Q3 2021 Lithia Motors Inc Earnings Call
[music].
Good morning, and welcome to the Lithia and driveway third quarter, 2020 One conference call. All lines have been placed on mute to prevent background noise. After the Speakers' remarks, there will be a question.
I didn't answer session I would now like to turn the call over to Jack every director of S. P. A day. Please begin.
Thank you and welcome to the Lithia and driveway third quarter 2021 earnings call presenting today are Bryan to bore president and CEO, Chris wholesale executive Vice.
President and CEO, and Tina Miller, Senior Vice President and CFO.
This discussion may include statements about future events financial projections and expectations about the company's products markets and growth such statements are forward looking and subject to risks and uncertainties that could cause.
Actual results to differ materially from the statements made.
We disclose those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission.
Urge you to carefully consider these disclosures and not to place undue reliance on forward looking statements we undertake no.
To update any forward looking statements, which are made as the as of the date of this release.
Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website.
<unk> Investor Relations Dot com, highlighting our third quarter results.
I would like to turn the call over to Bryan Deboer, President and CEO.
Thank you Jack good morning, and welcome everyone.
Earlier today, we reported the highest adjusted third quarter earnings in company history at $11 20.
<unk> one per share a 63% over last year's strong results.
Record revenues of $6 $2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses.
During the quarter total revenue grew 70% while.
Gross profit increased 83%.
On a same store basis used vehicles led our revenue growth up 40% followed by a 22% increase in F&I income a 7% increase in service body and parts revenues and a relatively modest 3% decrease in new vehicle revenues.
Additionally, same store gross profit increased 23%.
Our operational teams executed our best in class used inventory procurement model to source and recondition, a large volume of used vehicles in a highly cost effective manner, our ability to reposition vehicles within our nationwide network in our driveway procurement.
Total technology allowed for optimal inventory levels throughout the quarter on the new vehicle side increased gpus more than offset the decline in volume Chris will be providing additional details on our same store sales inventory levels and operational highlights in a few moments.
Our omnichannel strategy and.
Chairman ending our network by acquiring new vehicle franchises, we have rapidly increased our size and scale further growing our significant capital engine in the third quarter, we generated $530 million and adjusted EBITDA greater than any full year in our history before 2019, providing us additional capital.
Unexploited towards network expansion and driveway, while also accelerating our continued exploration into adjacencies.
<unk> customer demand we saw in the third quarter was driven by high levels of household savings government subsidies lower interest rates and increased equity and trade ins elevated demand.
To dividends are likely to be sustainable into the next few quarters due to the continued strength from these drivers.
Coupled with tight new vehicle supply and accelerating miles driven has consumers return to work and continue to travel using their vehicles.
As our industry transitions towards electrification and more.
And Martin unions, and empowered mobility solutions.
We will anticipate and adapt to execute and proactively lead this change.
Our plan to reach $50 billion in revenue and exceed $50 and EPS by the year 2025 from hereon referred to as our 2025 plan.
Working with design with these and other consumer trends in mind.
Lithium driveways full lifecycle offerings in adjacencies are evolving to respond to changing preferences.
Beyond the lithium driveway channels are complex expensive and difficult to replicate design that we have incrementally unveiled over the past 15.
Today includes green cars, the foremost educational marketplace for sustainable vehicles, a quickly growing fintech driveway finance growing fleet and leasing operations and our Canadian presence to establish the seeds for international growth longer term we.
We look forward to continuing to share further elements of our.
Months, and how our digital solutions can be applied to similar mobility industries and further adjacencies to create a broad based highly diversified multi sector disruptive company.
Our traditional lithia business are now evolving their offerings, given our decentralized culture and belief that our stores know their local.
Science best they operate as local brands with the autonomy to implement e-commerce solutions that meet their customers' needs.
When designing our Omnichannel strategy careful consideration was given to the existing end to end digital solutions that many of our lithia stores omnichannel offerings already utilized.
Market, while continuing to grow these lithia experiences lad establish driveway as a unique independent brand with dedicated leadership engineering and marketing teams developing proprietary software and a complete lifecycle of in home experiences to attract incremental consumers to lab.
This also provided consumer solutions that are broader and lower cost than any of our used only e-commerce retail peers.
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In conjunction with the acceleration of consumer demand for in home retail experiences, we're seeing the massive benefits of having consumer optionality for both driveway.
And lithia in store and online experiences.
Our initial design and early learnings from driveway continued to guide and expand how our lithia businesses interact with consumers.
While our attentions were turned to driveways completely incremental revenue growth.
<unk> been remiss in sharing.
And Lithia business continues to provide digital experiences through its 300, plus local regional and Lithia web sites for.
For the third quarter. These lithia websites and associated online shopping experiences connected with $11 5 million quarterly unique visitors. These.
These lithia e-commerce customers.
That are for 36600 or 25% of all units retailed in the quarter and simply estimated at five $9 billion of annualized revenues attributed to the e-commerce portion of our traditional Lithia channel.
These lithia ecommerce sales are in addition.
Accounted I've ways growing successes that we will share in just a few moments to put this into perspective. These ecommerce sales as a percentage of monthly unique visitors represents a three 2% or what we call a golden ratio.
This performance level is similar to other established digital only.
He used retailers.
To further illustrate the strength of our Omnichannel strategy when our lab total sales are compared to unique visitors from all channels are golden ratio was 146% nearly five times more successful than our digital used only peers lastly, it is important to note.
Note that we are not incurring incremental spending on our stores ecommerce tools as we are leveraging third party vendors similar to our new vehicle franchise peers E branding efforts.
Though we are pacing significantly ahead of our 2025 plan, we remind everyone that our revenues have experienced drag from inventory constraints.
