Q4 2021 Lithia Motors Inc Earnings Call

Good morning, and welcome to the Lithia and driveway fourth quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1: Good morning and welcome to the Lithia and Driveway fourth quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

I'll now turn the call over to Jack <unk> Director of S. P. N. A please go ahead.

Speaker 1: I'll now turn the call over to Jack Evert, Director of FP&A. Please go ahead.

Presenting today are Bryan Deboer, President and CEO , Chris Hoelscher, Executive Vice President and C. O O Tina Miller, Senior Vice President and CFO , and Chuck Lietz, Vice President of Driveway Finance Corporation.

Speaker 2: Thank you. Presenting today are Brian DeBoer, President and CEO , Chris Hulschute, Executive Vice President and COO, Tina Miller, Senior Vice President and CFO , and Chuck Leitz, Vice President of Driveway Finance Corporation.

Today's discussions 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.

Speaker 2: Today's discussions may include statements about future events, financial projections, and expectations about the company's products, markets, and growth. Such statements are forthcoming and subject to risks and uncertainties that could cause actual results to differ materially from the...

Speaker 2: We disclose those risks and uncertainties we deem to be material in our filings with the securities and exchange.

Deem to be material in our filings with the Securities Exchange Commission.

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.

Speaker 2: urge you to carefully consider these disclosures and not to place undue reliance on forward-looking

Speaker 2: We undertake no duty to update any forward-looking statements which are made of as of the date of this.

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 Lithia Investor Relations Dot com, highlighting our fourth quarter results with that I would like to turn the call.

Speaker 2: Our results discussed today include references to non-GAAP financial...

Speaker 2: Please refer to the text of today's press release for reconciliation to comparable gaps.

Speaker 2: We have also posted an updated investor presentation on our website, lithiainvestorelations.com, providing our fourth quarter results.

Over to Bryan Deboer, President and CEO .

Speaker 2: With that, I would like to turn the call over to Brian DeBoer, President and CEO of

Thank you Jack good morning, and welcome everyone.

Speaker 2: Thank you, Jack. Good morning and welcome everyone. Earlier today we reported the highest adjusted fourth quarter EPS in company history at $11.39 per share, 109% increase over last year. Our full year adjusted EPS was also a record, coming in at $40.03, 120% increase over last year is $18.19 per share.

Earlier today, we reported the highest adjusted fourth quarter EPS in company history at $11 39 per share a 109% increase over last year, our full year. Adjusted EPS was also a record coming in at $40 and three.

120% increase over last years $18 19 per share.

Record annual revenues of $22 $8 billion were driven by contributions from acquired businesses are growing ecommerce platform and successful navigation of the supply and demand environment.

Speaker 2: Record annual revenues of $22.8 billion were driven by contributions from acquired businesses, our growing ecommerce platform, and successful navigation of the supply and demand environment.

SG&A as a percentage of gross profit decreased to 57, 2% 730 basis points better than last year, resulting in us generating over $1 $8 billion in adjusted EBITDA for the year.

Speaker 2: SG&A as a percentage of gross profit decreased to 57.2%, 730 basis points better than last year resulting in us generating over $1.8 billion in adjusted EBITDA for the year.

Given the higher than expected EBITDA generated in our M&A cadence since the launch of the plan. We are excited to provide an updated 2025 plan and our vision of the future state for lithium driveway.

Speaker 2: Given the higher than expected EBITDA generated, and our M&A cadence since the launch of the plan, we are excited to provide an updated 2025 plan, and our vision of the future state for lithium driveway.

18 months ago, we launched our plan to grow from just under $13 billion in revenue and $12 in EPS to <unk> $50 billion in revenue and $50 in EPS.

Speaker 2: 18 months ago we launched our plan to grow from just under $13 billion in revenue and $12 in EPS to $50 billion in revenue and $50 in EPS.

The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.

Speaker 2: The transformation of our company into a diversified Omni-channel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.

Today, we are eclipsing our initial plan and seeing early returns from leveraging our scale adjacencies data and growing network.

Speaker 2: Today we are equipsing our initial plan and seeing early returns from leveraging our scale, adjacencies, data and growing network.

Through these efforts we are dealing king the historical relationship of each billion dollars of revenue producing only one dollar of EPS as follows.

Speaker 2: Through these efforts, we are delinking the historical relationship of each billion dollars of revenue producing only one dollar of EPS as follows.

We just completed a year, where despite inventory constraints, we generated nearly $23 billion in revenue and earned $40 in EPS, including a full year of performance from 2021 acquisitions, our annual run rate is well beyond $25 billion in revenue.

Speaker 2: We just completed a year where despite inventory constraints, we generated nearly $23 billion in revenue and earned $40 an EPS.

Speaker 2: including a full year of performance from 2021 acquisitions, our annual run rate is well beyond $25 billion in revenue.

Next we have acquired businesses that will contribute $11 1 billion in annualized steady state revenues and entered the Canadian market, our physical footprint now reaches 95% of consumers within a 250 mile radius.

Speaker 2: Next, we have acquired businesses that will contribute $11.1 billion in annualized steady-state revenues and entered the Canadian market. Our physical footprint now reaches 95% of consumers within a 250-mile radius.

In January the 13th month since the inception of driveway, we achieved over 2000 transactions.

Speaker 2: In January , the 13th month since the inception of Driveway, we achieved over 2,000 transactions.

In addition, 28000 of our Lithia channel sales in Q4 with E Commerce, representing a combined annual revenue run rate of $6 billion in Lat E Commerce revenues.

Speaker 2: In addition, 28,000 of Arlythia Channel sales in Q4 were e-commerce, representing a combined annual revenue run rate of $6 billion in LAD e-commerce revenue.

Driveway finance or Dfc portfolio stands at over $700 million as of December 31.

Speaker 2: Drive-Wave Finance or DFC's portfolio stands at over $700 million as of December 31st.

When we reached $50 billion in revenue in 2025, we now believe that every billion dollars in revenue will produce $1 10 to $1 20 in EPS or <unk> 55 to $60 in EPS.

Speaker 2: When we reach $50 billion in revenue in 2025, we now believe that every billion dollars in revenue will produce $1.10 to $1.20 in EPS or $55 to $60 in EPS.

The increased profit target considers the following factors.

Speaker 2: The increased profit target considers the following factors.

Sales volumes reflect a blended two 5% new and used vehicle U S market share next continued investment to scale driveway and Green cars is included.

Speaker 2: Sales volumes reflect a blended 2.5% new and used vehicle US market share. Next, continued investment to scale driveway and green cars is included.

Total vehicle Gpus, returning to pre pandemic levels.

Speaker 2: Total vehicle GPUs returning to pre-pandemic level.

Improvements in personnel productivity increased leverage of our underutilized network and economies of scale in marketing from National brand awareness driving SG&A as a percentage of gross profit towards 60%.

Speaker 2: improvements in personnel productivity, increased leverage of our underutilized network, and economies of scale and marketing from national brand awareness, driving SG&A as a percentage of gross profit towards 60%.

Coring, a further $9 billion to $10 billion in annual revenues to complete the build out of our North American footprint afford a 500 locations. We do not expect any further equity capital raises meaning no further dilution of EPS.

Speaker 2: acquiring a further $9 to $10 billion in annual revenues to complete the build out of our North American footprint of 400 to 500 locations. We do not expect any further equity capital raises, meaning no further dilution of EPS.

Next an investment grade rating and utilization of free cash flows for M&A and internal investment driving deep decrease borrowing costs.

Speaker 2: Next, an investment grade rating and utilization of free cash flows for M&A and internal investment driving decrease borrowing costs.

<unk> ability and headroom in capital allocation for share buybacks in the event of valuation disconnect continued drag on Dfc profitability due to building of C. So reserves as we scale from our current penetration rate of approximately 4% to a targeted 15% and finally earn.

Speaker 2: Flexibility and headroom and capital allocation for share buybacks in the event evaluation disconnect.

Speaker 2: Continued drag on DSC's profitability due to building of Cecil reserves as we scale from our current penetration rate of approximately 4% to a targeted 15%.

<unk> benefits from Adjacencies with higher pre tax margins that also carry structurally lower SG&A costs.

Speaker 2: And finally, early benefits from adjacencies with higher pretext margins that also carry structurally lower SGNA.

Given that the contributions from new businesses will still be in gross stages in 2025 as such the above outlined doesn't fully extrapolate our EPS potential as such we are also providing insights into our longer term future state that reflects the contributions from.

Speaker 2: Given that the contributions from new businesses will still be in gross stages in 2025, as such, the above outline doesn't fully extrapolate our EPS potential.

Speaker 2: As such, we are also providing insights into a longer term future state that reflects the contributions from these factors at maturity along with other known adjacent.

These factors at maturity along with other known Adjacencies.

Marrying those benefits on to the $50 billion in revenue base attained at the completion of the 2025 plan and growing towards 5% U S market share, we see opportunity for each billion dollars of revenue to produce up to $2 in EPS.

Speaker 2: Luring those benefits on to the $50 billion in revenue base, attained at the completion of the 2025 plan, and growing towards 5% U.S. market share, we see opportunity for each billion dollars of revenue to produce up to $2 in EPS.

Our future state contemplates the following additional drivers.

Speaker 2: Our future state contemplates the following additional driver.

Up to 20% of units are financed with DSC and there is no headwind from recording the sea. So reserves outpacing the recognition of interest income.

Speaker 2: Up to 20% of units are financed with DFC, and there is no headwind from recording the Cecil reserves outpacing the recognition of interest income.

Our cost structure is optimized to below 50% SG&A as a percentage of gross profit and finally, our horizontals such as fleet and lease management consumer insurance and new verticals are further developed please take a few minutes and review our new slide deck.

Speaker 2: Our cost structure is optimized to below 50% S-GNA as a percentage of gross profit. And finally, our horizontal such as fleeting lease management, consumer insurance, and new verticals are further developed.

Speaker 2: Please take a few minutes and review our new slide deck and our website.

Our web site.

More specifically slide 10, now provides a glimpse into how lab will look in 2025 and beyond.

Speaker 2: More specifically, slide 10 now provides a glimpse into how Lad will look in 2025 and beyond.

We have also refreshed the timeline competitive advantages and new market information slides in the appendices.

Speaker 2: We have also refreshed the timeline, competitive advantages, and new market information slides in the appendices.

Turning to acquisitions, it's important to emphasize the synergistic relationship between our expanding physical network driveway and Adjacencies like Dfc in more in.

Speaker 2: Turning to acquisitions. It's important to emphasize the synergistic relationship between our expanding physical network, driveway, and adjacencies like DFC and more.

In addition to being cash flow positive and highly accretive to EPS at inception acquired businesses support driveways in home solutions, enabling faster delivery after sales experiences quicker turnaround times for reconditioning, lower logistics costs, and a higher proportion of sales with no <unk>.

Speaker 2: In addition to being cash flow positive, and highly accretive to EPS at inception, acquired businesses support driveways in home solutions, enabling faster delivery, after sales experiences, quicker turnaround times for reconditioning, lower logistics costs, and a higher proportion of sales with no shipping.

Shipping fees.

In addition to these competitive advantages acquired businesses also expand the base from which Dfc originates loans accelerating its growth.

Speaker 2: In addition to these competitive advantages, acquired businesses also expand the base from which DFC originates loans, accelerating its growth.

Together these create services experiences and lasting brand impressions throughout the vehicle ownership lifecycle.

Speaker 2: Together, these create services, experiences, and lasting brand impressions throughout the vehicle ownership life site.

Since the end of the third quarter, we have completed acquisitions that are expected to generate $1 $4 billion in annualized revenues, adding critical density to the north Central region three in the South East region six.

Speaker 2: Since the end of the third quarter, we have completed acquisitions that are expected to generate $1.4 billion in annualized revenues, adding critical density to the North Central Region 3 and the Southeast Region 6.

