Q4 2020 Lithia Motors Inc Earnings Call

Good morning, and welcome to the Lithia and driveways fourth quarter, 'twenty and 'twenty conference call. All lines have been placed on mute to prevent background noise. After the Speakers' remarks, there will be a question and answer session.

I would now like to turn the call over to Eric Pitt Vice President of Investor Relations and Treasurer. Please begin.

Thank you and welcome to the Lad for lithium driveway fourth quarter 2020 earnings call presenting today are Bryan Deboer, President and CEO, Chris <unk> Executive Vice President and CEO of and Tina Miller Senior Vice President and CFO. Today's discussions may include statements about future events.

<unk> 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 and 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 of results discussed today include references to non.

Non-GAAP financial measures. Please refer to the text of today's press release for a full reconciliation to comparable GAAP measures. We have also posted and updated investor presentation on our website with the Investor Relations Dot com highlighting our fourth quarter results with that I would like to turn the call over to Bryan Deboer, President and CEO.

Thank you Eric good morning, and welcome everyone.

Earlier today, we reported the highest fourth quarter earnings in company history at $7 and <unk> <unk> per share.

Adjusted fourth quarter earnings were $5 46 per share and increase of 85% eclipsing last year's record $2 95 per share by a wide margin.

Tina will provide details on the pro forma adjustments and a moment.

Our full year adjusted EPS was <unk> $18.19 of 55% increase over last year, so of $11 76 per share.

These record results were driven by an acceleration and our acquisition engine, including the purchase of nearly $1 $8 billion and expected annualized revenues during the fourth quarter underpinned by strong operational performance and our core business.

We saw continued gross profit strength and new vehicles revenue growth and used vehicles normalizing of fixed operations sales and leveraging of our cost structure.

Combined we grew revenue by three 6% for the year and an industry that was down over 14% and continue to carry the momentum and focus into 2021.

Now that our unique strategy and associated 50, 50 plan are well underway, we look forward to utilizing our strength of execution to continue to establish lithia and driveway as the consumer channel of choice.

I want to start by congratulating, our lab partners group or LPG winners for their exceptional performance in 2020 Rex.

Our recognition as an LPG member is a highly coveted award and represents the pinnacle of our mission growth powered by people.

And though high performance reside throughout last at these stores demonstrate a relentless and elevated focus on culture customer experiences and continuous improvement to create impressive results. We aspire that all locations within our network rise to a partner level. Thank you to our entire team.

<unk> and well done in 2020.

During the quarter total revenue grew 21% and total gross profit increased 30%.

New vehicle revenue increased 19% for the quarter and remains a key driver and sourcing high quality scarce used vehicles and the catalyst to growth and our higher margin fixed operation and business lines.

Total used vehicle revenues increased 24% F&I increased 27% and service body and parts increased 16%.

Total vehicle gross profit per unit for the quarter increased 4300, $71 $667 increase over last year, driven largely by 28% increase and new vehicle gross profit per unit.

Gross profit levels began to normalize during the fourth quarter when compared sequentially to the third quarter of 2020, primarily due to more typical supply and demand levels for used vehicles.

These elevated gross profit levels and new vehicles.

Coupled with higher performing new acquisitions and improvements in all business lines and strategic cost saving measures executed last year led us to earning over $750 million and adjusted EBITDA for 2020.

We are at an exciting time and and the early stages of executing on our five year plan to expand our presence in the over two trillion dollar market of automotive products and services.

Our strategy focuses on the most expansive addressable market of any retailer and automotive space is designed to address the full vehicle ownership lifecycle all levels of affordability and ensures our considerable competitive advantages are maximized.

We are now well underway towards our $50 billion and revenue and $50 EPS five year plan that was designed three years ago and began on July one of 2020.

Building on our existing network and multiyear development and driveway. We're excited to now provide the most comprehensive E commerce home solution in the automotive retail space.

Our multi faceted and disciplined approach to investing to meet changing consumer needs and Leverages, our owned inventory personnel and national network of locations to thoughtfully focus on gross margin in order to competitively and profitably modernize the industry.

Beginning with our first proprietary technology released in Pittsburgh and May of 2019, driveway empowered consumers to simply and transparently sale of their vehicles through our application from home.

And this release included key functionality, such as workflow management for our valets consumer scheduling and Geo fencing for logistics on a national level and are now mature and the backbone of our recent released offerings.

We expanded the driveway application functionality with the launch of in home service options in September of 2020, and Portland, Oregon and establish the first my driveway consumer portal and our interface.

Sure.

This expansion of the driveway experience allowed us to provide consumers with convenient and home service solutions, while further leveraging our physical network and decades of rich consumer data.

Earlier in the fourth quarter of 2020, we launched the ability for consumers to shop for our 'twenty and high quality used vehicles available for delivery anywhere in the United States with assistance and checkout from our driveway care Center.

Later that quarter, we achieved our most crucial milestone by providing consumers with a complete end to end digital shopping solution with consumer driven and fully automated checkout.

This advancement and integrated immediate financing from 'twenty, three financial institutions and the option for in home F&I as subscription services to protect their vehicles through their entire ownership lifecycle.

With this functionality consumers can choose to complete their entire lifecycle of vehicle ownership from the comfort of their own home and never set foot and a traditional dealership again.

Two weeks ago driveway also became the first E commerce retailer and the country to offer and negotiation free new vehicles with free and home delivery and seven day money back guarantee at a national level draw.

And <unk> drive ways, new vehicle solution now with vehicle leasing and captive manufacturer of financing added another six lender Apis now totaling 29 available to consumers with auto approvals and a matter of seconds.

This lease and finance auto approval of Optionality was released two quarters ahead of our previously shared plans.

Driveway now offers a selection of 57000, new and used vehicles, the largest negotiation free inventory selection of any retailer and the country.

Our new vehicle inventory represents all major brands and our selection of scarce used vehicle spans the entire spectrum from certified used vehicles to 20 year old value autos.

Although consumers today can purchase all vehicles of accompanied with our brand guarantees and risk.

<unk> and home delivery anywhere in the country. Our marketing dollars are currently focus only in Portland, and Pittsburgh markets as we continue to perfect our execution and these two markets demand from existing network and competitive positioning has allowed us to accelerate.

Our further network rollout plans to key top 10 largest U S metropolitan areas and.

Driveway will now enter four of these markets by April and a minimum of 12 total major markets located and all six of our regions by the end of this year.

Our data science continues to show us that although driveway customers now have the option to purchase and finance their vehicles fully online the complexity of their own finance ability and desires will usually require the assistance of of driveway care Center and network are financing virtual.

Centers of excellence connect our existing finance specialists with our driveway care centers.

Behind the scenes. These 900 finance experts are using their relationships with over 150 lenders throughout the United States to quickly gain approval for consumers that are not auto approved.

In addition to leveraging our third party financial partners, we have continued to expand lithia and driveways Fintech arm.

Driveway Finance Corporation or Dfc is a fully integrated captive finance company that further strengthens our ability to auto decision consumers by leveraging driveways powerful data science engines.

Dfc also utilizes the rich data history of our legacy Southern Cascades Finance Corp, which was started nearly a decade ago for the last three months Dfc has originated and average of 1000 loans per month across all channels.

Longer term, we expect that driveways fintech platform will play a larger role and elevating the experience for our consumers and capture up to 20% of all vehicle sales transactions further differentiating lab and profitability.

Driveway remains competitively positioned to be the leading provider of personal transportation solutions with 210 existing reconditioning and vehicle storage locations and over 500 nationally distributed inventory procurement specialists and now <unk>.

9000 existing underutilized associates that currently perform in a negotiation free environment.

While driveway of is still in its infancy, we embark on 2021 with a clear pathway for driveway to become the online buying selling and servicing brand of choice.

Today the team of 90 driveway engineers have developed a suite of consumer solutions and functionality that provide the first complete end to end digital ownership experience spanning the full vehicle ownership lifecycle, our team continues and aggressive network rollout cadence.

