Q1 2021 Lithia Motors Inc Earnings Call
Good morning, and welcome to the Lithia and driveway first quarter 'twenty 'twenty One conference call.
All lines have been placed on mute to prevent the background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to turn the call over to Eric Pitt Vice President of Investor Relations and Treasurer. Please begin.
Thank you and welcome to the Lithia and driveway first quarter of 2021 earnings call presenting today are Bryan Deboer, President and CEO, Chris <unk> Executive Vice President and CFO, and Tina Miller, Senior Vice President and CFO.
Today's discussions may include statements about future events, and financial projections and expectations about the company's products markets and growth and such.
The 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-GAAP financial measures. Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted and updated investor presentation on our website with the Investor Relations Dot com highlighting our first quarter results with that I would like to turn the call over to Bryan Deboer, President and CEO.
Yes.
Thank you Eric good morning, and welcome everyone.
Earlier today, we reported the highest adjusted first quarter earnings in company history at $5 89 per share of 193% increase over last year and record revenues of $4 $3 billion.
These results were driven by strong operational performance across all business lines and channels and acceleration of acquisitions and the strengthening retail environment.
During the quarter total revenue grew 55% over last year and 52% over 2019, while total gross profit increased 55% over last year and 58% compared to 2019.
As a reminder of the pandemic only impacted our first quarter 2020 results for the last two weeks of March.
The new vehicle revenue increased 60% used vehicle increased 55% F&I increased 63% and service body and parts increased 30% compared to the first quarter of 2020.
Total vehicle gross profit per unit for the quarter increased to 4300 $92 per unit of $692 of increase over last year, driven largely by of 24% increase and new vehicle gross profit per unit Chris.
Chris will be giving our same store sales results and further color on inventory levels and their respective impact on vehicle margins and just a few moments.
Earlier this month, we announced one of the largest acquisitions and the history of the automotive industry.
The suburban collection ads to $4 billion and annual revenues over 2000 team members 34 locations and is a key pillar of the lithia and driveway footprint and our most spars north Central region three.
With nearly $6 $5 billion and expected annualized revenues purchased since the launch of our five year plan. In July 2020, we are considerably ahead of our expectations.
The combination of elevated gross profit levels, and the new and used vehicles.
Rapid integration of high performing acquisitions incremental lift from the new driveway channel and significant improvements in all business lines and.
And the strategic cost savings measures and.
Instituted last year led us to earning over a quarter billion dollars of adjusted EBITDA in the quarter.
Entering our 75th year and operations, we reflect on how our history of exponential growth coupled with our team's ability to execute has positioned us to pragmatically and profitably and disrupt the status quo of the industry.
Our multifaceted strategy for disruption begins by combining our proprietary technology with the scale of our people inventory and network to modernize the industry and.
As we continue to develop and enhance our digital home solutions, our lithia and driveway teams are ready to serve not only our traditional customers, but incremental e-commerce customers as well.
Our focus on the most expansive addressable market of any retailer and the automotive space allows us to leverage our massive competitive advantages to demonstrate that E. Commerce can be highly profitable and ultimately yield the highest possible EBITDA returns in the space.
The used car business lacks bearers to entry. However success requires infrastructure financing solutions for all customers reconditioning expertise and the procurement of high demand scarce vehicles to quickly achieve scale with smooth execution.
All of which Lithia and driveway have established and have proven to be effective and executing on since 1946, hopefully the climb and our former C. O O is listening and today as the 1946 comment was especially made for him.
Building on the broadest nationwide network and multiyear design and technology development of driveway. We are excited by our initial success and continue to enhance the most comprehensive e-commerce home solution and the automotive retail space our.
Our proprietary consumer applications are maturing and now ready to quickly scale across our existing network that has the broadest and the country.
Now, we're entering our second quarter with a full spectrum of offerings driveway is empowering consumers to simply and transparently shop sell and service their vehicles from the convenience of their homes.
And the driveway brand was designed to attract a different and incrementally new consumer than the Lithia channel.
And this is the first time and our history that we've been able to market and deliver our 77000 and vehicle inventory to the entire country under a single brand name and experience.
And we knew our used inventory was broader and more scarce and our competitors and we are now realizing these advantages as evidenced in our same store and margin results.
While driveways full spectrum offerings have only been live for a few months our early learnings and data are showing a clear pathway for driveway to become the brand of choice for online buying selling and servicing both domestically and internationally.
We are on target to achieve a run rate of 15000 driveway shop and sale of transactions by year end.
Important to note that this target does not include driveway finance and service transactions.
On our pathway towards this first volume milestone that took other e-commerce use the only competitors two to three years to reach we are finding several interesting early trends, we'd like to share with you today.
First 97, 8% of our driveway customers during our first quarter were incremental and had never done business with on Lithia dealership before.
Second we are seeing that it is taking 19 minutes on average for a customer to complete a full vehicle purchase transaction online with financing included.
We are also seeing that about 15% of all credit decisions, our auto approved and.
And overwhelming majority of our consumers still need help from our driveway care center to structure of their purchase balance their credit with their desires and get through the financing process.
43% of our sales are out of region and our average shipping distance of 732 miles with an average shipping fee of $477.
Lastly, we continue to build our online reputation with an average group Google reviews score of $4 98 stars out of five.
During the first quarter driveway also became the first ecommerce retail around the country to offer negotiation free new vehicles.
And with free on on more and home delivery and the seven day money back guarantee at the national level Driveways financing solutions with new vehicle leasing and captive manufacture manufacturer of financing now total is 29 lenders and are available to consumers with auto approvals and a matter of <unk>.
This lease and finance the auto approval Optionality was released two quarters ahead of our previously shared plans.
Driveway now offers the largest selection of negotiation free new and used vehicles of any retailer and the country. Our new vehicle inventory represents all major brands and our selection of used vehicles spans the entire spectrum from certified used vehicles to 'twenty year on.
Value items.
Today consumers can purchase any vehicle accompanied with our full brand guarantees subscribed to full ownership of repair and maintenance options and.
And receive and home delivery anywhere in the country.