Looking forward, we have $1 $1 billion in annualized revenue under contract or LOI.

Speaker 2: Looking forward, we have $1.1 billion in annualized revenue under contract or L.O.I.

In addition, our active deal pipeline has grown to over $13 billion we.

Speaker 2: In addition, our active deal pipeline has grown to over 13 billion.

We remain confident in our ability to find deals that build out our physical network.

Speaker 2: We remain confident in our ability to find deals that build out our physical network.

And that are priced at 15% to 30% of revenues or three to seven times EBITDA.

Speaker 2: and that are priced at 15 to 30% of revenues or three to seven times EBITDA.

This discipline ensures that we will meet our after tax return threshold of 15% in a post pandemic profit environment.

Speaker 2: This discipline ensures that we will meet our after-tax return threshold of 15% in a post-pandemic profit environment.

Ladder is known in the industry as the buyer of choice due to smooth manufacturer approve ability timely confidential and certain completion of transactions and retaining over 95% of its employees.

Speaker 2: LAD is known in the industry as the buyer of choice, due to smooth manufacturer approbability, timely confidential and certain completion of transactions, and retaining over 95% of its employees.

Last month, we shared the driveway had significantly outperformance December volume target by 32% with <unk> hundred 50 transactions.

Speaker 2: Last month we shared the driveway had significantly outperformance December volume target by 32% with 1,650 transactions.

This momentum continued into January with over 2000 transactions.

Speaker 2: This momentum continued into January with over 2,000 transactions, taking us one step closer to our 2022 target of over 40,000 transactions or an estimated $1 billion in rent.

Taking us one step closer to our 2022 target of over 40000 transactions or an estimated $1 billion in revenue.

With a little over a year since driveway entered the marketplace. We are excited with the positive response, it's receiving from consumers the growing brand awareness and how it is expanding our reach beyond the local markets in which our Lithia channel operates.

Speaker 2: With a little over a year since driveway entered the marketplace, we are excited with the positive response it's receiving from consumers, the growing brand awareness, and how it is expanding our reach beyond the local markets in which our Lithia channel operates.

Over 97% of our transactions were incremental to lithia or driveway and have never trend transacted with us in the past 15 years.

Speaker 2: Over 97% of our transactions were incremental to Lithia or driveway and have never transacted with us in the past 15 years.

In addition, our average shipping distance was 932 miles, though we believe once the network is fully built out and inventories returned to normal shipping distances will be meaningfully less.

Speaker 2: In addition, our average shipping distance was 932 miles, though we believe once the network is fully built out, and inventory returns a normal shipping distances will be meaningfully less.

We continue to learn and improve and add new functionality to drive away dotcom earlier.

Speaker 2: We continue to learn, improve, and add new functionality to driveway.com.

Earlier this year, we launched our fully proprietary new car platform and a more robust finance prequalification module, well done George and team on the used vehicle side. Our technology is now more advanced or at parity with our e-commerce peers that have been in the market significantly longer.

Speaker 2: Earlier this year, we launched our fully proprietary new car platform and a more robust finance pre-qualification module. Well done, Georgian team. On the youth vehicle side, our technology is now more advanced or at parity with our e-commerce peers that have been in the market significantly longer. These new features will enable us to increase our conversion rates by further expanding our consumer optionality.

These new features will enable us to increase our conversion rates by further expanding our consumer optionality.

Driveway continues to provide shop in sale functionality and in home delivery to every part of our country.

Speaker 2: The driveway continues to provide shop and sell functionality and in home delivery to every part of our country.

During the quarter, our marketing expanded to another nine markets located in regions foreign six now totaling 19 markets and reaching 27% of the U S population.

Speaker 2: During the quarter, our marketing expanded to another nine markets, located in regions four and six, now totaling 19 markets, and reaching 27% of the U.S. population. While continuing to expand budgets in key markets, we recently launched our first nationwide advertising campaign on sports radio, laying the groundwork for the full rollout of nationwide advertising as the year progressed.

Continuing to expand budgets in key markets. We recently launched our first nationwide advertising campaign on sports radio laying the groundwork for the full rollout of nationwide advertising as the year progresses.

Our team is laser focused on targeting advertising spend increasing conversion rates and improving performance in our three driveway care centers for.

Speaker 2: Our team is laser focused on targeting advertising spend, increasing conversion rates, and improving performance in our three driveway care centers.

For 2022, the expected $1 billion in revenues contributed by driveway represents the amount generated from shop transactions.

Speaker 2: For 2022, the expected $1 billion in revenues contributed by driveway represents the amount generated from shop transactions along with the revenue associated with the subsequent retailing or wholesaling of vehicles procured by driveway.

Along with the revenue associated with the subsequent retailing or wholesaling of vehicles procured by driveway.

This reflects similar revenue recognition to our e-commerce used only peers.

Speaker 2: This reflects similar revenue recognition to our e-commerce used only peers.

Driveway finance or Dfc is the adjacency that that is the most mature and has the potential to massively disconnect revenue and EPS.

Speaker 2: Driveway Finance or DFC is the adjacency that is the most mature and has the potential to massively disconnect revenue and EPS.

<unk>, our vice President of Dfc with decades of executive level experience in this space has overseen the development and expansion of DSC since early 2019.

Speaker 2: Chuck Leitz, our Vice President of DFC, with decades of executive level experience in this space, has overseen the development and expansion of DFC since early 2019.

Under his leadership, we completed the inaugural offering and today have grown the dfc portfolio to nearly three quarters of a $1 billion.

Speaker 2: Under his leadership, we completed the inaugural offering and today have grown the DSC portfolio to nearly three quarters of a billion dollars.

<unk> joins us today on the call and will be providing additional insights on dsc's performance in just a moment before closing I want to briefly touch on electrification and potential feature future evolution of the current industry sales model.

Speaker 2: Chuck joins us today on the call and we'll be providing additional insights on DSC's performance in just a moment. Before closing, I want to briefly touch on electrification and potential future evolution of the current industry sales model. We are excited and will continue to lead the future move to sustainable transportation and more seamless and convenient ownership experiences.

We are excited and we will continue to lead the future move to sustainable transportation and more seamless and convenient ownership experiences first lad believes that sustainable vehicles are the future and at educating consumers to drive greater adoption is not just good for our business.

Speaker 2: First, Lad believes that sustainable vehicles are the future and that educating consumers to drive greater adoption is not just good for our business, it's good for our planet.

It's good for our planet.

To that end in 2019, we launched green cars Dot com, the leading educational site and marketplace for consumers to research the <unk>.

Speaker 2: To that end in 2019, we launched GreenCars.com, the leading educational site and marketplace for consumers to research the environmental benefits, performance and affordability of sustainable vehicles. During 2022, we will be further upgrading and powering up the GreenCars marketplace with driveways, industry leading proprietary, new and used technology.

Environmental benefits performance and affordability of sustainable vehicles. During 2022, we will be further upgrading and powering up the green cars marketplace with driveways industry, leading proprietary new and used technology.

This will be supported by a 20 fold increase in our marketing spend to champion education about sustainable vehicle ownership in.

Speaker 2: This will be supported by a 20-fold increase in our marketing spend to champion education about sustainable vehicle ownership. In addition, our early learnings have shown that these affinity buyers convert at a higher rate and cost about half the amount of our other e-commerce leads.

In addition, our early learnings have shown that these affinity buyers convert at a higher rate and cost about half the amount of our other e-commerce leads.

Moving on to after sales sustainable vehicles appear to have lower repair and maintenance needs than comparable ice vehicles through their first seven to 10 years of ownership.

Speaker 2: Moving on to after sales, sustainable vehicles appear to have lower repair and maintenance needs than comparable ice vehicles through their first seven to ten years of ownership. Now that we are approaching the expected battery replacement windows, for Gen 1, the EV and PHEVs, ultimate affordability will become much clearer.

Now that we are approaching the expected battery replacement windows for Gen. One <unk> and <unk> ultimate affordability will become much clear today.

Today, there is still limited data on battery replacement and the impact it will have on total ownership cost residuals or even salvage values.

Speaker 2: Today, there is still limited data on battery replacement and the impact it will have on total ownership cost, residuals, or even salvage value.

Combined with income streams from battery replacements and reconditioning.

Speaker 2: Combined with income streams from battery replacements and reconditioning, LADS in-home service offerings, proprietary diagnostic service equipment and expanded customer retention through longer warranty periods on sustainable vehicles, will enable us to both retain and conquest business from third party after sales competitor.

<unk> in home service offerings proprietary diagnostic service equipment and expanded customer retention through longer warranty periods on sustainable vehicles will enable us to both retain and conquest business from third party after sales competitors.

Second franchise laws are determined state by state and are an integral part of the U S economy. They establish a framework not just for dealers, but for franchise ores and franchisees in many industries not just mobility.

Speaker 2: Second, franchise laws are determined state by state and are an integral part of the U.S. economy. They establish a framework not just for dealers, but for franchiseors and franchisees in many industries, not just mobility.

Though we believe we could benefit from the removal of franchise laws, we view the models future evolution being driven by removing friction and creating a more seamless experience from build to drive ways for consumers.

Speaker 2: Though we believe we could benefit from the removal of franchise laws, we view the model's future evolution being driven by removing friction and creating a more seamless experience from build-to-drive ways for consumers.

The design thesis of our 2025 plan was built on providing consumer optionality and diversifying lab, so that it thrives in any environment.

Speaker 2: The design thesis of our 2025 plan was built on providing consumer optionality and diversifying lad so that it thrives in any environment.

In closing our company is just beginning to leverage the benefits of the massive customer data, we possess and proprietary technology growing adjacency and what's possible with our Nash National network and branding.

Speaker 2: In closing, our company is just beginning to leverage the benefits of the massive customer data we possess and proprietary technology, growing adjacency, and what's possible with a national network and branding.

Unlike other retail sectors automotive retail is totally on consolidated in our 2025 plan is the first to activate the potential of these various components and integrate them into a cohesive holistic dynamic and transformative customer experience and business.

Speaker 2: Unlike other retail sectors, automotive retail is totally unconsolidated and our 2025 plan is the first to activate the potential of these various components and integrate them into a cohesive, holistic, dynamic, and transformative customer experience and business model.

Model.

Ladd has a track record of exceeding targets through strong execution in any environment as demonstrated in the 18 months since the launch of its 2025 plan. The 25 years since becoming a high growth public company and our 75 year history since our inception here in southern.

Speaker 2: LAD has a track record of exceeding targets through strong execution in any environment, has demonstrated in the 18 months since the launch of its 2025 plan, the 25 years since becoming a high growth public company, and our 75 year history since our inception here in Southern Oregon.

Oregon.

Delighting, our customers and responding to evolving trends, while growing revenue and profitability is in our DNA and the next few years and those beyond 2025 will be no different with that I'd like to turn the call over to Chuck Lietz, Our vice president of driveway financial.

Speaker 2: Delighting our customers and responding to evolving trends while growing revenue and profitability is in our DNA. And the next few years and those beyond 2025 will be no different. With that, I'd like to turn the call over to Chuck Leads, our Vice President of Driveway Financial.

Thank you, Brian Dfc's value proposition is to provide a seamless financing options to consumers governed by an internal credit risk appetite designed to maximize our risk adjusted cash flows while minimizing volatility during periods of economic stress.

Speaker 2: Thank you, Brian . DFC's value proposition is to provide seamless financing options to consumers governed by an internal credit risk appetite designed to maximize our risk-adjusted cash flows while minimizing volatility during periods of economic stress.

We are a full credit spectrum lender targeting a near prime portfolio, which we feel appropriately balanced credit risk with the financial spread we earn.

Speaker 2: We are a full credit spectrum lender targeting a near prime portfolio, which we feel appropriately balanced credit risk with the financial spread we earn.