And we'll be releasing improved functionality updates approximately every two weeks in 2021.

Consumer convenience and cost advantages and competitive pricing is achieved through having a physical network of locations closest to our customers. These elements are the foundation for how we designed our experiences and future network needs.

Density of this network provides massive competitive advantages over any of our digital and used only competitors building our network with new vehicle franchise positions Lithia and drive way with other advantages such as upstream procurement from new and certified.

Trade and with more attractive valuations and distributed inventory and reconditioning network that eliminates logistics costs.

And by being closer to the customer and access to the industry's highest margin service body and parts businesses that brings 10 times, the consumer lifecycle touch points than vehicle sales only retailers.

These advantages are delivered through our network cost similar or lower than used only retailers. Please.

Please reference slide 16 of our Investor presentation to learn more about our network cost and utilization rate relative to our competition.

The opportunities for rapid consolidation within our industry remain plentiful and our pipeline remains full during the quarter. We completed the acquisition of Lytham forward and Albany, New York Keys, Automotive group, and California, and Arizona, Sterling luxury group, and Washington D C and the important.

Region. Three addition of Ramsey, Subaru Mazda and Iowa. These.

These strategic acquisitions and key geographic locations are anticipated to generate nearly $1 8 billion and annualized steady state revenues for.

For the entire year. This brings our total network expansion to $3 5 billion of which $3 3 billion occurred.

Since launching our five year plan seven months ago.

With the addition of key franchise dealerships in the mid Atlantic debt.

The Lithia and driveway network now reaches 100% of the U S population within a 400 mile radius this'll.

This allows for efficient and competitively price reconditioning delivery and pickup of vehicles across all business lines.

Our nationwide network continues to grow and each of our six regions and we continue to target of 100 mile reach to allow for convenient affordable and timely consumer servicing experiences during and after the purchase of their vehicles.

And with nearly $1 $4 billion and available liquidity, we remain poised for further growth and acceleration of our network.

We continue to seek acquisitions to improve our reach more conveniently serve our customers and grow our highest margin business lines with.

With the acquisition of more than $3 $3 billion of revenue and the last six months. We are well ahead of our base case five year plan that outlined acquiring $4 billion per year.

We now have more than $3 billion of additional revenue under definitive purchase agreements.

That is expected to close in early 2021, and numerous others under LOI.

Lastly, we have another $7 billion to $10 billion of potential acquisitions that we believe are priced to meet our disciplined return hurdles.

As such we expect our network expansion and 2021 to far exceed our record levels achieved last year.

Coming off our highest annual earnings in company history, and doubling our quarterly earnings again over the prior year, we remain humble never quite satisfied and acutely focused on our growth aspirations.

History has shown that are complex and diversified high growth business strategy is difficult if not impossible to replicate.

Our growing network composed of our people inventory and physical locations combined with our driveway digital home solution completes our unique omni channel strategy.

And our mission of growth powered by people and our values of customer for life, 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 of $50 billion and revenue and $50 of EPS with that I'd like to turn the call over to Chris.

Thank you Bryan as we enter 2021, our Lithia operations team continues to build on the success of last year and find ways to exceed customer expectations and increased market share and improve profitability and the demand from our consumers for both in home and in network solutions continues to grow and has shifted the mindset of our teams which includes.

Accelerating the adoption of driveway throughout our network. Our store leaders are also challenging their teams to maximize performance by selling individual departmental goals to achieve their 2021 annual operating plan or <unk>.

These <unk> are a key.

Foundation and defining their specific actions necessary to continue to drive the highest levels of performance throughout the network.

Following his of discussion about our quarterly results and is on a same store basis.

For the three months ended December 31, 2020 total same store sales increased 3% driven by a slight increase and new vehicle sales and 9% increase and used vehicle sales and a 4% increase and F&I revenue and a 3% decrease and service body and parts revenues.

The new vehicle business line increased slightly for the entire quarter and improved to an increase of 4% for the month of December for the quarter, our average selling price increased 6% and unit sales decreased 5% gross profit per unit increased to $3023 compared to $2263 last year.

$760 increase or up 34%.

Total new vehicle gross profit per unit, including F&I was $4814, an increase of $897 per unit or 23% at approximately $4800 of gross profit per unit new vehicles remain highly profitable with an 11% margin similar selling cost per unit as used vehicle.

Kohl's and inventory carrying cost that are subsidized by our manufacturer partners.

For used vehicles, we saw a 9% increase and revenues for the quarter gross profit per unit for the quarter was 2000, and $456 and increase of 16% or $334 over last year.

Used vehicle gross profit per unit, including F&I was $3963 and increase of $467 were up 13% our used vehicle mix for the quarter was 20% certified 58% core of our vehicles three to seven years old and 22% value auto or vehicles older than eight years.

Ears as.

As Bryan mentioned earlier, our strategy of selling deep into the used vehicle age spectrum and our ability to procure the rights scarce vehicles remains a catalyst for future success and growth of driveway buy and sell consumer offerings.

New and used vehicle sales are supported by our experienced financing specialists and help match the complexity of of consumers' financial position with lending options at over 150 of financial institutions and.

In the quarter, our finance and insurance business line and continue to show substantial improvement averaging $1635 per unit compared to 1520% of the prior year and increase of $115 per unit.

New and used vehicle sales create incremental profit opportunities through the resale of trade and vehicles, great manufacturer incentives F&I sales and future parts and service work and we continue to monitor this through the growth of our total gross profit per unit, which was $4398 this quarter and increase of $683 per unit.

And over 18% over last year, although we experienced a significant increase over last year. We expect continued sequential moderation of gross margins at the supply and demand environment and continues to normalized new.

<unk> vehicle margins may remain elevated as our very manufacturers idled their factories due to the recent micro chip shortages and continued county and city COVID-19 business mandates and some states as used vehicle supply and returned to seasonal levels and the fourth quarter margins have mostly normalize and we do not expect any material gross profit of elevation and 2021.

Our stores remain focused on the highest margin business lines and service body and parts, which decreased 3% for the quarter. This was driven by a 2% increase and customer pay work offset by a 7% decrease and warranty and 10% decrease and wholesale parts and of 13% decrease and body shop revenue and December these negative trends were.

First of course, and we saw single digit increases and our service body and parts, which was driven by double digit growth and our highest margin customer pay work our service body and parts business see over 5 million paying consumers and brand impression of annually generating over 50% margins, which remains a huge competitive advantage for lithia and driveway.

Same store adjusted SG&A to gross profit was 62, 3% and the quarter and improvement of 760 basis points over the prior year driven largely by the gross profit expansion and our new vehicle segment, we expect to see the continued normalization of margins throughout the first half of 2021 and SG&A to gross profit returning to 67.

And 1% and the second half of the year, our five year plan continues to target SG&A to growth and the low 60% range as we continue to properly modernize the consumer experience the opportunity to leverage our existing cost structure will continue as we maximize the utilization and integration of our existing locations and as our digital home.

<unk> solution driveway adds additional incremental sales and the flexibility and synergies with SG&A and provide significant earnings opportunities as our highest performing stores consistently maintain and SG&A to gross profit metric below these long term levels for.

And for the year the lag consumer funnel saw $31 5 million unique website visits and increase of seven 4 million unique visits over the prior year. In addition, our four business lines generated more than $5 5 million paying consumer brand experiences for the year and through our acquisitions. We added another 600000 annual pay and <unk>.

Consumer brand experiences.

As evidenced in recent months, we are ready now more than ever to accelerate our growth engine. We took measures over the past few years to strengthen our operational leadership team and now have 10 platform, Vice president and that our experienced and acquisition integration and cultural transformation, while being geographically positioned to support all six regions partner.

And with our home office team. These leaders of the backbone of our growth and can be relied upon to support multiple individual and group acquisitions at any time, we continue to source of our pipeline of high performing leaders through internal development and higher performing acquisitions, which together provide a massive beds for the continued growth in front of us are.

