Q3 2020 Lithia Motors Inc Earnings Call
[music].
And welcome to the Lithia Motors third quarter 2020 conference call.
All lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question answer session I would now like to turn this call over to Mr., Eric <unk>, Vice President of Investor Relations and Treasurer. Please begin.
Thank you and welcome to the Lithia Motors third quarter 2020 earnings call presenting today are Brian de Boer, President and CEO, Chris Holzshu Executive Vice President and COO, and Sienna Miller Senior Vice President and CFO.
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 differ materially 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.
We urge you to carefully consider these disclosures and not to place undue reliance on forward looking statements we.
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 todays press release for a reconciliation to comparable GAAP measures.
We have also posted an updated investor presentation on our website Lithia Investor Relations Dot com highlighted our third quarter results with that I would like to turn the call over to Brian to bore president and CEO.
Thank you Eric good morning, and welcome everyone.
Earlier today, we reported the highest quarterly earnings in company history.
$6.89 per share, 103% increase over last year.
These results were driven by strong used vehicle revenues combined with record gross profit level and continued sequential improvement in new vehicle and service body and parts sale.
In addition, we restarted our acquisition engine clothing, nearly $1.5 billion and expected annualized revenues during the third quarter.
We would also like to welcome all of our new partners that participated in our equity and debt offerings last month and look forward to our future growth together.
Our performance this quarter demonstrates the success of our highly diversified highly complex growth strategy that that's what the apart from its competitors.
Our digital home collection driveway, coupled with our existing network of over 200 locations allows us to meet customers on their terms throughout the entire lifecycle of mobility ownership.
But the ability to offer both in home and in network solutions provides consumers experience that satisfy the broad range of customer needs with a commitment to affordability transparency and convenience.
This omni channel strategy led us to this historic quarter of record earnings.
And it's all it's progressing towards our five year plan, a $50 billion of revenue and $50 and earnings per share.
During the quarter total revenue grew 9% and total gross profit increased 28%.
New vehicle revenue a key driver of our ability to source high quality used vehicles and the catalyst to growth in our higher margin business lines increased 3% for the quarter.
Total U.S revenues increased 19% ethanol I increased 18% and service body and parts increased 6% growth.
Chris will also be sharing same store information in just a few moments.
That's substantial improvement in gross profit of over $1000 per unit compared to third quarter of 2019 are largely attributed to high level of incentives from our OEM partners and a perceived inventories shortage in the country.
These record gross profit levels, coupled with sequential improvements in all business lines.
And strategic cost saving measures executed earlier this year allowed us to eclipse a quarter billion dollars of adjusted EBITDA in the third quarter.
As consumer behavior, a ball the two trillion dollar market of automotive products and services is more ripe for consolidation and disruption than ever before.
Our five year plan to achieve $50 billion in revenue focuses on the most expansive addressable market of any retailer and the $350 billion of gross profit to any.
To ensure strong profitability along the way.
This plan was designed to address both the fall vehicle ownership lifecycle and all level of affordability.
It includes new am certified vehicle sales from 30 manufacturers.
A whole spectrum of non certified used cars.
Plus the high margin ethanol I, an aftermarket businesses, including service body and parts.
Our National brand and foundation for disruption driveway begins by combining our proprietary technology with the scale of our people inventories in network to profitably modernize the industry as well.
As we continue to market additional digital harmful loosened our teams are ready to serve not only our traditional customers, but also incremental E commerce customers through our new offerings.
During the quarter, we unveiled drive way as our E commerce and in home National brand.
Alongside our proprietary selling technology perfected over the past 16 months under the barrel Dotcom Regional brand, we reached our second functionality milestone with the launch of our in home driveway service experience in the northwest or region one.
This experience allows consumers to scheduled service work with free home pickup and delivery, including three loaner vehicles within a predefine Geo fenced area.
This key differentiator in our omni channel model allows for more than 10 times the brand impressions compared to digital used vehicle only experiences that sell a customer of vehicle. One every six years.
This service offering allows consumers to pay as they go subscribe to and home services for the lifetime that they own their vehicle or as we like that they have your vehicle service then your slippers.
Earlier this month, we soft launched our third milestone they used vehicle revenues during those.
Though still in its infancy driveway now has over 20000 high quality used vehicle available for purchase and delivery anywhere in the United States.
By the end of this quarter. This solution will be upgraded to provide customers with an end to end digital solution with functionality rivaling all other digital platforms.
Our selection of scarce used vehicle spans the entire age from certified used vehicle to 20 year old value on it all.
All vehicles have a seven day return policy free delivery within 100 miles fulfilled by our existing logistics team.
Teams and other brand guarantees to reassure consumers of their purchase.
