Lithia Motors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Lithium Motors second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Jordan Jaramillo, Senior Director, Investor Relations. Thank you. You may begin.

Good morning. Thank you for joining us for our second quarter earnings call. With me today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President, Tina Miller, Senior Vice President and CFO, Chuck Leitz, Senior Vice President of Driveway Finance, and finally, Adam Chamberlain, Chief Operating 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 reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on 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, Jardon. Good morning and welcome to our second quarter earnings call. Our lithium driveway teams continue to drive results as we mature our unique and profitable mobility ecosystem. Our associates met the operational challenge we faced in the quarter and delivered much improved operating results and execution of our strategy with an adjusted diluted earnings per share of $7.87, a 30% improvement sequentially despite the CDK outage. We achieved our highest ever quarterly revenue, our first quarter of profitability in financing operations, and laid the foundation for continued growth in our ecosystem as we serve customers wherever, whenever, and however they desire. We've strategically used the higher profits and capital of recent years to grow scale revenue and earnings by nearly three times since COVID began, plus built, acquired, and funded all our crucial differentiating strategic adjacencies, driveway, green cars, DFC, PVM, and now wheels. These important design and scale advantages built and assembled during a period of low cost capital have paved the highway to higher margin and a lower cost business with unlimited potential to capture market share. We are now focused on growing this market share leveraging our scale, realizing all the potential we have built, and delivering operational efficiencies through customer experiences across our ecosystem. This quarter brought a unique challenge when CDK faced a cyber attack that impacted many of ours and others dealer management systems. I'm proud of the way our team responded, quickly pivoting to create solutions and continuing operations across our network. We will talk about the impact on results and operations in a moment, but I want to recognize the impressive efforts of our team members who rose to the challenge, serving our customers 24-7. We continue to make significant progress with large sequential improvements in profitability, even after the impacts of CDK. We've achieved the first promised stage of the 60-day plan that aimed to create at least $150 million in annualized SG&A cost savings that will be fully realized during Q3. Looking forward, we now believe there is potential to double this amount, primarily driven from inventory reductions and are expected to occur by year end. During Q2, we made significant progress in areas such as personnel, advertising, and corporate level expenses, and implemented a redesign of leadership roles to focus on maximizing profitability while leveraging our ecosystem. We are pleased to announce that we have purchased a minority stake in Wills in partnership with Marabeni Corporation. Wills is one of, if not the largest, fleet management company in North America with the best in class management teams, strong performance, and surrounded by a robust competitive moat. This investment in a high margin and highly profitable fleet management operator has the potential to create transformative synergies between our retail and their fleet platforms. Alongside PVM and FAF leasing, Wheels completes our global omnichannel strategy focused on a complete mobility ecosystem. Now, on to key results for the second quarter. Lithium driveway grew revenues to $9.2 billion, up 14% from Q2 of last year. While vehicle operations experienced headwinds as a result of the CDK outage, Prior to the outage, Q2 had strong improvements in our same-store sales and delivered good momentum in our cost savings efforts. Diving into same-store sales performance, total same-store revenues were down 6.4% and gross profits declined 12.5%. Consumers remain resilient despite recent trends that reflect challenges from affordability and higher interest rates, with unit sales in the quarter down only 3%. Total vehicle gross profit per unit remained resilient in the quarter at $47.62, similar to last quarter, and down $951 compared to the same period a year ago. Our after sales business was down 1.4% in the quarter. This decline is primarily related to CDK, which drove after sales down almost 40% during the 12 days of the outage. We expect some of the work will be deferred into early July as our systems and processes return to normal. Our teams have been nimble and responsive and we do not expect any long-term impacts. Our investments in adjacencies are maturing nicely as they move towards sustainable and considerable profitability. Financing operations produce strong results with income of $7.2 million in the quarter compared to a $18.7 million loss last year achieving profitability earlier than expected. Driveway and green cars burn rates have also been reduced by 40% compared to a year ago as we continue to refine our e-commerce strategies, improve operating and advertising efficiencies, and convert new customers. All in, we generated adjusted diluting earnings per share of $7.87, a decrease of 28% from Q2 of last year, with an estimated $1.10 impact from the CDK outage. We saw clear strength in operational performance in the second quarter and we're on pace for nearly a 50% increase in sequential EPS. We continue to focus on unlocking the profitability of our ecosystem by decisively acting to meet customer demands and operate efficiently by delivering on our core strength, execution. Moving on to our unique and extremely difficult to replicate strategy. The foundation of the LADD strategy is our vast physical network built upon the industry's most talented people, highest demand inventory, and dense physical network. We continue to build the most extensive physical network in North America and the UK, adding new stores, foundational adjacencies, and strategic partnerships such as wheels, to expand our customer experiences and diversify our portfolio. Operating in the largest addressable retail market in the world, we continue to strengthen our ability to profitably grow across all elements of our business. Our strategy to expand and create customer solutions that are simple, convenient, and transparent, allowing us to capture more of the customer's wallet share remains unchanged. These solutions integrate digital solutions and create sticky natural retention of customers within our ecosystem, while magnetic brands like driveway and green cars provide access to 50 times more customers than our core physical businesses do. The