In addition, our marketing dollars have recently expanded outside the original Portland, and Pittsburgh markets as such our driveway brand marketing is now live and Tampa Bay, Dallas, Houston Metro, New York, and New Jersey, Los Angeles Riverside Oxnard.
Des Moines, and the surrounding markets.
With these recent market launches of the driveway brand message is now reaching over 67 million individuals or 21% of the population of 16 fold increase over our two initial launch margin markets.
As we continue to perfect our execution and these markets are innovation and product teams are working relentlessly on improving the driveway experience.
Driveway receives continuous enhancements that will be released every two weeks throughout the year and is on its way to becoming the e-commerce leader of automotive retail.
During the quarter ladder Fintech arm driveway Finance Corporation originated over 1000 loans per month across the channels. We continue to see driveways fintech platform elevating the experience for consumers with the ability to capture up to 20% of all vehicles sales transactions.
And further differentiating lad and profitability.
Today, our team of 110 driveway engineers and data scientists have developed a suite of consumer solutions and functionality that provides the first complete end to end digital ownership experience spanning the full vehicle ownership lifecycle and.
In addition, our exclusive driveway care center and inventory procurement teams are growing rapidly to mirror, the exponential growth and consumer demand.
The foundation to our Omni channel plan is the growth and expansion of our physical network.
Having the ability for consumers to conveniently access all of our business lines and for us to store and recondition vehicles closer to them and insurers of highly profitable digital experience across the United States. The.
And the opportunities for rapid consolidation within our industry remain plentiful and our acquisition pipeline remains full.
For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after tax return of over 20% annually.
During the quarter, we completed the acquisition of the fields of auto group and the greater Orlando market, The think auto group and Tampa, Florida area.
And Avondale, Nissan and Phoenix, Arizona. We also opened of previously awarded Infinity location in downtown Los Angeles as mentioned earlier, we completed the acquisition of the suburban collection and the Detroit, Michigan area earlier, this month, adding of massive platform of <unk>.
34 locations to our north Central region.
Combined these acquisitions strengthened our strategic network density and regions to three and six and are anticipated to generate nearly $3 1 billion and annualized steady state revenues.
Since launching our five year plan nine months ago. This brings our total network explained expansion to over $6 5 billion, adding more than $4 and future annualized EPS, Inc.
Important to note that the consolidation of the largest retail segment and the country can be accomplished and a highly accretive way and these cash flow positive businesses further add to our massive capital engine.
We are and the most active consolidation environment that we have seen and the last two decades.
Even with the pace being well ahead of schedule, we continue to replenish the more than $3 billion and revenue still under LOI and the more than $15 billion pipeline of potential acquisitions that we believe our price to meet our disciplined hurdle rates.
As such we are expecting our network expansion and 2021 to far exceed our record levels achieved last year as we seek to continue improving our network density, especially and the central and southeastern regions.
As our top priority for allocating capital continues to be to Accretively expand our network with new locate new vehicle locations. It is important to highlight the competitive advantages and points of differentiation for Lithia and driveways network growth strategy.
The first new vehicle franchises create and accretive growth model with the self generating profit engine of nearly $1 billion of EBITDA annually.
Second network costs are considerably lower investment when compared to any new entrants into the industry.
These refer to slide 16 of our investor presentation to learn more about our network costs and utilization rates relative to two of our competition.
High ticket new vehicle margins are quite strong at 10% and the carrying costs are subsidized by our manufacturer partners.
Upstream procurement from new and certified vehicle trade ins have more attractive valuations than direct from consumer or ox and purchases.
Fifth affordable offerings at all levels allows the customers to remain and the lithia and driveway ecosystem their entire lives with vehicles and services that match of full spectrum of income and credit levels that change over time.
Our sophisticated reconditioning network with specialized diagnostic equipment located closest to the customer to eliminate any logistics costs.
These reconditioning centers are also utilized for the industry's highest or 50% margin service body and parts businesses.
These businesses bring 10 times, the consumer lifecycle touch points as compared to used vehicle only retailers and allow for substantially lower marketing cost per vehicle sold.
Captive leasing through our OEM affiliated partners provides new vehicles with the attractive competitively priced monthly payments when compared to one to three year old used vehicles and.
Additional financing support from our manufacturer partners through rate subvention with their captive financing arm and new vehicle incentives or rebates that allow for the highest level of finance ability and absorption of negative equity plus lower down payments for our.
Consumers.
10 of diverse upstream the offering of zero emission products and supporting repair and maintenance services through manufacturer partners product lines.
Also of leading advocacy for lower and zero emission vehicle ownership with the comprehensive resource center, providing education on vehicles and.
Incentives charging infrastructure ownership of affordability guides and a sustainable vehicle marketplace through green cars.
Lastly, new vehicle franchises create loaner and fleet management opportunities to build a factory like used vehicle inventory pipeline.
As our nationwide network continues to grow and each of our six regions. 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 vehicle as a reminder, infrastructure cost for delivering the <unk>.
Driveway e-commerce experience our zero as it resides in the underutilized capacity of our growing network.
Key to our design and three years ago was allowing the flexibility to adjust our investments between channels and multiple business lines to align with consumer demand.
Whether any economic cycle and compete with any future competitor.
And expand our cash engines to expand into further adjacencies.
These combined with our many competitive advantages strongly position us to achieve our five year plan and pave the way to even greater aspirations.
In closing our first quarter results doubled the previous highest first quarter earnings and our history as we live our mission of growth powered by people.
We continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities the advantages of a responsive and adaptable team with the multi decade track record of executing together is the driving force behind our ability to outperform and compete.
And any environment.
With our technology poised for rapid scalability across our existing and future network. We are positioned to as quickly as possible lead lithia and driveways progress towards $50 billion and revenue and $50 of EPS. The first leg of our journey.
With that I'll turn the call over to Chris.
Thank you Bryan we continued the momentum from last year and delivered another record performance in the quarter. The demand from consumers remained strong for both in home and in network solutions, and we accelerated the rollout of driveway through our key strategic markets and our platform.
Each day, our leaders of rising to the challenge challenge of achieving our 50 50 plan of.
Volume to meet consumer demands and developing our talent and living our mission of growth powered by people our team remains humble and never satisfied as they look to continue record performance levels throughout 2021 and beyond.