The purchasing process is a one price digitally enabled experience that will include immediate financing and in home finance subscriptions by the end of the fourth quarter.
Our data science shows us that although consumers will have the option to purchase in finance their vehicles fully online the complexity of their own finance ability and desire well usually require the assistance of our driveway care Center and network.
RBC ease or virtual centers of excellence include our finance specialists from our existing network behind the scenes as.
As partners with our driveway care centers to provide solutions and expertise for customers, who are unable to be automatically approved.
These experts are using their relationship with over 150 lenders throughout the United States to structure the consumers transaction in a way that they can be approved.
Though we look forward to the days when our automation and H.T.I.s can solve for a larger portion of consumers our history and science tells us that this will move slowly in the.
In the interim RBC ease greatly expand our ability to finance two to three times more consumers than other digital competitors like.
Lastly, our new vehicle revenue stream, which will include an industry first seven day return policy will launch early next year and we'll add another approximately 30000 vehicles to the driveway online selection.
With over 200 existing reconditioning and vehicle storage locations 500 inventory procurement specialists and 8000 associates that currently perform in a negotiation free environment. We are competitively positioned to support the driveway national brand.
In addition, our 5 million paying customers will soon have access to the drug my driveway portal a customer experience huh.
Simply put the my driveway portal will allow consumers to shop self service and manage their vehicle.
In this single location a customer can control their vehicle ownership lifecycle from vehicle information scheduling at home or in network service.
Viewing their maintenance maintenance history, and happened I product subscriptions and even more.
By constructing the portals on the driveway U.R.L.
Organic search and marketing dollars will be much more effective than any current or future competitor. The combination of driveways difficult to replicate offerings allows consumers to complete all of their vehicle ownership experience and the convenience of their own home.
And if they choose never set foot in a traditional dealership again.
The foundation to our Omni channel plan is the growth and expansion of our physical network.
No company, having over 1.5% of the two trillion dollar market the opportunities for consolidation within our industry remained remain plentiful and our pipeline remains full.
Our plan models acquiring approximately $4 billion in revenue annually over the next five years.
This highly fragmented market has allowed us to consistently invest in increasing the reach and the density of our physical network by acquiring strong assets.
Building, our network with new vehicle location positions Lithia end driveway to leverage massive competitive advantages overused only retailers.
These advantages include upstream procurement of new and certified vehicle trade ins.
A more distributed reconditioning network that eliminate logistics costs, and it's closer to the customer and access to the highest margin service body and parts business is all at a relative network cost similar to use only retailers.
We've added a new comparative slide on page 16 of our investor deck that illustrates the cost of our network relative to revenue and gross profit as well as our current utilization rate.
With more than $2 billion in cash and available credit and finance real estate that can add an additional $225 million and liquidity.
Over $700 million in EBITDA production annually and an adjusted leverage ratio of approximately two times we.
We are well positioned for accelerated growth.
Assuming an average equity investment of approximately 25, percentof revenues, our available liquidity and annual free cash flow could.
I could add $8 billion in revenues or more than 50% growth.
During the quarter, we completed the acquisition of San Francisco BMW, The 10 store, John Eagle Auto group in Texas, and they C.J.D. our store in Knoxville, Tennessee.
In addition earlier this month, we completed the acquisition of Lake import in Albany, New York.
These acquisitions are anticipated to generate $1.5 billion in annualized steady state revenues for the.
For the year. This brings our total network expansion to 1.75 billion and expands our density in key geographic areas.
We continue to seek acquisition to improve our reach more conveniently serve our customers and grow our highest margin business line or.
Our customer proximity to our physical network is a key element of our growth strategy and design as it enables us to supply convenient touch points throughout the ownership lifecycle.
We have approximately $2 billion of revenue under definitive purchase agreement that are expected to close during the quarter and.
In addition, we have approximately $3 billion under a low why that are expected to close in early 2021 for a total of $5 billion more.
Coming off our highest earnings in company history, and more than doubling our quarterly earnings over the prior year, we remain humble never quite satisfied and acutely focused on our growth aspirations.
Our diversified high growth business strategy is highly complex and difficult to replicate.
Our growing network composed of our people inventory and physical network combined with our driveway digital home solution completes our unique omni channel strategy.
Our mission of growth powered by people and our values of improving constantly and taking personal ownership are the driving forces behind our ability to outperform and compete in any environment.
This strategy and culture positions us to continue to lead our industry's transformation and progress towards our five year plan, a $50 billion in revenue and $50 any P.S. with that I'd like to turn the call over to Chris.
Thank you Brian as we enter the final months of 2020 and reflect on the strongest quarter in our company's history. Our store leaders continue to challenge our teams to exceed customer expectations increase market share and improve profitability the demand from consumers for transparent in home solutions has shifted the mindset of our teams and accelerated the.