LADD ecosystem, including driveway, showed a 2% increase in total MUVs year over year, reaching 12 million per month, with green cars contributing over 900,000 MUVs. MUV effectiveness is also building momentum. where we saw over 38,000 digital units in the second quarter, up 5% compared to last year. Our teams have made great strides in our digital channels, with a Google rating of 4.7 out of 5 year to date, and renewed focus on reaching profitability and expanding market share. As emphasized by recent events with CDK, technology provides an avenue for sizable increases in productivity within our business. We are excited about the progress our Lithia UK platform is making with Pinewood Technologies as we can continue to convert our stores there onto a single platform. Solutions such as Pinewood Systems bring the ability to place customers and associates in the same ecosystem in order to increase productivity, substantially improve our current customer experience, and enhance our operational resiliency. This quarter, our investment in Pinewood Technologies generated a nice return, which reflects the market's positive view of the platform's possibilities. These strengths, combined with our mission, growth powered by people, financial discipline, and regenerative free cash flows, enable us to quickly respond to local market dynamics. This capability allows us to increase touch points throughout the customer's lifecycle across our adjacencies, and equips our stores with the tools to improve market share, loyalty, and ultimate profitability. Acquisitions continue to be a core competency, and we remain disciplined as we look for accretive opportunities that can improve our network focused on the United States. As a reminder, we target a minimum after-tax return of 15% or greater and acquire for 15% to 30% of revenues or three to six times normalized EBITDA. We reiterate our expectations that estimated future annual acquired revenues will be in the range of $2 to $4 billion per year. Life to date, our acquisitions have yielded over 95% success rate and after-tax returns to over 25%, demonstrating that LADD is not your typical high-risk roll-up strategy. This quarter, we welcomed two stores from the Sunrise Group in Tennessee, and the Woodbridge Hyundai Store located in the Greater Toronto Area to Lithian Driveway. To date, in 2024, we have acquired $5.6 billion in annualized revenues. I would like to personally welcome all our new associates to the Lithian Driveway family. We are growth oriented and see industry consolidation as a driver of strong long-term returns. With the capital engine we have built, we are able to deploy our free cash flows to drive the greatest returns responsive to market conditions. As discussed last quarter, we have adjusted our capital allocation targets to equally balance acquisitions and share buybacks. During the quarter, we repurchased $202 million, or 2.9% of our outstanding shares. We continue to monitor valuations on both acquisitions and share repurchase and remain opportunistic. Weaving these elements together and assuming a normalized SAR and GPU environment, we see more clearly a pathway to generating $2 of EPS for every billion dollars in revenue as we illustrated in slide 14 of our investor presentation. The key factors underlying our future steady state are now totally within our control as follows. continuing to improve our operational performance by realizing the massive potential that we have built in our existing stores. This includes increasing our share of wallet through greater customer lifecycle interactions, sustained productivity gains in growing each store's new used and after-sales market share, increasing profitability with continued cost efficiencies, combined with the technology catalyst created by customers and teams members coexisting in the same solutions will help as well. Through these levers in our business, we see pathway to achieve SG&A as a percentage of gross profit with adjacencies in the mid 50% range. Second, optimizing our network by acquiring and driving high performance in larger automotive retail stores, in the stronger profitability regions of the Southeast and South Central United States. We also expect further growth in our digital channels to increase our market share to ultimately reach a blended U.S. market share of 5%. Today, we have combined new and used vehicle market share of 1.1%. Third, financing up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves. Our financing operations achieve profitability in Q2 and is expecting to continue consistent profitability growth going forward. Fourth, through scale and size, drive down vendor pricing with solutions like Pinewood, improve corporate efficiencies to save costs, and lowering borrowing costs as we path towards an investment grade credit rating. Fifth, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure, and captive insurance. And finally, deliver ongoing return of capital to shareholders through increased share buybacks and dividends. We continue our journey in building a total mobility ecosystem and are well-positioned to maximize our unique and powerful scale and reach to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale. Our original design elements are now firmly in place, and we look forward to focusing all of our attentions on execution to establish new levels of performance for our industry. Now, before we move on, I would like to share some organizational changes that I spoke to that are designed to support our evolving company delivering at a high level of performance. I am very excited to announce the promotion of Adam Chamberlain to Chief Operating Officer. Adam's leadership as Chief Customer Officer and Eastern Regional President since 2022, combined with his extensive experience in automotive industry, positions him perfectly for this new role. Adam's commitment to improving operations and creating customer-centered culture will be instrumental in driving a more connected and convenient experience across our ecosystem. Diana DePries will step into the Chief Customer Officer role, partnering with Adam and Operations to continue to build out driveway channel along with our customer ecosystem and related experiences in our after-sales business. With these changes, Chris Holshue will be handing the baton to Adam, allowing Chris to strengthen our ecosystem to spark growth and serve as the company appointee on the boards of Pinewood Technology and Wheels. Chris has been instrumental in our growth, and we are excited to see his continuing contributions to expand our partnership and enhance the company. These changes provide the organizational leadership and design to deliver best-in-class results and continue to execute on our strategy, driving profitability through seamless customer experience across our unique ecosystem and aligns our future success and differentiation. Congratulations, Diana, Chris, and Adam.