Following into the discussion about our quarterly results and is on a same store basis and as Bryan mentioned earlier, the pandemic impacted only the last two weeks of our first quarter 2020 results.
For the three months ended March 31, 2021 total same store sales increased 28% over last year. These increases were driven by a 29% increase and new vehicle sales of 32% increase and used vehicle sales of 30% increase and F&I revenue and the slight increase and service body and parts revenues.
Comparing our 2021 results two of 2019 baseline first quarter same store sales increased 28% with new vehicle revenue up 23% used vehicle revenue up 43% F&I increased 32% and service body and parts increasing 6%.
For the quarter, our new vehicle business line increased 29% over last year, our average selling price increased 6% and unit sales increased 22%.
Gross profit per unit increased to $2979 compared to $2188 of $791 increase or up 36%.
Total new vehicle gross profit per unit, including F&I was for $778, an increase of $897 per unit or 23% and approximately $4800 of gross profit per unit, new vehicles remain highly profitable with a 12% margin similar selling cost per unit of.
Used vehicles and inventory carrying cost that are subsidized by our manufacturer partners.
As of the end of the quarter, we had of 41 day supply of new vehicle inventory, excluding in transit orders, indicating we have well over one month supply of vehicles on the ground and and adequate supply of in transit that of replenishing our on ground inventory every day.
However, new vehicle margins may remain elevated in the near and the near term due to continued microchip and other supply chain shortages, coupled with elevated consumer demand levels driven by additional stimulus funds.
While select Oems are experiencing reduced level of inventory. We currently have sufficient inventory to balance the current supply and demand trends expected over the coming months.
For used vehicles, we saw a 32% increase and revenues for the quarter gross profit per unit for the quarter was 2000, and $426 and increase of 14% or $295 over last year.
Total used vehicle gross profit per unit, including F&I was $3994 and increase of $421 or up 12% total.
Total used vehicle gross profit per unit began to normalize early in the quarter, but accelerated again in March finishing it for $384 per unit.
Our used vehicle sales mix and the quarter was 20% certified 59% core of vehicles three to seven years old and 21% value auto or vehicles older than eight years with over 60% of the annual of 40 million used vehicles sold in the U S being nine years or older. Our continued strategy of selling.
Deeper into the used vehicle age spectrum, and our ability to procure the right scarce vehicles for multiple channels remains the catalyst for the future success and growth of Lithia and driveways.
As of March 31, we had of 42 day supply of used vehicles and our 800 used vehicles procurement specialists are working diligently to ensure we are meeting the current demand environment with their focus on securing scarce high demand used vehicles through the most profitable channels as the top of funnel of new car dealer, 80% of our inventory comes.
From non auction sources, which allows us to meet consumer demand and a low supply environment.
New and used vehicle sales are supported by our 500 experienced finance specialists that help match the complexity of consumers' financial position with lending options and over 150 financial institutions, including driveway financial.
And the quarter, our finance and insurance business line continued to show substantial improvement, averaging 1006 hundred $74 per retail unit compared to $1557 of the prior year and increase of $117 per unit new.
New and used vehicle sales create incremental profit opportunities through the resale of trade and vehicles greater manufacturer incentives F&I sales and future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was for $388. This quarter and increase of $664 per unit for <unk> 18 per.
Sent over last year.
Our stores remain focused on the highest margin business lines and service body and parts, which decreased 1% for the quarter adjusting for one less day of production compared to last year service body and parts showed a slight increase for the quarter and this was driven by a 7% increase and customer pay and 12% decrease and warranty the 6% decrease and wholesale.
Parts and of 14% decrease and body shop revenue. However in March we saw double digit increases and service body and parts driven by a 32% increase and our highest margin customer pay work. We expect these trends to continue into the second quarter as the economy reopens further and consumers look to get back on the road and returns of the.
And the normal routines.
As a reminder, our service body and parts business see over $5 million being consumers and brand impressions annually, which generate over 50% margin and remain a huge competitive advantage for lithia and driveway.
Same store adjusted SG&A to gross profit was 64% and the quarter and improvement of 990 basis points over the prior year driven largely by the gross profit expansion and our new and used vehicle segment and recovery and service body and parts, we expect to see the normalization of SG&A to gross profit and supply constraints or alleviate.
And it later in the year and gross margins returned to normalized levels.
With our highest performing store is consistently maintaining and SG&A to gross profit metric and the mid fifties, our five year plan and continues to target and SG&A to gross profit level and the low 60% range as we continue to profitably modernize the consumer experience the opportunity to leverage our cost structure will continue as we maximize the utilization.
Physician and the integration of our existing location and as our digital home solutions driveway as meaningful additional incremental sales in summary, our teams continued to be responsive to the changing environment and the opportunities available to continuously improve and the evolving personal transportation industry, we are innovating and meeting consumer.
Increasing digital and in home expectations and are focused on meeting the preferences of our consumers wherever whenever and however, they desire with the integration of several regional platforms that come with performing teams, including strong operational leaders and customer focused associates, we remain humble and confident that we continue to deliver industry.
<unk>, leading results, while pragmatically modernizing automotive retail, while taking a moment to welcome David Fisher Junior and the entire team of over 2000 associates at the suburban collection. We also reiterate that we remain focus on our five year plan to achieve $50 billion and revenue and $50 of earnings per share with that.
I'd like to turn the call over to Tina. Thank you Chris for the quarter, we generated nearly $265 million of adjusted EBITDA and increase of 154% compared to 2020 and $189 million of free cash flows defined as adjusted EBITDA plus stock based compensation less of the following items per.
And cash interest income taxes dividends and capital expenditures as a result, we ended the quarter with $1 4 billion and cash and available credit and addition on finance real estate could provide additional liquidity of approximately $552 million for a combined nearly $2 billion of liquidity as of <unk>.
March 31, we had $4 billion outstanding of debt of which $1 8 billion with floor plan used vehicle and service loaner financing. The remaining portion of our debt is primarily related to senior notes and the financing of real estate as we on over 85% of our physical network.
A unique aspect of debt and our industry is the financing of vehicle inventory with floor plan debt. The financing is integral to our operations and collateralized by these assets the industry treats the associated interest expense as an operating expense and EBITDA and excludes the stat from balance sheet leverage calculations on.