The option of driveway and drive way type services throughout our network the fall.
The following discussion about our quarterly results is on a same store basis.
The three months ended September Thirtyth 2020, total same store sales increased 1% driven by a 4% decrease in new vehicle sales, an 11% increase in used vehicle sales a 7% increase in half an eye revenue and a 3% decrease in service body and parts revenue as.
As previously reported we have seen continued sequential improvements each quarter as our leaders have adjusted to the impacts in their local markets and focus on providing safe convenient transportation solutions to our credit consumers.
The new vehicle business line was down 4% for the quarter, but improved two an increase of 6% for the month of September.
Our average selling price increased 6% and unit sales decreased 10%.
Gross profit per unit increased to $3022 compared to $2079 last year, the $943 increase are up 45% total.
Total new vehicle gross profit per unit, including up and I was $4770, an increase of $1116 per unit or 31%.
At approximately $4800 a gross profit per unit, new vehicles remain highly profitable with an 11% margin similar selling cost per unit as used vehicle inventory carrying cost that are subsidized, but our manufacturer partners.
For used vehicles, we saw an 11% increase in revenues for the quarter gross profit per unit for the quarter was $2971, an increase of 30% or $685 over last year total used vehicle gross profit per unit, including up and I was $4606 an increase of one.
$1270 are up 38% as.
As Brian mentioned earlier, our strategy of selling deep into the used vehicle age spectrum and our ability to procure the rights scarce vehicles remains the catalyst for the future success and growth of our existing network and driveway.
Then when used vehicle sales are supported by our experienced finance specialist that continue to find better ways to master complexity of a consumer financial position with lending options at over 150 financial institution and.
In the quarter, our finance and insurance business line showed substantial improvement averaging $1617 per retail unit compared to $1473. The prior year, an increase of $144 per unit as consumers continue to take advantage of the product offerings available to protect their mobility investments.
Overall, new and used vehicle sales create incremental profit opportunity to the resale of additional trade and vehicles greater manufacturer incentives half an eye sale and the future parts and service, where we continue to monitor this through the growth of our total gross profit per unit, which was 4600 a $90 in this quarter an increase of 1027.
In dollars per unit or over 28% over the last year.
Our stores remain focused on the highest margin business lines, our service body and parts, which decreased 3% over the prior year and improved two an increase of 2% in September as Bryan previously mentioned, our service body and parts business see millions of paying customers and brand impressions annually that generate over 50% Mark.
And and remain a huge competitive advantage for lithia.
The decisive cost savings measures taken earlier in the year continue to take hold and are expected to continue into 2021 combined with the increases we saw in new and used gross profit margin same store adjusted asking you to gross profit was down to 59.1% in the quarter, an improvement of 910 basis points over the prior year.
The S. DNA opportunities ahead provide significant earnings opportunities as we look to our highest performing stores that consistently maintain an estimated gross profit metric at these level in it.
In addition opportunity to leverage our existing cost structure will continue as our digital home solutions driveway creates additional incremental sales and leveraging our existing network of locations. This strategy allows us to profitably monitored by the consumer experience and.
In summary, our teams continue to meet the ever evolving preferences of consumers wherever whenever and however, they desire.
As each store teams begins the process of sending their individual annual operating plan or LP. The information provided by our data science continues to allow them to be nimble and responsive to the changing environment and the opportunities available to continuously improve we're innovating and meeting consumers' increasing digital enrollment expectation.
They are incremental and pragmatic modernization and are poised for continued growth and 2021 and beyond.
Our ability to achieve high performance in any environment continues to be the foundation of our culture as we remain focused on our longer term goal with that I'd like to turn the call over to Tina. Thank you Chris for the quarter, we generated over 255 million of adjusted EBITDA and over 125 million of free cash flow.
As a result, we ended the quarter with over $694 million in cash and available credit earlier.
Earlier. This month, we raised gross proceeds of 855 million three follow on offering of class a common stock concurrently we raised 550 million, they're issuing 4.375% senior notes due in 2031 together. This brings our current total cash and available credit to fund our growth.
[laughter] over $2 billion in it.
In addition, I'm finance real estate can provide additional liquidity of approximately 225 million.
As of September Thirtyth, we had 3.5 billion outstanding debt of which 2 billion with floor plan used vehicle in surface lot of financing again.
A unique aspect of that in our industry is the financing of vehicle inventory with four plant that this financing is integral to our operation and collateralized by these assets.
Industry treats the associated interest expense as an operating expense in EBITDA and excludes this that some balance sheet leverage calculation on adjusted our total debt to EBITDA is overstated at five times adjusted to treat these items as an operating expense our net debt to adjusted EBITDA is 2.1 times.
