Q1 2022 Lithia & Driveway Earnings Call
Good morning, and welcome to the Lithia and Driveways first quarter 2022 conference call.
Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session I would now like to turn the call over to Jack every director of S. P. A day. Please begin. Thank you presenting today are Bryan Deboer, President and CEO , Chris <unk> Executive Vice.
And C O O Tina Miller, Senior Vice President and CFO , and Chuck Lietz, Vice President of driveway Finance today's discussions may include statements about future events and 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 materially differ from the statements made.
We disclose those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission. We urge you 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 our.
<unk> 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 to our website investors dot Lithia driveway dot com, highlighting our first quarter results with that.
I would like to turn the call over to Bryan Deboer, President and CEO . Thank.
Thank you Jack good morning, and welcome everyone.
Earlier today, we reported the highest adjusted first quarter EPS in company history at $11 96 per share a 103% increase over last year.
Record first quarter revenues of $6 7 billion were driven by strong performance across the Lithia channel and growing contributions from driveway.
The first quarter reflected the responsiveness and adaptability of our model.
Elevated Gpus earned in in new and used and F&I business lines, along with the increased contributions from after sales generated $551 million and adjusted EBITDA, providing significant optionality in our plan execution.
We accelerated investment in driveway, and driveway finance or Dfc, while maintaining our aggressive acquisition cadence.
Last quarter, we shared our updated plan to generate $50 billion in revenue and $55 to $60 in EPS by 2025, and we are excited with the progress being made.
Total revenues increased 54% over last year, driven by contributions from acquired businesses.
Driveway sales grew sequentially through the quarter, reaching the milestone of 1 million monthly unique visitors or movies in February and completing 3100 transactions in the month of March for an annual run rate of 37000 transactions.
We're really excited about our consumer thirst for driveway and the momentum that continues to build.
In the first quarter, we retailed or wholesale 4200, 50 units that contributed over $120 million in revenue.
We continue to target $1 billion in incremental revenue through driveway in 2022.
This represents shop transactions and the subsequent retail and wholesale upsell transactions as similarly reported by our E Commerce peers.
In addition, we retailed over 30000 vehicles for approximately $1 $2 billion in the quarter through our Lithia E Commerce channels.
Driveway finance achieved milestones within the quarter originating over $100 million in loans in a month and be coming labs number one lender.
Overall dfc originated over 8600 loans during Q1 and as of quarter end the portfolio stands at over $900 million.
Since announcing our plan in mid 2020.
We have acquired businesses that are now contributing $11 5 billion in annualized steady state revenues and the pipeline has never been larger.
D linking one dollar of EPS production from every $1 billion in revenue in 2025 will be driven by several key factors to follow that I'd like to reiterate now.
Cheating a blended two 6% new and used vehicle U S market share total vehicle Gpus, returning to pre pandemic levels.
Driving SG&A as a percentage of gross profit down towards 60% through increased leverage of our cost structure.
Acquiring a further $9 billion to $10 billion in annual revenues to complete the build out of our north American footprint of four to 500 locations.
No further equity capital raises meaning no further dilution of EPS.
And investment grade credit rating driving decreases in borrowing costs.
Flexibility and headroom in capital allocation for share buybacks in the event the valuation disconnects.
Continued drag on Dsc's profitability due to building of see silver reserves as we scale towards our targeted 15% penetration rate.
And finally early benefits from Adjacencies with higher pre tax margins that also carry structurally lower SG&A costs.
It's important to remember that contributions from new businesses and Adjacencies may still be in the development stages in 2025 and will not fully reflect the magnitude of our future earnings power.
Layering on the contributions of additional future aspirations at maturity, we see opportunity for each billion dollars in revenue to produce up to $2 in EPS key factors underlying our future state and totally within our control are as follows.
Up to 20% of units are financed with Dfc and there is no longer a headwind from a recording of seasonal reserves.
And optimized cost structure, taking us to SG&A as a percentage of gross profit below 50% and finally mature contributions from our other horizontals such as fleet lease management charging infrastructure consumer insurance and other new verticals.
Foundational to our strategy as convenient proximity to the consumer and our physical infrastructure efficiently leveraging for vehicle procurement reconditioning and storage.
The lab network is comprised of nearly 300 locations strategically positioned at 250 miles from 95% of the population and within 100 miles from 60% of the population.
This puts us in considerably closer proximity to consumers than any other industry player.
As we add density to our network. This synergistic overlay with driveway deepens, enabling faster delivery quicker turnaround times for reconditioning structurally lower logistics costs, a higher proportion of sales with no shipping fees, while also providing dfc with a larger base of loans to penetrate from.
In addition to the previously announced Sullivan transaction.
We acquired three still Lantus Dodge CJD stores in Las Vegas that are expected to generate $400 million in annualized revenue and diversify our brand mix in the Las Vegas market.
Total acquisition revenue completed year to date totals $1 1 billion.
Since the announcement of our 2025 plan, we have acquired a total of $11 5 billion in annualized revenues, representing 58% of our initial goal. Additionally, we have another $1 9 billion in.
And annualized revenue under contract or LOI.
The acquisition climate remains robust and we continue to add to our pipeline, which sits now at over $15 billion. We.
We have not altered our return thresholds of 15% to 30% of revenue or 3% to seven times normalized EBITDA.
And are confident in our ability to find partners excited to join us at reasonable prices.
This discipline ensures we hit our after tax return thresholds of 15% and stay below our targeted leverage of three times and a normalized earnings environment.