And adjusted our total debt to EBITDA is overstated at four three times adjusted to treat these items as an operating expense our net debt to adjusted EBITDA is one seven times.
This means we could add over $1 2 billion and additional debt, which equaled the acquiring $4 8 billion and annualized revenues and 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 the three times for a sustained period, we would look to deleverage quickly through the equity capital market.
As a reminder, our disciplined approach is to maintain leverage between two and three times as we continue to progress toward another sizable competitive cost advantage of achieving an investment grade credit ratings.
Our capital allocation priorities for deployment of our annual free cash flows generated remain unchanged, we target of 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 earlier.
This morning, we announced the 13% increase and our dividend to <unk> 35 per share.
Even with the acquisition of the suburban collection announced earlier. This month, we continue to have the capacity to grow and are well positioned for accelerated disciplined growth. We continued to make strong progress and modernizing the consumer experience to the driveway and building a robust balance sheet positioning us to be the leader and consolidating this massive industry on.
While progressing toward our five year plan of achieving $15 billion and revenue and $50 of earnings per share. This concludes our prepared remarks, we would now like the call to open for questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation of total indicate your losses in the question queue you.
And you May press star two if he would like.
And to remove your question from the Q.
The floor and participants using speaker equipment and may be necessary to pick up the handset before pressing the store key.
Our first question comes from the line of Rick Nelson with Stephens. Please proceed with your question.
Alright, Thanks, a lot.
Yeah.
Right.
The 2021.
Bryan Thanks, Rick.
It sounds like Oh, yeah.
The acquisition pipeline.
The robust.
Kerry.
We're PUC approval of products have.
Yeah.
And what you're hearing.
And any challenges.
That 15 billion.
Active bids Scott and kind of I guess from a bigger standpoint.
$50 billion and.
Revenue targets and travel out there.
The great question, Rick This is Bryan.
Good day have you on the call this morning.
I think when we think about our OEM partnerships that really built off of the foundation of of value based acquisitions over the last couple of decades, where we're able to take underperforming stores and improve their performance.
Most of our manufacturer partners if not all are very stable they're involved with.
In depth discussions and regards to what our growth aspirations are and.
And are supportive of those aspirations the $15 billion that we believe it's priced appropriately and we still purge any data if were have like what I would call contiguous markets.
Or there is limitations by region within the manufacturer of framework agreement to give you kind of appears sense of what does our network look like for growth net of any of those issues that may occur I mean, one example would be like on the keys acquisitions, we actually reached.
Our western limit of limitations, okay and in that case, we ended up divesting.
From two businesses, even though we got bigger businesses and keys and that's part of our M&A strategies and we've solved for that typically in the asset purchase agreements on the $50 million.
Base case, five year plan, we still see no.
Impediments to reaching that level as well and.
Remember almost $10 billion of it is coming from drive when those things may shift over time, but we see a lot of headroom even beyond that in regards to.
And what our framework agreement and say are what our manufacturers would feel comfortable with.
Current character.
The color all total.
Hello.
Inventory.
For a tight and crowd.
And the Australia at 41 days.
<unk> per new.
Curios here of the thoughts.
Good morning.
For the inventory normalizing.
The implications for.
The <unk> you and.
It depends on our.
Our ratios and on one of your peers.
What I would suggest.
The code of Sky.
And <unk> conviction.
And through 2021.
Yeah, Hey, Rick it's Chris Good morning.
And a 41 day supply right now I think we feel really comfortable of that.
Without even counting and transit, which is probably another similar day supply that we feel like it's still coming into the pipeline.
Most of our Oems have plenty of inventory on the ground right now to meet customer demand and and with that and the supply issues that we have you are also seeing the impact of that on two things first of all.
New vehicle margins, obviously up $800 per unit.
And is definitely a byproduct of supply and demand and then.
Used car valuations as well.
Definitely ramping up which actually gives new car customers the advantage of the.
The positive equity or more equity I guess on the used vehicle trade.
But.
Our day supply is calculated of 41 day supply coming off of $17 7 million Saar run rate from March and so based on what we're getting right now and the feedback that we're getting we may have some tight inventory issues running through the summer months, but at the same time.
But because of supply and demand I think the margin offset on that and and our ability to procure used cars to offset any issues that we see on the used car side or on the new car side.
And we felt pretty comfortable that we're in a good spot right now today.
Okay great.
Currently the apart <unk>.
Bourbon and collection and understand that came with it some use the only.
Sure.
Curios.
And any plans.
To expand that strategy.
Rick This is Bryan again, it was actually 30 for new car stores. There is no standalone used car p&l's. There may be a few used car lots that are attached to new car stores and I think I think most importantly.
And there was a number of body shops, as well, but we're really looking at that Detroit being the core for region, three which is our upper.
Our upper Central region, where we don't have a big presence and I know David and his teams are pretty excited about jumping in and supporting the.
The last mile delivery and activating their inventories on driveway as well and.
That will come over the next few quarters I would imagine, but there is no specific used car independent stores in the $2 4 billion and revenue.
Okay.
Sounds good.
And for clarifying that.
Good luck.
Thanks, Rick.
Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.
Good morning, guys.
The first question on on driveway can you.
Talk about what the average vehicle and average customer was there.
And the people that you sold and the company you sold too and then also if you could give us some information on the 43%.
Vehicles and customers that were sold out of out of region. Just trying to understand if there are high and get customers or average customers or maybe lower end customers trying to understand the driveway and then the out of region portion of the share John sure. John This is Bryan I think most importantly, I mentioned that.
We're having about a 15% credit decisioning auto approval on consumers, but let's also remember that that 15% doesn't automatically complete the purchase okay. So our what we would call happy path.
Is about a third of that okay, meaning it's a heck of a lot lower of those consumers that go all the way through get auto approved and end up buying we are seeing that the credit tier is.
A little more impaired and a little more challenging than what we expected, whereas originally we were thinking that the ideas of of 30 unit per associate and the care center could be achievable, it's still may be but our early blend of technology with consumer.