Our capital allocation priorities, which support either our diversified high growth strategy remain unchanged, we target, 65% investment in acquisition, 25% internal investment, including capital expenditures modernization and diversification intensified and shareholder return in the form of it.
Wins and share repurchases.
Earlier. This morning, we announced the 31 cents per share dividend equal to the increased dividend amount announced in July our adjusted tax rate of 27.5% in the quarter. However, we continue to anticipate a full year tax rate to be between 29% to 30%.
As Brian mentioned earlier with over 2 billion and available liquidity, we are well positioned to accelerate our growth strategy in the coming quarter, while maintaining strong capital discipline. We plan to continue to pragmatically in Bath and modernizing the consumer experience your driveway and building the teams needed to support our growth with.
With a robust balance sheet and a massive regenerating capital and then we remain laser focused on achieving our five year plan, a $50 billion of revenue and $50 earnings per share.
This concludes our prepared remarks, we would now like to open the call for questions operator.
Oh, we will be conducting a question answer session.
He would like to ask the question. Please press star one on your telephone keypad a combination <unk> indicate your line is in the question queue you.
Maybe I'll start.
Question from the Q.
Using speaker equipment, it may be necessary to eat a pick up your handset booklets crossing the sparky.
While we poll for questions.
Our first question comes from the line of Vijay <unk> with JP.
JP Morgan you May proceed with your question.
Hi, good morning, everyone. Thanks for taking my questions.
Good morning, Roger.
Good morning, My Brian just a question on your word you used to retail volume.
Inventories quarter, you know last 4% same store can you can you give us a sense. So you know how that progress.
Through the quarter Merrill Lynch in July August September and then.
The college, how is October looking on that front and just how should we think about the golden Janeiro for the remainder of the year, especially you know as you start to see some traction on dry so I'm sure sure sure Raj. If you remember I mean, we came out of out of June at almost 20%. So we did that didnt.
Stabilize a little bit we saw weakness in our day supply that really troughed in the August time period around 43 days, that's actually back up to almost a 60 day supply today. So we like what we see there and I think when we think about how we procure cars and how we think about.
Moving into Q4 and into Q1, it's important to always balance inventory supply with margins. So we were up almost a thousand dollars and unit economics are in used whereas we were only up $150. When we were at that you know that 22% run rate that Ah ha in back in June.
So.
I think it was a good choice a and you know going forward I don't I don't think that the persistence of thousand dollar per unit on youth will will be maintained but I think through Q4, and maybe even into Q1 that we'll still see some strength there.
Got it but are you confident both do well even good right now.
Or are you still or is it like it was a down year over year like I did with a good third quarter.
They're based on like homage.
We are making on like the gross profit side.
Yeah. Roger This is Bryan again, yeah. The trends in in early Q4 are very similar to Q3.
Oh got it okay and just a follow up question on no thoughts and services you know might have driven looks like no. It is likely to be structurally lower here going forward.
You're obviously expanded your product selection.
Services coming up.
No.
Is it reasonable to assume that your thoughts and services business.
No organic based on an organic basis can come back.
He joined you 90 levels in 2021 or no just.
Just curious as to how we should be thinking about that and what you're seeing on the ground there in terms of demand.
Sure I I think that we're very pleased with the return to positive same store sales levels in September where we were up 2% year over year and you know if you recall from last quarter, we were talking about being down around 20%. So that's nice improvements, though the costs.
After we were still down 3%, we are seeing a cone customers return now there are obviously is the chance of of of a co. Good relapse or something like that that we think we're very well positioned to be able to go in home and I think that's a a good tailwind moving into 2020.
The one as well.
Got it so do you think you can grow the business.
Despite a mild driven overall like you've been down.
HM.
Is that more of a comp is that more due to something specific actions or just seemed like the like enough.
Pent up demand out there that can you can do good you know like offset weakness.
Yeah, I think if you reflect back on miles driven I think that's important to think about.
But I also know that our offerings in different commodities being a full maintenance and repair and now in home, we think that any any softness there that we can offset and in our forecast, we're assuming a about a 5% to 6% same store growth rate.
Within our service body and parts businesses over the next five years.
Got it okay.
That's helpful I'll pass it on and get back in the queue. Thank you.
Thanks Roger.
Our next question comes from the line of Adam.
Morgan Stanley You May proceed with your question.
Hey, Brian everybody.
Couple of quiet about digital Hey, a couple of questions about digital and I guess.
If I were to ask the question broadly what percentage of your.
U.S sales last quarter or digital and tell us how you define digital and that I I would like to also know within that how what percentage would you describe as the digitally skilled are really truly touchless or perry pursue with a carvana experience I know, it's a very low number.
But we're going to start asking questions and expecting transparency and disclosure on comps at some point. So I wanted to give you a chance to you know.
