Lithia Motors, Inc.

Good morning and welcome to the Lithia and Driveway fourth 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. With me today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President and COO, Tina Miller, Senior Vice President and CFO, and Chuck Leitz, Senior Vice President of Dryway Finance. 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 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, investors.lithiadriveway.com. highlighting our fourth quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thanks Amit, and good morning everyone. We appreciate you joining us today and look forward to updating you on our business growth and how our differentiated strategy is progressing. We posted another record year of revenues and earnings. In 2022, we grew revenues to $28.2 billion, up 24% from 2021. Over the past three years and since the launch of our 2025 plan, we have over doubled the size of our company from $12.7 billion in revenues and have nearly quadrupled EPS from $11.76 back in 2018 to $44.42 in 2022. Driven by a team and culture of high performance, a focus on customer optionality to attract and interact with customers, and investments in adjacencies to expand our profitability, we are well positioned for continued growth. We have a constructed and nimble platform that combines our experienced, knowledgeable, customer-centric team with the most expansive and diversified nationwide network in North America, with a massive capacity to continue to scale the network we are truly living our mission of growth powered by people. This foundation has been key to our consistent results, growth, and ability to consolidate a highly fragmented industry. What began as a regional platform is moving towards a global platform with innovative technology, diversified products, brands, and financial solutions. In the fourth quarter, we reported adjusted EPS of $9.05, Our teams are navigating through the used vehicle market as it rebalances at a gradual and orderly pace as shared on previous calls. Our vehicle operations, SG&A as a percentage of gross, was 60% excluding the burn rates of our two adjacencies. Secondly, revenue was impacted by our new vehicle mix having tepid volumes at two of our domestic manufacturer partners. New car inventory is also rebuilding. but at a less uniform rate and varied by OEM. After experience the lowest new vehicle SAR since 2012, we anticipate SAR in 2023 to be between 14.5 and 15 million units. As perspective, the industry averaged a 17 million vehicle SAR between 2015 to 2019, implying a future lift of 17% in addition to conquesting market share. We're pleased to have Chris back at home this call to provide additional color on the quarter in a few minutes. Our vehicle operations continue to lead the omni-channel auto retail evolution. Our quickly growing infrastructure of omni-channel options ranging from physical store footprint to technologies offered by our stores to driveway and green cars combine to provide customers with a variety of flexible options throughout their vehicle ownership life cycle. Our core store operations massive growth and performance remains strong and continues to produce one of the highest operating margins and lowest SG&A costs in the industry. Moving to our digital channels, our combined average monthly unique visitors reached 10 million in the quarter, an increase of 94% compared to last year, with our spend only increasing 33%. Driveway and green cars traffic was particularly strong, growing 236% to nearly 2.5 million visitors per month during the quarter. Traffic across all digital channels continues to gain momentum driven by a robust inventory selection and a variety of products and experiences. During the year, 22% of our vehicles were sold to customers utilizing our omnichannel technology in our stores, driveway green cars representing just shy of $5 billion in revenue. Driveway, our innovative technology platform with a negotiation-free, fully online vehicle shopping and selling experience, generated revenues of nearly $900 million in 2022. This combination of in-store options and our driveway experience expands the reach of our network, with our stores interacting with our over 90% of customers in the country being within 100 miles now. Driveway continues to conquest new customers, with over 97% of its business coming from new customers to LAD within the last decade. Moving to our financing operations. Driveway Finance Corporation, or DSC for short, ended the year at over $2 billion in receivables, solidly positioning DSC as the largest lender in our network. The penetration rate rose 200 basis points from the previous quarter to over 13%, and we originated over 19,000 loans in the fourth quarter. Last week, we completed our third ABS securitization accompanied by an investment grade rating by both Moody's and KBRA. We believe this reiterates the strength, quality, and discipline nature of our captive finance decision making and the differentiation from our other used only retailers with captive finance arms. As such, we are extremely pleased with how this adjacency has laid the foundation for expanding our profitability in the future. I'd like to commend our entire DFC team and Chuck, who will be providing more color on the results and outlook later in the call. Now, turning to acquisitions. In the fourth quarter, we made four notable acquisitions, including Glenn's Freedom CJDR in Kentucky, Ferrari of Denver, the sole dealership of its kind in the