In November of 2021, we completed our inaugural ABS offering and we're excited with the market's reaction and pricing of the deal during 2021 with DSC originated over 21000 loans penetrating approximately 4% of our retail units and in Q4 became labs largest re.

Speaker 2: In November of 2021, we completed our inaugural ABS offering and we're excited with the market's reaction and pricing of the deal. During 2021, we DFC originated over 21,000 loans, penetrating approximately 4% of our retail units, and in Q4 became LADS largest retail lender.

<unk> lender, we plan to become a programmatic ABS issuer going forward, allowing us to balance the growth of the portfolio with capital required in credit risk.

Speaker 2: We plan to become a programmatic ABS issue we're going forward, allowing us to balance the growth of the portfolio with capital required and credit.

Of the loans originated in 2021, the average loan amount was $33000. The average interest rate was 8% and the average FICO score was $6 70.

Speaker 2: Of the loans originated in 2021, the average loan amount was $33,000. The average interest rate was 8%, and the average PICO score was 6.7.

We have adopted the <unk> accounting standards, where we record loan loss reserves upon origination and recognize the interest income over the life of the loan as a result individual loans generally are not accretive to earnings until the second year gift.

Speaker 2: We have adopted the Cecil accounting standards where we record blown loss reserves upon origination and recognize the interest in come over the life of the loan. As a result, individual loans generally are not a creative to earnings until the second year. Given our plan to ramp origination through 2025 and beyond, we'll be growing loss reserves faster than profit.

Given our plan to ramp originations through 2025, and beyond we will be growing loss reserves faster than profits and our future state. However, dfc's contribution is clear assuming a 15% to 20% penetration rate on $1 5 million units sold Dfc could originate between 225.

Speaker 2: In our future state, however, DFC's contribution is clear. Assuming a 15% to 20% penetration rate on 1.5 million units sold, DFC could originate between 225,000 and 300,000 loans and contribute up to $650 million of pre-tax earnings annual.

And 300000 loans and contribute up to $650 million of pre tax earnings annually.

We believe dfc's targeted penetration rates will not impact our relationship with our lending partners.

Speaker 2: We believe DFC's target penetration rate will not impact our relationship with our lending partners. Looking at the future state and DFC...

Looking at the future state in Dfc's contributions Dfc alone has the potential to significantly grow EPS faster than revenue the amount of incremental capital generated by Dfc will enable us to further grow and transform lab in a cost effective manner next I would like to turn the call over to Chris. Thank you check.

Speaker 2: DFC alone has the potential to significantly grow EPS faster than revenue. The amount of incremental capital generated

Speaker 2: We'll enable us to further grow and transform LAD in a cost effective manner. Next, I would like to turn the call of...

We appreciate the job you and your team have done to scale and integrate this adjacency within lab powerful network. This will be a huge compliment to our core business and a massive profit engine for lithia and driveway looking back on the one of the most challenging years ever in automotive retail I'd like to acknowledge and thank the achievements of our 22000 team members. Despite.

Speaker 2: Thank you, Chuck. We appreciate the job you and your team have done to scale and integrate this adjacent to you within the lab's powerful network. This will be a huge complement to our core business and a massive profit engine for Lithia and driveway.

Speaker 2: Looking back on one of the most challenging years ever in automotive retail, I'd like to acknowledge and thank the achievements of our 22,000 team members. Despite the impacts of the pandemic and inventory shortages, the Lithia Channel achieved record levels of profitability and continued to evolve the business to ensure that all customers can buy, sell or service their vehicles wherever, whenever, or however they desire.

The impacts of the pandemic and inventory shortages to Lithia channel achieved record levels of profitability and continue to evolve the business to ensure that all customers can buy sell our service their vehicles wherever whenever and however, they desire. This also enabled the company to significantly outperform our 2021 annual operating plans and <unk>.

Speaker 2: This also enabled the company to significantly outperform our 2021 annual operating plans instead of set us up for another year of high performance in 2022.

Set us up for another year of high performance in 2022.

I also want to congratulate our lab partners group or LPG winners for their exceptional performance in 2021 recognition of an LPG member is a highly coveted award and represents the pinnacle of our mission of growth powered by people that are high performance resides throughout labs. These locations demonstrate a relentless and elevated focus on culture.

Speaker 2: I also want to congratulate our LAD partners group for LPG winners for their exceptional performance in 2021. Recognition of an LPG member is a highly coveted award and represents the pinnacle of our mission of growth powered by people.

Speaker 2: Though high performance resides throughout Lad, these locations demonstrate a relentless and elevated focus on culture, customer experience, and continuous improvement to create the highest level of execution in automotive retail.

Customer experience and continuous improvement to create the highest level of execution and automotive retail looking forward to 2022 and beyond our leaders continue to evolve our business practices to address changing consumer preferences, what we call retail readiness that means upping our game on how we present vehicles in store or online.

Speaker 2: Looking forward to 2022 and beyond, our leaders continue to evolve our business practices to address changing consumer preferences, what we call retail readiness.

Speaker 2: That means upping our game on how we present vehicles in-store or online, how we price and recondition vehicles, and how we use technology to elevate transparency and convenience in the sales and service experience.

How we price and recondition vehicles, and how we use technology to elevate transparency and convenience in the sales and service experience. These actions will drive higher volumes in store and nationwide on driveway increased customer satisfaction and decrease SG&A as a percentage of gross profit.

Speaker 2: These actions will drive higher volumes in storage and nationwide on driveway, increase customer satisfaction, and decrease SGNA as a percentage of gross profits.

New vehicle sales volumes continue to be impacted in the fourth quarter by the current supply demand environment with same store revenues decreasing 8% in volumes decreasing 21% compared to last year consistent with the decrease in national Saar volume declines were offset by higher gross profit per unit, including F&I, which increased 84%.

Speaker 2: New vehicle sales volumes continue to be impacted in the fourth quarter by the current supply-demand environment with same-store revenues decreasing 8% and volumes decreasing 21% compared to last year consistent with the decrease in national SAR. Volume declines were offset by higher gross profit per unit including F&I which increased 84% over last year.

Over last year, our teams excelled in increasing used vehicle volumes to offset the decline in new volumes with same store sales revenues up 39% and volumes up 11% compared to last year used vehicle gross profit per unit, including F&I increased 37% over last year.

Speaker 2: Our teams excelled in increasing used vehicle volumes to offset the decline in new volumes with same store sales revenues of 39% and volumes of 11% compared to last year. Use vehicle gross profit per unit, including F&I, increased 37% over last year.

As of December 31, we had 24 day supply of new vehicles, and a 61 day supply of used vehicles from an inventory.

Speaker 2: As of December 31st, we had 24 days supply of new vehicles and a 61-day supply of used vehicles.

Tori procurement perspective, our store leadership team is taking actions that are within their control for new vehicles. This means increasing our sales velocity and exceeding manufacturer expectations, allowing us to take market share and obtain incremental allocations for used vehicles, it's increasing the proportion of vehicles, we're sourcing directly from the consumer.

Speaker 2: From an inventory procurement perspective, our store leadership team is taking actions that are within their control. For new vehicles, this means increasing our sales velocity and exceeding manufacturer expectations, allowing us to take market share and obtain incremental allocations. For used vehicles, it's increasing the proportion of vehicles resourcing directly from the consumer and vehicles we retail versus wholesale and retain in our network.

And vehicles, we retail versus wholesale and retain in our network for the fourth quarter, we saw a 74% of used vehicles direct from consumers and 26% or from other channels such as auctions other dealers or wholesalers in the fourth quarter, we increased the percentage of vehicles, we source from consumers by 8% earned over 45.

Speaker 2: For the fourth quarter, we saw 74% of used vehicles direct from consumers and 26% were from other channels such as options, other dealers or wholesalers.

Speaker 2: In the fourth quarter, we increased the percentage of vehicles we source from consumers by 8%, earned over $1,400 more in gross profit, and turned them 14 days fast.

Hundred dollars more in gross profit and turn them 14 days faster.

Turning to service body and parts same store revenues grew 12%, which was driven by an 18% increase in customer pay work and a 27% increase in wholesale parts offset by a 9% decline in warranty and a 2% decline in body shops.

Speaker 2: Turning to service body and parts, sink store revenues grew 12%, which was driven by an 18% increase in customer pay work, and a 27% increase in wholesale parts, offset by a 9% decline in warranty, and a 2% decline in body shop.

As consumers return to normal driving habits hold onto vehicles longer while waiting for new vehicle supply to recover we anticipate this positive trend to continue same store SG&A as a percentage of gross profit for the fourth quarter was 58, 2% or 320 basis point improvement over last year. This metric benefited from the incremental <unk>.

Speaker 2: As consumers return to normal driving habits, hold on to vehicles longer while waiting for new vehicles to supply the recover. We anticipate this positive trend to continue.

Speaker 2: Same store SGNA as a percentage of gross profit for the fourth quarter was 58.2%, a 320 basis point improvement over last year. This metric benefited from the incremental throughput of elevated gross profit dollars offset by investment costs to grow driveway and DFC. The $45 million incurred during the quarter are ahead window our SGNA, but lay the foundation for significantly increasing profitability in the future that Brian shared with us.

Put of elevated gross profit dollars offset by investment cost to grow driveway and Dfc the $45 million incurred during the quarter are a headwind to our SG&A, but lay the foundation for significantly increasing profitability in the future that Bryan shared with you in.

In summary, our teams remain hyper focused on executing at the highest level possible in this unusual operating environment, focusing on retail readiness supporting adjacencies and continuing to outperform their local markets and all business lines will translate to continued opportunities to increase leverage and drive additional profitability as expected in our <unk>.

Speaker 2: And summary, our teams remain hyper focused on executing it the highest level possible in this unusual operating environment.

Speaker 2: focusing on retail readiness, supporting adjacencies, and continuing to outperform their local markets in all business lines, will translate to continued opportunities to increase leverage and drive additional profitability as expected in our 2025 plan and beyond. With that, I'd like to turn the call over to Tina.

125 plan and beyond with that I'd like to turn the call over to Tina. Thank you Chris for the quarter, we generated 538 million of adjusted EBITDA, and 118% increase over 2020 and $304 million of free cash flow defined as adjusted EBITDA plus stock based.

Speaker 3: For the quarter, we generated 538 million of adjusted EBITDA, a 118% increase over 2020.

Speaker 3: And 304 million of free cash flows defined as adjusted EBITDA plus stock-based compensation less the following items paid in cash. Interest, income taxes, dividends, and capital expenditures.

<unk> left the following items paid in cash interest income taxes dividends and capital expenditures, we ended the quarter with $1 $5 billion in cash and available credit, which if deployed today with support network growth of up to $6 billion in annualized revenues.

Speaker 3: We ended the quarter with $1.5 billion in cash and available credit, which it's deployed today with support network growth of up to $6 billion in annualized revenues.

Target maintaining leverage between two and three times and remain committed to obtaining an investment grade credit rating, which would be another sizable competitive cost advantage as of quarter end our ratio to net debt of net debt to adjusted EBITDA was 135 times.

Speaker 3: We target maintaining leverage between two and three times and remain committed to obtaining an investment grade credit rating, which would be another sizable competitive cost advantage. As of quarter-end, our ratio to net debt of net debt to adjusted EBITDA was 1.35 times.

Our targets for the deployment of our free cash flow has remained unchanged at 65% toward acquisitions, 25% toward internal investment and driveway and DSC, along with capital expenditures modernization and diversification and 10% towards shareholder return in the form of dividends and share repurchases.

Speaker 3: Our targets for the deployment of our free cash flows remain unchanged. At 65% toward acquisitions, 25% toward internal investment in driveway and DFC, along with capital expenditures, modernization and diversification, and 10% toward shareholder return in the form of dividends and share repercussions.