The Decisioning is really yielding about of 12 unit to everyone care associate and I think to highlight one of our competitors of seven to eight years old with their technology being live for now that long Theyre really looking at about a seven unit per care associates. So technology.
In the E Commerce space. It's a lot of people that are mid to low tier credit, okay, and I'd say of $5 50 to seven beacon score or FICO scores that are looking for and easier solution and then going into a traditional dealership, where theyre having to negotiate and then also solve for their credit issues. We're now there.
To solve for it themselves.
And secondarily, you asked about the logistics fees.
At about 732 miles of about 43% out of region. We have about 30, 32% of our vehicles that have no shipping fee, meaning that there within the 100 miles of the location of the vehicle, Okay and important thing to remember okay. So also our customers are seeing the.
<unk> of our extremely convenient experience and being able to find scarce high demand vehicles, which is the different credit spectrum at each level of our inventory, which will be able to give you. Some specific data offline as well, but hopefully that gives you enough color to keep us moving alone. Thanks John.
That's helpful. Just a second question on on Driveway, Inc.
And so is there any potential over time to sort of underwriting directly and.
And maybe flow and ABS deal to fund that.
Have any capital spend so.
And that will grow over time kind of wet gas and carmax.
Yes. So we're now doing I think we almost hit 1400.
The contracts in the month of March again, and $17 7 million Saar some much more robust than I think we will see you know averaging for the year when we get done but we've on that pace, we should have a and appropriate amount of receivables.
To be able to go to the ABS market.
Late this year, Okay, and then once we get on that.
Since we will have those out there every I would say one to two quarters, okay to be able to accomplish that and take it off balance sheet and redeploy that capital Thats now warehoused and net leverage it's actually sitting out there into the network again.
And just the follow up of the bulk of those contracts or the those loans would be on the used vehicle side is that is that correct or almost all of them right.
Youre correct, Jon So we believe that our aggregated population of all vehicle sales should be around 20%, but it's massively tainted towards used okay. We would say that we should be able to achieve a 40% to 50% penetration rate on our used finance contracts with.
The 5% to 10% on new being that new vehicles are subsidized with with some vented rates from the manufacturers and have the advantages of leasing. Okay. So we think our penetration rates will be quite low.
As well as certified vehicles, a lot of times hubs of vintage right. So obviously the deeper you go into the age of vehicles, the higher penetration will have on driveway Finance Corp.
Okay, and then just lastly on the stock trading at a multiple.
Far higher than in some of your peers. Obviously the growth is what people are looking at there so.
And certainly not saying, it's not justified the.
Why not use that multiple to do a stock for stock deal and accelerate or add to your you play and here I mean, it just seems like that would be very accretive even if you pay 20% premiums for one of the other public public groups and then also on the stock. He was I think September 30 of last year when you did it.
Doc.
Issuance of secondary issuance and I think it was the stock was around 220.
We're looking at almost 380, right now and why not issue more stock.
And that capital to go after these acquisitions, maybe even at a faster pace. So why not of stock for stock deal and why not raise more capital.
John I think maybe the easy answer is the.
And you're probably right I mean, it does makes sense thats in our repertoire of solutions and we always try to balance the long term opportunities and stabilize the likelihood of getting it through capital and you know we do sit there nicely today and we're fortunate that we do trade at a little bit of of.
<unk>.
For the sector, but we still also traded a discount to some of the new entrants by a pretty considerable amount and.
Obviously, our early learnings and driveway have taught us.
It is of more formulaic business, Okay, and I think it's it's going to be exciting over our second third and fourth quarters of being in business and e-commerce to be able to actually extrapolate that when we open markets and we have top of funnel that said X number of.
Of unique visitors that translates into X number of sales.
It's quite different and what we've experienced in auto and traditional retail on the vehicle side that there is some art and it okay and this is not as much art. It's a lot of science, okay, and it's exciting to be able to see that theres a trajectory that is different with the unique customers then.
Our traditional channel, where we've had to really roll up our sleeves and and fight those battles and find solutions for customers, whereas here youre throwing a much broader net with a lot lower closing ratio, but it is somewhat formulaic based off your investments and marketing and care of associates and the.
And the technology, and we think that we progressed quite nicely over the first.
Order of being live and now about almost two years of having the technology under development.
So the.
Understanding Bryan.
I mean, you think that you could use the start for for an acquisition or potentially use the ATM to raise capital to accelerate the plan is that.
The Aircard possession, that's an accurate statement John.
Okay. Thank you very much.
Our next question comes from the line of Rajat Gupta with Jpmorgan. Please proceed with your question.
Hi, good morning, everyone and thanks for taking my questions.
Just had a question on <unk>.
Parts and services and recovery.
Pretty pretty strong number and <unk> in March.
Could you have like just.
The dissect that a little bit how much of that and you spent of demand versus.
And we would like a more normalized level of demand and just curious as true.
How do you see the trajectory of the recovery.
The second quarter and through the second half.
And by when do you see the business just getting back to pre pandemic levels.
The normalized basis.
And given like might be and and potentially lower and miles driven the environment, which is what's the speed bump that may.
And the follow up thanks.
And Roger Good morning, this is Chris.
Obviously pent up demand is a big driver and.
We are starting to see that.
Coming out of March where we actually started to finally see.
And some real big volume increases year over year were great, but we're really trying to do is figure out when will we start to get to a normalized recovery over what was really the.
For 2019 kind of year, if we use that as the base case and in the quarter, we saw ourselves about 5% up over that 2019 level.
And prior to the pandemic last year, we were projecting of double digit low double digit increase and our parts and service business. So we definitely see that trend continuing into April and we expect that to continue through the summer months as we as we kind of rally and <unk>.
Customers.
And coming normalizing their lives again and getting back on the road and driving their vehicles and then needing parts and service work. So Raj out one other factor as Chris was talking I was looking at.
On March <unk>.
Year over year over year, or 2021, as compared to 2019, Okay, and our service body and parts were up 9%. Okay. So we're starting to get back into those comparative that we've been running at for the last half a decade of that.
And like Chris said in certain quarters, where low double digits and most quarters were high single digits.
Got it got it and Thats continued into April so far on that.
Two year comp basis right.
Yes.
Got it and.
Thanks for the color there.