You know at least give a starting point.
No no problem, Adam about 80% of our consumers use digital forms a in some in some way during the process, we actually only sell about 1.5% of our cars today on a truly digital end to end type of solution and even drive way today is not.
On an end to end solution now it will be by the end of the quarter. So that's important to keep in mind and we agree with you that as we move further into you know the second and third innings of our E. Commerce strategies that by mid 2021, we should be able to give you clear data specifically to drive way.
<unk> or our existing legacy business in terms of their digital strategies that's very.
That's very helpful. Brian any any.
A year on year on those comps on that 1.5% I realize it may be an obscene year on year, but I didn't know if you had to wonder if I ask you. The same question a year ago.
I know you know this is a little bit of a of a guess, but I would say it probably double where it was a year ago and that's really coming from the best practice sharing from the two channels that we think will gain momentum throughout 2021.
Thank you and just finally from me any color on that and again I realize it's early days and 1.5% as an awfully small number although we all know that's going to go up a lot.
Any color on GPU of.
Of the of that of that pure digital versus your brick and mortar attack.
Attachment rates gross profit anything you could add on that color right now where you see it trending sure sure sure Adam <unk> I think to start with our base assumptions on our five year model is that theres, no acceleration or deceleration in front end unit.
Economics in driveway.
Except for in App, and I were assuming $600 lower per unit around a thousand dollars within the driveway Ah strategy because consumers are are really using digital consultation to make those decisions rather than face to face a consultation Oh and I think that's where we where we really sit today are.
Our data science is telling us that their $600 better unit economics, when we sell a car through drive way in other words today, we negotiate we over negotiate what we need to relative to transaction prices in the market and we get that data by scraping.
They independent used car or whether one price dealers to be able to extrapolate that.
That's great color Thanks, Brian.
Thanks, Adam.
Our next question comes from the line of Rick Nelson with Stephens. You May proceed with your question.
Thanks, Good morning.
Good morning.
So I read.
Correct.
Hi, I'm a challenge right both <unk> for you.
The used cars.
Oh great.
The tree because you lose some.
Having some problems.
Some positive impact I know, it's Janet Lynne do you think supply is a normal some.
Could you discuss the outlook as we look into next year in terms of them to do so and that's true in <unk>.
Rick or Chris has got some perspective on that.
Hey, Rick good morning.
Brian mentioned already from a from a from a used vehicle perspective, we feel like our day supply is back where we need to be you know obviously.
Obviously with pricing going up late in the second quarter, our stores reacted and one more for growth versus volume model, but definitely a back on that the German trail when 51% of our vehicles actually coming outside of trade, meaning you have to go find those vehicles.
Our stores did a wonderful job getting ready for the fourth quarter and being prepared with used cars as far as new vehicles are concerned I think we've seen kind of a steady trend off of what Brian alluded to which is about a 50 days DSL and we anticipate that to continue probably at those levels into next year.
Okay. Thanks.
Okay, so follow up or.
[laughter] early learning center.
Since you launched a driveway and region well and.
You know what sort of mark today, and how did you do around that launch from March being a plant or dry was going forward.
Sure sure Rick maybe I'd start with it so far in the first 40 days, which the early stages, we're only inventory procurement or sell as well as service from home and we just now recently launched the used vehicle inventory, it's not really.
Being supported by marketing budgets, yet because obviously our functionality on the used vehicle side is still limited to about halfway through meaning that we don't have full end to end functionality on that site to buy a used car now we have end to end functionality on selling a vehicle as well as servicing of vehicle.
We've seen 25000 visits to the site since.
Since the launch which is a far ahead of our projections considering that it's only in a portion of region. One a which is nice I do believe that we will have to work on.
Some of our pricing thought processes on the service side and a lot of our learnings are more in that vein, there's definitely a propensity for higher income or luxury product consumers to lead.
To lean towards in home service offerings at the current time, but also remember remember that we're offering them at premium pricing, okay, and and over time, I think and we as we gain volume we can become more efficient in pricing because of scale. So outside of that it's like we said I mean, we're really in.
In the early innings of of our projects and the sale the sale of used vehicles, and you know and new vehicles, which comes out next quarter or are eminent will teach us a lot more about what consumers are really looking for and how we can respond to convenience affordability and and in power.
I'm in for them.
Okay. Thanks for that.
Turning to us to do that that's M <unk> and.
But all in the works what is the timeline for about <unk> role.
Rollout doesn't cause a b other route truck.
Sure. So there's only there's two components that allows the consumer to go all the way through to the end and click buy and have the financing components included in that where we print print paper work and take the car to their home, Okay and that is the finance ability, meaning the p. eyes that are attached to each of the initial six.