And earnings are greatly inflated from vehicle margins.
Finally, we are pleased to report that every channel and adjacency is a considerably ahead of plan.
We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible.
Avenue and margin available to us in this market as a reminder, the 2025 plan assumes a pre COVID-19 business environment margins and growth rates in.
Internally, we view the 2025 plan as a base case and our leaders are focused on taking our execution to the next level.
And de linking $1 billion of revenue to produce more than $1 of EPS.
Key drivers of this are no further equity capital raises meaning no further dilution to EPS.
Leveraging our underutilized network to support a two to three times increase in vehicle sales and a four times increase in.
<unk> rent service sales through the existing network further improvements in personnel productivity.
Economies of scale in marketing from National brand awareness and.
And investment grade credit rating to reduce borrowing costs and most importantly, further adjacencies with higher margins and structurally lower.
Parts of G&A costs.
The adjacency, we're furthest along with his driveway finance or Dfc that has experienced rapid growth since expanding in spring of 2020.
During the quarter DSC originated 6200 loans and now has a portfolio of $530 million.
<unk>, we are planning to enter the ABS term market by the end of the year, which will allow us to quickly and profitably scale future consumer offering in lending volumes.
Important to note is that alone originated with driveway finance earns three times the amount earned when we arrange financing with a third party lender.
On a fully discounted basis, we believe that driveway finance can penetrate 20% of our finance retail used unit sales.
This percentage is lower than used only peers finance companies as some vented leases and finance contracts with our manufacture captives will always account for a sizable portion of our new <unk> certified.
<unk> businesses.
The threat loading of our M&A provides a larger base for driveway finance to draw from and increases the potential contribution above what our current 2025 plan includes.
We are excited about the continued growth of driveway and the interest and engagement it seeing from our consumers.
Driveway generated over 530000 monthly unique visitors in September a 68% increase over June.
96% of our customers were incremental and had never transaction with Lithia driveway before.
Monthly shop transactions increased 86% during the quarter.
Strong.
Strong, Google and Facebook reviews, and our net promoter score of 90 indicate driveways building an online reputation for exceeding consumer expectations for a fully digital frictionless experience.
We recently launched driveway marketing in Las Vegas, and Phoenix, our ninth and 10th.
It's continued improvement in our existing markets improved our overall driveway golden ratio, even with the early dilution from these two new markets. We anticipate entering further new market soon and remain on pace to expand our nationwide marketing by the end of next year.
Market to support consumer demand, we accelerated the opening of our third driveway care center in Dallas, which occurred in September and.
In addition, we have ramped hiring at all three time zones care centers and believe we are well positioned to support the increased volume of traffic, we expect to see in the coming months.
Driveway is on track for its 2021 target of 15000 annual transaction run rate exiting December looking.
Looking forward to 'twenty two we are forecasting 40000 transactions with a two 2% to one sell to this sharp ratio.
Driving.
Base dedicated management operation Engineering, and marketing teams are continuously testing and learning as they enhance the driveway website and consumer experiences recently deploying another powerful new feature.
<unk> now offers consumers the ability to sort by distance this enables consumers to see which.
Which vehicles are in the closest proximity to them and delivered the fastest with the lowest or no shipping fee.
This new feature will decrease delivery times and increase our golden ratios view.
Viewing our dealerships omnichannel tools and driveway together, we are well positioned to retain our existing dealership customers.
<unk> by interacting with them in new ways that are aligned with their ever evolving preferences.
Additionally, we believe our digital infrastructure will enable us to conquest market share from competitors that lack the resources to invest in technologies <unk> nationwide network or choose not to commit to a transparent.
<unk> empowered negotiation free experiences to effectively attract incremental customers.
Acquisition growth the backbone of our strategy continues to expand our physical network to support all of our business lines, whether in store or in home.
And our future state.
<unk> expect our optimal physical network to be approximately 500 stores across the U S. Placing us within 100 miles of all U S. Consumers. This enables us to offer timely convenient and affordable and home solutions, while realizing the economies of scale that will come from our nationwide footprint and brand.
We had several large deals were announced recently the automotive retail industry remains highly fragmented and unconsolidated with the market share of the 10 largest groups at only about 10%.
We have nearly $1 $5 billion in annual revenue commitments as well as over $12 billion in.
Blaine, which excludes our peers large transactions, we remain confident in our ability to find deals that best fit our regional network strategy and are priced at our disciplined 15% to 30% of revenues and three to seven times EBITDA.
This ensures we meet our after tax return thresholds.
The <unk>, 15% in a post pandemic profit environment, lithium driveway or known in the industry as the buyer of choice obtaining manufacturer approval timely and certain closing of transactions and retaining over 95% of the employees during the quarter, we completed acquisitions that are expected.
Of the $817 billion in annualized revenues and year to date, we have completed $6 2 billion <unk>.
Included in the total we made our first international acquisition partnering with <unk> automotive in Canada with a strong presence in Toronto Canada's largest market. We are excited to have Chris fast.
Jen is high performing team join us.
In addition to its stores staff operational leasing business furthering our learnings of synergistic Adjacencies. We also expanded our U S footprint, particularly in the southeast region, six entering the Atlanta, Georgia, and mobile Alabama markets.
In closing we are acutely focused on executing our omni channel strategy designed to continue our track record of earnings and revenue growth for decades to come.
Though our plan may seem complex, our fast moving and hyper proactive team with multiple decades working together.
<unk> is ready for any challenge or competitor.
We have grown exponentially, while maintaining industry low leverage of around two times for nearly a decade with our various channels meeting customers wherever whenever and however, they desire we are well positioned to gain share and outperform the market in <unk>.
