Lithia Motors, Inc.

Greetings and welcome to the Lithia Motors fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amit Marwaha, Director, Investor Relations. Thank you, Amit. You may begin.

Thank you for joining us for our fourth quarter and full year 2023 earnings call. With me today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President and COO, Tina Miller, Senior Vice President and CFO, Chuck Leitz, Senior Vice President of Driveway Finance, and finally, Adam Chamberlain, Chief Customer Officer. 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 the reconciliation of 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.

Thank you, Amit. Good morning and welcome to our fourth quarter and full year earnings call. In Q4, Lithium Driveway grew revenues to $7.7 billion, up 11% from Q4 of last year, and generated adjusted diluted earnings per share of $8.24. 2023 was a record year for us as we reached just over $31 billion in total full-year revenues. Results in the quarter were driven by continued strength in new vehicle sales, with same-store units up 10% and after-sales revenues up 3%. This was offset by lower new vehicle GPUs continuing to normalize declining approximately $150 sequentially per month in line with our expectations for new vehicles. Our manufacturer partners continue to replenish inventory at a steady pace with manufacturer incentives, both lower subsidized rates and cash rebates, continue to support consumer demand across a variety of brands and models. Used GPUs came in near decade lows, while F&I GPUs were essentially unchanged. With our unprecedented acquisition growth and the expansion into adjacencies with driveway, green cars, driveway finance corp, Pendragon vehicle management, and a strategic partnership with Pinewood Technologies, our key strategic design elements are all now in place. This positions us perfectly for 2024 and beyond to focus our attentions on what we do best, execution. Our team remains acutely focused on delivering revenue growth and profitability across all business opportunities. The LADS strategy is built on our vast store network made up of the industry's most talented people, highest demand inventory, and a dense, expansive physical network. This foundation is driven by our culture that challenges our teams to operate with autonomy and respond nimbly to local market dynamics to achieve industry-leading performance. Expanding our store network and leveraging our many strategic adjacencies increases the touchpoints throughout the customer's lifecycle while also equipping our stores with the tools necessary to improve productivity, loyalty, and ultimate profitability. The LAT ecosystem is designed to expand our total addressable market and market share through omni-channel solutions and adjacencies that are there for customers wherever, whenever, and however they desire. This will drive us from approximately 1.9% market share today towards our previously stated target of 5%, and more importantly, a ratio of EPS to $1 billion of revenue of 2 to 1. Moving on to our financing operations, driveway finance corporation or DFC posted another strong quarter with a smaller than expected loss of 2.1 million while receivables grew to 3.2 billion. The DFC team has demonstrated success navigating through the fluid interest rate environment while maturing its capital structure and liquidity position. We are excited to see this adjacency continue to mature as it looks to achieve break even later this year while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on operational results of both vehicle and financing later in the call. At the heart of our strategy is expanding customer solutions that are simple, convenient, and transparent. Our network is being designed to be within 100 miles of consumers to provide an easy and convenient delivery solutions for our customers. Over time, the leveraging of this network with our omnichannel solutions will generate more attractive and diverse impressions, more memorable experiences, better returns on capital, and a unique ecosystem that provides differentiated and deep value for our customers. We exercise patience and discipline during the fourth quarter, bringing us to $3.8 billion in annualized revenues acquired in 2023. 2024 has also started off strong with our successful completion of the Pendragon transaction at the beginning of this month. This transaction forms a strategic partnership with Pinewood Technologies, adds a highly profitable fleet management business, both new adjacencies, and the UK Motors business with 160 stores across the United Kingdom and over $4 billion in total revenue. This is an exciting new chapter of diversification and growth as we round out our presence in the United Kingdom. I'd like to personally welcome all our new Pendragon associates and Pinewood partners to the Lithia family. Acquisitions are a core competency of LADD, and we remain disciplined and opportunistic as we look for accretive opportunities that can improve our business. As a reminder, we target a minimum after-tax return of 15% or greater and acquire for 15% to 30% of revenue or three to seven times normalized EBITDA. Life to date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%. As GPUs normalize and liquidity tightens, we expect valuations to become more realistic as well. Our robust acquisition strategy has opened up new markets and mobility verticals, creating considerably more opportunities for us in the future. However, for the foreseeable future, we are fine-tuning our targets to focus 90% of our M&A dollars to automotive in the United States. In addition, now