Just had a follow up on the SG&A edge of gross comment earlier.
And so just based on the deal done this year and just how strong the first quarter and started.
Assuming no other deals or is it going to be more deals of I'd like say, Germany now for the view.
And the sense of what we should expect SG&A to gross margin for 2021 overall I'm not sure. If you gave that I might have missed it.
Rajat. This is Bryan I think when we when we think about SG&A to growth and this environment. It is important to remember that margins are impacting the gross more than cost reductions are because remember we have considerable ramp up costs in terms of driveway engineers as well.
As marketing budgets and other things and we're still able to to gain that level of leverage. So as you see margins either stabilized, which I think they are pretty solid in the probably Q3 and maybe even into Q4 as Chris indicated you should see good stable SG&A.
At this what I would call Inc.
<unk> level or anomaly level. Okay. Now once we move outside of Covid impacted our inventory impacted sales. It is more of the heavy lifting that we did last year, where we did do staff reductions that were of permanent two to 300 basis point drop and SG&A.
And I think you can reference back to pre acceleration of network development from 14% and 15 on a steady state we were running at 64, 65% that's not looking at any sharing of best practices technology that is helping consumers do more of the work themselves.
Which would give us a productivity gains and personnel, which makes up almost two thirds of our SG&A costs. So some different things to be thinking about but really we're really targeting that.
Low 60 percentile on the five year plan and we really didn't build in a lot of what we would call synergies are advantages for the driveway channel that could be scaled over time, that's more of the aspirational plan that we internally aspire to achieve and that over time, we will be able to share.
And more in terms of what that looks like beyond the $50 50 plan.
Got it.
Selling units for care and remember it goes to charity.
All the incremental upsides right <unk>.
Got it and you got it and we're assuming and the 57% SG&A and the driveway channel of the five year plan that we get to 57% SG&A as a percentage of gross and that that would imply about $1000 and personnel cost per.
Per unit sold.
Okay, which is.
And which is not much lower than what we currently sit at and the Lithia channels. The most of the most of that dropped from the mid 60% SG&A to the 57 is no network cost. Okay. So that's the biggest part of what that drop is theres not a lot of synergies. We're also assuming almost one.
And marketing budget and as we know we only spend about 250 to $300 and the traditional channel and I think we can clearly see a pathway to drive ways marketing budgets at scale and and national presence getting to that level over some longer period of time.
Got it that's super helpful kind of Bolivar.
All of I'll jump back and peers. Thank you.
Thank you Roger.
Our next question comes from the line of Ryan simple with Craig Hallum. Please proceed with your question.
Good morning.
Bryan just want to follow up quickly on the last kind of the customer care Center and you mentioned kind of one.
Alright, guys 12 sales per employee are longer term 30, you think thats purely kind of of scale thing as you scale driveway and the care center or has there been kind of a structural change as youre getting into the care center and kind of how much work and time and effort it takes per sale.
Well Thanks, Ryan for the question and this is Bryan again, I think there is.
And it's surprising that our original design, we thought the 30 to one was a no brainer and a lot of that came from our experiences with the shift technologies, which was our our partner and still is our partner in <unk>.
And in a sense. So we saw 30 to one care center too.
Vehicle per care center associate level, but when we start to look at the spread of credit spectrum and the age of vehicles that we're looking at it may be that mid term over the next two to three years that 12 to one is a real number Fortunately they are a little bit lower cost and what traditional.
Associates cost and the traditional channel. So we still think that the $1000 of unit for the next.
Five years is still doable I think it's going to we're not positive that our technology today, and we have 29 Apis with lenders, which is almost four times, what our competitors and the e-commerce space have and we're still seeing massive amounts of.
Of this auto finance fall through the cracks, meaning that most people aren't able to structure their transaction, even with us guiding them digitally to be able to match this what credit.
The credit companies are able to accept so there's that looping idea that consumers today and driveway or having to go back and change information, whereas what our ultimate state is really where the consumer just puts and what it is we query all 70000 vehicles that are and inventory against all of.
29, <unk> with our lenders and we spit back that these 900 cars you can buy exactly the way you want for the payment you want Okay that is what our design three years ago was ultimate state, Okay, and no one today and the industry, even gets close to doing that and we believe that we will be the first.
Later this year early next year to be able to do that and we will have multiple iterations of that type of logic over the next couple of quarters that improve that too.
Two of at least the level of our competitive level to what some of the others that are that are doing today.
Great and then just on the driveway and 97, 8% of customers are incremental.
Is that of function of marketing specifically to <unk>.
New customer for I guess, why do you think that such a high percent of out of network customers today.
Yes, so Bryan it's two things one is we are specifically focusing our dollars to tech savvy on.
Or credit based Decisioning, where consumers looking for a simpler more transparent empowered experience, okay, a little bit different it's why it's a separate channel it's not an adjunct to the Lithia channel. Okay also the.
The $40 50000 vehicles online today and driveway are now reaching customers that arent in our basic.
Ours or areas of responsibility, where we have business remember its 732 miles I believe was the distance average of our customers, while our average reach and our traditional network is around 45 miles. Okay. So those two things together are really leveraging.
The inventory that we've never leveraged before and then targeting consumers with that inventory to match. The two to keep that what we would call that incremental level of up to a very high level.
Great. Thanks, Good luck and I'll hop back in the queue.
Thanks Bryan.
Our next question comes from the line of Ram <unk> with Morgan Stanley. Please proceed with your question.
Hi, and this is on behalf of Adam Jonas.
Oh great.
Yeah, I won't be as entertaining as them, but.
The Boston.
So our guidance for.
For the acquisition and it seems that.
Probably number one for al.
It is building and Omnichannel strategy.
M&A strategy is an outgrowth of the on the objective for <unk>.
And is Huawei and Huawei you make your biggest acquisition thus far on the deal.
Or are we sort of the foresight on one metro area can you help us understand how this fits with the broader omnichannel strategy.
I'd imagine with line of sight towards a more balance slash the broader market coverage rather than concentrations. So much concentrating some of the capital and a single city.
Great question, Adam and the ramp that that makes a lot of sense I think when we think about our strategy of e-commerce and the ideas of transparency and empowerment and then overlay those with the network. We don't look at them independently, we look at those as hand to hand.