Whether motivated by succession planning or monetization sellers are attracted by lithia. His track record of closing deals timely and confidentially retaining over 95% of employees and becoming part of our industry's future.
With the benefit of the elevated earnings environment businesses acquired since the launch of the 2025 plan have contributed $875 million and adjusted EBITDA, adding considerable fuel to our capital engine.
Now turning to driveway, our investments over the past three years and personnel software and logistics layered over the physical network of our Lithia channel have created an innovative consumer centric platform that is finding a receptive audience and scaling rapidly.
Driveway now offers the largest selection of negotiation for new and used vehicles deliverable anywhere in the country.
Different than our traditional or e-commerce peers, our new vehicle inventory represents all major brands and selection of used vehicles ranges from certified used vehicles to 20 year old value autos.
These offerings were designed to attract a full spectrum of consumer affordability and full lifecycle of after sales experiences, creating the largest tam of any single company in personal mobility.
Considering our growing physical network of over 1100 associates distributed across North America focused on procuring used vehicles, our design is quite difficult to replicate or compete with.
In the first quarter over 97% of driveway transactions, where incremental with consumers, we had never transacted with in the past 15 years.
And the average shipping distance approximately 920 miles.
Amidst this growth our average Google review was four six stars driven by our focus on building the business sustainably and earning cuts consumer trust for the entire vehicle ownership lifecycle.
So far in 2022, we have opened 17, new markets and now directly reached 29% of the U S population with targeted local advertising reach.
Recently, we also expanded our marketing spend to include the March Madness basketball tournament and our upcoming sponsorship of the <unk> Radio Music Awards.
These strategic investments have driven meaningful additional traffic, while still improving our conversion rates.
As we continue to expand our nationwide campaign throughout the year, we reinforced our view that driveway is well on its way to becoming the dominant profitable e-commerce online retailer.
Our engineering teams have also continued to innovate.
Earlier this quarter, we launched our first end market proprietary new vehicle shopping experience consumers.
Consumers now have all the transparent and convenient driveway used vehicle functionality that they've come to love unused vehicles now on new vehicles to.
Expanded functionality for new includes the convenience of seeing all applicable incentives and rebates factored into pricing upfront along with instant online fan. It financing approvals. These new features have meaningfully improved our conversion rate and increase the volume of new vehicles sold.
Doing the coding ourselves means we can deploy continuous enhancements plus nimbly and proactively respond to consumer feedback and trends.
In March we announced our collaboration with U S bank to offer real time payments to consumers selling their vehicles, making driveway. The first online platform to offer this exciting new functionality.
Instead of waiting several days for checks to clear funds are deposited into the bank account instantly before the vehicle even leaves their driveway.
Increased efficiency in our care centers fine tuning of our finance algorithms and the deployment of our new vehicle offerings drove the first quarters considerable outperformance in the context of tight inventories and seasonality the sequential growth being realized is even more impressive we are more confident than.
Ever that we will exceed our 2022 target of 40000 transactions that was established in only two short quarters ago.
Turning to sustainable vehicles, we have seen significant consumer demand for highly competitive new vehicles being launched by our OEM partners.
In our conversations with our OEM partners. They view the dealer as an integral part of the sales experience their communities and throughout the ownership lifecycle.
In addition to our advocacy is sustainable vehicles on green cars and in the Lithia channel. We are actively investing in our physical footprint and installing charging stations.
With over 600 installed to date, we can effectively sell service in charge electric vehicles.
Traffic to Green cars has significantly increased with 260000 movies in March. We also recently powered up green cars marketplace with driveway shop and cell technology.
Organic traffic grew faster than paid search and education derives 80% of the movies.
Assigning all marketing costs to the 20% of unique visitors that are green cars marketplace.
<unk> results in the lowest cost per <unk> of any of our channels.
Consumers interested in zero or low emission vehicles can now easily jump from educational offerings directly to labs largest sustainable inventory seamlessly accessing the convenience and transparency of the driveway experiences.
As our most mature adjacency Dfc has become an integral part of our strategy transforming the margin profile of our business.
It is important to reiterate dfc's position as a top of funnel captive lender for the quickly growing lab customer base, Chuck Lietz will be providing information on DSC and our first detailed guidance on the business and just a few moments.
In closing labs, 2025 plan is well underway and our future is clearer than ever.
Our massive competitive advantages difficult to replicate optionality and synergistic design across Adjacencies has positioned us as the consumer choice for complete ownership lifecycle experiences.
Please spend some time on our newly revised investor presentation, and our new slide six illustrates the design timing and drivers of our current and future verticals in horizontal adjacencies.
The incremental free cash flows we are earning allow us to accelerate our plan and transformation, while also providing for near term shareholder return.
Lastly.
We manage our business for the long term remain nimble and aware, while not being distracted by the supply levels monthly price changes are factors outside of our immediate control.
Some believed our 2025 plan was ambitious when announced 21 months ago, reflecting now at the first third of the initial timeline.
And we are considerably ahead of that plan.
Today, we look beyond 2025 to meaningfully positioning lithia driveway and green cars as the dominant leader in auto the largest retail sector in the country with that I'd like to turn the call over to Chuck.
Brian Dfc is now lithium number one lender and in the first quarter. This translated to a penetration rate of six 2%.
Loans to prime or near Prime customers with a FICO score above 660 accounted for 67% of the loans, while loans to subprime customers with a FICO scores below 620 accounted for 7% of Dfc loans.
Used vehicles accounted for 78% of the 8600, plus originations up from 65% a year ago.