In our 2025 plan.
With that I'd like to turn the call over to Chris.
Thank you Brian.
And during the final quarter of 2021 with another record year already behind US our store leaders continue to challenge our teams to embrace the future evolve in all business lines and achieve the 2025 plan. This includes.
Ensuring that our 22000 associates continued to lead the digital transformation of automotive retail in their respective markets, while exceeding customer expectations, increasing market share and improving profitability.
As most of you are aware our manufacturer partners were impacted by micro chip shortages and struggled to supply a sufficient volume of new.
<unk> was to meet customer demand during the third quarter. As a result same store new vehicle unit sales decreased 3% in revenue and 14% in units consistent with the nationwide sorry decrease we were able to offset the decreased volume with higher total variable gpus, averaging seven $446 in the third quarter.
Vehicle to $6082 in the second quarter of 2021 and $4754 in the prior year.
As of September 30, we had a 24 day supply of new vehicles on the ground, which excludes in transit while the new vehicle days supply environment was challenging our 58 days supply of used vehicles.
Compare inventory exiting June 2021 positioned us well for the third quarter, where we saw a 40% increase in revenue on a 13% increase in units or 1000, plus procurement personnel did excellent work sourcing vehicles, enabling us to offer customers a wide spectrum of vehicles, meaning all levels of affordability.
<unk>.
We currently sit at a 48 day supply of used units and anticipate we will be able to continue to mitigate pressure on the new vehicle supply by maintaining solid used car comps and strong profitability.
In the third quarter, we saw a 74% of our used vehicles direct from consumer such as trade ins and off lease.
We're we as top of funnel franchise dealers get first look at the used vehicle inventory pipeline.
Only 26% of our vehicles were procured from other channels, such as auctions other dealers or wholesalers.
During the third quarter, we earned $3897 and gross profit on used vehicles sourced from customer channels.
<unk>, which turned in an average of 33 days for used vehicles sourced from other channels on the other hand, we earned $2696 in gross profit per unit and those turned in an average of 51 days, which again demonstrates the benefits of an omnichannel strategy for Lithia and driveway.
Our expanding physical network of new vehicle.
Sizes and the benefits of driveway allow us to offer the most diverse inventory in North America, we offer vehicles to meet all affordability levels with the largest number of bulk manufacturer certified pre owned vehicles and those priced under $10000 or over 10 years old again. These vehicles also turned the fastest and yield the highest margin percentage.
France. Additionally, our internal dealer trade network, which creates an opportunity for our own network to our first shot at the 100000 units. We wholesale annually allows us to cost effectively move vehicles to better match supply and demand and increase our retail versus wholesale mix.
Turning to parts and service same store revenues increased seven.
<unk> percent over last year, the growth was distributed across all business lines, except warranty.
We anticipate a continued tailwind benefiting service into 2022 as a substantial losses in the miles driven rebounds, and well positions our highest profit margin business line.
With SG&A, we are focused on improving productivity of our personnel.
<unk> investments in marketing and further leveraging our fixed expenses. These actions will improve our gross profit throughput when margin subside. We believe that these actions reduce our normalized SG&A levels at least 300 basis points below pre COVID-19 levels or approximately 65% of gross profit.
As our teams prepare their 2020.
Targeted annual operating plans they remain hyper focused on executing to ensure a topline growth is aligned with further productivity improvements that result from our investment in the Omnichannel model wherever whenever and however customers choose these efforts along with our exploration of Adjacencies translate to significant potential to increase leverage.
Leverage and drive additional profit as expected in our 2025 plan with that I'd like to turn the call over to Tina. Thank you Chris for the quarter, we generated over $530 million of adjusted EBITDA of 104% increase over 2020 and $304 million of free cash flow as defined.
Defined as adjusted EBITDA, plus stock based compensation less the following items paid in cash interest income taxes dividends and capital expenditures.
We ended the quarter with $1 7 billion in cash and available credit, which if deployed to support network growth could purchase up to $6 8 billion in annualized revenues.
As of September 30, we had $3 8 billion outstanding in debt of which $1 billion with Floorplan and used vehicle and service loaner financing. The remaining portion of our debt primarily relates to senior notes and financed real estate as we own over 85% of our physical network.
Our disciplined approach is to maintain.
<unk> leverage between two and three times as part of our commitment to obtaining an investment grade credit rating, which would be another sizable competitive advantage once obtained as of quarter end our ratio of net debt to adjusted EBITDA is 125 times.
Our capital allocation priorities for deployment of our annual free.
Maintain those generated remains unchanged, we target, 65% investment in acquisitions, 25% internal investments, including capital expenditures modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases earlier. This morning, we announced a 35 per share dividend.
Cash related to our Q3 performance.
With capital raises completed earlier this year and elevated free cash flows generated as a result of the current environment, we accelerated our investment in driveway and Dfc incurring over $50 million in SG&A and capital expenditures year to date the personnel costs for our over 500 associate.
Dividend to support the scaling and continued build out of driveway and Dfc the marketing investment for driveway and it development cost our current period headwinds and most importantly support the buildout of our future State and provides the foundation for a new generation of incremental profitability we.
We are well positioned for AXT.
Associated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and exceed $50 of earnings per share by the year 2025.
This concludes our prepared remarks, we would now like to open up the call to questions operator.
Thank you if he would like to ask a question. Please press star one.
On your telephone keypad, a confirmation tone will indicate your line into the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Rick Nelson.
Celebrate even.
Please proceed.
Thanks, Good morning.
Some of them.
Quarter.
Thanks, Rick.
<unk>.
New car inventory in 2000 and core values.
Supply at the end of the quarter carriers.
No.
Where we go from here.