Our leaders are all innovating and meeting consumers', increasing digital and home expectations through incremental and pragmatic modernization and are prepared for the continued growth that will occur in 2021 and beyond.

I would also like to congratulate our 2020 lab partner group winners for an amazing year, while we saw incredible performance throughout the platform. These leaders and bought a high performance and set a high bar for all of our teams to exceed in 2021 of our teams ability to achieve high performance in any environment continues to be the foundation of our culture as it remained.

And on profitably modernizing and consolidating the industry and reaching our $50 50 plan with that I'd like to turn the call over to Tina.

Thank you Chris and.

Bryan mentioned earlier, our fourth quarter on adjusted earnings per share was $7 and <unk> compared to an adjusted earnings per share of $5 and 46.

The difference was related to a $1 19, unrealized gain and our investment and shift technologies, which went public and the fourth quarter and through that transaction and of 41 gain from the sale of stores as we continue to optimize our network. These gains were offset by acquisition expenses of <unk>.

For the quarter, we generated nearly $250 million of adjusted EBITDA and over $123 million of free cash flow defined as adjusted EBITDA plus stock based compensation less of the following items paid and cash interest income taxes dividends and capital expenditures.

As a result, we ended the quarter with $1 $4 billion in cash and available credit and Unplugged, New vehicle inventory and addition are and finance real estate could provide additional liquidity of approximately $471 million for a combined $1 8 billion of liquidity.

As of December 31, we had $3 9 billion outstanding and debt of which $1 9 billion with floor plan used vehicle and service loaner financing. The remaining portion of our debt is primarily related to the financing of real estate associated with owning over 85% of our physical network.

Of Yanke aspect of debt and our industry is the financing of vehicle inventory with floor plan debt. This financing is integral to our operations and collateralized by these assets.

And the industry treats the associated interest expense as an operating expense and EBITDA and excludes this debt from the balance sheet leverage calculations and <unk>.

At our total debt to EBITDA is overstated at five one times at.

Adjusted to treat these items as an operating expense our net debt to adjusted EBITDA is one eight times.

This means we could add over $900 million and additional debt, which equaled declined $3 6 billion and annualized revenues at our 25% purchase price to revenue metric, while remaining within our targeted range.

If our network growth and associated planned capital deployment would increase our leverage beyond three times for a sustained period and look to deleverage quickly through the equity capital markets.

As a reminder, our disciplined approach is to maintain leverage between two and three times as we quickly progressed toward another sizable competitive cost advantage of achieving an investment grade credit rating.

Our capital allocation priorities for deployment of our annual free cash flow generated remain unchanged, we target at 65% investment and acquisitions, 25% internal investments, including capital expenditures modernization and diversification and 10% and shareholder return and the form of dividends and share repurchases are planned to achieve.

At $50 billion and revenues includes nearly doubling our physical network of stores through acquisitions, which are accretive on day, one as we execute this strategy our capital deployment strategy, we will prioritize using our free cash flow debt and equity efficiently, while maintaining leverage between two and three times earlier.

Earlier this morning, we announced a <unk> 31 per share dividend.

Adjusted tax rate was 26, 9% and the quarter and 27 five per cent for the year, our quarterly tax rate was positively affected by the profitability mix of our states due to acquisitions and a reduction and non deductible expenses.

With over $1 4 billion and available credit and <unk> inventory and finance real estate that could add an additional $471 million and liquidity and over $750 million and EBITDA produced annually and an adjusted leverage ratio of approximately two times, we are well positioned for accelerated growth.

Assuming an average equity investment of approximately 25% of our revenues our available liquidity and annual free cash flows could add up to over seven 5 billion and revenues are more than 50% growth.

We have made strong progress and our pragmatic investment and modernizing the consumer experience, new driveline and building the teams needed to support our growth with our robust balance sheet at of massive capital engine, we remain confident and our ability to achieve our five year plan of $50 billion and revenue and $50 of earnings per share.

This concludes our prepared remarks, we would now like to open the call for questions operator.

Thank you if you would like to ask a question and please press star one on your telephone Keypad, Inc.

Information and tone will indicate your line is and the question queue. You May press star two if he would like to remove your question from the queue and sort of participants using speaker equipment and maybe.

Be necessary to pick up here and.

Set before pressing the star Keys. Our first question is from Rick Nelson with Stephens. Please proceed.

Alright. Thanks.

Alright.

Good morning, and Rick have skewed prime about.

And our acquisition pace from.

Pipeline and it sounds like cheap debt free.

Lined up.

So they're at close.

And.

And on the call today it sounds like.

Several of them.

Acquired revenue might be a more realistic expectation of what your 2021.

And you could clarify that.

Of the helpful.

Sure sure Rick This is Bryan.

And I think first and foremost.

And we did a fair amount of acquisitions and 2020 and actually had a record year in terms of of growth from and our network, but we expect 2021 to be much more robust and that and as you.

And we do have $3 billion under definitive contract.

We completed the almost $2 billion that we had previously announced on our Q3 call and our offering calls.

As well as on top of that we have additional transactions that are now and the under LOI at state and the 7% to $10 billion bucket of revenue. That's in negotiations are priced right is still sitting out there. So we do think that it's going to be a historic year once again.

And I would remind everyone that lithia of practices historically have been that we don't confirm or deny acquisitions until they're completed so a little bit different than many people do but we think it's usually best for our network and the people and our acquisition of our partnerships.

To be able to stay focused on their customers during any transitions that occur.

Good day.

Curious about the approval products have kind of a quick notes from.

How about skull.

Are there any of you.

Major challenges.

Coming up against.

Yes.

Yeah, Great Great question, Rick as Bryan again, I think if you think about the track record of almost what two five decades now of being public and being acquisitive.

We have had definitive agreements on 254 transactions over our history and we've completed 251 of those so somewhere around 99% success rate, which would give indications of our ability to getting manufacturer approval, but our experience.

<unk> and that arena and partnerships with our manufacturers are strong and really don't have major limitations.

During any of the next five years or of $50 50 plan, which gets us into about 335% new car market share.

We're still only at probably 20%, 30% capacity of what the restricted manufacturers that have national limitations would allow us to get to so keep that in mind that thats not really a issue, but also remember that one of the major differentiators of Lithia is model has always been to buy.

By value based investments that underperform and you can always refer to what we have on page 20, which shows the lift and new vehicle sales, which shows the lift from below average performance to above average performance in terms of owner loyalty and retention.

And I think that bond with our manufacturer partners has always been.

Been viewed us as lithia and driveways being a high performing company that they want to buy stores and add value to the experiences for their consumers.

Okay.

And it was hard at asking about digital penetration.

And where that stood and look towards quarter end.

With those rollout.

And now to these major markets.

Going into 2020 and water.

Sure Rick Bryan and once again.

And if we think about the fourth quarter rollout of our digital initiative or drive way, which is and in home E Commerce solution.

Really that Didnt go live and an end to end solution until the towards the end of the quarter. So theres no real material results in that sense I will share with you that January was our first full month of having sell and shop functionality on drive.

Wei and <unk>.

And to end solution and we did see almost 300 transactions in that first month now I would also caveat.

That in that we are still hyper early stages I mean, I think it's important to remember that we're in the iterative state where not only our care centers are losing learning but.

Our engineers are learning and Iterating, each and every day and we're adjusting and have already had two releases in 2021 net added functionality or modified workflows for their consumers or for <unk> to be able to adjust things so keep that in mind as we.

As we think about our actual results in those arenas we are expecting.

In 2021 to have about 15000 transactions in both shop and sell.

In the driveway.

Applications, so and we're well on our way to be able to establish that.

Lastly in terms of the market Rollouts and some of you may recall that we were discussing being and six of the five or six of the top 10 markets by the end of 2021, we now will be and four of the top 10 markets by April Okay. Hyper important acceleration of the strategy that came from <unk>.