With recent market volatility we believed it was prudent to opportunistically repurchase shares in the fourth quarter and to date in 2022, we have repurchased approximately 912000 shares representing 3% of our outstanding shares at an average price of $284 in November we obtained an additional.

Speaker 3: With recent market volatility, we believed it was prudent to opportunistically repurchase shares. In the fourth quarter and to date in 2022, we've repurchased approximately 912,000 shares, representing 3% of our outstanding shares, at an average price of $284. In November , we obtained an additional 750 million repurchase authorization from the board, and as of today, have a remaining availability of 679 million.

$750 million repurchase authorization from the board and as of today has a remaining availability of $679 million.

Appointment of capital for acquisitions, and internal investment is always preferred as they reinvest and grow our business.

Speaker 3: Deployment of capital for acquisitions and internal investment is always preferred as they reinvest and grow our business. However, we had excess cash generated from our 2021 performance and saw an opportunity where the returns generated from repurchasing or stock, which has no integration risk, exceeded the return hurdle rate ranges for acquisitions. Opportunistic share repurchases allow us to efficiently provide immediate shareholder return.

We had excess cash generated from our 2021 performance and saw an opportunity where the returns generated from repurchasing our stock which has no integration risk exceeded the return hurdle rate ranges for acquisitions and opportunistic share repurchases allow us to efficiently provide immediate shareholder return. Additionally.

Additionally earlier this morning, we announced a <unk> 35 per share dividend related to our Q4 performance.

Speaker 3: Additionally, earlier this morning, we announced the 35 cent per shared dividend related to a Q4 performance.

We remain well positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and $55 to $60 of EPS by 2025, with even more significant upside into the future.

Speaker 3: We remain well positioned for accelerated discipline growth on the path toward achieving our plan to reach $50 billion of revenue and $55 to $60 of EPS by 2025, with even more significant upside into the future.

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

Speaker 3: This concludes our prepared remarks. We would now like to open the call to question. Operator.

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Our first question comes from the line of Rick Nelson with Stephens, Inc. Please proceed with your question.

Speaker 1: Our first question comes from the line of Rick Nelson with Steven Ding. Please proceed with...

Thanks.

Speaker 4: Thanks, get good morning, can't congrats on a great quarter.

Congrats on a great quarter.

Another record.

Speaker 4: I wrote another record of 2021 and thanks for the detail in the long term. And the long-posed lines I'll like to

21, I'm, sorry to the detail of the long term.

Hum.

Laurence I'll, let too.

Just a follow up on D C.

Speaker 4: just follow up on the FC, you know, significant pre-packed.

The tax.

Target so if you could repeat it.

Speaker 4: income targets if you could review that some math that goes into that long-term target that you said $650 million per pack.

A mask.

Telcos and put out that long term target.

$650 million pre tax.

Well, thanks for joining us today, Rick This is Bryan I'm going to actually let.

Speaker 2: Thanks for joining us today Rick. This is Brian . I'm going to actually let Chuck handle the DFC questions since he's an expert at this.

Chuck handle the DSC question since he's an expert at this.

Thank you Bryan Chuck Lietz so.

Speaker 2: Yep, thank you Brian , Chuck Leads. So relative to the $650 million, that's really predicated upon achieving a penetration array to cross the Lithian network of between 15 and 20%.

Relative to the $650 million Thats really predicated upon achieving a penetration rates across the Lithia network between 15, and 20% that really would equate to a significant amount of loans that we would contribute to our pretax income.

Speaker 5: That really would equate to a significant amount of loans that we would contribute to our pre-tax income and use the originating somewhere in the neighborhood of three and a half to four billion a year in overall originations.

And easy originating somewhere in the neighborhood of three 5% to $4 billion a year.

And overall originations.

The other big part of that would just be leveraging the economies of scale as we continue to grow our portfolio.

Speaker 5: The other big part of that would just be leveraging the economies of scale as we continue to grow our portfolio. And that would hopefully generate a significant amount of pre-taxoring.

And that would hopefully.

Generate a significant amount of pre tax earnings.

Okay.

So that also with.

Speaker 4: And I can't say thanks for that. Also, with this long-term outlook, Brian , there's new horizontal verticals that we're currently on this slide deck.

So long term outlook Brian .

New Horizontals verticals.

Our referred to on those slides.

If you could.

It might be.

Speaker 4: Give us some ideas. What you're thinking along those lines.

What are you thinking along those lines.

Sure Rick.

So most importantly, our horizontals because thats really what were focusing on for the next three to four years with obviously, the first being dfc and probably the largest.

Speaker 2: Most importantly are horizontal because that's really what we're focusing on for the next three to four years.

Speaker 2: with obviously the first being DFC and probably the largest contributor to the disconnect between the billion dollars and a dollar of EPS generation from that.

Contributor to the disconnect between the $1 billion in a dollar of EPS generation from that.

And then followed by that we obviously have fleet and leasing companies almost a quarter billion dollars in our portfolio at this stage and we intend to grow that out as well.

Speaker 2: And then followed by that, we obviously have fleet and leasing companies, almost a quarter billion dollars in our portfolio at this stage and we intend to grow that out as well.

And that.

Speaker 2: and that maybe could be as big of horizontal, but that's yet to be determined. And then obviously consumer insurance is another horizontal that we are in pilot stages in a few of our stores, as well as possibly charging networks to really utilize.

Maybe it could be as big as horizontal but that's yet to be determined and then obviously consumer insurance is another horizontal that we are in pilot stages and a few of our stores.

As well as possibly charging networks to really utilize the infrastructure that we built in our 300 locations in and the density that we had to make sure that.

Speaker 2: the infrastructure that we built in our 300 locations and the density that we had to make sure that we're moving forward in a sustainable manner as well. Now, in terms of the verticals, and we refer to adjacencies as both.

We're moving forward in a sustainable manner as well now in terms of the verticals and we refer to adjacencies as both the verticals are more mobility verticals and we've talked about those in the past which would be.

Speaker 2: The verticals are more mobility verticals and we've talked about those in the past.

Speaker 2: which would be like power sports or construction equipment or farming equipment or long haul trucking or any of those type of verticals and those are really things that we're really looking at beyond the 2025 plan and we started the layer in in this future state idea because obviously if you think about the horizontals or you think about the strengths of Lithian driveway.

Mike.

Power sports or construction equipment or farming equipment or long haul trucking or any of those.

Type of verticals and those are really things that were really looking at beyond the 2025 plan. We started to layer in in this future state idea because obviously if you think about the Horizontals are you think about the strengths of lithium driveway, it's pretty easy to be able to leverage those into a business that has the same <unk>.

Speaker 2: pretty easy to be able to leverage those into a business that has the same four business lines of new used service and part.

For business lines of new used service and parts.

Right.

The color I could ask a near term.

Speaker 4: Right, thanks to the color. And I could ask a near term question as well. On the command, are you saying any has a patient at all consumers to the elevated prices is the lower end consumer constrained at all along those ones?

The club channel as well.

Are you seeing any hesitation at all.

Consumers to the elevated prices.

The lower end.

Consumer constrained at all.

Sure.

Hey, Good morning, Rick This is Chris I think the easy answer is absolutely not.

Speaker 5: Hey, good morning, Rick. This is Chris. I think the easy answer is absolutely not. You know, as fast as we're replenishing our new car inventory, which started off January , probably in the best position that we've seen since last summer, we're able to retail out of those units at, you know, the consistent margins that we've seen really in the back half of the year. So demand is very high right now and we're taking advantage as much as possible and both new and used in that capacity.

As fast as we're replenishing, our new car inventory, which started off January probably in the best position that we'd seen since last summer.

We're able to retail out of those units and the consistent margins that we've seen really in the back half of the year. So demand is very high right now.

We're taking advantage as much as possible in both new and used in that capacity.

Good to hear tanks.

Speaker 4: Good to hear. Thanks. Good luck.

Good luck.

Thanks, Rick.

Thank you. Our next question comes from the line of Rajat Gupta with Jpmorgan. Please proceed with your question.

Speaker 1: Thank you. Our next question comes from line, Avraj Aguiba with JP Morgan. Please proceed with your question.

Yeah.

Great. Thanks for taking the questions just a couple on <unk>.

Speaker 6: Great thanks for taking the questions. Just a couple. First on driveway.

First on driveway.

The platform is still in the <unk>.

Speaker 6: The platform is still in the early evenings here, but how do you get comfortable around scaling it from roughly one billion in revenue this year to?

Early innings here, but how do you get comfortable around scaling it from roughly $1 billion in revenue this year or two to the $9 billion by 2025.

Speaker 6: to the 9 billion by 2025. Can you give us any color on how the store culture is evolving? You know, align with the store personnel in the centralized location.

Can you give us any color on.

The store culture is evolving.

With the store personnel and the centralized location.

Any updates changes due to the advertising strategy you mentioned nationwide branding.

Speaker 6: Any updates changes to the advertising strategy you mentioned nationwide branding. And maybe any further updates come to the platform, you know, integration with Tecra and Adafolos. Thanks. Sure, Roger. Great question.

Maybe any any further updates coming to our platform integration et cetera.

I have a follow up thanks.

Roger Great question too and it's it's.

The part of the plan that we're starting to get more comfortable with but its still the probably the most cloudy because it is a startup and like you said we're into our 13th month live with our consumers and we're quite excited of what we're initially seeing in our thesis related to about 50% of the market is looking for something that's an auto dealership experience in.

Speaker 2: It's probably the part of the plan that we're starting to get more comfortable with, but it's still probably the most cloudy because it is a start-up. And like you said, we're into our 13th month live with our consumers and we're quite excited of what we're initially seeing in our thesis.

Speaker 2: related to about 50% of the markets looking for something that's an out of dealership experience and more of an in-home type of environment. So we do believe that there are

More of an in home type of environment. So.

We do believe that there are three basic drivers and we can talk about the store a little bit as well in the network and how it supports it but fundamentally when we built driveway or grow belief in growth revolved around incremental consumers and the ability to find incremental inventory. So if.

Speaker 2: three basic drivers and we can talk about this store a little bit as well in the network and how it supports it.

Speaker 2: Fundamentally, when we built driveway, our belief in growth revolved around incremental consumers and the ability to find incremental inventory. So if you think about the driveway model versus any of the used car peer competitive group,

You think about the driveway model versus any of the.

The used car peer competitive group are big model differences that we have 200 people on the ground buying cars out on the street and not going to auctions now. We're also able to procure a lot larger portion of cars directly for consumers. So our ability to scale out depends on our ability to source cars.

Speaker 2: Our big model difference is that we have 1,200 people on the ground buying cars out on the street.

Speaker 2: and not going to auctions. Now we're also able to procure a lot larger portion of cars directly for consumers.

Speaker 2: So our ability to scale at depends on our ability to source cars is close to the customer as possible. Obviously starting with the customer, then moving the customer trade-ins that are across the street at a competitive dealer, and then working through your different channels of fleet and leasing, and then lastly, auction type of vehicle. So in terms of scaling, that's critical, okay?

It's closer to the customer as possible, obviously, starting with the customer than moving the customer trade ins that are across the street at a competitive dealer and then working through your different channels of fleet and leasing and then lastly auction type of vehicles. So in terms of scaling that's critical okay. Now lets move up funnel real quickly and let's.

Speaker 2: Now let's move up funnel real quickly and let's talk about what we're seeing in MUVs because

Talk about what we're seeing in <unk>, because I think if you think about how do we get to a couple of hundred thousand units. Instead of a couple of thousand units I really believe that the brand of driveway is gaining momentum okay. We moved.

Speaker 2: I think if you think about how do we get to a couple hundred thousand units instead of a couple thousand units I really believe that the brand of driveway is gaining momentum, okay? We move

From our December monthly unique visitors of about 725000 visitors in January to almost 865000 visitors. That's a massive move okay. That's a 30% increase in traffic a little less than that okay with the marketing budget that only went up 8% month over month.