Things get tighter to leave started start to build inventory levels.
Hi, Joseph.
Fourth quarter some of the trends we saw in Q3 alright.
Continuing to the fourth quarter.
Sure sure Rick I do.
With that those trends should continue into the fourth quarter I think we're looking at a few more quarters of strength, but I also know that a lot of this is going to be dependent upon what happens with the stimulus packages because if they renew those child credits now all of a sudden we have you know.
More income in that middle income.
Do believe income pockets, which could be a catalyst for continued demand for maybe throughout 2022, Chris do you have some specifics for US yeah. Rick Good morning, I mean, I think part of this is the line of sight on inventories is still a bit murky.
We're kind of day by day manufacturer by manufacturer on kind of what's going on.
But as you said, we had a 24 day supply, which was actually up one day from from last quarter. However, our day supply uses a 30 day look back so when youre looking at that trend, we have declining sales volumes, which would indicate that a 24 day supply is an apples to apples when you compare to last quarter. So obviously more inventory in the pipeline.
And lowering now the flip side of that is we do have a 48 day supply of used vehicles and I think the benefits of being a top of funnel franchise dealer. When it comes to used cars is really evident when you see the massive sales comps that we had up year over year and 18% in volume and 40% in revenue.
Are some of the benefits that we see that.
We can kind of outrun outpace.
Some of the trends that we're feeling across the industry right now on new cars.
Thanks for the color also look to follow up I mean, you all tomorrow.
Alright.
Uptick there pretty unit.
Pardon me.
Mitch.
Away from moved toward Us.
Right.
Adam I will try to see driveway financings.
Impacting us.
How do you expect it to impact from a teacher.
Yes, Rick this is Chris again, good morning.
So.
As far as F&I is concerned I mean this has been a focus that we've talked about for the last several years, obviously lagging some of.
Our competitors as far as Oh, where those F&I trends came out and we continue to see the progress of focusing on people process products and obviously our comp plans around.
Driving that performance up.
We are seeing some benefits from obviously the economic indicators that Brian mentioned in his prepared remarks as well as valuations that are coming in and used vehicles that give our customers a chance to invest in protection products that that support their vehicle purchase.
As far.
His driveway is concerned.
Seeing a probably about right now as they ramp up their business somewhere around a 50 dollar.
Per unit impact on the overall finance transaction, but as they continue to see record revenue record record deals coming into the driveway finance portfolio.
<unk> is confident that over time.
The benefits of having a captive company captive finance company are definitely going to outweigh.
Some of the headwinds that we're seeing right now today.
Great.
Thanks very much.
Good luck too as we push forward.
We're going through it.
Our next question is from Ryan Seagull with Craig Hallum Capital Group. Please proceed.
Good morning, guys. Congrats on another really strong quarter.
Hi, Ryan.
Curious on M&A, you guys talk confidently about you know a lot of opportunities.
Well out there and it seems like your peers have followed suit a rather late but a lot of increased activity multiples going higher there. So does that change some of the negotiations you guys are having in the confidence and continuing.
At good valuations.
Yeah, Ryan this is Bryan I.
Stills importantly.
Keep our eye on the $20 billion that we set out to achieve in the 50 50 plan. Okay now referred to as the 2025 plan.
Where we were really targeting to get to that 500 store locations to be able to deliver <unk>.
Services and products to consumers within.
About a two hour or about 100 mile reach that's our ultimate goal. We're very fortunate that we were able to book almost $10 billion worth of revenue over the last 15 16 months.
At very attractive multiples in that middle of our 3% to seven times EBITDA range and now we're looking at multiples.
Especially those two larger deals that were you know close to probably double on a pre COVID-19 or post COVID-19 multiple range as to what we paid for those assets I think what you know about lithium driveway is that we're very disciplined okay. We have enough in the funnel that we can still find.
In the the Gms in that.
And the opportunities are now around $12 billion and that's assuming that the two major deals.
A close with our two peer group and wish them the best on that.
And then on on GPU.
<unk> seemed like Q2 was exceptionally strong and things could get better and then you you Trump new by well over $1000 into Q3. So you mentioned strength in margins continuing for the next several quarters you know a lack of new inventory that's obvious out there but.
Do you think these Q3 levels are sustainable.
It's kind of a blend between the two but any kind of directional help would be helpful.
Yes, I think as Chris mentioned, we did we believe that we've trough in terms of inventory and probably at least 50% of the manufacturers and you know the remaining 50% at their trough ing either now or.
Or is it in the next 30 days. So we really believe that once inventories start to return that we should be sitting it you know I would say more like Q2 levels and maybe at some point even Q1.
It's really hard to predict I mean, we could have never predicted another 16 to 17.
Or in the hundred office in margins in the $7400.
New vehicle margins, including F&I are now pushing what 16, 5% total margins on new that's that's pretty massive when pre COVID-19. We were flirting with you know just below 10%.
So you know it is.
17, it is somewhat supplied based but we would also say and remind you that this is a demand based.
Dilemma, that's being caused more than anything in days' supply isn't really an indicative measure of what margins are going to do long term because we have many.
Factors, we've run at these 20 day supply levels for decades.
The margins arent there so in the short term yes. There is the disconnect but hopefully we can constructively you know have lower day supply, but it doesn't translate into automatic.
Substantial profit increases.
Nice job guys I'll turn it over to the others. Thanks, Thanks, Ryan Thanks, Brian.
Our next question is from John Murphy with Bank of America. Please proceed.
Hi, good morning, everyone.
This is TJ Fletcher on for John Murphy, sorry.
<unk>.
Hi.