<unk> from the network, Okay, and also the ability to procure more used cars as well as sell of those vehicles through either channel.

And we will have 12 major markets now released by the end of 2021, and we think that may still be at slightly conservative number because of lot of what we're asking is just to be able to accelerate the level of valet services, rather than having one or two in each store.

And that we have today, we're asking to have a full robust valet team because of the marketing dollars. When we do those 12 major market rollout, we have to beef up their valet services in those markets because marketing dollars do attract consumers more readily within that spin.

<unk> locality or within that region, and obviously, we'll be have good density and every region really other than region, three which is the upper Midwest and a little bit of light coverage still in the southeast which is region six for us.

Okay.

Great.

Thanks, and good luck.

Thanks, Rick.

Our next question is from Rajat Gupta with Jpmorgan. Please proceed.

Oh, Hey, good morning, everyone and thanks for thanks for taking my question.

And just one clarification and a couple of follow ups.

On the SG&A to gross.

Word correctly did.

And did you say it was expected to be at around 67%.

For 2021 was that did I hear that Bryan.

Hey, Roger This is Chris Yes, that's exactly right.

What we're seeing right now is really a tailwind from the incremental gross profit that we're seeing on new and used vehicles, giving some of the supply constraints.

At carrying through the quarter and so.

And we anticipate and look forward into 2021, I think normalizing and some of the gross profit margins that we expect to see that's going to put some pressure on our variable cost structure, which then buy and turn means that we're going to see.

And increase in our SG&A to gross and so for us to outrun the increase and expenses that will come and increased.

SG&A to gross calculation, we'll have to see about a 5% lift in gross on a same store basis, just to keep parity of debt, 67% and.

And we're going to work hard to do that.

Got it and this does not assume or take into accounts of $3 billion that you expect to close and early 2021 rate or does that take.

And does it include at about that.

Rajat. This is Bryan no. It doesn't include future acquisitions, that's just.

<unk> base and the acquisitions that we did last year, Okay, and what we've been kind of saying is at that 67% is really our jump off point for the remaining four and a half years of our five year plan, where ultimately and the five year plan, we get to low 60 percentile SG&A, okay and that will come through each.

Each of the different channels performing at certain levels ultimately with the core getting back to that mid 60 percentile range than it was in 2014 and 2015 before we began to accelerate acquisitions with lower performance now on the new acquisitions. Most of them are performing and the 65 to 70 per.

A cent range about three quarters of them. So we are buying higher quality businesses than what we typically had and that had been purchasing and the past. So keep that in mind, where there is only a quarter of their really those value investments at start out and the high 80 percentile SG&A and it takes us four of five years to get those really.

And of the sub 70 percentile range.

Got it.

And for color and that.

One other question on the used vehicle side of things.

Of all volume.

Growth decelerated.

The fourth quarter.

And then you gave some numbers in December.

Can you could you help well I just.

The breakdown of Florida in terms of like what.

And as you walk us through the quarter for the used vehicle business.

And what are there any specific buckets, which will more weak and the California, Oregon that might've heard that number and then.

Anything you can give us on now joined and 21 and started.

And for Us.

It would be useful.

Sure sure Raj at I think it's important to note that we always balance volume with margins and what supply chains, we see in the future. So we do sit at a 65 day supply and used which is about the same day supply as we were last year. So our procurement.

Only for the E commerce engines as well as with our 500.

What we would call of the virtual center of excellence buyers of high quality used cars are doing their jobs to get cars and line and its really looking at the marketplace and deciding whether youre going to achieve a little bit higher same stores rates or whether youre going to hold it at.

In terms of margin and our stores appear to still be choosing to hold margin because although we were up 9% and revenue on a same store basis and used as you noted we were basically flat in unit volumes and a market that was down a little bit so.

We think it's still the right answer we are getting that lift.

Through our E commerce strategies, and we will continue to see that but ultimately.

We do balance those two initiatives I will also say through the quarter, we did see of lapse.

For almost two weeks that started on about November 20th, Okay, which is right before black Friday, and cyber Monday, where the wind came out of our sales and it was primarily due to California, and the northeast going back into Lockdowns. Okay. So that did affect things and we were fortunate.

Net.

Moving into the early parts of December that we were able to carry the strength in the quarter to get back to those levels and I will say that in January we were up nice.

Mid single digits high single digits.

And both new and used which.

It's a big comp relative to the fact that.

Covid really started in March of last year. So if we can start to lapse comps in January and February at those levels, we're going to see nice results moving into the rest of 2021, where the comps are quite nice for Q2, and Q3, where sales were off and service was up pretty substantially.

Actually.

Well that's helpful. Just one quick last one from me on the SG&A side of.

Yes.

Most of your marketing.

Ex acquisitions.

Would you be able to quantify.

Out of $1 that we should expect and terms of.

No.

Or related to your driveway.

And Youre looking to maybe you can just spend and.

And also keeping in mind. The fact that you are accelerating some of the market Rollouts here.

Thanks.

I'm going to let Chris answer that but I would also note that if you think about our January volumes, we were coming off of January and February there were up 22% year over year from the previous year and same store so to be able to lapse of 22% comp and this tie in of market in January we think of.

And quite impressive and is right on target with what we were hoping while still having a lot of wind at our back in terms of the vaccinations coming out and stimulus packages. Chris do you want to answer is specific question on yes and related to marketing.

Say that we're spending about 22 million of quarter on a same store basis, and we picked up about 153 basis points and and SG&A to gross.

Benefit and as we said as we start to see competitive the competitive nature of our inventory come back end and which is going to drive up pricing is especially on the digital side, we anticipate.

Going up probably about 10% or so and our AD spend on a same store basis through the rest of the year. So remember that's and the Lithia channel as well, okay in terms of the driveway channel.

That's got its own budgetary.

Standards that are specifically tied to the volume levels that we achieve in and driveway to fulfill our promise that we're going to make sure that every incremental sale and drive away as incremental EPS, so keep that in mind as well.

As you dissect the strategy and Youre planning.

Now in terms of the 10% increase includes.

Or does it exclude the driveway spending where that takes that and Jacob.

Total same store spend rate and that will include driving.

Debt.

And that Raj at that same store so that would not include driveway, okay and thats just our existing store base. So our budget for 2021 for a driveway is about $10 million.

With the acceleration of the rollout it does require us to be able to get the driveway brand name out and to be able to really sell of shop sell and service and the holistic approach to in home E Commerce transparent empowered buying solutions, okay, but we believe that the volumes are going to be.

There and both shop and sell to be able to create enough additional incremental lift to be able to get there, but you know what just like always we'll balance that and ensure that.

And that we're effectively doing that.

Got it okay, great. Thanks, so much.

EBIT <unk> question is from Nick Jones with Citigroup. Please proceed.

Thanks for the questions I guess I'd like to drill at a little bit more of a driveway.

And.

And I guess the.

Marketing is that largely brand.

Advertising are you give more of kind of lower funnel of targeting and mind I guess can you help me understand.

How driveways going to get marketed to be incremental versus cannibalizing people, who otherwise would have gone at the dealership.

Nick This is Bryan again, so it is a combination of holistic brand marketing as well as targeted by shop sell and service with the focus on shop and sale of primarily as the service component tree will be driven by F&I subscriptions as.

Well as the network.

Converting to in home fulfillment over the next two years. Okay. So when we think about those marketing budgets at specifically by those those 12 markets major metropolitan areas in the country, where we will specifically be.

Pushing.

Seo and SCM within those markets.

And our web crawlers will be attached to those marketing dollars to ensure that our keyword searches are there as well as our organic which includes the my driveway portal will be driving that those marketing dollars to make them as effective as we possibly can okay. It is about.

<unk> thousand $500 of unit that were assuming which is the majority of our 57% SG&A costs within our driveway strategy. So it is a lot of money okay.