Central Rockies, Metair CJDR in the Dallas-Fort Worth area, further expanding our footprint in the Lone Star State, and finally, the Airstream portfolio we mentioned on our last earnings call. So far in 2023, we've kept pace with the momentum we built through 2022, acquiring another $50 million in annualized revenues to start the year off. We expect this to be another significant year of growth for the network. We acquired over $3.5 billion in annualized revenues during the full year of 2022 and nearly all public company M&A activity for the year, as shown on our slide 11 of our recently updated investor presentation. Since launching our five-year plan in mid-2020, we have acquired a total of $13.9 billion, 63% of the total $20 billion originally targeted by 2025. Our patient, disciplined, and consistent approach towards acquisitions continues to generate massive value by maintaining our multi-decade long valuation methodology of three to seven times normalized environment earnings levels. We have made a conscious decision to utilize the majority of our cash flows towards acquisitions rather than redistributing them primarily towards shareholders or paying down debt. As such, we have and will continue to establish the foundation for massive competitive advantages in size, scale, SG&A cost leverage, interest costs, profitability levels, and most importantly, consumer optionality and attachment. As we hit the midpoint of our 2025 plan, we remain confident that our strategy is durable and have clear sight to achieving the $50 billion revenue target. Our portfolio mix New adjacencies and focus on profitability translates into better operating leverage with the ability for $1 billion in revenue to drive up to $1.20 in EPS by 2025, up from our historical ratio of $1 in EPS, and eventually achieve the $2 in EPS future target. Let me take a few moments and outline the drivers to achieve our 2025 plan. we continue to drive consumer optionality, operational efficiency across all platforms. We are prioritizing our profitability goals as we optimize and integrate our omnichannel options, which will result in improved margins and leverage our network and cost structure. In addition to continually driving high performance, this will help drive SG&A as a percentage of gross profit below 60% in a normalized GPU environment, enhance liquidity, and continue cash flow generation. Second, the investment in our financing operations, DSC, will grow our earnings power and diversify our portfolio. As demonstrated by DSC's capital structure moving to sustainable self-funding, DSC is maturing and effectively managing its growth. We are targeting a 15 to 20% penetration rate at DSC, primarily driven by used vehicles, and we are well on our way to profitability later this year. Third, we continue our cadence of growing our network, the backbone of our plan, through acquisitions. Growth of our physical network to reach 95% of our consumers within 100 miles creates the foundation of our business. It gives us the ability to physically reach customers throughout their ownership lifecycle within a two-hour proximity. Acquisitions continue to be the core competency of LADD, to consistently generate strong returns while optimizing the network with timely, profitable, and strategic divestitures of smaller poor performing stores that lack strategic value to the network. Lastly, we remain financially disciplined with a strong balance sheet and committed to capital allocation strategy focused on the best risk reward for our shareholders. We've reduced our leverage over the past several quarters while still growing through acquisitions. We invested in network growth, our omnichannel tools, growing our captive finance business, and generated meaningful shareholder returns through dividends and share repurchase. As crafted a half a decade ago, we continue to believe in a longer-term strategy while finding the balance between smaller, shorter-term gains and long-term strategic positioning. Lithian Driveway is well underway towards building a differentiated, diversified mobility and transportation platform across multiple geographies. We're focusing on making the experience of owning a vehicle easy and hassle-free with strategically designed and positioned options for all types of owners across our network and e-commerce platforms, including our captive finance arm. Core to our business is delivering highly profitable growth as we continue to execute on our 2025 plan to reach $50 billion in revenue and our longer-term ambition of $2 of EPS for every $1 billion in revenue. With that, I'll turn the call over to Chris. Thank you, Brian. It's good to join everyone on the call today to provide a brief overview of our operating results and discuss our focus areas for 2023. However, before jumping in, I'd like to congratulate our 2022 class of Lithia Partners Group winners, better known internally as LPG. These 56 leaders and their teams generated the highest performance levels among their peers last year, independent of store size, franchise representation, or geographic location. These stores led their market share with exceptional consumer satisfaction and solid profitability. They were also key supporters of driveway, DFC, and green cars, executed the majority of our mobile service and at-home pickup and delivery, all while growing future team leaders. We now have over 40% of our eligible store leaders attaining this coveted status and we look forward to all of our teams attaining LPG status