Manny if I guess, just alright, guys have kind of touched on this a little bit but how much of the diverging performance on new and used same store comps do you attribute your increasing focus on the used vehicle market and your various initiatives like value auto versus typically new vehicle consumer shifting down in <unk>, given the pervasive inventory right. So I'm.
I'm getting a sense of what you think is more kind of a structural shift versus more transitory sure T. G. This is Bryan again.
It's important to remember that in and the lithium driveway procurement model.
We specifically focus on channels that procurement that are a little different than most we actually hit in.
Just trying to say that is the major driver of our performance is those that can find the vehicles and recondition. The vehicles are going to be the ones that are able to expand their same store sales at a greater rate. So we actually hit an all time high and procured 74% of our inventory directly from consumers.
And I would mers and much different than maybe a used only retailer that we have 58% of our vehicles come from trade in we had another 6% come off lease and another 10% come from private party and probably the most important thing that we look at is we also had a low <unk>.
However, an auction procurement, which.
Consumer only 13, 13% of our mix and Chris had mentioned that the importance of the consumer channels is that we don't have to transport cars and pay auction fees. Both directions. So we make about $1100 more in that channel on that three quarters of cars and you can relate that now in terms of.
Which is what was driveways influence on the overall business, okay, whether it was the shop or sale functionality is important to keep in mind that the the cell functionality or creating more inventory is another channel that we haven't really explored until nine months ago, and thats quite attractive and we would attribute.
Dubuque about 20% of our volume in same store sale increases coming from from that channel at the current time.
Okay got it that makes a lot of sense and then just a last housekeeping question is it fair to assume that the noncash unrealized loss on investment in the quarter was shift is there any realized.
Our cash loss on investment and kind of how do you think about the nature of that investment over time, whether it be core or non core to that.
Looking at her driveway business model.
So there was a.
A large adjustment that was based off the value of shift of what they traded at.
As well as we had.
A possibility to get other.
Shares of shift, but the stock the performance of the company didn't reach the level. So we add debt, we basically just adjusted that balanced Tina anything to add on that.
Yes.
Related to evaluation of shift tied to the stock price and then as Brian mentioned, we had some shares that were held in escrow that.
Didn't didn't meet the performance metrics.
Okay I understand thank you that's all for me.
Thanks D G.
Our next question is from Chris by the delivery with BNP Paribas. Please proceed.
Everyone. Thanks for taking the call.
I wanted to ask you Brian wanted to ask about the us business. So.
0.5% unit growth in two year CAGR of 9%.
Sure.
It market.
Yes.
Can you give us a sense for how that fared monthly throughout the quarter and into October as being relatively consistent as a volatile and then just related to your inventory levels are still pretty strong, but not as strong as they were in Q2 do you feel good.
Okay.
Okay.
Sure.
Feel good that we saw consistency throughout the quarter, Chris so and exiting the quarter, even though we're a 10 day lower supply if you take the increase even quarter over quarter. Our used car sales were up considerably. So that actually 30 day look back when you when you take that.
Account or actual static inventory numbers were about the same as they were exiting Q2, which we like and we're continuing to buy more also October is looking pretty good so.
I would remind everyone that our quarter over quarter look back versus 2020 that was.
That into a quarter. Okay. So it's not we stopped talking about 2019, which was really for that one quarter of Q2, when we had half a quarter, where we were basically shut because of regulatory closures.
Yeah, that's right that's really impressive.
So then my next question is.
What's it going to be scaling driveway, making a lot of incremental investments too.
Of the $50 million gave us a sense for like what the split is on SG&A and Capex and then separately if I heard you correctly. It sounds like you are becoming more confident on the level of structural cost takeout.
It seems like at least 300 basis point of improvement versus pre Covid just want to make sure.
You said that correctly and then two kind of maybe just speak to whats, making you more confident what are you seeing the business. That's making you think like some of this is structural.
If inventory ever normalizes.
At least 300.
Yeah, I think most importantly, Chris this is an investment in our future and a channel that's growing.
So of the $50 million about about one third or $15 million of it was actual capex. The remainder is those 500 associates that are that we're building into our future for them.
We think it's the right investment, including the expansion into Phoenix, Arizona, and Las Vegas, Nevada, which is now.
Intense markets because we did see.
Two of our markets. Our initial two markets Portland in Pittsburgh have one has actually reached the 0.15 Golden ratio, which was our next level of scaling the other ones trajectory looks eminent in the next month or two so.
So we felt it was an appropriate time to to.
<unk> that and we are somewhat fortunate that we are in and in a hyper inflated gross profit environment, which allows us the flexibility to expand that business at a probably a little more rapid rate than we initially expected you know 15 months ago.
Gotcha, Okay. Thank you for the time.
Thanks, Chris.
Our next question is from Rajat Gupta with Jpmorgan. Please proceed.
Okay, great. Thanks, Ron Thanks for taking the question.
I had a question on the M&A environment, and just capital allocation in general.
Sure.
You raised.
We're in a $5 billion or so in in May.
And so you still have like a lot more acquisitions do just to finish that capital January and given like what youre seeing in.
In the LOI and what you've closed so far.
Sure.
How quickly do you think you need or how origin do you think of the need to deploy all of that capital that you raised or.
It could not finding the right deals at the right multiples would there be other sources of debt capital.
Would the company go into some other uses.
Oh, Thanks understood. Roger This is Bryan again.
Obviously, we spend about two thirds of our capital on the network strategy and the growth of M&A.
We had 107 or what $1 $7 billion remaining of the approximately four billing. It you mentioned the two capital raises plus internal cash flows which were way more than expected.
<unk>.
We do have about $1 billion five.
Contracted okay or under commitments, which is about a third quarter of the amount that we would need if we deployed 100% of the $1 seven because as Tina mentioned, it's about $6 billion that we could buy.