And we but we plan on having and be effective and so far and the Portland and Pittsburgh markets. Its been hyper effective and we've been able to build brand and traction lastly, I would say that by having those 12 major markets and all six of the regions. We should have a I'll call. It at <unk>.

And national presence that at the end of 'twenty, one our brand names should be out there to most of the population, okay, meaning that there will be awareness on the brand and the offerings as well as the guarantees and the effectiveness of of of.

The driveway solution. So we think that it's a good strategy, it's a way to ensure that it's incremental because driveway isn't branded through the Lithia network gets branded independently as and E Commerce solution and I think if youre thinking about how do we ensure that there is lift.

And that it's not cannibalizing the other channel.

I think you need to think about at this way and I think everyone should always be thinking about that the winners in the used car space will be those that can break here the highest demand and the greatest number of used cars because used cars are not of factory you don't build them you broke.

Sure them, Okay, and I think as long as our buy and sell functionality are creating additional inventory than whatever channel. It's sold through its incremental lift to lad as a whole, okay and I think it's an important delineation to remember that the.

The reason we're building our network with new vehicle stores as we get about a third of the product that.

And that we get is off of new car trade, which is the.

The highest demand vehicles and it hasnt of 1100 dollar cost advantage over the vehicles that we buy from auction, okay, and it's ultimately because we procure these cars and they come into the 214 locations and they don't move they get reconditioned, there and most of the time of about 70% to 80% of the time they are sold with.

And 100 mile radius of that location, okay massive competitive advantage in terms of where reconditioning is located and where you have to pay and auction fees or logistics cost and move things back and forth from consumer or to auctions or to reconditioning centers.

Greg can I ask a follow up then maybe just on the SCO component and so if most of the cars or kind of staying local.

How do you kind of build and advantage and SCO versus maybe companies providing nationwide industry.

Our selection.

And then and then also kind of having and upper funnel of college had strategy, which drives more organic traffic. So I guess I guess, maybe there's two parts kind of widen like is is.

Does your Sto optimization and house are you outsourcing not sure.

Everything you get leverage kind of nationwide if at most of the cause of staying local because it seems like that would limit kind of capabilities and Nick Let me go back through some so everything is done in house. Okay. So remember that all of our engineering is done and announced all of our web Carnival crawlers are built in house, we've done everything from scratch today, we have 90 engineers.

Sitting in our driveway innovation center up and Portland and Okay.

So more importantly than that.

And we need to go back to what is inventory and what are consumers buying okay. If you think about the scarcity of of used vehicle, Okay, and why I say that 80% of vehicles stay within 100 mile reach Okay is for a reason that those vehicles or <unk>.

<unk>, Okay, and they may move further than that today because of the world isn't that efficient or flat or transparent. So people could be looking for a transparent experience and they don't have one and their local market. So they may buy what's called a lower mid demand scarcity car, okay, whereas our inventory as much scarce.

And in fact, 78% of the Lithia and driveway inventory today is over four years old is four years and older. Okay. It's much different than our one and then our used car E. Commerce competitors that have a lot of one to five year old vehicles, we believe that even in the one to five year old bucket those aren't scarce vehicle.

And if a consumer can find those.

They can find 50 to 100 of them within a 20 mile radius why would they pay to ship of car because everyone is charging now logistics costs for some range. Okay. So when we thought about our logistics pricing, we basically said within 100 miles it's free okay from the vehicle and remember our inventories are more difficult.

<unk>, Okay, and then we basically charge an extra $2 99, if it's within the region, which could be up to four of 500 miles, especially if its in the northwest region, which is very broad and expansive okay and then.

12, 99, and if it's in a.

And a non adjacent region and $6 99, if it's in and adjacent region, where basically pricing cars. So in alignment with scarcity of that if of cars. So scarce at a consumer wants to pay for the day logistics costs, and then more power to them but.

To allow consumers to buy cars that are competitively priced in their backyard and then subsidize the logistics cost isn't a viable long term.

Yes.

Model are you. Following me remember also that our inventory as of national level, and we now have 100% coverage of of the country, including Hawaii, and Alaska within 400 miles and and regions, one and two which are the western regions. We have 100 mile density and one and about 200 mile density and region.

Two okay and that's growing so we should be at a point, where most cars are available to most consumers. Our general thesis is this we believe that debt 95 per cent of the cars should never have to leave of region and the future. So long as are our inventory and.

<unk> is around 25% to 50000 cars.

And today, we sit at around that in the whole country. So we need more density we need more selection to make sure that we have the offerings to consumers that are closer to them that this idea of national delivery of vehicles. There is no reason to deliver vehicles that are not scarce.

Anywhere outside of a 100 mile region or at the absolute worst one of our six regions.

Great. Thank you.

Our next question is from Ryan <unk> with Craig Hallum Capital Group. Please proceed.

Great. Thanks, guys for taking our questions just wanted to dig.

And again I'm driveway of little bit more I know a lot of it's been asked and I know, it's early on the new side as well a few weeks here, but anything you can say.

Checked out of that on kind of buy and interest conversion rates et cetera, and new vehicles and driveway versus used.

Sure I'd Love to Ryan. This is Bryan again, I think first and foremost if you go back of the discussion that we just had with Nick about scarcity new cars of the same everywhere. Okay. So let's remember that now there are scarce products and every product line, whether it's at Toyota Tacoma or whether its at Jeep wrangler.

And we're now of Ford Bronco or other products. There is scarcity that occurs that can create a more disparate distribution of vehicles, okay, but ultimately new vehicles don't have that ability to have a lot of demand outside of that reach so it is going to be more.

What we would call of affordability, okay and that affordability, we believe will be the catalyst for expanded reach and new vehicles. Okay. Our affordability is primarily driven off the fact that 85% or so of the consumers on new vehicle finance.

Our ability to now have leasing, which you can go online today on driveway and you can perfect of lease and it's all done automatically okay and that's something that we are the first of half leasing of affordability and most mainstream cars is about 60% the monthly cost of what purchasing is.

Because of the lease and value helps cut into that payment because you are not responsible for a good portion of the lease and value of the of the vehicle. So you have that advantage, which we believe that leasing is an instrumental part of affordability. Okay and you will find that we will be pushing leasing over.

Of the coming quarters as well as captive manufacturer financing. So new vehicles are sold and finance at about 50% of the time by the captive manufacturer, primarily because of of incentives or some vented interest rates, okay and dose event at interest.

Every one of has the same basic model. It's just how do you disperse those there is another key delineation and new vehicles, that's important to understand and it will be something that we cut into the one to three year old vehicle sales of our competitors when we get when we build momentum and this <unk>.

And that's.

Affordability as it applies to <unk>.

New vehicles have a massive advantage over the low demand and mid day van and used vehicles that a lot of our competitors today are using as a benefit and E commerce, because they can absorb this equity and still finance of consumer because right now consumers really can't buy outside of driveway.

New cars, but remember new cars have something that is unique to new cars. It's called manufacturer incentives manufacturer incentives are qualified cash down okay. At helps absorb this equity so when our average when our average rebate or incentive is three to five.

And dollars that advantage combined with the two to $3000 at a consumer puts down.

And get you into a position where you can absorb five to $8000 and this equity okay. Today of one to three year old vehicle. That's low demand you buy for two to $3000 back of book, Okay, and Thats, what you can absorb and dis equity. Okay. So in terms of finance ability new cars has different dynamics we're national.

Scale isn't quite as important because the vehicles are very similar okay in year, five just to keep things relevant.

We're actually at a three and a half to one used to new ratio. Okay. We are only expecting to sell about 65000 vehicles new in year, five and about 215000 used vehicles. Okay. So keep that in mind and that's partly to do with the discussion that we just have that theres only so many new cars that you.

Can penetrate outside your own market and turn and earn from each of our manufacturer partners is a little different to be able to maximize at and we're assuming about.