in future years. Now to the quarter. Overall, same-store gross profit declined 12% as the recovery in new vehicle volume trends did not offset the expected declines in vehicle gross profit per unit, or GPU, as we transitioned out of the COVID-fueled retail environment. New vehicle GPUs, including F&I, was $7,719 per unit, compared to $8,593 the prior year. Used vehicle GPUs, including F&I, were down to $4,028 from $5,341 in the prior quarter. F&I results were strong at just over $2,117 per unit, down from $2,162 the previous year. As a reminder, new vehicle GPU levels are still significantly above our historical levels from 2019 of around $3,600 per unit while used vehicle GPUs have returned to pre-COVID levels. During the quarter, combined import and luxury vehicle sales were relatively strong, growing in the low single digits, offset by domestic sales, which fell over 10% on a same-store basis. While domestic OEMs make up about 27% of our new vehicle sales, we are starting to see a shift towards additional incentives from these OEMs, on certain product lines, which we expect to continue into 2023 as normalization in the market continues. Used vehicle prices averaged $29,545, up nearly 2% from last year. As a top of funnel franchise dealer, we remain aggressive on retaining trades we are offered, as well as the continued procurement of inventory from all external channels, even as pricing pressure on used continues with the rising interest rate environment and recovering new vehicle inventory supply. transitory issues and pricing pressure on used vehicles should have a minimal impact on 2023 as we carry less than a 60-day supply and the shortage of late model used vehicles from the abnormally depressed new vehicle SAR environment takes years to normalize. At the end of December, new and used vehicles day supply were 47 days and 55 days compared to 39 days and 65 days at the end of the third quarter. Customers appreciate our vast range of products at all price levels including the option to purchase and service vehicles up to 20 years and older, as represented in our value auto segment, which is 17% of our used vehicle sales volume. Our nationwide network, aligned with the execution by local market leadership, casts a wide net across all geographies and allows us to service a diverse set of demographics and purchasing preferences with one team. Working together, we can service local markets individually or ship vehicles regionally or across North America as represented by driveways where the average distance delivered is over 900 miles. Providing a negotiated experience in our local network and a negotiation-free process through the driveway national channel allows consumers empowerment and the option to choose their pathway. As we continue to gain further insights on the consumers and their relationship between product demand by market, Our stores are making better decisions to price and merchandise our product across platforms, resulting in better economics. Over time, this will translate to significantly more leverage in our network. Our after-sales business remains strong across all business lines, up 8.4% in the quarter. With a record units in operation and an average age of vehicle over 13 years, we anticipate continued growth throughout 2023. Shifting to SG&A, Core operations, excluding adjacencies, generated SG&As of percentage of growth below 60% on the quarter. However, even in the core business, there remains ample opportunity to improve our operating leverage in our lower quartile segments of stores, which vary across geography and size. we estimate there's upward of 250 basis points, or $125 million in additional profitability, we can achieve by solely moving this bottom quartile to an average level of performance. These focus stores are expected to continue to improve top line growth, boost productivity, drive down costs, and enhance utilization of our innovative technology solutions. As illustrated, our best stores in this environment, aligned with LPG attainment, achieve SG native growth of 48% or better. Conversely, there's a cluster of stores operating at 75% SG native growth and our operations team is focused on improving the results at these locations. Over the past three years, we've invested nearly 40 locations with an average revenue per store of 42 million and replaced them with larger stores averaging over 100 million in revenue and performance level in our upper quartile in many cases. We remain diligent on optimizing our network where it makes sense and look forward to continuing our high cadence M&A growth trajectory. In summary, each day our team is rising to the challenge to aggressively meet the needs of consumers and the ever-changing future of automotive retail. We're motivated by the evolution in our core business and look forward to navigating through the transformation to become a more diversified, greater consumer optionality company. The team is looking to improve across all of our business lines, leveling up our digital retail readiness, leveraging our cost structure at new levels, and driving incremental profit to the bottom line that will eventually translate to $2 in EPS for every $1 billion in revenue we generate. Their efforts will continue to evolve our in-store and at-home solutions to meet consumers wherever, whenever, and however they choose. We remain humble and look towards another strong year and remain laser-focused on achieving our plan. With that, I'd like to turn the call over to Chuck.