By with the one seven based off what we've been paying traditionally I would also say this Roger we're pretty disciplined in what we do okay. In the network strategy and what we pay is hyper important to how we value things and if we look at those maybe those two larger deals that we were active.
On but maybe not as aggressive because we didn't believe that the network strategy was as good for us as maybe it was for one of our peers and we wish them all the best in that as well, so I think that our ability to deploy the remaining what.
Let's say about $1 billion to.
Probably it takes us two to four more quarters in the environment.
<unk> may change a little bit, but also remember that transactions aren't just about how much you pay it's about what you do post signing and what you. What you provide the teams that are exists there and what those dealer.
<unk> sellers are really looking for for their culture and for their succession to achieve the things remember lithia driveway as an expert experienced M&A company for the last two decades. It is a core value of our company, okay and that.
Although $12 billion thats in the pipeline, there's a good chance that there is plenty of volume there.
At least achieve that $6 billion over the coming quarters and years or the remaining $10 billion that we have in the $50 50 plan.
Got it got it so it looks like M&A.
So like the number one priority use of that capital.
So I.
I had a question on the 36600 e-commerce units could.
Could you just baseline us on like how would you define that transaction as it.
Is it a few parts of the transaction being done online or.
One part online just curious on just the comparable maybe where some of your peers. So Roger and I apologize to everyone. This is something that we just assumed was part of our business and when we did the design six years ago, we were at about a 5% to 6% of our total volume.
At that time and it has since grown through our own proprietary solutions or partners like roadster and more modal that provide end to end solutions.
But the way that we're looking at this is that digital funnel engagement that created a sale okay. Much like what we do and driveway or much.
Like.
Any of our e-commerce retail competitors do we just had discounted it instead.
It's just part of our business when it's really not it is a digital E Commerce channel. Its just not aggregated under one umbrella like it is under driveway. So it's all e-commerce business.
In the 300, local and regional brands as well as the Lithia direct brand.
Got it but the consumer is not necessarily doing the full transaction online. There is just more just.
Getting below grade electric car, yeah, Roger let's remember this okay the consumers.
At our competitors that are e-commerce retailers are not either or they wouldn't need 13000 employees to be able to sell those cars. So you'll remember the final efficacy were seeing 7% of our consumers in driveway that are happy path to remember that stay within the technology the whole way.
<unk> and that's 100% savvy ecommerce solution. Okay. So keep that in mind remember this also that because of this equity a lot of transactions are.
Require human involvement whether it's through chat or whether it's through email or phone calls to be able to do.
Through.
Sure sure if anyone would like.
Some of the driveway.
Numbers as a comparison to our traditional lithia channels.
Got it.
One last one on the 15% approval ability for financing.
It seems a little below.
<unk>.
We're still love you walk from from other peers, maybe it is not like for like about.
What's the customer credit mix that Youre seeing there is that something that's coming in the way also.
And can drive these line items.
Reduced direction or just help increase that probability rate sure.
Do that I'm not sure if theres, a difference between 15% approval rate and and 7% actually buy rate, okay, meaning that consumers actually carry forward with the approval that was given them. Okay. So keep that in mind I don't want to confuse any any any one there.
In terms of our.
So Ron efficacy and driveway, we are seeing that the average consumer and I would also.
Comment a little bit on driveway financials influence in just a second but the driveway consumer is averaging exactly 50 points lower on their FICO scores. So there are 671 versus a seven two.
<unk> and Lithia, but I would credit that primarily to new car customers. Okay that is a difference that most consumers believe or have the financial wherewithal to be able to buy new okay, which will have a higher credit spectrum. Okay.
We also we did finance a higher percentage of customers and driveway.
<unk> at 75% and only financed 60, 67% of Lithia customers. So there is a little bit of a difference there now in terms of what we would call our golden ratio that we talk about all the time.
We do notice is there is a difference and when we get to the ABS market and the.
Next few months it could allow us to portfolio land, okay, and that basically means that youre lending at not a one to one lending meaning you have standards that you lend on and that individual customer has to meet that standard or not and if theyre not above it they don't get they don't get approved okay.
So what some of our competitors do is what's called portfolio lending mean that meaning that if they got three customers in a row that we're above the standard and this is just an example of for customers and one that was below that standard that one other customer gets approved okay, and thats called portfolio lending, where your broad based lender.
Okay, we don't technically do that today at driveway financial but we're building the API and the software it's one of our two major.
Roadmap initiatives on the technology that will require some back end fund linked to specific lenders or if we choose to keep that loan directly in the driveway.
<unk> financial will have the ability to do that but it is something that does allow the final efficacy from finance <unk> ability to be improved at a pretty dramatic pace.
Now remember Roger you have 30 lenders that are API, but remember it's a one to one lending so you still have.
<unk> lemma, Okay. I will also say this there's a different way that people seem to count, okay, and what youre getting is pretty raw numbers from us as to how we would look at it in an equitable way from a traditional retailer standpoint, like we do at the Lithia business that your typical traditionally used to.
That don't understood great. Thanks for all the color and good luck.
Thanks Roger.
Our next question is from Nick Jones with Citigroup. Please proceed.
Great. Thanks for taking the questions I guess.
Take care.
Picture view here of a bigger picture question.
Yeah.
You've talked about wanting to be around 100 miles from all U S. Shoppers once you kind of build out that footprint.
How should we be thinking about consolidation from there I mean, how are you thinking about the strategy of consolidating.
Government, which you kind of touched on earlier that like top 10, maybe a 10% share. So once you have the footprint is there capacity across.
Ross.
Just kind of across your footprint to increase volume.