DSC is top of funnel, which from a risk management perspective is highly beneficial, particularly in a rising rate environment. As we continue to leverage labs vast transactional data to evaluate and adjust our lending practices.
During the quarter Dfc modified our credit policies to mitigate risk by limiting loans with elevated ltvs and selectively adjusted our offer rates to reflect the impact of rising interest rates.
The average FICO score in Q1 organically increased to 677 with DSC not seeing any degradation in yield helping dfc maintain an appropriate risk adjusted return.
For the quarter DSC in pre tax loss was $2 1 million as our interest rate margin of $13 6 million reflected a yield of eight 5%, which was offset by an increase in the loss provision driven by the growth of originations for.
For 2022, we are guiding a mid 7% penetration rate with a 10% rate exiting December and an average loan balance of $30000 with a 70 30 used to new mix due to the recording of Cecil reserves, we forecast a net loss of $9 million to be generated dfc.
<unk> growing penetration impacts 2022, F&I revenue, but it's important to note that the interest income earned and recognized over the life of the loan is at least three times. The amount earned from third Party Commission on a fully discounted basis I encourage you to review slide 11 in our deck for long term guidance.
Dfc's current operational platform scaling concurrently with labs growth the opportunity to achieve our penetration rate targets, while striking the optimal balance of capital requirements risk mitigation financial objectives, and maintaining the relationships with our current strategic lending partners is high.
Dft's contribution today is math due to the growth of our thoughtful reserves, which are outpacing the interest income earned on the portfolio in the short term if our originations stopped growing and stayed flat, but the $100 million per month, we saw in March dfc with breakeven on a month.
The basis in August and start contributing earnings.
As a reminder, we see a clear pathway for DSC to contribute $650 million in earnings at a future stage of 15% to 20% penetration on our $50 billion revenue base as a captive lender the earnings growth will be fueled by capturing a greater share of the vehicles, we are already selling.
Now I'd like to turn the call over to Chris.
Thank you Chuck our operational teams continued last year's momentum and delivered another record performance and we are confident that our team remains nimble and we'll continue to adapt to the changing market dynamics and evolving supply chain developments by OEM by region and by market.
The entrepreneurial mindset of our teams is driving this environment and we're excited for the future state. We are build under our mission of growth powered by people for Lithia and driveway with the sales levels over the last two years well below normal we continue to see strong demand for new and used vehicles tightening vehicle inventory supply impacted our ability to satisfy the demand.
For every manufacturer.
Same store revenues down, 3% and volumes down 17%, we expect that pent up demand will convert into sales is the availability of inventory improves and this constantly changing environment, our decentralized model and culture of taking personal ownership at the local market level.
Has allowed our 22000 associates to mitigate these headwinds and increased profitability with total new gross profit per unit, including F&I, increasing over 84% from last year and consistent with the fourth quarter.
Turning to used vehicles, the strength of our model in terms of top of funnel inventory procurement reconditioning expertise and carrying inventory that matches all levels of consumer affordability enabled us to increase revenues, 31% over last year and down only 1% on volume. This outperformance of the market was led by our core and value auto say.
<unk>, which increased almost 3% offsetting the headwind faced and the availability of certified pre owned vehicles.
In addition, driveways cell or procurement channel helped us resupply inventory in the quarter and we will continue to contribute to the competitive advantage of our omnichannel strategy as the vehicles purchased onto highway Dot com contributed an additional $400 and gross profit per unit over auction purchases total used gross profit per unit.
Net including F&I increased 30% over last year.
A key driver of our results was the contribution of our nearly 1000 finance managers and today's rising rate environment their years of experience in matching the complexity of consumers' financial position with the lending options at over 180 financial institution, including Chuck's team met Dfc is essential customizing their presentation to eat.
Consumer increased our penetration rates in all major product lines driving meaningful increases in F&I per unit, which increased $492 or 28%.
As of quarter end, we had 27 days supply of new vehicles, and a 50 day supply of used vehicles, while we saw an increasing deliveries in our lots in March visibility of our new car availability remains fluid and our operational teams are focused on taking actions within their control to increase turn and gained share these actions and our top up.
One our procurement position at Lithia and driveway enabled us to source, 76% of used vehicles from consumers with the remainder source through the other channels, including auctions and other dealers.
Our return on investment on consumer sourced vehicles was three eight times higher than those sourced at auction as we earn higher gpus on consumer purchases and turn them at a much higher rate.
We have not seen a material impact on our consumer demand from higher gas prices for interest rates and saw a record amount of digital traffic on our website was $16 5 million unique visitors visiting our various channels in the corner are up 40% on a same store basis with our wide selection of inventory offerings at all levels of affordability.
<unk> and the Green cars marketplace powered by drive way, we are well positioned for any change in consumer preferences. Our after sales business grew 13% as pandemic restrictions ease and miles driven driven increase with the aging of units in operation, providing a future tailwind for years to come performance was led by the wholesale parts business, which was.
Up 35% customer pay increasing 15% and body shop, increasing 5% as expected warranty work declined 3%.
Same store SG&A as a percentage of gross profit for the quarter was 57, 5% a 500 basis point improvement over last year. While this metric benefited from the flow through of elevated Gpus and also contain the investment and driveway and driveway finance in terms of marketing personnel costs and Cecil reserves that are landed.
Groundwork for future profitability, we remain focused on structurally increasing the leverage of our cost structure. For example by expanding the oversight and span of influence of our highest performing leaders and empowering them to take the actions that bring us closer to 60% SG&A as a percentage of gross profit in a normalized environment.