120% to 130% of average and each of our network locations to be able to achieve that hopefully that gives you enough color Ryan and we can take it offline. If you had other questions.

Sure.

That's helpful. And then just one follow up for me you talked quite a bit of a financing et cetera. You mentioned I think in your prepared remarks, you want to growth kind of your in house cash.

Captive financing fintech to 20% of your driveway.

Transactions did I catch at right and then can you remind me what your percent of kind of captive financing as of today of your brick and mortar.

Sure so.

So that was 20% of our entire business stream. Okay. Now our manufacturer partners are captive finance companies with our manufacturers are hyper important to our relationship and they give you. This event at rates, which are hyper important and leasing and financing. So we don't plan on on attacking that at all.

It's really and the non certified used cars and the older vehicles, where we believe that that prime customer or even that sub of deep prime customer is something that we could look at which today. Our focus is really prime and subprime. Okay. We have been and the deep prime and subprime business for over a decade.

And southern Cascades financial and what we really did is build of our decisioning models over the last two years to move into the prime business, which is a hyper low risk type of environment. So we think that at approximately 10 to 15 of incremental profit dollars as and <unk>.

And tire company and lift and if you look at some of our competitors somewhere between $30 and 45% of their profits are coming specifically from their captive finance company. Okay and you can take the 1100 units each of the last three months and divide that into our unit sales and get you what our penetration.

Rates are today, but we think ultimately it's more around 20% of our total volume that we can achieve to then realized about 10% profit lift.

And our overall profitability model.

Great. Thanks, guys. Good luck.

Thanks Bryan.

Our next question is from John Murphy with Bank of America. Please proceed.

Good morning, everybody and it but it is again a little bit late so I apologize.

A little bit duplicate of bid.

Youre talking about <unk> 4 billion of liquidity and good morning, sorry.

The $1 4 billion of liquidity.

Dumb Guy's math and you say you are buying at 20% of revenue, maybe its little bit higher and that maybe it's a little bit lower than that.

That would equate to the 7 billion and talking about 2021, so implied that you're probably going to do another capital raise at the right way to debt.

And to think about at that you might go out there and do another equity deal given where your stock is it seems like it would make sense yeah, great. Great question, John Let me just clarify so the one 4 billion the $7 billion related to that of 20% purchase price to revenue isn't a target for 'twenty.

21 at illustrating that at $1 4 billion and you could buy 7 billion. Now we did also comment that we have $3 billion plus some additional transactions under contract and LOI. So you can get to that assumption, but.

We aren't targeting $7 billion in 'twenty and 'twenty, one even though we believe that that's achievable because you do still bump up against leverage ratios and I think that's what's going to determine really whether or not we have to go back to the market and ask and.

And reissue equity or debt to be able to cover that and we really target that two to three times leverage and I think of you watch that and we'll make sure to be able to let you know where we always stand on that so you can see that but it would make sense that if you take the $3 billion that we've now announced that under contract and.

A little bit more you are starting to put to work. The original $1 3 billion that we got and we're probably at around two thirds of deployment of that capital, which is great. I would also remind everyone that whatever our volume is and acquisitions of network growth.

This is what Lithia motors has done for 25 years and it's what we're built to do people and integration and our mind is a core competency of Lithia motors and is much different than most companies out there. So whether we do $3 billion or whether we do $10 billion to us it's just a matter of accretion.

And the ability of control leverage below that three times.

Yes, I would also note that youre buying stuff. That's got earnings. So I mean that helps to leverage when you're making acquisition, but that's it.

Youre right at all kind of depends where you nailed it and you nailed it I mean, we don't do acquisitions that arent accretive typically out of the shoot and obviously on the high performing ones were really targeting <unk>.

12 months to 18 months to get them to seasonal seasoned level, whereas at other 25%. That's our typical value investing does take three to five years to keep that and minus your as youre thinking about forecasting and we'll try to give you good insights on that.

And sort of of another.

Left field question I mean at $7 billion revenue number just happens to equate to roughly what Asbury did.

In 2020 and.

And if youre going after big.

Big acquisition years like this it does kind of lead us to think that at some point you might do some kind of big acquisitions like that or even a large private groups. I mean is something in one fell swoop like net.

Possible.

Curious and I know, you've mentioned framework and and you have room there.

And just trying to understand like what the actual targets could be at there is one of the Onesies and Twosies are just not going to get you there.

Yes, that's that's.

And that's a great question John.

John and I think what we think about is the 7% to 10 billion debt I was disclosing in the end in the in the question before is not including any publix. Okay. We do believe that the best way to come back the entire industry is at the public should roll up okay and why.

Other or not that can or can happen. We will tell you. This it's not restricted from framework agreements. We believe that we have strong relationships and our national limitations in those three or four manufacturers that do have.

And as ceiling of established.

So it doesn't preclude us from buying any of the other publics are joining forces I do also like the fact that many of them appear to be replicating some of the strategies that we've.

<unk> been focused on over the last three years and we're pleased to see that because I believe that the new car retailers. If we can cut off the stream of used vehicles to the used car and new entrants in this space and all they can really get his auction cars or late model cars. The margins that we can make in the over at <unk>.

Three year old cars are massive debt the new car dealers could have a strong hold on this space for decades to come even if electrification changes thing or connectivity or all of the other things that are and all in the back of all of our mines over the coming quarter.

Quarters years and decades.

And given your multiple and your stock right now.

And at least by our estimates at a little bit of of premiums others stock per stock Youll can be possible is that correct.

And that's that is correct.

And I would say that we really respect.

The three people that we believe geographically.

Net nicely with the lab network and would round out our network almost at full capacity fairly quickly where we could be.

Even more discerning in terms of our network growth beyond that so to us it's more of how does the new car groups rally.

To ensure even further stability now lad is going to be able to do that on their own but we think it's more constructive to have of scale now because of the one thing that we don't do and our 50 50 plan is at that is a base case. Okay. It is not an aspirational case that would include <unk>.

And like you are talking about which is really of best practices are really leveraging the fact that you would have 100 mile density within the network a lot sooner, where you can start constructively managing costs and national marketing budgets and those type of things at scale that isn't even something that's built into that five year plan.

And so really great thoughts, John and I think it is something and I really I really wish that.

Our peers would feel the same way and would see the value and us joining forces and I will say this that Chris and our operational teams are ready for it if we can do that and we could still do the hypothetical of $10 billion to $13 billion, which is under contract under.

<unk> are in that $7 billion to $10 billion of negotiation are priced right.

The ideas. So we didn't we spent the last three years reordering redesigning the organization to do everything okay. So understand that and when we're buying better deal or risk of integration is even lower than the 80% success rate. We've had on these underperforming acquisitions.

That's incredibly helpful and then just lastly.

Some questions about your driveway cannibalizing.

And consumers and all of that I'm, just curious I mean as you look at the <unk>.

You're kind of alluding that you can go out and distance driveway.

Further and you might have traditionally you can go down and in vehicle age wise and go deeper into our market. So there's a lot of ways and you can see EBIT.

Yeah.

Largely you know a lot of it can be very incremental I'm. Just curious as you think about that if you could dimension and those those two factors, maybe just thinking about where traditional dealership reaches and where you could go with driveway and then how.

All of you could go and the vehicle age spectrum at and maybe I mean, I think when you talked about your used net is at 20% of our CPO. So theres a newer vehicles.

At the mid aged vehicles, we're at 58% of at eight plus year old vehicles were 22%.

And that spectrum, maybe thinking about maybe you can talk about it in that context of of that each spectrum of how GPT go as well so of distance and each navy secure debt.

Sure I think when you think about.

Comparing and contrasting distance to age I believe the older of vehicle gets the scarcer at gets so in theory, the bigger reach that and older vehicle would have.

Over a one to three year old vehicle, which in theory should have no real reach because supply is there. So yes, I do believe that it's our design thesis five years ago that was submitted three years ago was all built around the premise of how do we make sure that we get our value auto vehicles.