They continue to take share and I guess more broadly do you think this can consolidate like maybe like auto insurance or top 10 or closer to.
70 or 80%.
Yeah.
Sure Nick this is Bryan.
And so.
So I would say that the 100 miles is important to us because of the lifecycle of the interactions with your consumers, let's remember that.
When we think about the 500 locations in the country that gets us to about three and a half to.
<unk>, new car market share, but we believe that with wonderful customer offerings that are providing solutions, where when and how consumers choose that that could be expanded now I would also make this comment that our ability to get much past I would say, 10% of U S market share.
<unk>.
Is a little bit restricted by our manufacturer partnerships, which many have a 5% to 7% of their national footprint and then if you assume that you could get two times the throughput through that through those existing stores. Then you can get somewhere a little bit north of 10.
10% remember, Ben and all both new and used.
Vehicles in new or they are allocated okay. So they do manufacturers do control, it's not like you're Greenfield ing like an insurance business, where the top 10 could get to 80% of the country now if each one of them.
Got to 10% in theory, yes, but I don't believe that the marketplace is that unified.
Could ever really do that okay. Remember also on the used car side. Its all about inventory procurement and those that are further up funnel and have lower cost reconditioning are going to be the ones that are able to capture more.
Scar market those kind of go hand in hand to some extent, so I could see a day, where the top 10 or 20% to 30%, but remember that ability to get there with the manufacturers is all dependent upon performance and relationship with those manufacturers.
It's probably fair to say that.
There's two or three of our peer group that actually are looking at that relationship is long term, okay and as collaborative by what they buy and yield performance levels that are in step in stride with those manufacturer partners.
Got it and then I guess, maybe a follow up as soon as you kind of get towards that.
More you'd have a being around 100 miles for every consumer then kind of M&A slow then presumably there's a lot more investment and driveway in kind of a D to C.
Our approach is that the right way to think about what will happen or all kind of naturally yes, Nick let me, let me share that obviously the adjacencies domestically can take.
Take some of the capital, but part of its strategy on Canada was to start planning seeds that you could now move internationally to be able to deploy capital as well more importantly than that we believe that there is opportunities to overlay our digital e-commerce strategies.
As well as our underlying network strategy enter into two will mobility in the tractor trailer mobility and into farming mobility. So as we begin to grow domestically, that's where you would have the same type of disciplines that are in automotive retail, which is the most proactive in terms of customer.
Our ability okay could be overlaid into those three other industries at some point as well and I think youll see us start to plant seeds in those areas domestically because they are based off the same for business strategy, which is new vehicles disposing of the used vehicle through year network, Okay, and then having the service.
Does that Ian parts operations much like what we have in new vehicle sales.
Great. Thanks for taking the questions.
Thanks.
Our next question is from Bret Jordan with Jefferies. Please proceed.
Good morning, guys.
Hi, Brett.
Are responding any manufacturer pushback at all on the consolidation obviously, you've done a lot. Some of your peers are ramping it up is there any conversation as far as or any.
We're a complicated conversation involved in the transfer of franchises.
No there really hasnt been a change I think.
Because most of our relationships with our manufacturers are contractual win what's called a framework agreement that as long as you achieve their performance standards you have the ability to grow to a certain level. So I don't really see that as an impediment.
And.
To us or to others if they.
Maybe just to get their performance to a level, that's broad enough to be able to buy multiple brands, okay, which is usually the hang up when youre buying large groups.
Okay, and then of course the question on the structural profitability change and you talked about.
Historic New Gpus little under 10.
Yes.
Theyre able to promote from a labor model.
Is there anything that sort of when you think about going forward in a normal sort of post.
2021 environment is the new GPU.
A couple of hundred 200 basis points higher forever or do we in a cyclical slowdown go back to the old profit levels.
So.
So I want to define that in the 2025 plan, it's very clearly that it goes back to old profit levels, but we will be updating that in the coming quarter. Okay. In February to April Okay, and I can give you a little color in some of the areas. There may be margin expansion, we probably won't predict.
<unk> margin expansion, even though today.
The negotiation free or fixed price model are generating approximately $600 higher sale prices, then post negotiated prices of negotiated dealers, which makes up 98% of the transactions.
Okay. So there is a case that could be made but I believe and I think our team believes that as the world becomes more transparent and more business is transacted.
Through e-commerce, Okay that pricing becomes more transparent with that which ultimately that gap will most likely go away.
Now if we're able to compete and buy cars at a lower price and recondition those logistically closer to our customers than there are ways to be able to expand margins and we'll be able to give you more color on that but hopefully that gives you a tidbit of information Chris did you have something to add to that just as a call.
Net our own team is that historically prior to these margin levels, our top 25% of our dealers are running at SG&A levels at where we're seeing things today on average so I think that our expectation is that as we continue to see margins returned to normalized levels, our focus on personnel marketing and leveraging our facilities.
To maintain this level of profitability is something that we've called out 65% is kind of our midterm goal, but obviously, we'd like to see it better than that longer term.
Okay, Great and then just a data point I think in past calls we've talked about the geographic reach of driveway, how far our customers are buying.
Do you have that number for the third quarter I do.
Due in fact, it's one mile further than it was last quarter. It's 931 miles was the average distance. The average shipping fee was actually a little bit higher was $5 76 versus $5 61 last year and I would say that that continues to grow so long as there's shortages.
<unk> in new and used inventory, okay, because and it's something that we're really thinking about is there as inventories start to build back does that reach start to shrink a little bit again.
One other piece of information that we do provide is that incrementally new customers to lithia and driveway.
It did.
It did drop one percentage point down to 96 from the 97 eight.
Last quarter and the quarter before that was actually 95, so it's back to where Q1 was.