In summary, each day, our leadership team is rising to the challenge of navigating the current operating environment continuously improving all business lines raising the level of digital retail readiness, leveraging cost and driving incremental profit opportunities at each location. Their efforts will continue to evolve our in store and in home solutions to meet consumers.
Wherever whenever and however, they choose we remain humble and never satisfied and look to continued record performance levels throughout 2022, and stay relentlessly focused on achieving our 2025 plan with that I'd like to turn the call over to Tina. Thank you Chris for the quarter, we generated $551 million.
Adjusted EBITDA of 108% increase over last year and $461 million in free cash flow defined as adjusted EBITDA plus stock based compensation less the following items paid in cash interest income taxes dividends and capital expenditures.
Over the last 12 months, we have generated over $1 3 billion and free cash flows, which if fully deployed to fund network growth, which support the acquisition of up to $5 2 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 of net debt to adjusted EBITDA was 135 times and as a reminder, this does not include pro forma contributions from acquired businesses that have been.
Operator for less than a year.
Our disciplined capital management provides us ample opportunity to fund, our accelerated growth and acquisitions driveway and Dfc will being positioned well for the future.
With the elevated earnings environment, and our current liquidity position, we funded dst's portfolio growth through a mix of working capital and availability on our ABS warehouse Blaine or.
Our targets for the deployment of our free cash flow remains unchanged at 65% toward acquisitions, 25% toward internal investment, including driveway and DSC along with capital expenditures.
Modernization and diversification and 10% towards shareholder return in the form of dividends and share repurchases.
We have repurchased approximately 515000 shares so far in 2022, and an average price of $292 80.
With $572 million remaining on our authorization, we have optionality to take advantage of market volatility and opportunistically repurchase shares going forward to provide immediate shareholder return.
Factoring in last year's activity, we have repurchased approximately 4% of our float. Additionally earlier. This morning, we announced a 20% increase to our dividend to <unk> 42 per share.
We are well positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion in revenue and $55 to $60 in EPS by 2025, with even more significant upside in the future.
This concludes our prepared remarks, we would now like to open the call to questions operator.
Thank you.
To ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up here.
Before pressing the star Keys. Our first question is from Daniel <unk> with Stephens incorporated. Please proceed.
Hey, good morning, everybody. Thanks for taking my questions.
Good morning, Daniel Brian I wanted to start on just inventory.
Days inventory on new actually stepped up I think up to the high 20 that seems like it's above peer levels.
<unk> also stepped up so can you maybe breakdown.
What drove that sequential step up in GPU, even add inventory improved a bit.
Yes. Good morning, Daniel This is actually Chris I think the first kind of highlight comment we would make is that demand just continues to exceed any supply we have with any OEM and so while we're seeing a little step up in inventory DSO, we still have really an unlimited supply of new car customers out.
They're right now ready to make those decisions and as an example, we started the month with 13000 vehicles on the ground and we sold around 24700 in the month, which was an increase month over month of around 4300 units. We received 23700 units, which was an increase of 1800, but even with.
That increase in supply the demand outran the supply again, and we're sitting with.
Ending inventory of 12000 units on the ground ready to sell and so.
This situation is very fluid the line of sight on it is very near near term and I think we just have to take month to month and get every vehicle, we can and sell everyone that comes in with high turn in and receive more allocation than some of our competitors. Okay. Chris was just speaking about new as well we ended at 50 days supply on used.
And we're pretty active in being able to find that fine vehicles, including the zero to two year old vehicles that we're able to get off of lease a lot easier than some of our peers.
Got it that's really helpful. And then one for China, or maybe actually for Chuck but driveway finance you know I appreciate the detailed long term outlook on the slides.
Can you talk about any changes youre seeing in credit performance in any areas of the credit spectrum and if you had to tighten your lending standards, how would that affect the long term projections you provided today.
The slide deck.
Yes. Thanks, Danielle this is Chuck.
Great question. So first part of your question was regarding our lending sort of credit policies and practices as I had mentioned in my comments, we did actually in the first quarter.
<unk> for some of our lower credit spectrum.
<unk> our loan to value.
Two a lower percentage, which should limit our risk and mitigate some of our exposure and then the second part of our questions to your question.
Relative to long term performance I think it's critical to note that we will continue to take advantage of Lithia is.
Top of funnel position of having a tremendous amount of data that we can react on a real time basis to make sure that we're not taking undue risk return ratio and Thats really the critical part is as we will change our credit policies and credit disciplines to make sure that we maintain our fiscal risk adjusted fully.
Burdened rate of returns and hurdle rates and that will that will be what will allow us to continue to hit our projections, regardless of the economic cycle as we go forward versus our projections.
That's really helpful and if I could sneak one more in there just affordability and maybe use demand has been really a topical for Brian could you address maybe how that progressed through the quarter and then any changes you've seen through March or maybe even into April with tax refunds got paid.
Sure Daniel.
We haven't seen any material changes in affordability as of yet we're assuming that at some point those funds that.
Much of the population receives do begin to run out but for the time being it looks pretty good I think in.
In April we are trending up about 9% in unit sales and used so it still looks strong and the balance between certified core and value is still looking similar.
That's great well. Thanks, so much for all the color guys and best of luck.
Daniel.
Our next question is from Rajat Gupta with Jpmorgan. Please proceed.
Great. Thanks for taking the question.
There have been a.
A lot of emerging concerns.
That.
The economy.
Drawn into a mild recession or we.
We might see a slowdown in the consumer.
Can you give us a sense of like how you expect the business to perform.
We do run into some sort of a mild recession here. Maybe later this year or early next year.