<unk> for the eight year old vehicles, and the four to seven year old vehicles, which is our core product and just to compare and contrast, the thesis was that we will always be able to price compete in the one to three year old vehicles. So long as we have the higher margin vehicles on our lot, Okay, which means that we.

Can go head to head with the E commerce retailers, because thats, what theyre going to be able to get that's what they know how to recondition reconditioning is difficult on older vehicles, you have to have the technology, the diagnostic tools and the expertise and technicians and we sit here with over 3000 technicians and our network.

Today that understand drive ability and out of repair vehicles not replace parts on vehicle. So just to run through some numbers for everyone that are hyper crucial.

Our value auto part of our over eight years old of our current current sales volume that will that is now deployed through the driveway channel as well, though I will give you that condition is more disparate the older at card gets okay, meaning that consumers may be more apt to take us up.

And our seven day return policy, which is more power to them wed love for them to do that but we also think that they understand that older cars are just going to come at a little lower condition, but today, we sell at 20% of our cars our value auto.

We sell 58% of our cars are four to seven year old vehicles or core.

For a total of almost 80% of our vehicles are what we would call mid and high demand scarcity vehicles, okay to keep this in mind with F&I our value auto vehicles.

Build a 28% gross margin.

8% core is around 16% gross margin and certify at our one to three year old are only around 13% to 14% gross margin. Okay. So if you're thinking about how do you support making sure we're always price competitive in the plentiful vehicles, which is one to three year old vehicles.

You do it through selling forward at 20 year old vehicles. Okay. So that is the dichotomy and I would think I would still go back of the fact that the scarcity of the vehicle is whether it's new whether it's certified or whether it's used the further the reach and impact it would ultimately have to be able to go to market with consumers.

Yeah.

That's incredibly helpful and maybe if I could just sneak in one last one just on inventories and in the short term here I mean, obviously, we're hearing a lot of and turned around.

Chip shortages and production disruption as a result of that.

And what are you guys seeing as far as deliveries and some of it's only come around the trucks on the way to you and and where you think this kind of land where you on first quarter, you might be even shorter and that can help grosses that you think of kind of normalize and right now, but it seems like we're going to hit another short term shortage here that might be helpful and the growth side, yes.

Yes, you bet.

John.

On new vehicles, we were sitting at 71 day supply at this time last year, we're sitting at 50 day supply. So it's almost two days and that doesn't include and transit okay.

So we don't think that their inventory is a massive problem on new okay. We do have shortages and certain manufacturers like general Motors and a few others that are having some micro chip issues and may continue to have persistence of microchip issues. So, we'll manage that and balance that with margins. Okay.

Remember, we trough on new vehicle day supply back in July August timeframe around low <unk>. Okay. So its built since then but also are at.

Our our Delta on our turn rate is also at a low seasonal time of year keep that in mind. Okay. In terms of new vehicle or used vehicles were actually sitting at 65 day supply, which is the same at was last year. Okay. So we're pretty pleased with that which kind of makes at a pretty good deal and <unk>.

Remember, we got we're talking about mid to high single digits growth in January and.

And the first month of the quarter and we sure hope debt with the stimulus package and.

Further vaccinations at that releases.

Consumers to be able to create greater and greater demand based off that somewhat lesser supply than last year on new vehicles, but really the same supply on used vehicles and we're pretty confident that we can keep our used components and apply nice and strong throughout any environment, because we do have.

Of those 500 experts out and the field and now a number of driveway experts that are buying cars.

At at at scale, and fleet and stuff as well.

Okay, Great and helpful. Thank you very much.

Our next question is from Bret Jordan with Jefferies. Please proceed hey, good morning, guys.

Hi, Brett.

And the third quarter call, you talked about reevaluating or maybe.

Changing the process on pricing for the driveway services and I was wondering whether or not that is something that you've completed and whether sequentially from third quarter to fourth quarter you saw.

And a real changes in those and driveway service bookings on the market share in.

Oh, great memory and get Great question, Brett So actually on the service side of things we're seeing.

Initial stages of very little attraction from the consumers and those products. So we didn't redevelop the pricing at still sitting at the same level, where we have maintenance, we actually raised the pricing back up to where we were and saw very little degradation and volume, which we thought was good.

And we're really today at sitting at people that are willing to pay a premium are doing at and those that arent arent really that enamored with it today, we do believe that the easiest way to build volume, there, which will ultimately drive costs down.

And of our valets is to be able to sell of the F&I.

Subscription and services in home.

Remember that rollout is combined with the in home service body and parts offerings that will be done in the Lithia network as well as through the driveway channel that's of two to three year rollout. Okay. So we believe that the major driveway in the driveway service business will.

Come from F&I subscriptions initially to be able to get us the volume necessary to drive down our cost and ultimately have that.

GAAP full lifecycle service ability to of consumer and their homes. So it's still there and it's still working but the revenue dollars that we can generate and incremental EPS dollars are really going to be found and shop and sale.

Okay, Great and then a question of you talked about pushing leasing more aggressively in 'twenty, one I think of you.

And this question years ago, but what is your lease penetration and.

And is returned leased vehicles improving source of inventory for your used mix I mean, I'd imagine and residual assumptions and three years ago didn't anticipate the spike in used vehicle values and are you able to source cars of what's coming in and lease returns.

Yeah, Brett that's a good question. So we lease currently about 25% of our new cars.

And we think that that can grow and hopefully we can mirror of that on the driveway side as well and I think the affordability will ultimately drive that in terms of vehicles coming on lease it's important for everyone to remember that those vehicles come to dealers before they ever go to auction, meaning that most manufacturers say, if we don't have to ship the car.

At auction and pay auction fees, we're going to give it to you which is part of that of $1100 cost advantage. Okay. So off lease vehicles, we still have of five to $600 cost advantage of what other has end up buying them from fleet agencies or from auctions. So that pipeline is fine I will also caveat. The note debt I don't believe.

All of that used car values are that inflated anymore. They were inflated in late summer and they have began to normalize throughout the winter months as expected. So I think the supply of off lease vehicles will be close to Leds.

As we move into next year now in certain manufacturers, we could see overhang effect on one to three year old off lease vehicles, depending on what their supply of new is okay. So we'll see how that plays out but this microchip thing looks like it's a.

Q2.

Solution and into Q3, we should see more normalized.

Inventory levels.

Okay and then one final quick logistics question I guess, you said you are now selling nationally through driveway and the new side, you've found no regional sort of pushback from franchise dealers with you selling from out of state on the new side of the business.

Great question, so, though our marketing dollars arent at a national scale, Theyre really only Portland and Pittsburgh today. It is available new cars are available for delivery and home across our network, which is national.

And is available and we saw no pushback from our manufacturer partners because they ultimately are looking at it is it's really just a cars dot com, our car Guru or Truecar, which is of lead provider. We ultimately still do delivery with the home and we still do a walk through with the consumer with a <unk>.

Manufacturing specialist that can explain the product to the consumer okay. So a little different that comes out of the driveway care center in conjunction with the fulfillment and the stores.

So you could sell of Mercedes and Florida out of our franchise, and California, and not get pushback from other Florida, Mercedes dealer and kind of thing.

No there's no restrictions of any brand other.

Other than lexis debt Lexis does not allow you to market market only two.

Two markets that are not contiguous to your own meaning that if I'm in la and I can only market and law basically right. One contiguous AOR of responsibility, okay that doesn't mean I can't sell a car in the Florida I can still sell a car I just can't market at meaning debt and Alexis I won't be able.

And to have national scale marketing, most likely within that one brand and you use Mercedes and an example of that is the only other manufacturer that limits your ability through the turn and earn system, meaning that if you sell a car outside of your market and you don't cover your own backyard effectively at.

At 90% of average they won't replenish the car okay now none of our Mercedes stores are below 90%. So we get full replenishment, even if we sell at outside of market. Every single other manufacturer will replenish your car and has no restrictions in terms of where you market.