Which we're really pleased and I think thats, an important notation between our lithia ecommerce.
<unk> business that has a good portion of repeat business. Our driveway was specifically designed to get incrementally new customers and thats holding strong even as we spread our wings and start to overlap with consumers that we've already touched once before so it truly is a new customer that is either.
We're meeting financial assistance.
In getting the vehicle the correct vehicle for them or consumer that's looking for more of a tech type of experience that they are empowered it's transparent and the convenience of the in home delivery.
Great. Thank you.
You bet Brett Thanks for the questions.
Our next question is from Ali <unk> with Guggenheim. Please proceed.
Good morning, it's all leaf augers from Guggenheim. Thanks for squeezing me in.
Hi Ali.
So I just wanted to confirm I got all the M&A numbers correct. So you have $1 5 billion in M&A under contract I'll likely close imminently.
It sounds like $6 billion, you think you can acquire some time maybe over the next two to four quarters and then a total pipeline of about $12 billion do I have all those numbers correct.
You do other than the $6 billion I don't know that that's we said that we have $1 $7 billion in capital.
That could.
<unk> acquired $6 billion. So we're not giving the forward looking as much anymore. Other than we believe that we need to add 20% to 22 billion in aggregate since the start of July last year, okay to be able to achieve that network coverage of 100 now I would give you confidence that the 6 billion.
<unk> is probably fairly reticent like in the $12 billion Theres enough deals and if you add the two large deals from our peers to the $12 billion, it's more than the $15 billion. So we added almost $3 billion in the quarter to that to that pipeline to get.
12 billion, which means the market is hyperactive theres. Good deals that are priced out there that either have opportunities or their earnings are similar to COVID-19 levels in many of the parts of the country. If they've had personnel problems of those type of things and I think we're always kind of looking for that diamond in the rough to be able to maintain.
That that 15% after tax return that we have.
So eloquently accomplished over the last couple of decades.
Great that makes a lot of sense and then just as a follow up here on your driveway you talked about 40000 shop and sell units next year is the right way to think about that as the majority of that is incremental to your used car business.
Because I think it implies roughly a 10% to your used car volumes next year. So just trying to make sure kind of how you think about those 40000 transactions.
Sure I think you can assume that.
The cell to saw sharp ratio was about $2 two to one that we're assuming.
And of the.
The shop portion those units will be about I'd assume 90% to 95% new incremental customers.
Chris did you have something to add on that okay.
Okay.
Thanks Sally.
Our next question is from David Whiston with Morningstar. Please proceed.
Hi, Thanks, good morning.
Looking at the.
GPU between new and used.
New was up.
It will be sent on a same store basis and 7% for us obviously at the time of Green Imbalanced, but was there also maybe a conscious decision on your part on unused pricing or is it you just are more competitive.
To understand the gap there.
Yeah. Good morning, David This is Chris I mean going back to our operating.
<unk> model where are we.
Engaging and expect each of our stores to make independent market decisions, it's kind of hard to generically just answer that we did something specifically from corporate on pricing I mean, each of our stores is reacting to the local market conditions that they are seeing and I think across the country. We're seeing obviously.
Good margins in new and used and obviously you know a scarcity of new car and volume kind of driven more by domestic and luxury but.
Overall those decisions are made at the local level and we expect that to continue.
Okay and on <unk>.
A two part question on on inventory.
Inventory procurement, but you're talking about 74% of your your inventory coming from consumers.
Is there some extra advertising push that youre doing to get that high of a ratio on driveway, specifically, how do you ensure that driveway.
Good luck with the mostly undesirable inventory that the stores don't wants.
So two things, let's remember that driveway inventory is the stores inventory that they leverage each other so that they would never get left with inventory that they do not want.
In terms of our ability to procure cars through the three customer channels that primarily comes from our.
Our ability to buy cars in the valuations that we provide so we don't specifically market in our traditional channel we do specifically market in our driveway channel in fact mid quarter, we had actually curtailed the valuations that we were giving on trades and it affected our our sale to shop.
<unk> ratio lightly okay, and we've now.
I think caught up with everyone else assuming that.
The last quarter of the year and early into the first quarter there is price.
<unk> that typically happen this time seasonally and we're obviously being sensitive to the supply as well to be able to do.
That so we did adjust those pricing algorithms, our valuation algorithms on our sale and driveway, which does give some guidance into the field as well.
Okay and finally.
So fair to say a few months ago earlier this year.
When consumers.
They are coming in now, especially if they want a new vehicle are they.
More willing to go use and they were a few months ago or are they more perhaps the other way more sovereign and saying I'm just going to wait for the chip shortage to end and they walk out.
So we're very fortunate that we do have visibility into our pipeline.
Especially with the domestic manufacturers, where those cars are spoken for up to 90% to 120 days in advance. So that pipeline is full in terms of the transition from a new vehicle to a used vehicle or used vehicle to a new vehicle again as Chris said, that's an individual decision.
The individual consumer when we look at it in driveway, we do have those discussions with consumers because obviously, a new vehicle has more margin and it typically which you can see from our Gpus that does help you deal with finance ability on our consumer and ultimately as driveway reaches.
Binal scale by end of next year and that type of framework, we will be converting consumers from used to new but at the current time, our technology isn't able to do that but should be able to by end of year early next year as we've disclosed in the past.
Okay. Thank you.
Nash.
The MP, David and then a question and answer session I would like to turn the conference back over to management for closing comments.
Thank you Sherri I would make this comment hold on we're just getting started.
And again, thank you for joining us today, and we look forward to updating you on lithium driveways fourth quarter results in February.
And also a little update on the 50 50 plan. Thanks al.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
February.
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Sure.
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Okay.