If you could help address investors' concerns around like what levers do you have in the business to offset pressures on.
On the volume side of the business and also like other parts of the business is what would be the puts and takes.
Maybe you can start there and a couple of follow ups.
Sure. Good question I think most importantly consumer.
Consumer confidence is currently is at its lowest level in almost 24 months. So we're already seeing the impact of that unfortunately, the supplies or.
Our balancing that out even though the consumer confidence numbers are pretty low we still see a robust environment and we imagine that later this year and maybe even into next year that may begin to soften a little bit but more importantly, we built our model off of.
Multiple verticals to create optionality with consumers.
That is the most in part important part of the Lithia and drive waste strategy that we now have lithia, that's robust and growing its network. We have driveway that provides consumers within home transparent experiences in one priced environment.
With a considerable numbers of cars and now in both new and used vehicles, allowing us to reach deeper into the U S population, whereas two years ago or a year and a half ago, we really only touched about 1% of the U S. Population today, we actively touch almost 28% of the population now with national advertising.
And feel like national advertising in the different regions like on March Madness.
Now touching close to 100% of the country, so our ability to bring optionality to new consumers and conquest incremental customers into our business and keep them in that lifecycle through sales service sales shop and service is an important part of our design Lastly, I would comment on this.
When we think about consumer demand changes or consumer shifts and behaviors. We are seeing a nice shift to sustainability, we were reaching almost 5%.
Market share as a country and bvs, which was quite special we sold over 10000 sustainable vehicles in the quarter, Okay and it made up 7% of our volume Green cars is a is a commodity that is capturing affinity customers that are looking for sustainability and green cars will.
Become not only the current leading educational source, but it will become the leading marketplace for sustainable vehicles, not only nationally but internationally.
Got it great. Thanks, Thanks for that color.
Parts and services.
<unk> strong growth here in the first quarter.
Could you maybe give us a sense of how you expect this to progress through the rest of the year.
Maybe across the different buckets, what youre seeing.
Currently and going forward as well.
Which which buckets do you expect to recover faster or slower across customer pay warranty collision et cetera.
I have one portfolio.
Yeah Rod this is Chris obviously miles driven is up giving kind of going post pandemic and seeing people actually out on the road again.
Definitely creates an environment where.
The service opportunities come more front of mind on vehicles, maybe that have had some deferred maintenance based on.
Periods of Lockdown.
In addition, we have 270 millions of <unk> and our car park and because of where we're at on the new vehicle supply chain.
The aging of those vehicles continues to run past, a 13 year Mark that we've had for history and I think the results of those things.
Those items led to what you saw in the quarter were CP was up 15% warranty was down slightly which again if you see two years now of reduced Saar youre going to expect to see some warranty decreases over the coming months.
Wholesale parts was up dramatically, which tells you that there is a lot of.
One off shops that are doing work lowered down the chain for consumers that also have repair needs and then lastly, our collision centers, where we get more vehicles on the road they tend to bump into each other from time to diamond. So I think as far as looking forward into 2022 and beyond I think we have a good run rate in this.
Enter cyclical fixed ops business that we have and we expect to see more of the same through the back half of the year.
Got it great.
On capital allocation.
Obviously, the balance sheet continues to delever here.
Where do you see today.
The M&A environment is it still like.
Unfavorable time or are you still getting like favorable multiples.
For the deals Youre looking at.
<unk>.
Ultimately given where we are you know just from going from the economy perspective.
What would be a more near term vaccines in terms of M&A, we can buyback given where the shares are trading today versus what youre seeing in the M&A market out there.
Okay.
Sure Rajat this is Bryan again.
On the on the M&A market were definitely.
Seeing balances in pricing. So we now have either closed or have under contract $3 billion, so far year to date.
That's a big number it's a little higher than what we expected.
Most importantly, we do not adjust our disciplines. Okay. We're finding partners that are excited about joining us at multiples that we look at on a normalized basis.
To be able to do that now we do also balance our stock price, Okay and look at the volatility in our space, which is obviously quite high to allow us to utilize capital in the best possible way, Okay, and when we're buying back it doesn't mean that that that that we think that that's the right stock price at <unk>.
It means that we've measured the volatility and hit it added.
At a opportune time to be able to do that now.
Even with the $3 billion through the first half of the year run rate, which should put us somewhere between five and six coming out of the year.
And buying shares back at a similar cadence of the 4% that we've bought back or are flowed over the last four to five months, we still have plenty of capital that's being generated so it's important to remember we generated almost $500 million in free cash flows in a quarter. Okay. So when you do look at this this isn't the same as a startup that.
Losing money when we spend our money on capital we get network. Okay. When we spend it on acquisitions I mean, we'd get network that network persists forever and allows us to get closer to the customer okay, others that lose money. The money's gone. Okay. So we kind of look at the fact that we make a couple of billion dollars in.
And free cash flows and then apply that to our network or apply it to two less share count to be able to get there, whereas there is a lot of dilution in and startups of how they think about their business relative to where we both end up in the long run, which ultimately will reflect in what the consumers are going to.
In terms of pricing in terms of the major cost advantages that we sit here with and are designed that.
That we're executing now on quite well.
Got it very helpful. Thank you and good luck.
Thanks Roger.
Our next question is from Chris, but it's Hillary with Exane.
BNP Paribas. Please proceed.
Hey, guys. Thanks for taking the question.
Just wanted to ask about the impact of rising rates I guess.
To date have you seen any lenders speaking on average that you see on lenders. We can do to begin to pass through some of the funding cost to customers yet.