Speaker 2: from our December monthly unique visitors of about 725,000 visitors.

Speaker 2: In January to almost 865,000 visitors, that's a massive move. Okay, that's a 30% increase.

Speaker 2: in traffic a little less than that, okay? With a marketing budget that only went up 8% month over month. So what we're starting to see is the organic or the awareness of driveway becoming more prevalent, okay? And we did move to a little bit of national advertising and sports radio.

What we're starting to see is the organic or the awareness of driveway, becoming more prevalent okay, and we did move to.

Two a little bit of national advertising and sports radio and we'll be moving throughout the year into more national programs, which obviously expands total market reach when today, our marketing budget outside that sports radio is really only touching about a quarter of the population in the country. So some different things to think about that now.

Speaker 2: And we'll be moving throughout the year into more national programs, which obviously expands total market reach when today. Our marketing budget outside that sports radio is really only touching about a quarter of the population in the country.

Speaker 2: So, some different things to think about that. Now, in terms of our network, the network is very...

In terms of our network the.

The network is very supportive as Chris had mentioned, we just announced our 52 LPG members.

Speaker 2: As Chris had mentioned, we just announced our 52 LPG members and want to really congratulate them for their exceptional leadership and retail readiness.

One of them really congratulate them for their exceptional leadership in retail readiness.

To be able to take us into the into the future in both channels.

Speaker 2: to be able to take us into the future in both channels. And that is something that we spent three years prior to roll out, trying to help our network understand that this is all about the consumer and when we're on how they choose.

And that is something that we spent three years prior to rollout trying to help our network understand that this is all about the consumer and when where and how they choose okay and we're getting good traction in virtually every store in the support is there. We now have layered that in with stock grants that are driveway.

Speaker 2: Okay, and we're getting good traction and virtually every store in the support is there. We now have layered that in with stock grants that are driveway stock grants to align everyone. And we've issued those at a one year cadence instead of a three year cadence.

Grants to align everyone and we've issued those at a at a one year cadence instead of a three year cadence to be able to reinforce whatever retail readiness. We believe our future holds so all in all we think that we've got the stars aligned to really take massive market share in the areas of the country that we don't.

Speaker 2: To be able to reinforce whatever retill readiness we believe.

Speaker 2: our future holds. So all in all, we think that we've got the stars aligned to really take massive market share and the areas of the country that we don't currently sell cars in and hopefully penetrate towards that two and a half to 5% market share over the coming five to six.

Currently sell cars in and hopefully penetrate towards that 2.5% to 5% market share over the coming five to 10 years.

Great. That's really helpful color and then maybe just a question on capital allocation.

Speaker 6: That's really helpful color. Maybe just a question on capital allocation. Slide 18 mentioned that you're targeting two to four billion in revenue that you're the

Slide 18 mentioned that you are targeting $2 billion to $4 billion in revenue.

<unk> acquired revenue this year.

I'll be similar run rate over the next two to three years as well to get to the 21 billion.

Speaker 6: probably similar run rate of the next two, three years as well to get to the turning billion. Yeah, however, it seems like we're going to be in this elevated level of, you know, new vehicle gross margins for a while, which means

However, it seems like you are going to be in this elevated level.

New vehicle gross margins for a while which means.

Like joining 'twenty, one could be another record year.

Speaker 6: seems like 2021 could be another record year, which would mean excess free cash flow once again. So you did not change your capital allocation framework in your slide bag, but...

Which would mean excess free cash flow once again, so you did not change our capital allocation framework in your slide deck, but.

As I mentioned you could could we expect a continued larger focus on the buyback here in the near term.

Speaker 6: As Tina mentioned, could we expect to continue larger focus on the buyback here in the near term? Before you shift back to your traditional plan, just curious how to think about that cadence you're going forward. Particularly in the context of like $55 or $100 CPS started studying.

Before you shift back to your traditional plan just curious how to think about that cadence yeah go.

Going forward.

Are you putting the context.

$55 $100 EPS targets than that.

Yes.

Thanks Rajat. This is Tina great question I think we have our capital allocation that we have been steadily doing for a long time, 65% toward acquisitions, and then that 25% toward internal investment as I mentioned in the remarks that is our best way to use our capital to really reinvest in that capital engine is acquisitions are accretive and generate even more free.

Speaker 3: Thanks, Raša. This is Tina. Great question. You know, I think we have our capital allocation that we've been steadily doing for a long time, 65% toward acquisitions and then the 25% toward internal investment. You know, as I mentioned in the remarks, that is our best way to use our capital to really reinvest in that capital engine as acquisitions are creative and generate even more free cash flow. I think, you know, similar to our history and what we've demonstrated with shared repurchases, when there's a disconnect in the price, when the math makes sense, right? You know, you will see us go opportunistically by back shares.

Cash flow I think similar to our history and what we've demonstrated with share repurchases. When there is a disconnect in the price when the math makes sense right you will see us still opportunistically buy back shares.

And it's something that we'll watch what the price and you can see in Q4 as well as the beginning of this year. We've done some active share repurchases I think repurchasing about 3% of our outstanding float to date. So I think we will continue to watch that I think we stay really disciplined and have a good structure around driving those returns for our shareholders and balancing that with that excess free.

Speaker 3: You know, and it's something that will watch with the price and you can see, you know, in Q4 as well as beginning of this year, we've done some active sharey purchases.

Speaker 3: I think repurchasing about 3% of our outstanding float to date.

Speaker 3: So, you know, I think we'll continue to watch that. I think we stay really disciplined and have a good structure around, you know, driving those returns for our shareholders and balancing that with that excess free cash. Well, it just gives us a lot of freedom to make choice in terms of where we're investing.

Cash flow. It just gives us a lot of freedom to make choice in terms of where we're investing.

Got it.

Is that the return math driven more.

Speaker 6: Got it and is that is that return map driven more about more more by you know Just the near-term EPS expectations, you know like next 12 months

No just the near term EPS expectations like next 12 months sources.

The M&A returns to generate just curious like what kind of valuation levels.

Speaker 6: you know what the eminion returns to generate. And you're just curious like what kind of valuation levels, you know, we should be watching for that.

We should be watching.

For the buyback program.

Rajat. This is Bryan again, I think most importantly, when we think about share buybacks, we balance it with acquisitions, Okay and right now we are seeing decent pricing still an acquisition even on a steady state earnings basis, It still looks pretty good and obviously with $13 billion and the pipeline we can pick in.

Speaker 2: Rajat, this is Brian again. I think most importantly,

Speaker 2: When we think about share by-backed, we balance it with acquisitions, okay?

Speaker 2: Right now we are seeing decent pricing still in acquisition even on a steady state earnings basis. It still looks pretty good and obviously with 13 billion in the pipeline, we can pick and choose acquisitions to achieve our two to four billion dollars a year that are remaining over the final couple years of the 2025 plan. Okay so it really boils back down to once you run those calculations.

Choose acquisitions to achieve our $2 billion to $4 billion a year that are remaining over the final couple of years of the 2025 plan. Okay. So it really boils back down to once you run those calculations can we get a higher return on buying our own stock back absolutely right now, okay, and it shouldnt be that way, but if the world doesn't.

Speaker 2: Can we get a higher return on buying our own stockback? Absolutely right now. Okay, and it shouldn't be that way, but if the world doesn't see what our company's dry powder is and what the potential is in driveway or DFC or further adjacency.

See what our companies.

Dry powder is and what the potential is and driveway or dfc or further Adjacencies. Then, we obviously will lean towards the buybacks to be able to do that we actually apply about a 25% premium over what we buy shares back at the company, saying that basically buying shares back isn't as important to us is good.

Speaker 2: Then we obviously will lean towards the buybacks to be able to do that. We actually apply about a 25% premium over what we buy shares back of the company saying that basically buying shares back isn't as important to us as getting to the two and a half to five percent market share in the future. So we want to be able to buy them back more constructively than what acquisitions are.

Getting to the two 5% to 5% market share in the future. So we want to be able to buy them back more constructively than what acquisitions are so that's kind of a simple way to look at it in terms of acquisition and obviously.

Speaker 2: So that's kind of a simple way to look at it in terms of acquisition. And obviously, you know, I think we all believe that the stock is vastly undervalued. Great, that's good.

I think we all believe that the stock is vastly undervalued.

Great that's clear.

Thanks for all the color and good luck.

Thanks Roger.

Thank you. Our next question comes from the line of Ryan <unk> with Craig Hallum Capital Group. Please proceed with your question.

Speaker 1: Thank you. Our next question comes from the line of Ryan Sig. with Craig Hound, Capital Group. Please proceed with your question. Good morning. Good morning.

Good morning, Congrats on the results.

Ryan.

So starting on Green cars, I guess looking out to 2025 targets you show incremental revenue.

Speaker 7: So starting on green cars, I guess looking out to your 2025 targets, you show incremental revenue for the green car initiatives, but it doesn't appear to be detracting from the traditional Coralithia business. I guess he talked you the put takes and how you think about potential cannibalization.

The green car initiatives, but it doesn't appear to be detracting from the traditional core Lithia business. I guess can you talk through the puts takes on how you think about the potential cannibalization there.

Sure I think first and foremost green cars as an educational site to be able to.

Speaker 2: I think first and foremost, green cars is an educational site to be able to be a catalyst.

Be a catalyst to the conversion to sustainable transportation. Okay. So that's first and foremost so anytime I'm talking about whats our lead conversion ratios of those type of things on Green cars no that the educational components is almost five X that number of customer base. Okay. So it's primarily there to educate consumers.

Speaker 2: to the conversion to sustainable transportation. Okay, so that's first and foremost. So anytime I'm talking about, you know, what's our lead conversion ratios or those type of things on green cars, know that the educational components is almost 5x, that number of customer base. Okay, so it's primarily there to educate consumers. Outside of that, we really look at green cars as a lead generation source.

Outside of that we really look at green cars as a lead generation source for driveway and later in the next few months will be upgrading the green cars website with all the driveway proprietary technology, both new and used as well as the functionalities of shops selling service, okay, but it's actually effectuate it in.

Speaker 2: for driveway and later in the next few months we'll be upgrading the GreenCars website with all the driveway proprietary technology, both new and used as well as the functionalities of shop selling service.

Speaker 2: Okay, but it's actually effectuated and the logistics and everything are done exactly the same as what we're doing in Driveway. So there is no network changes that need to happen or there's no structural changes in terms of logistics or customer guarantees. It's all the same as Driveway. Okay, so keep that in mind. Now we are finding that the green cars marketplace.

In the logistics and everything are done exactly the same as what we're doing in our driveway. So there is no network changes that need to happen or there is no structural changes in terms of logistics our customer guarantees. It's all the same as driveway. Okay. So keep that in mind now we are finding that.

The green cars marketplace. The leads that are coming through that while still getting the educational lift that we get from the site are costing about half the price of what they are costing in our ecommerce channels a driveway. Okay. So we like the fact that it's an affinity brand that we do get these benefits of what we're really saying is.

Speaker 2: the leads that are coming through that while still getting the educational lift that we get from the site.

Speaker 2: are costing about half the price of what they're costing in our e-commerce channels of driveway. Okay, so we like the fact that it's an affinity brand that we do get these benefits. So what we're really saying is our budget, our marketing budget for driveway that we can divert some of that marketing budget into the affinity brand green cars and get more effective funnel utilization throughout the entire model.

Our our budget, our marketing budget for driveway that we can divert some of that marketing budget into the affinity brand green cars and get more effective final utilization throughout the entire model.

Okay.

Great and then switching over to the potential for an agency model and Oems going more direct relationships on slide 18, you'll note that that's potentially a 2035 for certain manufacturers.