All of these that they need to work together, Okay and then on the network development side, we still have to remember that when you are able to buy acquisitions at a 15% to 25% of revenue, Okay and on day, one there is somewhere between 50 and <unk>.
Our 25% and 50 cents for every billion dollars of revenue accretive.
It's very easy to be able to still have the advantages of that while still not assuming that new car dealers are just going to not exist. They have been the new car business is quite a stable business that has for business lines and.
And is is quite accretive and profitable and I think when we think about it that way and we know that our returns are and the 15% to 25% investment range. We know we get our money back and three to seven years and for the three to seven year outlook, even though we believe driveway will become of.
Much larger portion of our business. We also know that the heavy lifting and the car business has to occur and if we have our money back on that investment within three years to seven years, then it's all a win win in terms of how we look at things so.
It's the.
The way the consumers buy cars today, even knowing what others are able to do with technology and now what we're able to do a driveway most consumers require a lot of help to be able to do that and on <unk>.
Help means that Theres trust, that's built and we can build that with technology or if a consumer chooses we can build it with face to face interaction and.
We understand the concept of 34 stores and the Midwest, but what we got was a wonderful cross section of luxury vehicles, okay, as well as domestic vehicles and.
And Honda Toyota and import vehicles to be able to service and recon and store of those vehicles closer to our customers and region three.
Awesome. Thank you so much.
Thanks for the question.
Our next question comes from the line of Nick Jones of Citi. Please proceed with your question.
Great. Thanks for taking the questions up to the.
The first one.
And as you rollout advertising for driveway into new markets, how should we be thinking and how are you thinking about the transition to more of kind of national advertising, where you can get more leverage on that space.
Nick that's a great question and it's something that our digital steering committee is dealing with every single week is how do we balance that I think if you remember we increased our budgets from a couple of hundred thousand dollars a month to over $1 million of months starting in April. So this is our first month of.
The quadrupling or.
<unk> of our budget, Okay, and what we're balancing is really what is our funnel of efficacy. Okay. So what are we getting and brand impressions. How many unique visitors does that produce and how effective are we of what we call our golden ratio, Okay, which is ultimately what's our sales are.
The revenue generated off of top of funnel.
And until we see that really start to take hold it gives us indications that we still need work and improving our care center that our technology may not be solving as much for the consumers as we like we look at happy path to be able to determine what personnel costs do we need outside of happy path to support that and we look at that too.
<unk>, the one or 30 to one of eventual ratio of of vehicle sales to associate to be able to determine that Nick I will say this we're definitely leaning in and some of it is even coming from your.
The challenges and aspirations that why would you not spend more money on marketing. If you can sell more cars and I think thats accurate, we're leaning towards that level of accelerating to get to national scale. When the numbers really dropped back to a reasonable level and we'll be able to talk more about that in the coming months and quarters, but right.
Now we're at a four to five times of where we started the 90 days ago and that May end up doubling or tripling again, depending on how we think about allocating our capital.
And different and different types of buckets.
Great. That's helpful. And then and then a follow up just kind of on the competitive landscape I know there are some slides on the deck and investors talk about we talk about it but given the fragmentation from here.
How are you and how should we be thinking about competition and I.
And I guess, given the size of the Tam.
And the number of units the kind of the top players are doing and it seems like there's probably many years before these competitive moats really start to show that the right way to think about it or is it more important to focus on kind of the competitive dynamics today or is this really more of kind of 567 10 years out when the consolidation is.
Yeah, a little bit more penetrated.
Great question, and I think it's great insights to the largest retail sector in the country and probably the world. If you take it in the United States. It sits at two trillion dollars.
I don't believe this is a winner take all even though I believe that we're nicely positioned to get as much as we possibly can and really strive to that 5% of U S market share and beyond that we've talked about now for a couple of years, but ultimately this is not a winner take all game okay because.
And you have to solve especially on the used vehicle side for inventory its not a factory that you just are able to turn your inventory quicker and get a larger portion of that you actually have to go buy the vehicles or take them and on trade. Then you have to recondition, those and have expertise to be able to do that and thats.
Something that's highly competitive and ultimately the most efficient channel, we will be able to pay the most for the vehicles to be able to do that and by having all four business lines and I really believe that we've designed the structure that will put us into the best competitive positioning with anyone that comes into that used car space and <unk>.
Obviously, we know the barriers to entry and the new car space as well as that high margin 60, plus percent repair business that is really how we've thought about our designers those higher margin businesses, because we know that that's what allows us the ability to boost marketing and.
Boose care associates, and expand our innovation solutions to be able to go to market with.
The next best thing for our consumers as the world changes.
Great. Thank you.
Our next question is the question from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys.
I'd rather quarter under your belt, I guess with zero emissions experience could you talk about how you see zero emissions products impacting that that maintenance service business going forward.
Absolutely. So I think when we talk about our service ability of future product lines. I believe it's always important to think about affordability, okay, and it's important to remember that 42% of vehicles today, new and used sold and <unk>.
Erica or about 58000 vehicles with the 17000, new and 40000 used or nine years and older. Okay, meaning that its a very low payment. Okay and is what people can afford theres. Another large percentage of the remaining 58% that is really what.
We're talking about is the possibility of moving into the impacts of serviceability right and the lower cost that could come from <unk> zero emission vehicles. So think about affordability as the driver and I think today, we sit at 10% to 15% of the consumers that can afford a 30.
Dollars or greater vehicle in the total buying public in any given year. So it is going to be slow moving we do believe and we hope that that our Congress. Our current Congress passes a zero emission bill it is important to remember, though that this isn't of BV.
Bill, It's a zero emissions bill and that Theres different solutions that can impact the service effectiveness of the vehicles okay.
More of affordable vehicles are typically hybrids, because it's lower cost to produce and ultimately at end of life. When you have to replace the battery that's a very high cost amount and it affects ultimately the LTV or the lease and value of the termination value of that vehicle. So think of those now we are seeing the.
Today, a hybrid is costing a little less in the first seven and five to seven years of life, but it is a little more expensive in the later years of life because you start to get in to battery replacement. Okay. We're also trying to adjust for content on those cars when we do those evaluations.