If so how much on average then.
Historically.
In rising rate environments, what impacts have you seen on your business when.
When rates have risen.
Is it going to impact your F&I profit per unit or.
So your ability to market loans has there ever been any changes to insurance product attach rates.
I appreciate it.
Yes, Chris Great question. This is Chuck I'm going to handle the lender part of your question first so as I mentioned in my prepared comments, we did selectively increase.
Our rate card for Dfc about 25 to 50 basis points, particularly where we felt like the market has responded in a similar fashion and I think thats really sort of what I would say is is that most lenders are being proactive in terms of raising rates selectively we don't see.
A lot of across the board increases I would say, particularly in the prime and near Prime segments of the market. Most lenders are staying very competitive and holding the line, but if there are future rate increases we do expect that to change as we go forward and Dfc will continue to react accordingly, Brian do you want to cover the business I'll, let I'll, let Chris running through the business.
Yes, I think what I would add to it is if you look over the last 12 years, we saw a really modest increase in what customers were willing to accept as far as monthly payment. So 12 years ago I think on the used side, we ran somewhere around the $300 payment per month on average coming right now into 2022, and it really accelerated rate.
In the middle of the pandemic that average payment in a high demand environment went to $456 and I wouldn't say that that was no interest rate impact and I think the big question that we've been kind of talking back and forth between our finance teams and our operations teams is is that $4 56 going here to stay.
Or is that something that rising interest rates are going to cause the actual payment to change and so when you go back in time in the last time that we had to talk about rising interest rate environment.
And in a recessionary period, what we saw customers do is they didn't decide to not buy a car or buy a car. If you want a vehicle you're going to get a vehicle you may just dropped down in D content that vehicle or dropdown in a model class to make sure that you get a vehicle and I think with the technology advancements that youre seeing in vehicles today.
A three year old newer car that may be stepped down one level may be more advanced and more technology ahead of where your vehicle was that you bought three years ago. Even if it was went up on a class and so I think this is something that's fluid for us to watch right now, but we are definitely seeing payment levels for consumers at some of the <unk>.
That we've ever seen and the question then is in a higher interest rate environment, our customers going to drop their payment or just drop the devaluation of the vehicle they purchase and we're.
We're anticipating watching that throughout the rest of the year.
Thanks, and then one quick follow up.
Kind of hit on this a little bit already but when you look at like your mix are you seeing any and I'm not sure. How quick closely monitor this but are you seeing any material deviations by income like are you seeing the high end consumer with materially stronger patterns on your.
Call it low income consumer or any way to stratify that for us.
No Chris it's very similar to it.
Where it's been over the last few years.
That's helpful.
Our next question is from John Murphy with Bank of America. Please proceed.
Good morning, guys.
One question on.
The used vehicle side.
In the revenue mix wholesale went up from $3. One two about five 8% based on what you guys were disclosing some revenue not units and but I'm. Just curious why that would increase as a percent of the revenue base, if you're trying to retail everything you, possibly can and just hard to get these.
These vehicles I mean, why would you have wholesale more vehicles.
John This is Bryan.
I would say that is because I mean, we did purchase.
About 2300 vehicles last month, and it's not targeted purchasing so when we purchase off of driveway, we buy everything.
Okay, so, whereas before our stores always just bought things that they were looking for or took things on trade that they were more aggressive on for things that they wanted whereas in driveway were aggressive on everything okay. Because we have an exit strategy, whether it's wholesale or whether it's a retail channel to be able to do that and I'm thinking that probably had a.
Maybe.
100 basis point.
Impact to that number.
Yeah.
Okay and then also on used.
<unk> margin went down but gpus are up.
We saw some normalization or feed in used vehicle pricing is probably not coming down too much anytime soon just because we're so short vehicles, but if you saw that that price fade to some degree.
Do you think you get held hold the dollar GPU and the percent margin would go up.
GPU is obviously much more important.
Yes, I think I think it is.
And to remember that we buy our inventory monthly and that we run at a 50 day supply so any changes.
End market conditions can be offset quickly by by new incoming inventory.
In terms of holding margin, it's truly a function of the demand market. So I would say that it depends on what happens if it's a slow economic impact. It's one thing if it's if it's something more extreme like Russia, moving into western Ukraine, or possibly into eastern Poland or something.
Now you are starting to talk about massive impacts that could happen quite quickly and then you now have these major emotional disconnects and consumers. So I don't know that its.
We can give you an exact indication I would just look at magnitude and speed of where the demand comes from because remember we've been talking about for the last two years that this is a 75% demand caused and 25% inventory costs now it's definitely now maybe 50 50 inventory because inventory.
As prolonged as shortages for a much longer period of time.
Hey, John just as a reminder, as well as a top of funnel new car dealer that gets used vehicles coming in on trade.
We're making about $1900 more on vehicles that come in from consumers, then that we buy at auctions or from other dealers and we turn them much faster. So it's a huge advantage that we have wanted to react to the issue that Brian talked about but just to continue to make sure that we have a very profitable.
And our pipeline of inventory coming in quickly on the used car side.
Okay, and then just I'm sorry, just one more on the you said I mean, what do you guys think of the carbon and the acquisition of the ADESA physical auctions does that impact your sourcing your costs at all or do you just kind of make a left turn away from those auctions and go to manheim and do more consumer direct consumer sourcing I mean, whats the kind of fall out so it's a big one.
Transaction.
We're kind of benign to it I mean, we haven't given specific instructions like I believe there is now seven manufacturers that are pull cars from ADESA important to remember and I believe the rest are planning to do it soon.