Speaker 7: Great, then switching over to the potential for an agency model and OEMs going more direct relationships. On slide 18, you note that that's potentially 2035 for certain manufacturers.

Any idea I guess on which ones or how much of the market could potentially go that direction Secondly, why is that.

Speaker 7: Any idea I guess on which ones or how much of the market could potentially go that direction? Secondly, why is that a...

15 years versus the next five years and then lastly can you talk through the economic differences of the dealer versus agency model and the puts and takes do you guys.

Speaker 7: years out versus the next five years. And then lastly, can talk through the economic differences of the DL versus agency models.

Sure.

I think most importantly, we have to remember that franchise laws or state by state and Thats, how they change we haven't had franchise law changes in about five years in 2017, when the one state in the country allowed both legacy manufacturers and new startups to be able to direct sale to consumers and we've seen no attrition by any of the true.

Speaker 2: I think most importantly, we have to remember that franchise laws are state by state and that's how they change. We haven't had franchise law changes in about five years.

Speaker 2: in 2017 when the one state in the country allowed both legacy manufacturers and new startups to be able to direct sale to consumers and we've seen no attrition by any of the traditional OEMs to move to a direct sale in that state.

<unk> Oems to move to a direct sale in that state. Okay. So keep that in mind as youre thinking about this so we believe this is very slow if you look into eastern and Western Europe . There is acceleration of the agency model and they are working out those agreements now in many of the European manufacturers primarily are talking about.

Speaker 2: Okay, so keep that in mind as you're thinking about this. So we believe this is very slow. If you look into Eastern and Western Europe , there is acceleration.

Speaker 2: of the agency model and they're working out those agreements now and many of the European manufacturers primarily are talking about moving to an agency model and we'll get to see a little bit more about what those margins and stuff look like as they move into 23 and 24 which is really their time horizons that they're looking at. Now in Eastern Europe and in other parts of the world where there is light agency models, primarily only with the European manufacturers. Okay, it looks like that the margins are somewhere between 6 and 6.

Moving to an agency model and we will get to see a little bit more about what those margins and stuff look like as they move into 'twenty three 'twenty four which is really their time horizons that theyre looking at now in eastern Europe and in other parts of the World where there is light agency models, primarily only with the European manufacturers, Okay. It looks like the <unk>.

Margins are somewhere between 6% and 10%.

On on the front end margin of the business. Okay. So remember that the F&I. Some of the F&I is also being reduced in the agency model. So I think if I was going to extrapolate something out what we know is that one of the German manufacturers is fairly aggressive here, but they just recommitted to the U S.

Speaker 2: on the front end margin of the business. Okay, so remember that the FNI, some of the FNI is also being reduced.

Speaker 2: in the agency model. So I think if I was going to extrapolate something out.

Speaker 2: What we know is that one of the German manufacturers is fairly aggressive here, but they just recommitted to the US.

While also saying that they know franchise loss doesn't allow them to move to an agency model. They basically committed to margins being stable for the next five years, Okay, and then beyond that they made the comment that agency model isn't really in the horizon because franchise laws don't allow for it I think most importantly, if we think.

Speaker 2: while also saying that they know franchise laws doesn't allow them to move to an agency model. They basically committed to margins being stable for the next five years. Okay, and then beyond that, they made the comment that agency model isn't really in the horizon because franchise laws don't allow for it. I think most importantly, if we think about the speed of change.

The speed of change I think it's going to be driven by the consumer Okay and I think as we built our model. That's all we thought about is how do we position ourselves to be in congruence with the manufacturers and how do we provide our consumers a better experience and obviously driveway is the most transparent and seamless and convenient.

Speaker 2: I think it's gonna be driven by the consumer, okay? And I think as we built our model, that's all we thought about is how do we position ourselves to be in congruency with the manufacturers and how do we provide our consumers a better experience? And obviously driveway is the most transparent and seamless and convenient experience really in the country on the new car space, okay? And as such, we believe that we can be the best partner for any of our manufacturers in the event.

It is.

Experienced really in the country on the new car space, Okay, and as such we believe that we can be the best partner for any of our manufacturers in the event that they ultimately choose this pathway or able to choose that pathway. So I would say in 2035, there is a chance that 5% to 10% of our volume is in <unk>.

Speaker 2: that they ultimately choose this pathway or able to choose that pathway. So I would say in 2035.

Speaker 2: There's a chance that 5 to 10% of our volume is in an agency type of environment. And if you take that 6 to 10% in a pre-COVID environment, that was higher margins than what we made. And remember about half of our SG&A costs in terms of personnel in sales are for what? It's for negotiation.

Agency type of environment, and if you take that 6% to 10% in a pre COVID-19 environment that was higher margins than what we made and remember about half of our SG&A costs in terms of personnel and sales are for what it's for negotiations.

And then below the line and SG&A, our interest cost of carrying cars are pretty massive okay and flooring costs, it's what drives our leverage ratio up and takes a lot of our capital. So I think when you think about that part of the model.

Speaker 2: Okay, and then below the line in S-GNA, our interest costs of carrying cars are pretty massive. Okay, and flooring costs would drive our leverage ratio up and take a lot of our capital. So, thinking when you think about that part of the model, we would really be shifting in the event that the-

We would really be shifting in the event that this did occur really to a high margin and low SG&A type of model rather than a lower margin and higher SG&A type of model. So we think that we're nicely positioned but I think most importantly, I'll leave you with the fact that we don't think that this is going to change that constructively.

Speaker 2: really to a high margin and low SG&A type of model rather than a lower margin and higher SG&A type of model. So we think that we're nicely positioned, but I think most importantly, I'll leave you with the fact that we don't think that this is going to change that constructively. And a lot of the discussions that are out there aren't really factual as who's going DTC. There is not a manufacturer today in the United States outside Tesla and now Rivian, I believe.

A lot of the discussions that are out there arent really factual as who's going DTC. There is not a manufacturer today in the United States outside Tesla and now review and I believe so.

A modest 1000 units last last quarter, okay outside of that there isn't a DTC, okay, even pollstar in hummer arent to DCT Dtc's and issued a type of a franchise agreement, where we get an override on profitability, okay, and theyre going through their traditional dealer network. So keep those.

Speaker 2: sold a modest 1,000 units last quarter. Okay, outside of that, there isn't a DTC. Okay, even poll star and Hummer aren't true DTCs and issued a type of franchise agreement where we get an override on profitability. Okay, and they're going through their traditional dealer network. So keep those things in mind. Stay grounded, okay. This is a slow process that I believe will be driven off of consumer demand. Let

Things in mind stay grounded. Okay. This is a slow process that I believe will be driven off of consumer demand.

That's always very helpful. Brian Thanks, Good luck.

Thanks, Brian .

Speaker 8: Thanks for Noah.

Thank you. Our next question comes from the line of Chris, particularly <unk> with BNP Paribas. Please proceed with your question.

Speaker 1: Thank you. Our next question comes from the line of Chris particularly with BNP Powerbot. Please proceed with your question.

Hey, guys. Thanks for taking the questions.

Just wanted to hey, just want to run through some numbers. So it sounds like the financing business.

Speaker 9: Um, hey, just want to run through some numbers, but sounds like the financing business

Youre, saying that Youll.

Speaker 9: You're saying that you'll sell 1.5 million units. So why don't you kind of focus on that number a little bit. Like how do you get there? I think you're running like 550,000 units today, roughly speaking, using the Q4 and annualizing that. Like how do you get that incremental, roughly million units from now to 25 year end? How much of that's dry away? How much that same store? How much of that position? Do you help reach that for us?

So $1 5 million units. So let me kind of focus on that number a little bit.

Like how do you get there I think you were running like 550000 units today roughly speaking it using the Q4 and annualize that.

Did you get that incremental roughly 1 million units from down two to 25 year end like how much of Thats driveway, how much that same store how much of the acquisition because it can help us.

Ill bridge that for us.

Sure.

Let's let's start with Lithia, obviously, we have a same store sales growth rate built in we're utilizing basically a normalized environment in all of our assumptions as well.

Speaker 2: Sure. So let's start with Lithia. Obviously we have a same store sales growth rate built in. We're utilizing basically a normalized environment in all of our assumptions as well, assuming that the current situation is short supply and new vehicles will return. Okay, so we look at that. Lithia ends up...

Assuming that the current the current situation in short supply in new vehicles will return okay. So we look at that.

Lithia ends up.

Do I have that right here hold on I Gotta get this.

Speaker 2: Do I have that right here? Hold on, I gotta get this.

Okay.

Okay. So the lithia core business.

Speaker 2: Okay, so delicia core business.

Which includes all businesses prior to July of 2020, Okay is around a half a million units. So about a third of the business.

Speaker 2: which includes all businesses prior to July of 2020. Okay, is around a half a million units, so about a third of the business.

The network development, which was originally estimated at around 20% to 22 billion.

Speaker 2: The network development, which was originally estimated at around 20 to 22 billion, which was all the acquisitions posed.

Which was all of the acquisitions post that.

That July 2020 makes up for around 600, and some thousand okay and the remainder is driveway, okay and those driveway or units are really the exponential lift that will come.

Speaker 2: that July 2020 makes up for around 600 and some thousand. Okay, and the remainder is driveway, okay, and those driveway units are really the exponential lift that will come through the e-commerce and conquesting market share outside of the network growth and the core business that sits there.

Through through the e-commerce in Conquesting market share outside of the network growth in the core business that sits there.

Okay, and then obviously in terms of the finance ability of that when we start to extrapolate the 15% to 20% penetration rates you can start to get to those numbers, we do use a little bit higher penetration rate on our used vehicle business. So when we get to that state where almost one five used to new ratio. So it's a little bit different.

Speaker 2: Okay, and then obviously in terms of the financiability of that, when we start to extrapolate the 15 to 20% penetration rates, you can start to get to those numbers. We do use a little bit higher penetration rate on our use vehicle business. So when we get to that state, we're almost 1.5 used to new ratio. So it's a little bit different than what, you know, you would look at today when we're sitting at, you know, 1.1 to one use a new ratio.

And what what you would look at today when we're sitting at one one to one used to new ratio.

So there was another question I have that.

Speaker 9: So there's another question I have that. I mean, the penetration seems a little conservative. I guess I take your use ratio. Like typically 75% of customers take financing. I would think your CPO penetration's well.

Penetration seems a little conservative I guess I take your use ratio like typically 70, 580% of customers take financing.

Thank you CPO penetration is roughly 30%.

So roughly there's like 45% of customers that get financing elsewhere. So it seems like youre still using a pretty conservative share.

Speaker 9: So roughly there's like 45% of customers that get financing elsewhere. So it seems like you're still using a pretty conservative...

Share of that last 40 to 45 like of that 40, 45, and Youre not financing.

Speaker 9: share of that last 40 or 45. Like of that 40, 45 that you're not financing, like where I guess like where's the gap? Is it is it there's certain ends of the credit spectrum that you don't want to finance? Is it you just expect to have a competitive platform with a lot of partners? Maybe just help us think through like why that can't be higher.

Where I guess like where is the gap is it is it.

Ends of the credit spectrum that you don't want to finance is it you just expect to ethical platform partners.

Can you just help us think through like why that can't be higher.

Yeah. So.

Let me start by saying it could be higher I mean, we use 15% as our penetration rate in the 2025 and used an upside of 20% when we talk about future state or steady state and obviously thats seasonal reserve has a big drag on things until you ever get to steady state and maybe you really never do.

Speaker 2: Let me start by saying it could be higher. I mean, we use 15% as our penetration rate in the 2025 and use an upside of 20% when we talk about future state or steady state. And obviously, that Cecil Reserve has a big drag on things until you ever get to steady state and maybe you really never do. I think most importantly, when we start to think about the penetration rate,

I think most importantly, when we start to think about the penetration rates our manufacturer partners to take the lead on all new cars, Okay, and we currently penetrated about 27% of our product is least okay, I don't see that changing materially.