The eight lenders that we will have by the end of this quarter, okay as well as the menu pricing up from finance and insurance subscriptions a that can be in home. Okay. So we don't have the f., an i. offerings on there as well as the finance ability, but those were both come by end of Q.
Order, Okay, we may get Lucky and get a few new cars on there as well if they don't have consumer incentives, okay. Because we can solve for them within our data and our algorithms or when we don't have incentives for the consumers just like we do for used cars, okay, but ultimately really where we're targeting the middle.
Q1 to have those other 30000, new cars, which is about 70, 580% of our of our new car inventory that can go live and also be available for delivery anywhere in the country. Remember also that when new cars come live we'll have a seven day return and that'll be an industry first on on every Brandon.
Those cars that were that we end up taking back for consumers. Those are really whats support our fleets of service loaner vehicles that are free within our driveway in home service offerings.
Great [laughter] tight swap him good luck.
Thanks, Thanks, Rick.
Our next question comes from the line of Ryan sitting down with Craig Hallum Capital Group. You May proceed with your question.
Great. Thanks, guys and congrats on the strong results and that really evolution of the business here.
Thanks Ryan.
It's just just one follow up on Dri, we talked a lot about it but curious what.
What percent of customers about 1.5% are repeat customers or how else are you driving traffic to the site.
So the 1.5% isn't specifically drive way, okay. That's in our entire business model of both channels. So that's that's that's not an of that a good portion of the of it is repeat business, Okay, and if I had to guess I'd say two thirds of that is repeat business.
Good then just switching over to M&A. The recent acquisitions, you've made how do those compare to past ones as far as SGN aid to gross profit profitability acquisition multiples et cetera, and then a follow up is Brian you mentioned.
Brian You mentioned 5 billion of targets under Ela wise, how do those compare to kind of historical sort of the bigger in scale or is it just an acceleration in the number of deals.
Sure Ryan so the most importantly, the Eagles and the Williams acquisitions performed at mature state or a seasoned level of typical lithia stores in the 3% to 4% margin range, it's surprising that our initial partnerships with both organizations we still.
Unable to expand a late or older used vehicles or core or value auto, which isn't something that either organization spent a long time doing and they quickly adapted to the logic entered are both doing quite well, which is great now when we think about the five year plan to grow at 4 billion.
Dollars annually or for an aggregate of $20 billion of which the 5 billion that you mentioned that weve a tentative we announced okay. I can run back through that but we really look at that are typical strategy of buying value based strong assets that aren't really performing at the strong level, we're only going to be able to buy about one.
Going into a billion five of that which is our traditional model our levels of growth. Okay. So about three quarters of the future growth will come from these Williams in Eagle type of acquisitions that are better performers. So.
So the you know the return dynamics still will be over the 15% after tax return threshold because doing the value type investing we've achieved over 25% after tax returns over the last 10 years and there are some that you know we we have the ability to to still be able to do that while buying a lot better acquisition.
Ones that are much easier to integrate and you know have a much higher probability of success.
Great. Thanks, guys. That's it for me good luck.
Right.
Our next question comes from the line of John Murphy with Bank of America. You May proceed with your question.
Good morning, guys I'm just.
The first question, we're hearing from one of your your big competitors. They are accelerating the growth of their.
The growth of their standalone used vehicle stores as well as their their omni channel efforts.
You guys are going out there building franchise network gets larger and just you and not just I mean, but like exclusively.
You know going online with which ride way. So I'm just curious if you ever see the opportunity or the need to have seen on U.S stores. I mean, you know we went through this LTV backing away no nine but I mean is that something that you would explore or you think you need to do or from your store network on the franchise side do you think that this dry.
Good way App will give you enough leverage in those stores become that much more productive.
Sure sure John Great question, I think when we think back three years ago.
Our strategy design was based on the foundation that we need to center, our growth of our network as well as our offerings around the consumer and the third is that the consumers have for transparency empowerment and convenience, okay and that didn't lead us down.
The pathway about a network being built in a different way than new car stores, New car stores are highly highly highly accretive as I, just mentioned that 15% returns and for every billion dollars that we get it add somewhere between 50 cents and a dollar of bps, okay with a similar capital structure to what we share.
During the offerings, okay, but those three things of transparency empowerment and convenience didn't require used vehicle network, we really looked at that the new vehicle network had so many competitive advantages that I mentioned earlier like upstream trade like high margin service body and parts.
Because our foundation and Jesus was that the battleground of used cars, what is going to be where we're going to win or lose so to have more upstream trades in higher margin businesses, we felt that that strengthened our ability to provide consumers that transparency empowerment and convenience, so a little bit different logic, but remember.