Which is part of that profit stream I would also remember that ADESA last months pre COVID-19 and they lost money.
During COVID-19 .
It was more of a they.
We have an infrastructure play.
And now I believe Carvana goes from what 22 reconditioning centers to about 70, so even sitting there they still have about a 500 dollar logistical disadvantage over our network.
The milestone of 40 miles from <unk>.
Customer in the country.
They still sit at about 550 70 locations.
I guess, that's how we kind of look at it is what are the cost advantages that we can transpose into our consumers' pockets in.
A little bit different way of maybe what you thought about it but that's.
That's another drag I would think on their earnings at some point, especially in.
Especially knowing that most of the inventory is getting pulled that's really helpful. And then just one last one.
As you look at the last two years and then this year given the supply constraints new vehicle demand is going to be a recessionary levels.
For three years running.
I know, there's a lot of talk about.
A potential recession, which without a lot of data to back it up perfectly honest.
Look at autos, even if we went into a recession isn't there a good chance to new vehicle volume in the next couple of years could still even be up in the face of that isn't just.
Industry that kind of leads the economy out of the trough so I mean.
How do you think about all of this it just it just seems like particularly for auto is a little bit overblown.
We would agree with you that when we've been running at $13 14 million Sars Theres massive pent up demand obviously the average car in the car Park is now almost a year older.
And despite the fact that maybe where maybe we were over earning on Gpus, a little bit. If you can add 20% to the volume, which has a trickle down effect into the used vehicles and the service body and parts. We believe theres massive tailwind is coming in.
We're excited of whatever environment, possibly is there even if its recessionary because I believe it's going to allow more consumers to get into the market.
Today arent willing to buy at MSRP, Okay, because that's something that's quite important to remember, okay and that obviously has its own implications on that 15 or 20% of consumers that have bought over the last 18 months. It may have a little bit more of this equity in the coming years, but ultimately we think that there's more there's a lot of <unk>.
<unk>.
Coming in whatever environment, whether it's continued strength in demand or whether there is a little bit of softening, which will allow more consumers to come into the market.
Okay. That's helpful. Thank you very much guys. Thanks.
Thanks, John Thanks, John .
Our next question is from Bret Jordan with Jefferies. Please proceed.
Hey, good morning, guys.
Hi, Brett.
On the topic of negative equity that you just mentioned I guess.
If theres going to be a move to maybe a lower loan to value.
In conjunction with maybe some negative equity showing up do you see that having any real impact on sort of a national Saar level or is it small enough it really doesn't count.
Brett Youre right. Its small enough I mean, that's why I made the comment at 15% to 20% of the consumer base that have transacted remember also that when you are calculating that this equity it's not just that this equity on the car, they're buying they're offsetting about half of that on an.
Evaluations of the trade and that they are dealing with so youre only taking about half of that that that that problem and carrying it forward on about 15% to 20% of the consumers. So we don't think it will have a material impact even if margins continue for another couple of years.
Okay, and then a question on <unk>.
Wholesale parts business I mean, obviously pretty significant growth. There is there anything driving that I guess from a mix standpoint, I mean, some of the collision guys had talked about supply chain problems or your.
Wholesale parts growth more mechanical or in the collision space or whats driving that strength.
Well, we did have body shop that was finally up but I really believe that it's with Chris spoke to which is really that we got do it do it yourself or is that still are working from home and.
They figure out how to manage their time better and as such they are buying parts directly and we're not putting them on the cars for them or we're selling them to the shops at maybe are a little bit more cost effective than the normal dealer now we do sell non OEM parts to consumers as well and we've done that for now almost through <unk>.
Okay.
Okay. So post warranty period, we're pretty price.
Competitive so in our markets, there's not a lot of aftermarket business leftover after.
After we take it post warranty period.
Okay, Great I appreciate it thank you thanks.
Thanks, Brett.
Our next question is from Kate Mcshane with Goldman Sachs. Please proceed.
Hi, good morning, Thanks for taking our question.
And most of our questions have been answered, but just in.
The.
Sense of just the impact of higher gas prices I know you've mentioned overall had no effect on demand, but has there been any change in mix.
In terms of demand for larger vehicles, and Suvs has that changed at all given the change in gas prices.
The one mixed shift and thanks for your question Kate is we were up 58% and sustainable vehicle sales. So that's a that's a pretty big units shift, okay and that could have some impact from gas prices and obviously, there's affordability issues that come with sustainability.
So I think what people, having a little bit more money in their pockets. It does create that transition that we're all hoping for a little bit quicker outside of our traditional vehicle sales or a mix from from more content or bigger vehicles, we're not seeing massive shifts away from.
Large suvs or trucks like we did see.
What was it about 10 years ago, when we went through the cat the gas crunch.
A decade or so ago. So today it looks it looks pretty stable, but I would expect that that <expletive> .
As things subside and people are running out of their their funds that they receive from the government I would expect that we will see some subsidized or some.
<unk> of growth rates and our sustainable vehicles now hopefully we can continue to take more market share and exceed what the national levels are to be able to conquest market share.
Thank you.
Thanks Kate.
And our next question is from David Whiston with Morningstar. Please proceed.
Thanks, Good morning on <unk>.
<unk> I was just you talked you mentioned on the call earlier that you give customers a tailored presentation to them I was just curious how do you present that value opportunity for the customer to choose dfc over one of the many other lending partners out there like a change capital one ally et cetera is it purely.
I suspect that youre, not just purely undercutting them in interest rates, but could you just give a little more detail would be great.