We know that the hybrids that we sell today are the content it over our typical vehicles.
Now when we move into <unk> or of 100% battery powered.
It's a totally different number okay. We're still too early into the game to know what the ultimate costs are of the evs knowing that the battery at some point may or may not need to be replaced okay, and those numbers could get blown up when asked today or be evs or about 30% to 40% less.
To maintain however, I will remind you that the that the diagnostic tools and the repair tools to fix them are way more expensive and new car dealers of the ones that have that proprietary technology to do it so any offset inefficiencies for owning of BV that may lower our serviceability, we believe.
We will conquest from independence, and then throw and our driveway and home service and we believe that conquest new vehicle dealers.
Business is as well and the long run is.
And how we really thought about the design.
Okay, Great and then one question I guess, you said almost 98% of the driveway customers were new to Lithia I guess to put that in perspective on a traditional brick and mortar footprint and how many of your customers of what percent would be first time users of lithia as well.
So in our in our traditional channel it's around 50%.
So it's real.
It's a massive difference in terms of what we've seen but remember we're getting 98% because we're reaching consumers that never saw our inventory before and we didn't have a national brand now we have the ability to leverage the scale of our inventory into areas and I think thats, creating a lot of that 98% plus the.
Marketing things that we talked about where we're specifically targeting a different type of consumer so we're not really getting into that cannibalization of our existing pipeline.
Okay, great. Thank you.
Thanks, Brett.
Our next question comes from the line of David Whiston with Morgan Stanley with Morningstar. Please proceed with your question.
And thanks, good morning, and.
I guess first on the suburban clutch and deal obviously, but it's the top group nationally.
But other than that I'm, just curious why you guys wanted to focus for that region on Detroit Metro versus another major Midwestern city, like Chicago or Cleveland, St. Louis etcetera.
Great question, David I would start by saying that the suburban organization is an absolutely wonderful organization with cultural values and history very similar to Lithia motors they.
And they started two years after lithia and $19 48, which was of great soundbite, they've been closer acquaintances and they've built an organization that is community based.
In terms of the business decision remember Detroit is the strongest domestic metropolitan area in the country, Okay and the profitability of those assets are extremely good theres one other secondary decisioning that went around this remember what of.
Plan, a and plan B customer is which are the employees that work directly for manufacturers. So almost 80% of their new car business, our employee factory employee customers or friends and family of factory employee customers, meaning that they're one price or negotiation free.
On all of those vehicles and remember the driveway model is one price so that obviously sharing of best practices and those initial learnings of of more negotiation free environment, where something that had a lot of attraction to us when our existing lithia traditional network today.
And has only a small fraction relative to the that that's being sold to compare and contrast, only about 25% of our new vehicle sales and the Lithia network are sold at a negotiation free of one price solution, whereas our used cars and lithia of about 51% non negotiated and remember.
Suburban is over 80% negotiation free on the new car side. So a couple of other things that we thought about aside from the fact that it did give us massive presence and region III.
No. That's helpful. Thanks, and I guess staying on the acquisition.
And most of our suburban and Bryan you've done a lot of deal and obviously in the past and roughly nine months, but I mean.
And why are you very often and not always successful, especially for prime assets like suburban I mean, you've got by publishers, Berkshire and Theres Terry Taylor's firm why does the seller and pick you.
So most importantly, we do what we say, we're going to do and our track record of success is now over.
And so about 286 out of 288 successful of closings as a company. We've only lost sorry, three deals I did my math, a little bit wrong. There over the last 25 years of M&A, we know what our manufacturers expect of us.
No how they look at approve ability to ensure that we meet those qualifications and all cases.
And today, we do sit in of capacity with the synergies that we bring with driveway that allow for and overlay and another incremental lift with driveway financial as well as the driveway.
Leveraging of those new customers to be able to expand their profitability and even a greater sense of which again allows us to be more competitive over time I will say this David we don't see massive competition of our on our deals I mean, we've now been doing this for 25 years.
And something that is cultural we don't have a VP of M&A okay.
The last one that was in that role it's something that everyone does in fact, Chris Holzschuh is doing deals and then we've got general managers that are doing deals. It's a bonded relationship with sellers and those 2600 leads for the last 25 years that we know can pay the amount that they are looking for.
Okay, while still making sure that it's highly accretive.
And there's not a real reason to put it out to market to put risk and their employees mines or have things go to market and our industry closes for out of 10 deals even at a definitive level and we're closing 98% of all deals that we that we sign and I think thats a risk that many sellers.
Don't want to put their people.
In the in the in the firing lines of having a deal fall apart, which we all know that that occurs fairly often.
Okay. That's helpful. Thanks, Don just I know, it's early to talk about 2022, but just Directionally speaking do you see a scenario where 2022 given the low entry we have for a long time now plus the very high consumer demand 2020 to start and possibly just explode upward and really do you want to get a lot more image.
Or would you do you like the pipe frankly power environment you have now.
I think David if we think about 2022, that's a long ways into the future, but I think of 17 million Saar is a pretty good assumption.
<unk>, a little bit here and there each of the next four of five years, Okay and that is still growing the average age and the car parked and now almost 12 years old I think in terms of how we think of things I'm really and I think Chris would we would reiterate that were benign to what happens in the <unk>.
Greater marketplace of its of 15 million Saar of 19 million Saar or inventories or higher of low where we are for businesses business lines, we have three distinct channels, including the green car channel.
We really designed our strategy three to five years ago to not have to worry about that we have enough levers to be able to pull that we can be highly profitable and really drive towards that $50 50 plan and whatever is really there knowing that I would say 12 months into.
To drive ways development now all of the sudden it's really within our control is how do we procure more used car inventory than anyone else and recondition that inventory and we're finally out of state that we really believe that we're in control of our destiny and not at the mercy of the market or for that matter.
Or at what our manufacturers decide to build on the new car side.
Okay.
I'd like to hand, the call back over to Bryan Deboer for closing remarks.
Thank you. Thank you Doug and thank you everyone for joining US today, we look forward to updating you on our Lithia and driveway second quarter results in July and wish everyone, a wonderful spring and stay safe.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.