Sure. It is a two trillion dollar industry and you know there's 40 million used cars sold a year and no. One player has more than about 1.5% of of that market, yet and I'm sure that there's many strategies that can be successful.
Great. That's very helpful and just a follow up on that though when you think about drive way.
Getting fully launched and as you know in operational in the coming quarters, how much more productive you think a single store E. Com. This think about new parking service and used I mean, maybe it to geographic reach or the other metric and you think about how much more productive that that.
As a glass it can become for you as it leveraged online.
Hi, John This is Bryan again, I think most importantly, when we did our design three years ago was built off the foundation that our existing network is only utilizing about 25% of its service capacity, Okay, and as we think about growth.
We're assuming not quite that low level of capacity on new acquisitions, because they will be more metro and they will be better performing but lets maybe you could double that on the future acquisitions, but our existing network is only used <unk> utilizing 25% of its service capacity. It's also.
He only utilizing about 50% of its storage capacity for the sale of vehicles now we are assuming a little higher velocity on our turn rate okay in that number but when we made that assumption, we really looked at that our ability to have to grow the network outside of new car franchises.
No I didnt really need to happen that way and I would point to the strong results of the quarter and the resiliency of not only in auto nation. Our competitor that you mentioned or next week the high level of performance that some of the others have already announced that the new vehicle busy.
This is pretty strong it's stable. It has a lot of levers to pull that we think are highs were crucial to our ability to maximize throughput through that network.
Got it and then just maybe a last quick one I mean, what's the variability of Youre asking a meaning what portion you think roughly as a rule of thumb is fixed and what portion is variable.
Yeah. Good morning, John This is Chris I mean for the last 10 years, we've always talked about the incremental growth that regenerate should translate to about 50% throughput, meaning 50% of that would fall to the bottom line and what we saw in the quarter was an incredible response by our team to.
To manage through both supply and demand issues and obviously, the cobas environment that they're in and we saw almost a 100% throughput in our stores and so you know I think over time.
The data that you know with.
You know with margin likely coming down to supply returns that we should see some permanent savings in the 200 to 300 basis point levels of what we saw kind of prior to this year, which would put us in the mid to high 60 percentage range on an EPS you need a gross but 50% throughput is still our target long term.
Very helpful. Thank you so much guys.
Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hi, good morning, guys.
But.
Your comment on region, one dry waste service experience I think you said you'd need to rethink pricing could you talk a little bit about what you are seeing in that or home delivery.
And and pickup in services.
It is margin better or worse than the average service margin and I guess is the customer you're getting an incremental customer where these people who were using your service bays previously or are these new users given the the convenience.
So initially we set the margins pretty high just because we needed volume levels to be controlled for the the fulfillment network or the six stores that are in the Portland area. So we.
So we are seeing that there is demand at the high level of luxury okay and it is new new types of customers that wouldn't typically go into a new car store that are looking for true convenience, which is which is good initial signs. We're also seeing and you have to remain.
For this that we have what's called Asrs or additional service requests. Okay. We are seeing in the initial stages of the asrs are somewhere around one and a half to two times higher and we do about $170 and asrs within our network today, Okay. So that's an improvement.
So it is margin expansion, we don't think that it's going to be permanent margin expansion like we're going to need to bring pricing into a more reasonable level to ensure that the Toyota Honda you know Dodge Jeep and Subaru customers are also able to do that within the Portland market is well okay. So.
It's early stages like I said, we're in at 45 days, but we're definitely learning and know how to pull those levers pretty quickly to be able to adjust on the fly to expand our revenue streams.
Okay, and then a follow up on new unit Gpus, you called out higher OEM incentives as well as the inventories situation in the quarter could you kind of bucket given the growth in GPU. What was are we versus maybe what from a supply demand standpoint, just what you got on pricing.
Yeah. Good morning. This is Chris So I think from an OE perspective, what we saw was a continued strength in incentive what's worth somewhere around the 4000 dollar range, which if you think about that from a supply and demand issue. When incentives are usually used to balance out inventories seeing a 4000 dollar you know incentive has been.
Very strong in the current environment.
And then as far as consumers are concerned you know the average cash down that we saw in the quarter was somewhere around $3500 and when you think about where that's been historically, there's like a 600 dollar lip over where where consumers cast down its traditionally been so what we're really saying is you know we.
Have a supply constraint coupled with good incentives from Arkansas or from our manufacturer partners and then consumers are I think allocating some discretionary income that they may have used historically for you know vacations moving houses other purchases and the directing them right now into automotive, which is really helping us on the margin side, Brett one other one other.
One factor is also Oh, our lift in average price of a new car went up $3500 year over year, which is a massive amount which means that their checkbooks are probably fuller and they're not able to fly the travel they're driving to travel and even though miles driven have been soft I think we'll see that start to return by by the end of year.