Speaker 2: Our manufacturer partners take the lead on all new cars, okay, and we currently penetrate at about 27% of our product is leased. Okay, I don't see that changing materially. That's how we retain our customers and keep them in that brand for a longer period of time. Beyond that, there's a large portion that's financed and then there's that 15% of consumers on new that truly pay cash.

We retain our customers and keep them in that brand for a longer period of time beyond that theres. A large portion that's financed and then there's that 15% of consumers on new that that truly pay cash. So we think that we probably are really sitting at a 10% to 50% penetration rate best case in terms of <unk>.

Speaker 2: So we think that we probably are really sitting at a 10 to 15% penetration rate, best case.

New on the used car side. It is a lot deeper penetration were actually only selling about 24, 25% of our Carson certified in the certified penetration levels of captives is pretty low still it's not the same penetration rates. So in theory.

Speaker 2: in terms of new. On the used car side, it is a lot deeper penetration. We're actually only selling about 24, 25% of our cars and certified and the certified penetration levels of captives is pretty low still. It's not the same penetration rate.

It grows yeah, you're right, we may be able to do 40% to 50% penetration in used vehicles, but again, we want to illustrate what is the most likely case, okay. Knowing that we're now talking out three or four years or even up to 10 years, when we start to think a little longer.

Speaker 2: So in theory, if it grows, yeah, you're right. We may be able to do 40%, 50% penetration in used vehicles, but again, we wanna illustrate what is the most likely case. Okay, knowing that we're now talking out, you know, three, four years or even up to 10 years when we start to think a little longer. Chuck.

Chuck do you have anything to add on that.

Just again that we want to continue also to maintain our banking relationships with our existing lending partners and so they provide a lot of other services to us and Thats. Another reason why our penetration rates are a little on the conservative side.

Speaker 5: Just again that we want to continue also to maintain our banking relationships with our existing lending partners And so you know they provide a lot of other services to us and that's another reason why our penetration rights are a little on the conservative side great Thanks for being

Makes perfect sense, thanks, guys.

Thanks, Chris.

Thank you. Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Speaker 1: Thank you. Our next question comes from Lino. John Murphy with Bank of America. Please, please.

Hi, good morning, guys.

Just a sort of overarching question you kind of went through this.

Speaker 10: All right, good morning guys. Just a sort of overarching question. You kind of went through this with a previous question, but just, you know, as you look what the automakers are doing and trying to capture more.

Yes.

Question, but as you look with the automakers are doing and trying to capture more revenue beyond point of sale.

Speaker 10: revenue beyond point of sale. You know any family board, you know, you call it agency model, whatever you want to call it. I mean, there's questions to mantids here, but it looks like they're trying to, with your help replicate the direct consumer model in some form of fashion, which you're already, you know, doing yourselves, you know, in some ways, sort of the online efforts that look similar to that.

No need simple you call. It agency model whatever you want to call. It and these questions demand this year, but it looks like they are trying to do with your help replicate the direct to consumer model.

In some form or fashion, which youre already.

Doing yourselves in some ways for the online efforts.

Look similar to that.

And do you view them as.

Speaker 10: If you do, you, them as partners in this or foes. I mean, it seems like they want to leverage you and your expertise, more as partners and leveraging.

Partners in this or suppose I mean, it seems like they want to leverage you and your expertise more as partners and leverage their networks.

By giving you maybe maybe greater share of revenue over time.

Speaker 10: by giving you maybe greater share of revenue over time in the back end and maybe take a little bit in the front end, but the net of it would be a positive for you. I kind of see this developing, because I mean, there's a lot of demand things of what you call it and all this stuff, but it seems like this is going to play to your strengths as a large network in the country in the US.

In the back end and maybe take a little bit in the flooding, but it did add if it would be a positive for you guys. How do you kind of see this development, there's a lot of demand because of how what you call. It and all this stuff, but it seems like this is going to play to your strengths as a large networking in the country in the U S.

John We believe so too and I think I think that.

Speaker 2: John , we believe so too. And I think that the dealers and the manuals

That the dealers and the manufacturers they trust each other okay. They understand what the fundamentals are in there trying to find simpler ways and more transparent ways to meet their customers, Okay, and I think the ideas of trying to replicate a driveway like what GM, maybe doing right is something.

Speaker 2: They trust each other, okay? They understand what the fundamentals are and they're trying to...

Speaker 2: find simpler ways and more transparent ways to meet their customers. Okay, and I think the idea is of trying to replicate a driveway like what GM may be doing, right?

That I think helps educate them that you know that the customer facing part of the entire formula is something that is involved with one on one relationships and communities.

Speaker 2: is something that I think helps educate them that.

Speaker 2: you know, that the customer facing part of the entire formula is something that

Speaker 2: is involved with one-on-one relationships and communities and

So many more things that dealers bring to the equation. When you think about the total profit equation I think we all get through this idea that we that.

Speaker 2: so many more things that dealers bring to the equation. When you think about the total profit equation, I think we all get to this idea that we...

The dealers are going to be disintermediation I don't think most manufacturers think that way. Okay. I think that they are exploring the ways of how can they make the experience more transparent from start to finish and I think where we as dealers feel the exact same thing and want to achieve the exact same things now if you think about it.

Speaker 2: the dealers are going to be disintermediated. I don't think most manufacturers think that way. Okay, I think that they are exploring the ways of how can they make the experience more transparent from start to finish. And I think we as dealers feel the exact same thing and want to achieve the exact same things. Now, if you think of...

From maybe other perspectives, where theyre going okay. This is the start of DTC or this is the start of a total new channel I don't believe that that's where it's at I think I think manufacturers have large challenges to be able to build sustainable vehicles and compete with some of the new entrants in this space like Tesla Okay.

Speaker 2: from maybe other perspectives where they're going, okay, this is the start of DTC or this is the start of a total new channel.

Speaker 2: I don't believe that that's where it's at. I think manufacturers have...

Speaker 2: large challenges to be able to build sustainable vehicles and compete with some of the new entrances in the space like Tesla. Okay, that they have plenty to do rather than worry about what happens post sale. And I think when we think in and dissect the profit margins of what a manufacturer is making and then the normalized amount that a dealer makes.

They have plenty to do rather than worry about what happens post sale and I think when we think and dissect the profit margins of what a manufacturer is making and then the normalized amount that a dealer makes in this equation is less than 20% of what the dealer makes so let's keep this all.

Speaker 2: in this equation. It's less than 20% of what the dealer makes. So let's keep this all relative that this isn't a big thing. And I think there's a difference like you said between trying and actually achieving. And it takes the partnership to be able to have massive competitive advantages is over those DTC manufacturers that do have some advantage today.

<unk> that this isn't a big thing and I think there is a difference like you said between trying and actually achieving and it takes the partnership to be able to have massive competitive advantages over those DTC manufacturers that do have some advantage today and the fact that the.

The consumer can buy transparently in our one price environment. When many dealerships are closed and I think together, we is the traditionally Oems and ourselves it's more important that our consumers can buy in the time when the dealerships are closed and that was the foundation of driveway and I imagine as the foundation of Carb.

Speaker 2: You know, the consumer can buy transparently in a one price environment.

Speaker 2: when many dealerships are closed and I think together we as the traditionally OEMs in our cell.

Speaker 2: It's more important that our consumers can buy in a time when the dealerships are closed and that was the foundation of driveway and I imagine is the foundation of Carbravo and together we'll find the right way to.

<unk> and together, we will find the right way to maintain or grow our market share in the traditional Oems and John is an opportunities to call out to our general managers that run in our decentralized model I mean, they are the ones that are empowered to create that relationship with our OEM partners as friends and so making sure.

Speaker 5: maintain or grow our market share in the traditional OEMs. Hey, John , it's an opportunity to call out to our general managers that run in our decentralized model. I mean, they are the ones that are empowered to create that relationship with our OEM partners as friends. And so, making sure that we improve turn rates as inventory comes back online, we focus on customer satisfaction, which is important to the OEM in both sales and service. But even more importantly, getting service retention back were those consumers that do buy new and CPO vehicles come back online for service is something that we put squarely on the shoulders of our operations leaders. And that partner group, a recognition that we give is focused on that. And so, thanks for the question. I think we definitely look at them as friends.

We improved churn rates as inventory comes back online, we focus on customer satisfaction, which is important to the OEM and both sales and service, but even more importantly, getting service retention back where those consumers that Dubai, new in CPO vehicles come back online for service is something that we put squarely on the shoulders of our operations leaders in that partner group.

A recognition that we give is focused on that and so thanks for the question I think we definitely look at them as friends.

And just and just to follow up on that in two specific things that the DRP.

Speaker 10: And just to follow up on that, two specific things, the BRP at GM and Car Bravo. I mean, it seems like they're launching these and they're constructing them as they're being implemented. And the end game is not set yet as to where they want to go with these things. In Car Bravo, my understanding is that they want to go to 10 to 15 year old vehicles, potentially, which really is getting to the second or third.

G M and car Bravo I mean, it seems like.

Youre launching these in there.

Constructing them as they're being implemented yet.

The end game is not.

Set yet as to where they want to go with these things.

Bravo My understanding is that they want to go to 10% to 15 year old vehicles, potentially which really is.

Adding to the second or third.

Or is it really going into the third on the vehicle to search on that in the life of the vehicle.

Speaker 10: right with a bit into the third owner you know the vehicle the third time in that in the life of the vehicle i mean do you think um... i mean what what is that mean how did that impact

Do you think.

What is that and how does that impact.

Your business, maybe just car Bravo, specifically, because it seems like it's somewhat.

Speaker 10: your business, you know, and maybe just car bravo, specifically, because it seems like it's somewhat of a tool by which the GM vehicles are then recaptured in network, and you still maintain the large portion of the economics, and it might help drive your used volumes up. I'm just trying to understand how you perceive that, because it's pretty opaque at the moment, and it seems like it's gonna be a positive for the GM dealers, but what does your take?

On the tool by which the GM vehicles are then recaptured in network and you still maintain the large portion of the economics and it might help drive used volumes up.

I'm just trying to understand how you pursue that because it's pretty opaque at the moment and it seems like it's going be a positive for the GM dealers, but.

What is your take.

I think it does build a marketplace to have visibility, but I would also go back to I wouldn't be fearful as a dealer about it because ultimately who controls the inventory the dealers are the ones that have the inventory. So we really looked at it initially is okay. Its probably a way for them to learn.

Speaker 2: I think it does build a marketplace to have visibility.

<unk> about and are beginning to end type of process again, even though many manufacturers have done this in the past and havent been hyper successful and that type of venue, what theyre going to find is that I believe they sit there much like our cars dot com or a car gurus that if you don't have the inventory.

Speaker 2: and beginning to end type of process again, even though many manufacturers have done this in the past and haven't been hyper successful in that type of venue, what they're gonna find is that

Speaker 2: I believe they sit there much like a Cars.com or a Cargoo Rooze that if you don't have the inventory.

What part of the profit equation can you ultimately demand and if it's really this 10 to 15 year old vehicles I do know that they control their pipeline of off lease cars in the event that we don't take them in on trade and early terminate those leases, but in the 10 to 15 year old model, they need us, okay, and we need them. So.

Speaker 2: What part of the profit equation can you ultimately demand? And if it's really this 10 to 15 year old vehicles, I do know that they can scroll their pipeline of off-least cars in the event that we don't take them in on trade and early terminate those leases. But in the 10 to 15 year old model, they

Speaker 2: Okay, and we need them. So, you know, and I would say more so, the small dealer rather than the Lithia and driveway, which we're building our own brand impression. And I would imagine even when we look back two to five years from now, drive will have a larger inventory of selection of that 10 to 15 year old vehicle than even the aggregated GM dealers will have.