that we have realized the scale necessary to find, fund, and operate new adjacencies, we will evaluate share repurchases with parity to acquisitions. Past practices prioritize acquisitions as more beneficial strategically than buybacks, but at our current size and scale, we are now returning to a balanced, deployment of free cash flows to drive the strongest possible returns. We continue to monitor valuations of both, being patient for strong assets priced within our acquisition hurdle rates. We expect pricing to take some time to normalize and now estimate annual acquired revenues, excluding the Pendragon acquisition, in the range of $2 to $4 billion a year. Our near-term target of $50 billion in revenue remains within our sights, and our team is confident in our ability to achieve this while doing so in the most prudent fashion possible. Our team is experienced in executing and integrating acquisitions, and we remain committed to achieving strong returns as we build out our network. Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and have now acquired over $22 billion in revenue. In addition, the strategic partnership with Pinewood Technologies allows us to leverage technology to stitch together our strategic adjacencies, modernize the customer experience, and someday realize considerable cost savings in our technology stack. We are excited to begin the journey with the implementation of the Pinewood Dealer Management System, or DMS, in our UK operations this year. Beyond the UK and next year, we are excited to be part of the North American partnership with Pinewood Technologies, continuing to grow our own driveway customer experiences and creating simple, transparent, and aligned customer and associate experiences. Shifting to our omni-channel platform, our MUVs across our digital channels were up 16%, reaching 13 million per month. Digital transactions, including driveway, grew to nearly 38,000 in the fourth quarter, up 27% compared to last year. Green cars, the leading sustainability vehicle education channel, continues to grow as a lead generation channel and contributed over one million MUVs, up 102% over last year. Sustainable vehicle sales now account for 16% of our new vehicles in Q4 up from 11% in the same period last year. With our customers at the center of our design, join me in welcoming Adam Chamberlain to the call and congratulating him on his expanding role as our Chief Customer Officer. His decades of experience and proven track record driving results will lead our continued transformation of the customer experience combining our foundational elements to create deeper customer loyalty and increasing market share and profitability. Now that all the foundation elements of our plan are in position, attentions turn to improving margins and lowering our SG&A through a combination of growth, efficiency, diversification, and scale. These elements are now well underway, And when combined with our newest adjacencies of fleet management and a strategic technology partnership, we are well positioned for both further growth and realizing the profit potential of a more holistic lifecycle relationship with our customers. Weaving these elements together and assuming a normalized SAR and GPU environment, we now can clearly see a pathway to $1 billion in revenue, ultimately generating $2 in EPS. Key factors underlying our future steady state and now totally within our control are as follows. First, continuing to improve our network by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer lifecycle interactions, leveraging our cost structures, personnel productivity gains, and growing each store's new, used, and after sales market share. The result is to achieve an SG&A as a percentage of gross profit in store operations that's below 55% in a normalized GPU environment. Second, continue focusing on acquiring larger automotive stores in the higher profitability regions of the South Central, Southeast, and Midwestern United States. Combined with further growth in our digital channels, we expect to reach a blended U.S. market share of 5%. Third, financing of up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves. As a reminder, our first adjacency DFC remains on track to achieve profitability during the latter half of this year. Next, maturing contributions from our horizontals including fleet management, DMS software, charging infrastructure, and captive insurance. Fifth, through size and scale, we continue to drive down vendor pricing, improve corporate efficiencies to save costs, and lower borrowing costs as we path towards an investment grade rating. Combining both store operational improvements with higher margin adjacencies and the other design advantages discussed, ultimate SG&A as a percentage of gross profit will fall below 50%. And finally, ongoing return on capital to shareholders for dividends and opportunistic share buybacks. Please refer to the LADD investor presentation for further details and reconciliations. As we approach the middle of the decade, we are well positioned to maximize our unique an unreplicable mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale. Our strategy, combined with our experienced and focused team, will continue to expand market share, leverage our size and scale, and grow our complementary adjacencies to produce an ultimate long-term profit-to-revenue ratio of $2 of EPS. All elements of our original design are now securely in place, and we look forward to focusing all of our attentions on execution to establish new levels of performance for our industry. With that, I'd like to turn the call over to Chris.