And now there are manufacturers that limit what you can sell a car for and there's what's called marketing covenants at say that you can't market of car below cost, okay or price dump, okay, which I think is really important to the health and well being of our gross margins on the new car side.

Okay, great. Thank you.

Thanks, Brett.

Yes.

Our next question is from Adam Jonas with Morgan Stanley. Please proceed.

Okay, Bryan well first someone get those due to Gatorade and this is a long call.

From here.

Yeah.

Oh My gosh it is.

It's an hour and we apologize to everyone on the call at <unk>.

Alright.

Very informative as I'm riveted.

Listen Bryan why.

Just one and then let's wrap this baby up Xiaomi and what it sounds good Adam.

And so we'd like Tesla I think we agree represents two of large degree where the industry is going to share of the industry and they don't use franchises and when I talked to and they're like we're never going to do at like ever and.

And then and you talk about all of these other up and comers you get lucid.

Or fair at a rig in and a lot of others behind that as you know and and again and then maybe there is one but why aren't we seeing any of these start ups.

Use of franchise model, they all say never like not happen and brown kind of thing like what am I missing why are they and maybe I am missing something of like no add on and there's lots of startups and we're talking to them and.

Bryan I'll tell me here, Adam, but if im not why why are they not why are they going be to see for now are they all falls.

No I don't think Theyre, all pools, I believe that our whole thesis on driveways that theres, a lack of transparency in the dealer network. So why would they get into and negotiated type of environment.

And they Shouldnt are you following me and I and I will also say just like pleasantly simple I'm not I shouldn't be surprised because that you're admitting that it's just it's very refreshing to hear.

I will say this I mean, our whole design around the entire strategy, which includes green cars Dot com is the general thesis that our manufacturer partners are slow movers in terms of empowerment and transparency with our consumers and I love It and it's not just them it's at the dealer Council.

And our country are the ones that believe that they make all of their money through negotiations, okay, and it's not we make we make our money because Honda and Toyota and our other manufacturer partners make great cars.

Okay and.

And I really believe that now I will also tell you. This.

I believe that all of the future world.

Isn't just about <unk> I believe it's about zero emission and I believe if we all look at Massachusetts are California, and our general Motors Theyre talking about zero emission less than be EV, so and and it's because of one thing I believe of affordability will drive change now our government and <unk>.

Regulatory agencies have also now established a very clear 14 year target for our manufacturer partners, which I believe at the best thing that could have happened to our manufacturer partners. Okay. It's probably the worst thing that could happen to the <unk> companies because now if you think about how to.

Tesla grew they grew off of credits from the traditional manufacturers. Okay. It's the majority of what they got it allowed us now to move to and electrified world at 3% market share and our country. That's wonderful it's who we are as a company I believe and that I want that to continue.

But I will also saved at any of the new revision and trends or these others that you are talking about they don't have the advantage to be able to protect shareholders' investments with credits that theyre going to be buying from the traditional manufacturers that are selling today. The other 97.

Percent of cars.

Because as soon as those manufacturers come to market with be evs or hybrids in the interim that are much more affordable or now even hydrogen fuel cell vehicles, which is what most other primary traditional manufacturers believe is the long term solution and not be evs.

Because <unk> still require physics debt as a heavier car there.

And what you need now you have to get infrastructure for hydrogen fuel and some other things, but 14 years is a long time to be able to solve for infrastructure. The individual cars and the ideas of range anxiety as well as the ideas of sustainability of the battery.

And post sale that I think all have to be taken into consideration as to what does our world look like in 2035 and I Hope, we're saying this in 2025, not 2035, but I believe that traditional manufacturers have yet to show.

What their strength Saar, but they've held back in terms of automation and connectivity and most of most importantly affordability of zero emission cars that will come to market over the next two or three years and change the face of competition in this environment.

As consumer affordability ultimately drives everything so just some other things that we all should think about as we think about our future in automotive retail.

Alright, Brian Thanks, Euro and automotive retail Renaissance man and I'll go get at drink of water.

And I love at Adam Thanks, Buddy appreciate it and.

And and our final question is from David Whiston with Morningstar. Please proceed.

And good morning.

Good day everyone.

And first of all on inventory.

On the new new side I mean, the 50 day, given what's going on and 50 days at a pretty good number to report.

How are you able to keep getting replenished and how are you able to keep getting product out of your Oems and delivering a promise of allocation because thats been a problem for your industry and the past few months.

Yeah.

You know I don't know where that comes from but we've now powered through the entire pandemic, where inventory is believed to be of problem to me I believe that we're always looking for something that can go wrong on the new car side and we forget about those are massive day.

Supply and and any inventory and any other industry that usually can power through cycles.

And we all have to remember new cars still make of 11% margins today and pre COVID-19 were making 10% margins. Okay on a very high dollar vehicle I'm not sure other than it feels like debt because we're a negotiated industry and that's what we're really trying to transform is day.

Move into a more transparent industry. If there's just a belief that there's got to be something wrong, but the new car industry is at a hyper strong hyper profitable economy insensitive environment and I think whether it was 2008 and 2009, where we saw none of the major.

Retailers ever get to losses, and now powering through a pandemic and even in Q2 of last year roofs, new that I believe that this is a almost a prophecy that's coming from the external world rather than us as retailers I don't believe that inventory levels are going.

To affect us youre going to see the flexibility and the model, which you saw okay and enhanced margins of almost $800. Even in Q4, when we were over $1000 and Q3 youre going to see that ability to adjust the model that if inventories are a little tight and we're going to make more money on it and more.

And it's going to go to the bottom line, which ultimately just stabilizes earnings.

And it's nice to see that even one of our peers yesterday had pretty nice earnings relative to things and.

And there is this idea that $30 $40 50 day supply those are good levels of inventory and most industries. So just keep that relative and we.

We will be able to share more with you and the coming quarters.

Yes, I agree I'm really glad to see the publics are not chasing volume and focusing on profitability. Despite the hit to volume I think it will work and the long term.

Net.

And your you talked about the loans you're originating.

Are these staying on balance sheet long term.

No. We don't we plan on being able to pull those off balance sheet. Later this year early next year, but we're going to need half of $1 billion and.

Receivables and some some history to be able to show them, what the full spectrum of credit looks like before we go to the ABS market to do that.

So we do have some data we can share that with our offline call with you as well if you'd like to know what our portfolio looks like and stuff as well.

Okay, and then last question.

Given all of that being talked about both on your existing 50, 50 plan and the well above three and 5 billion of acquired revenue and then you when is that for other talking about consolidating and lots of publics I mean.

Really it just makes me wonder at maybe a 50 50 global is actually conservative that is at crazy to be thinking you'd be north of $50 billion by mid decade.

So I will say that we don't.

One of ever lead our investors or analysts down of pathway that we don't believe has a high probability of success at.

It's why it took us three years to come to the public to share our plans with you even though if you go back and look in 2018 Q1, we began to share of the plan when we have solidified at and so that strategy on page 11 of the investor deck and the 50.

50 plant, we do call at a base case, I mean, we have our own and aspirational case, that's what Christina Eric and I are focused on on a daily basis, and we hope to be able to delight.

But we don't also want to over promise and we believe that our likelihood of success on the $50 50 plan is fairly high outside.

Macroeconomic issues that are really outside of our control, but even in that space, we think that we've solved for.

Affordability, we think we've solved for changing consumer demand and we think we've we've solved for.

And so many other things like electrification.

Our shared autonomous vehicles or those type of things so.

And maybe with that David.

Do you have anything further.

No.

And you very much okay. Thanks, David.

That concludes our question and answer session I would like to turn the conference back over to management for it.

And I was thinking remarks.

Thank you everyone for joining us today, we hope everyone stays safe and healthy as we close out this pandemic and look forward to updating you on the first quarter and April on lithium driveway results. Thanks, everyone.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Yes.