So thank you David this is Chuck so first.
Within our environment, we have the direct and indirect lending model. So it's actually our F&I specialists within our dealerships, who actually are placing the paper with the lender of best fit so they really are looking at each individual consumers.
Needs in terms of how they want to structure the deal in terms of potentially down payments interest rate term and other factors to make sure that they have the optimal mix of meeting their needs and their individual financial situation and then matching that to a lender like Dfc and I think one of the big advantages for Dfc is is that we can communicate.
With our fellow employees on a real time basis to make sure that when we have optimized what's best for the consumer we can respond with an offer that fits those needs and thats one of our big competitive advantages.
Okay.
<unk>.
And then on.
Shifting gears over to the continued growth of Tesla with their direct to consumer model I'm. Just curious if your either your premium brands are any of your brand stores are getting hurt at all of our customers' growth.
Would there be if there was no chip shortage impacting production.
Yeah.
So we are we are not seeing it okay, and though tesla's market share continues to grow we were up in the quarter.
BMW was up 31% in unit sales.
And Mercedes was down just a touch okay. So the two big competitors are looking pretty good and the Super high lines I mean I'm not sure. This is that relevant Genesis was up almost double over last year Theres. Some theres some real keys at the rest of it is all premium locks probably not not that relevant.
Even though some of them were up over 100% so.
We think that the DTC model is how we mirrored driveway and green cars experiences.
That's important to remember we also I would imagine or have one of the largest <unk>.
Resellers of Tesla vehicles.
In the country, knowing that we sold the 10000.
And to be fair, it's setting a high bar for our manufacturers to aspire and to compete with them today. They are doing a pretty good job of.
Job at it because 70% of those sustainable vehicles, we sold in the quarter were from.
We're from our traditional manufacturers and where new okay.
Okay. We got every manufacturer pretty much now has a full EV.
So have plug in hybrids, which are almost 30% lower cost in fact, I think I'm buying.
BMW X five hybrid that goes 32 miles on a charge, which means I pretty much never have to put gas in my car and nets out at $60000 fully loaded X five with the with the federal funds. So we think that they are nicely positioned in most of the mainstream manufacturers have cui.
A bit of cars coming through as well and I think maybe even more important in terms of the DTC.
Sure.
Very well aligned with our manufacturer partners from a tier one in a tier three level in marketing and from consumer experience from factory to drive way that is the right answer for the consumers that will ultimately drive market share for their growth and the sustainability sector as well.
Yeah.
That's helpful. Just a real quick finally, do you guys still own your stake in shifts and if you do what are the long term plans for that.
We do we still I don't even know what our percentage I'm going to guess, 15% 16% of shift in.
It's still a wonderful source to be able to share information and ideas and.
And still like to have that as a resource knowing that there are 300 miles away and their views on.
The new World of E Commerce as is important to how we think about things.
I hope they feel the same about us.
Okay. Thanks, everyone.
Thanks, David.
And now our final question is from Glenn Chin with Seaport Research partners. Please proceed.
Good morning folks.
Yes.
Hi, Brian industry chatter as well.
<unk> sold several stores in the quarter can you talk to us about why the stores are sold.
The annualized revenue they contributed and if he can the multiples that you are getting on those stores.
Sure sure.
I think most importantly, we always optimize our network.
To make sure that it's clean.
We bought stores over over the years that.
That we're in groups typically that weren't right for Lithia and it's a matter of divesting. The I believe it was the annual run rate of about $90 million is that right Jack $90 million about $90 million were sold in the quarter. Okay. In a number of those were assets that we just don't believe.
Our assets that.
To some extent saleable, okay and in this environment everything is kind of saleable. So we took advantage of that and divested those stores and youll see youll, probably see more of that in the next few quarters, we probably have a half a dozen stores that are typically smaller stores may be located in an area, where it's not helping our network.
Our network at all meaning it's a duplicate store our secondary store or it's into smaller market. We're utilizing a general manager talent and you can reposition them in a better and bigger store.
Mhm, Okay, and I think likewise, Brian you sold several stores.
Also from the <unk> group in the fourth quarter is annualized revenue contribution from that set of stores also.
Not material.
This portion.
Yes, I mean, the stuff that was sold on their car bone group was a small chevy and GNC store.
Small Hyundai store.
And what that little Nissan store is that right. It's immaterial MW store, yeah. If you know Utica, it's about a 300000 person market registers about 12000 13000 vehicles. So you are talking about new car franchises, it's selling in the two to 300 units a year. Okay. So what we ended up with in the marketplace is a very.
Strong Dodge store.
And Jeep store are very strong Ford store are very strong Honda store in a very strong Subaru store and Thats, what our footprint will look like going forward in Utica.
Okay, and then just one more so on the flip side any movement on the multiples that youre seeing.
In the marketplace to sort of the asks.
Yeah.
I would say that the overall marketplace place probably has moved but with $15 billion and the pipeline. We havent, okay. Even though we believe that we're the best buyer for most businesses.
Discerning so when we when we assemble that $15 billion, that's assets that fit our network strategy model and the six regional strategy. So we don't we don't typically have to flex on price and most of ours are.
They're not just looking to sell their business. They are looking to provide opportunities for their team and the people that they built for years and be part of.
The next evolution of automotive retail of whether Thats in network or whether that's in home.
Okay very good thanks very much.
Thanks Glenn.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments. Thank.
Thanks, Sherry and thanks, everyone for joining us today, we look forward to updating you on lithium driveways second quarter results in July again bye bye.
Yeah.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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