population in the United States and 60% of our customer base being within 100 miles of those locations. That's a considerable competitive advantage versus any of our peers. At the end of the day, we're able to service our customers quicker, at lower costs, and provide an in-house financing solution in-store or online. That's a powerful combination. During Q2, we acquired $1.4 billion in annualized revenues. In the first half of 2022, we acquired $2.1 billion in annualized revenues, marking 63% of our total revenues targets in our 2025 plan. We are excited to welcome all of our new team members to the Lithia and Driveway family. In the past month, we have noticed an increase in queries from investors regarding the M&A climate and pipeline for our new opportunities. Investors have been trying to understand our valuation framework given the macro headwinds and normalization of GPUs. I want to reiterate, we are disciplined and methodical about our strategy and our pipeline of opportunities remains quite robust. A few final thoughts on M&A. One, we are a seasoned team with a track record of finding assets that fit into our investment profile and integrating new leaders into our culture. We remain disciplined in our pricing hurdle rates, targeting prices of 15% to 30% of revenues, three to seven times EBITDA based on normalized earnings, and generating a minimum of 15% after-tax returns. We continue to achieve over 25% historic returns on our acquisitions. Since launching our 2025 plan just two years ago, our M&A activity has contributed to nearly $1 billion in adjusted EBITDA and $12.6 billion in revenue, a noteworthy achievement. Our approach has been highly accretive to shareholders while consistently earning above our capital costs. Alongside our strong network across North America, we see significant opportunity to build leverage through expanding verticals, which drives revenue opportunities, and horizontals, representing adjacencies that increase profitability. Our e-commerce business vertical, Driveway, builds our online presence by integrating our physical infrastructure and logistics to develop a premier omni-channel business. We reported another strong quarter of driveway performance, demonstrating how we are making inroads, finding new customers, while many of our competitors are having to re-examine their own growth strategies. Driveway is well positioned to become the premier choice in e-commerce automotive retailing, and we remain confident with our plan to profitability in the near future. Green Cars continues to gain traction as we attract consumers with our Sustainable Vehicle Learning Center and Marketplace Powered by Driveway. During the second quarter, online activity on Green Cars grew to over 384,000 MUVs in June. Higher fuel prices have boosted consumer interest in all types of electric vehicles, and Green Cars provides a wealth of information on sustainable options from BEVs, to hydrogen propulsion solutions centered around affordability for all customers. To date, we have installed 600 chargers supporting the adoption of sustainable vehicles. We're also training our technicians and increase our breadth of services to provide the same level of service for sustainable vehicles provided to our traditional fleet of vehicles. Driveway Finance Corp, or DFC, our most developed horizontal posted another strong quarter making inroads as the primary lending option for Lithia and driveway customers. At its future state, we believe DFC can contribute approximately $650 million in incremental profits a year and is a key contributor to driving SG&A as a percentage of gross profit down to 50%. I'm pleased with the pace of growth and our ability to not sacrifice near-term growth at the expense of adding risk to our portfolio. While remaining nimble, our conviction in the Lithia and driveway strategy remains strong, and I'm confident we're well positioned to deliver on our 2025 plan and beyond. Our portfolio mix, acquisition strategy, and all sales verticals are performing ahead of expectations. We're rapidly growing market share and generating some of the best returns on capital in all of retail. Our capital allocation strategy is balanced, and we're ready to take advantage of dislocations in the marketplace. We have the right team in place to respond and find opportunities in changing market conditions. We will continue to lead the growth, transformation, and consolidation of our industry, the largest retail sector in the world. With that, I'd like to turn the call over to Chuck. Thank you, Brian.