As we move into the holidays, where people are still wanting to hopefully see their family.
Okay and pass you guys have called it a negative equity average per transaction do you see anything changing there as far as the profile like arcam them.
Yeah, Brett we actually we actually saw some differentiation in the quarter, but it also could be driven off of the thousand dollars more margin. Okay. We we we've typically been running at $5100 in negative equity for the 70% of consumers that had negative equity the 71% grew a little bit.
But the average this equity grew to 5400, okay. So just small nuances, but I think it's mainly driven off of that belief that there was a shortage in product.
Great. Thank you.
Our next question comes from the line of David.
Morningstar you May proceed with your question.
Thanks, Good morning.
I guess first on shift now being public does that.
Perhaps make you want to exit that investments in order to avoid the mark to market fluctuations on your earnings are you not really not relevant because it's non cash and would that adjustment. If it were a large enough to be called out as a special item or will it always just be included in and adjusted earnings or GAAP earnings.
Yeah in terms of the volatility with the shifting back then and what that looks like it at PNM. We do plan to call that out obviously, there are some gain that won't be with him going public and then in terms of yeah ex that I think Brian that I thought that I, Yeah, I think I mean, we love our partnership.
We shift I mean, we the sharing of best practices. Among the two organizations is highly beneficial I think from both of us.
And I think they would stay the same so our intent is to exit that is to continue the relationship and the continue of sharing of personnel and resources as we as we said as we see the two companies grow.
Okay and the last night.
Last night as you know GMC unveiled the hummer BV pickup trucks.
Performance model, especially starts at an extremely high price point over $400000 and.
You guys saw a lot of pickup trucks, especially in rural markets and do you see that that niche that's being carved out by both startups and.
Incumbent Oems of the the be the recreational pickup truck rather than a work truck do you see that being really just the domain a very wealthy consumers or do you think there's a lot more appealing or beyond.
Very wealthy people.
Hey, David I think it's really early for us to comment on the expectations of the market with the general motor New product, but I can tell you. We've got more I got more activity on that launch Oh, hey than I have seen on a product in a very long time and then you know it is a halo vehicle. It is expensive, but I think the idea is to generate interest and then.
Just like everyone else has tended to do is bring in you know lower price affordable vehicles in that class overtime and so I think we're very excited for general motors to have a product like that that will generate some activity in the showrooms and then hopefully overtime bring affordability down I know Brian has some color on that as well I I think the over.
The overarching concept of electrification I think is highly important and obviously with our green cars Dot com strategies in the 4000 vehicles that are online there, we really want that to happen I mean, we're pleased as to what California is doing what the 2035 plan, but ultimately you still have to go back to affordability.
And if you go on our our Green cars Dot Com you can look at the education that talks about affordability. That's the limiting factor there is only a small portion of of consumers that can really afford a car that's more than 20 to $25000. Let alone. When you started to talk about a 100000 dollar vehicle and we know that our menu.
Factors have wonderful concepts of whether its hydrogen fuel.
Fuel cells, the along with electric and now maybe even the invention of you know solid state battery power and those type of things and and trust that our manufacturer partners will be able to bring you know electrification into affordability level, whereas it's not just the ability to sell them a used car that's sustainable to be able to meet.
The needs of most of the consumers.
Okay, and lastly, what percent of your new car customers, roughly our subprime now versus a year or two ago.
So we sell a about a quarter of our used car business or what we call a value auto is older cars, but that doesn't mean, they're subprime our major subprime customers are really in the one to three year old vehicles that we can buy way back a book Okay.
Okay, and still deal with the the dis equity that they're on their trade as well as the cash down availability that they have okay and today. It sits at about 15% of our total business is subprime that nuance is very important to remember because as you moved to older cars you get into scarce.
Sure vehicles, which means we have 50% cash buyers in the value auto bucket, and 50% finance buyers and those finance buyers or a higher credit tier because the car is a higher value in relationship to book, which means people have to have more down payment or better credit to be able to find.
I cant overbook, Okay. The exact opposite holds true on certified and knew where 85% 80, 85% of the consumers are financing their car and only 15 to 20 are truly paying cash so some different <unk> different things to be thinking about but hopefully that gives you some insights David.
The 15% of total that's 15% of total users or total used a new new combined or.
I'd combined new and used our total business is about 50% subprime.
Okay.
All right. Thank you.
Thanks, David.
Ladies and gentlemen, we have reached the end of the question answer session I would like to turn this call back over to Mr., Brian divorce.
Yes.
Thank you all for joining us today.
We each look we look we hope everyone remains safe and we really look forward to updating you again on our fourth quarter and full year results in February of next year.
Goodbye, everyone have a good day everyone.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have the great rest of your evening.
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