And I would say more so the small dealer rather than the lithia and driveway, which we're building our own brand impression and I would imagine even when we look back two to five years from now drive where we will have a larger inventory of selection of that 10 to 15 year old vehicle than than even the aggregated.

<unk> will have.

Okay, and then just one sorry, one more follow up on that I mean do you believe that just means that your network is that much more powerful than what is otherwise in the smaller dealers.

Speaker 10: Okay, and just one more follow up on that. Do you believe that just means that your network is that much more powerful, than it is otherwise, and the smaller dealers?

This organization occurred whether it be through you or the automakers then further disenfranchised or.

Speaker 10: as this organization occurs, whether it be through you or the automakers is then further disenfranchised or...

Youll put at a disadvantage if you will.

Speaker 2: They'll put it at this advantage, if you will. I mean, or does this actually help them? Let me try and understand what this really means with the whole landscape. It may give a venue for smaller dealers to at least compete with the driveway, but most importantly, remember that the entire design thesis is around inventory.

Or does this actually helps them I'm just trying to understand that as really means OLED. It may give a venue for smaller dealers to at least compete with the driveway, but most importantly, remember that the entire design thesis is around inventory procurement the logistics of that procurement to the reconditioning site and then that.

Speaker 2: the logistics of that procurement to the reconditioning site, and then that vehicle going back to the consumer. And I think that's something that has to be done somewhere. So when you think about how the model works and where the profit equation ends up being, know that the dealers are the ones that have the technicians, the expertise and the distributed networks to be able to keep those cars closest to the consumer and do it at an affordable price to be highly competitive with maybe new entrance into the into the musical space.

Vehicle going back to the consumer and I think that's something that has to be done somewhere. So when you think about how the model works and where the profit equation ends up being no that the dealers are the ones that have the technicians the expertise and the distributed networks to be able to keep those cars closest to the consumer and do it at an affordable.

Price to be highly competitive with maybe new entrants into the into the used vehicle space.

You have a downturn very well thanks.

Speaker 10: You have it down. Okay. Thank you very much.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Speaker 1: Thank you. Our next question comes from Line, a bread Jordan with deforets. Please proceed with your question.

Hey, good morning, guys.

Hi, Brett.

In the prepared remarks, you talked about.

Speaker 10: In the prepared remarks you talked about the 25 model having a 2.5% market share and I think that you said GPUs at pre-pandemic levels. Do you think it's realistic to think that they go all the way back to pre-pandemic GPUs and I think you could you talk about the cadence how you see the step down from the current record level.

The 25 model, having a two 5% market share and I think you said Gpus at pre pandemic levels do you think it's realistic to think that they go all the way back to pre pandemic Gpus and I think could you talk about the cadence how you see the step down from the current record levels.

Great question, Brett and I think.

Speaker 2: Great question, Brett. And I think, let me start by saying, lithium driveway has made their history on focusing on what things we can control. So that's not the side step of the question. We believe that

Let me, let me start by saying lithium driveway.

Made their history on focusing on what things we can control okay. So that's.

That's not to sidestep. The question, we believe that the margins in ultimate inventories and Chris spoke to that a little bit that we are seeing glimpses of improvement, but ultimately the demand is out still outpacing the supply. So in the 2025 model there's no benefit for us.

Speaker 2: The margins and ultimate inventories and Chris spoke to that a little bit that we are seeing glimpses of

Speaker 2: improvement, but ultimately the demand is still outpacing the supply.

Speaker 2: So in the 2025 model, there's no benefit for us to show a big, you know, the margins maintaining that in the event that they do.

Show a big.

The margins maintaining that in the event that they do in.

Every day it does seem like the window for increased elevated margins are are probably there for longer than we all would like or our consumers would like but it may be that they don't return to some normalized level bread and in that event, we have some extra capital to do different.

Speaker 2: you know every day it does seem like the window for increased smart you know elevated margins are are probably there for longer than we all would like or consumers would like but it may be that they don't return to some normalized level bread and

Speaker 2: In that event, we have some extra capital to do different things of whether it's the adjacent seas or whether it's the network growth or

Things have whether it's the adjacencies or whether it's the network growth or whether it's the next thing that we can leverage our $7 million you know paying.

Speaker 2: The next thing that we can leverage our 7 million, you know, paying customers annually.

Paying customers annually to find new ways to service them and build brand recognition and lower cost marketing budgets and so on so you may be right, okay, but I think what we try to do is outline what our best most likely cases, rather than may be what best cases as we.

Speaker 2: to find new ways to service them and build brand recognition and you know lower cost marketing budgets and so on. So you may be right, okay, but I think

Speaker 2: what we try to do is outline what are best most likely cases rather than maybe what best cases.

We think about our 2025 model or now even the discussions about future state or more of a steady state type of model.

Speaker 2: as we think about our 2025 model, or now even the discussions about future state or more of a steady state type of model.

Okay, Great and then on the service side of the business had double digit in customer pay could you talk about the cadence of customer pay.

Speaker 10: Okay, great. And then on the service side of the business, you can double digit and customer pay. You talk about the cadence of customer pay. And I obviously have sort of seen that summary opening in the fourth quarter. And then the parts growth, obviously, being North of 20, is that something that is a new normal or is that related to supply chain issues where more of the independent service market is buying dealer parts because they can't get it in the aftermarket?

So you've sort of seen that summary, opening in the fourth quarter and then the parts growth obviously being north of 20 is that something that is a new normal or is that related to supply chain issues, where more of the independent service market is buying dealer parts because they can't get it in the aftermarket.

Yes. This is Chris.

Speaker 5: Yeah, this is Chris. I think what we're really seeing is the impact that you're seeing on the new vehicle side is also translating over to what's happening even on the wholesale part side where non-AWEM parts are in high demand, where you saw our warranty business was down year over year, which is really a function of, I think the allocation of OEM parts specifically, electronic parts that are going into production rather than sitting up for warranty. And so I think on the wholesale part side, I think having that good, better, best, the best being the OEM products is offerings, which we do have in our stores, both for retail and for wholesale, is setting itself nicely for the recovery where as customers are coming back on the road. You know, miles driven is increasing. The age of vehicles is, you know, at record levels. I think it set us up nicely for a good tailwind for, you know, 2022 and beyond. Good, Chris. Hey, Brett, one of the H??, you think you can't

I think what we're really seeing is the impact that youre seeing on the new vehicle side is also translating over to what's.

What's happening on EBIT on the on the wholesale part side, where non OEM parts are in high demand.

You saw our warranty business was down.

The year over year, which is really a function of I think new allocation of OEM parts, specifically electronic parts that are going into production rather than sitting up for warranty and so I think on the wholesale part side I think having that good better best the best being the OEM products and offerings.

We do have in our stores both for retail and for wholesale is setting us up nicely for the recovery, where as we as customers are coming back on the road.

Miles driven is increasing the age of vehicles is.

At record levels.

I think it set us up nicely for a good tailwind for 2022 and beyond good Chris Hey, Brett one other a couple of other key points, we're still basically flat from where we were in 2019. So.

Speaker 2: We're still basically flat from where we were in 2019. So, you know, there was a lot of, of a wind or sail that needed to be filled with that tailwind. Also keep this in mind and it's a small incremental amount. We were one less.

There was a lot of <unk>.

When our sale that needed to be filled with that tailwind also keep this in mind and its a small incremental amount we were one less day in the quarter than we were in the previous year. Okay. So that effects that same store sales number by about 152%. Okay. So it's probably more around 10 12, okay, but those are.

Speaker 2: day and the quarter, then we were in the previous year. Okay, so that affects that same store sales number by about one and a half two percent. Okay, so it's probably more around 10 than 12. Okay, but those are all the things similar to what Chris said. Okay, great.

All the things.

Similar to what Chris said.

Great. Thank you.

Thanks, Brett.

Thank you. Our final question. This morning comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.

Speaker 1: Thank you. I find a question this morning comes from the line of Colin Langen with Wells Fargo. Please proceed with your question.

Oh, great. Thanks for taking my questions.

Speaker 11: Oh great, thanks for taking my questions. You just heard some of the automakers made a comment that 20% of dealers are charging above MSRP and they're tracking these dealers and that might be future payback on allocations. I mean, one, are you selling above MSRP? The 20 actually, I thought it was a little low, do you think that's where the industry is? And are you concerned about maybe margins coming down as other dealers maybe pull in pricing based on those kinds of concerns? Sure, sure, Colin.

Just firstly.

One of the automakers made a comment that 20% of dealers are charging about MSRP and they're tracking these dealers and it might be future payback on allocation.

Are you selling above MSRP, the 'twenty actually I thought it sounded a little low do you think that's where the industry is and are you concerned about maybe margins coming down as well.

Dealers, maybe pull in pricing based on those kind of concerns.

Sure sure calling really good question I think one of Lithia is.

Speaker 2: One of Lithia's and driveways big claim to fame is that our stores make those decisions in the field. Okay, and they do that based off their supply and what their competitors are doing.

And driveways Big claim to Fame is that our stores make those decisions in the field, okay, and they do that based off their supply and what their competitors are doing okay. So yes, we do have some stores that are charging over MSRP. We don't have specific numbers, because we don't specifically track it because we allow our network to make the dis.

Speaker 2: Okay, so yes, we do have some stores that are charging over MSRP. We don't have specific numbers because we don't specifically track it because we allow our network to make the decisions closest to what their customer basis and what the supply and demand is in that local market.

<unk> is closest to what their customer base is and what the supply and demand is in that local market.

Okay.

You had mentioned in your commentary increased advertising and then some of the losses.

Speaker 11: And you mentioned your commentary increased advertising and then some of the losses for upfront booking of sort of losses on the driveway financial. I mean, is that a material impact that we should be thinking in SGNA to share or is that all kind of immaterial in the scope of the entire company? And just also, where exactly is the driveway financial book? Is that recorded and broken out in the segments if it's a newer used or is it where we're going? I'm not letting her run.

Upfront booking of certain losses on that.

Driveway financial I mean is that a material impact that we should be thinking in SG&A. This year or is that all kind of immaterial in the scope of the entire company and just also where exactly is the try away financial book does that recorded in the broken out in the segments of its new or used or is it.

And I'm going to let Tina run through that for you. Okay. Yes. So I mean on the Dfc business, we do not the income statement impacts of Dfc within SG&A at this point in time and the amount is not material lines that were not required to break it out.

Speaker 3: So I mean, on the DFC business, we do net the income statement impacts the DFC within S&A at this point in time. The amount is not material and so we're not required to break it out. And so any of those headwinds from the SETL reserves as well as the building of that is actually impacting our S&A and increasing that cost.

And so any of those headwinds from the sulfide reserves as well as the building of that is actually impacting our SG&A and increasing that cost yet and so it's really an investment is how we think about it similar to the advertising fund.

Speaker 3: Yep, and so it's really an investment as how we think about it. Similar to the advertising spend, you know, for driveway as well as our stores, that's also all within SG&A. So you can see those trends over time as we continue to build those brands and build these businesses that augment what we're doing.

Our driveway as well as our stores. That's also all within SG&A. So you can see those trends over time as we continue to build those brands and built these businesses that augment what we're doing.

Okay, alright, thanks for taking my questions.

Thanks Colin.

Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. <unk> for any final comments.

Speaker 1: Thank you. Thank you, Mr. Chairman. That concludes our question and answer session. I'll turn the floor back to Mr. DeBora for any final.

Thank you Melissa and thank you for joining us today, and we look forward to updating you on lithium driveway for the first quarter in just a few months.

Speaker 2: Thank you, Melissa. And thank you for joining us today and we look forward to updating you on Lithian driveway for the first quarter in just a few months.

Bye bye all.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Speaker 1: Thank you. This concludes this conference. You may disconnect your lines at this time. Thank you for your...