Lithia Motors, Inc.

Good morning and welcome to the Lithia and Driveway third quarter 2023 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 your host, Amit Marwaha, Director of Investor Relations. You may now begin.

Thank you for joining us for our third quarter earnings call for 2023. 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 Driveway 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 of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thanks, Amit. Good morning and welcome to our third quarter earnings call. We appreciate everyone joining us today and the opportunity to update you on our business, growth initiatives, and progress towards our long-term strategies. In Q3, Lithium Driveway grew revenues to $8.3 billion, up 13% from Q3 of 2022, resulting in adjusted diluted earnings per share of $9.25. Overall, same-store sales momentum improved sequentially. led by new vehicle units up 5% and after sales revenues up over 4%. Sequentially, GPUs were in line with our expectations for both new and used vehicles, while F&I margins remained resilient. Year to date, GPUs for the new vehicles have come down approximately $100 per month or down 19% from the end of 2022. We are well supplied with new vehicles and parts to meet customer demand across the domestic brands throughout year end. Our teams are driving both growth and profitability while we focus on continuous gains in efficiency across vehicle operations, DFC, and our other adjacencies. Our business model is flexible and diversified, giving our store teams the tools and autonomy to adjust with local market dynamics and manufacturers. Our goal is to provide customers with a wide variety of products and services and access to solutions that fit their needs throughout the vehicle ownership lifecycle. This allows us to create a culture that is responsive to varying needs and delivers the best possible experience for customers wherever, whenever, and however they desire. Moving on to our financing operations. Driveway Finance Corporation or DFC posted Q3 results in line with expectations as receivables grew to 3.1 billion. The DFC team has been methodically and prudently navigating the shifting currents of increasing rates in the ABS and credit markets. The team has managed loan loss provisions in line with expectations and steadily growing their loan portfolio. Our plan remains on track to gradually expand margins, move towards profitability late next year, while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on results of both vehicle and financing operations later in the call. At the heart of our strategy is expanding consumer solutions that are simple, convenient, and transparent. Our network is being designed to be within 100 miles of consumers, which allows us to leverage our physical and virtual infrastructure. Over time, we expect this will generate more convenient impressions, more memorable experiences, better returns on capital, and an ecosystem that is unreplicable. Acquisitions are a core competency to our design and organization. We remain disciplined and opportunistic as we look for accretive opportunities that can improve our business. We target after-tax returns of 15% or more 15 to 30 percent of revenues, or three to seven times normalized EBITDA. Life to date, our acquisitions have yielded over a 95 percent success rate and after-tax returns of over 25 percent. We're looking for acquisitions that are complementary to our network development strategy and meet our return thresholds in an unconsolidated industry. During the third quarter, we completed two acquisitions in the United States Combined, they are expected to generate approximately 290 million in annualized revenues, and year-to-date, we've acquired over $3.8 billion in revenues. In addition, I'm pleased to announce the impending purchase of Pendragon UK Motors, the Pendragon Fleet Management Business, or PVM, and strategic partnership with Pinewood Technologies. This transformative transaction is a crucial step towards executing on our long-term design, and brings with it a strong partnership with a highly profitable and innovative DMS CRM system, expands our footprint further into fleet management, and finally grows our retail footprint in the United Kingdom. We expect our annual revenue run rate to grow to approximately $38 billion and are excited with the addition of two fundamental pillars, DMS and Fleet Management Company, or FMC, to our global business. We'd like to welcome our new and future partners to our Lithia family as we expand our worldwide presence. As a reminder, we target annualized revenues acquired in the range of $3 to $5 billion per year. Our primary focus remains on building out our US network and complement our network strategies. We are proud of our team's track record of executing and integrating multiple transactions as we make our way towards and beyond $50 billion in revenue. Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and will have acquired over $22 billion in revenues once the Pendragon transaction is completed. In addition, Driveway Finance Corporation, our captive finance division, continues to make steady progress as our top finance partner and have line of sight to realizing the full potential and contributions to our profitability in the future. As you may recall, the average loan we originate at DFC is three times more profitable over its lifetime relative to the fees we receive from third-party commissions. Shifting to our omnichannel platforms, we're making steady progress, growing online MUVs up 34% across our digital channels, while digital transactions grew to over 37,000 units in the third quarter, up 21% compared to last year. Supported by the education provided by green cars, sustainable vehicle sales accounted for 16% of total no vehicle sales in the quarter, up from 10% in Q3 of 22. LADD remains on track to become the preferred international omnichannel provider products and services meeting a diverse set of customers' needs throughout the ownership lifecycle and across multiple adjacencies. Our plans have positioned us to improve margins and lower SG&A through a combination of growth efficiency, diversification, and scale. Combined, these efforts will disconnect the ratio of $1 of EPS from every $1 billion in revenue and and achieving $1.10 to $1.20 for every billion dollars of revenue by 2025. This will be driven by a few key assumptions, namely, achieving through scale a blended U.S. market share of 2.5% through both acquisitions, channel expansion, market share gains, and same-store growth improvements in a normalized SAR environment. Second, driving SG&A as a percentage of gross profit to below 60% through increased leverage of our cost structure in a normalized GPU environment and optimizing our network. Third, continued maturity and growth of our first adjacency, DFC, achieving profitability in the latter half of 2024. Fourth, continuing to expand revenue and consumer optionality with Driveway by attracting 98% new customers through a seamless and transparent one-price experience with seven-day return privileges and shipping directly to your home. Fifth, green cars educating consumers on sustainable transportation and expanding our penetration levels of electric vehicles. And finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. The above opportunities are now well underway combined with DMS and FMC design additions sets us up for further growth and profitability in the coming years. In a normalized environment, we can now clearly see the path for significant change where a billion dollars of revenue will ultimately generate two dollars of EPS. Key factors underlying our future steady state and now totally within our control are as follows. First, optimizing our network and continuing to diversify our portfolio through focusing on acquiring larger stores located in higher profitability regions of the South Central and Southeast US, filling in the Midwest, and integrating our international businesses while growing our omnichannel platform and other mobility verticals. Second, financing up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves. Third, through size and scale, we will continue to drive down vendor pricing, develop competencies internally to save costs, and lower borrowing costs as a path towards an investment-grade credit rating. Fourth, to increase our share of wallet through improving the customer lifecycle by leveraging our cost structure to reduce our SG&A as a percentage of gross profit to below 50%. And finally, maturing contributions from other horizontals, including fleet management, software, charging infrastructure, and consumer captive insurance. In closing, Lithian Driveway provides a unique and unreplical mobility platform and transportation solutions that deliver great customer experiences throughout the ownership lifecycle at a global scale. Our design is durable, diversified, vast, and nimble to meet the needs of consumers with both online and in-store solutions, coupled with financing solutions like DFC. The combination of our strategy and experienced teams gives us the confidence in our ability to eclipse $50 billion in revenue and produce a ratio of $1.10 to $1.20 of VPS for every billion dollars of revenue in the midterm and ultimately over two dollars long-term with the completion of Pendragon transaction all elements of our original design are now securely in place allowing us to do what we do best and are known for and that's execute with that I'd like to turn the call over to Chris thank you Brian first off I'd like to provide an early welcome to the six thousand associates at Pendragon that will be unifying