Q4 2022 Lithia Motors Inc Earnings Call
Yeah.
[music].
Good morning, and welcome to the Lithia and driveway fourth quarter 2022 conference call.
All lines have been placed on mute to prevent background noise. After the Speakers' remarks, there will be a question and answer session I would now like to turn the call over to Amit Marwa Hawkes director of Investor Relations. Please begin.
Thank you with me today are Bryan Deboer, President and CEO , Chris Holzschuh, Executive Vice President and C O Tina.
Tina Miller, Senior Vice President and CFO , and Chuck Lietz, Senior Vice President of driveway finance.
Today's discussion May include statements about future events financial projections and expectations about the company's products markets and growth.
Such statements are forward looking and subject to risks and uncertainties that could cause actual results to 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 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 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 investors got Lithia driveway.
Com highlighting our fourth quarter results with that I would like to turn the call over to Bryan Deboer, President and CEO .
Thanks, Amit and good morning, everyone. We appreciate you joining us today and look forward to updating you on our business growth and how our differentiated strategy is progressing.
We posted another record year of revenues and earnings.
In 2022, we grew revenues to $28 2 billion up 24% from 2021.
For the past three years and since the launch of our 2025 plan, we have over double the size of our company from $12 7 billion in revenues and have nearly quadrupled EPS from $11 76.
Back in 2018 to $44.42 in 2022.
Driven by a team.
Culture of high performance, our focus on customer optionality to attract and interact with customers and investments in adjacencies to expand our profitability. We are well positioned for continued growth.
We have constructed a nimble platform that combines our experienced knowledgeable customer centric team with the most expansive and diversified nationwide network in North America with a massive capacity to continue to scale. The network. We are truly living our mission of growth powered by people. This foundation has been key to our consistent.
<unk> growth and ability to consolidate a highly fragmented industry.
What began as a regional platform is moving towards a global platform with innovative technology diversified products brands and financial solutions.
In the fourth quarter, we reported adjusted EPS of $9.05.
Our teams are navigating through the used vehicle market as it rebalancing at a gradual and orderly pace of shared on previous calls.
Our vehicle operations SG&A as a percentage of gross was 60% excluding the burn rates of our two adjacencies.
<unk> revenue was impacted by our new vehicle mix, having tepid volumes at two of our domestic manufacturer partners.
New car inventory is also rebuilding but are less uniform rate and vary by OEM. After experienced the lowest new vehicle Saar since 2012, we anticipate Saar in 2023 to be between 14, five and 15 million units.
S perspective, the industry averaged a 17 million vehicles Saar between 2015 to 2019, implying a future Alaska up 17% in addition to conquest market share.
We're pleased to have Chris back at home nurse call to provide additional color on the quarter in a few minutes.
Our vehicle operations continue to lead the Omnichannel auto retail evolution are quickly growing infrastructure of omnichannel options ranging from physical store footprint to technologies offered by our stores to drive land Green cars combined to provide customers with a variety of flexible options throughout their vehicle ownership.
Lifecycle, our core store operations massive growth and performance remains strong and continues to produce one of the highest operating margins in lowest SG&A costs in the industry.
Moving to our digital channels, our combined average monthly unique visitors reached $10 million in the quarter, an increase of 94% compared to last year with our spend only increasing 33%.
Driveway and Green cars traffic was particularly strong growing 236% to nearly $2 5 million visitors per month during the quarter.
Africa across all digital channels continues to gain momentum driven by a robust inventory selection and a variety of products and experiences.
During the year, 22% of our vehicles were sold to customers utilizing our omnichannel technology in our stores driveway Green cars, representing just five just shy of $5 billion in revenue.
<unk>, our innovative technology platform with a negotiation free fully online vehicle shopping and selling experience generated revenues of nearly $900 million into 2022. This combination of in store options in our driveway experience expands the reach of our network with our stores interacting with our.
Over 90% of customers in the countries being within 100 miles now.
Driveway continues to conquest, new customers with over 97% of its business coming from new customers to land within the last decade.
Moving to our financing operations Driveway Finance Corporation, our Dfc for short ended the year at over $2 billion in receivables solidly positioning Dfc is the largest lender in our network penetration rate rose 200 basis points from the previous quarter to over 13% and we.
At over 19000 loans in the fourth quarter.
Last week, we completed our third ABS securitization accompanied by an investment grade rating by both Moody's and KBR, Inc.
We believe this reiterates the strength quality and disciplined nature of our captive finance decision, making and the differentiation from our other used only retailers with captive finance arms.
As such we are extremely pleased with how this adjacency has laid the foundation for expanding our profitability in the future I'd like to commend our entire Dfc team and check who will be providing more color on our results and outlook later in the call.
Now turning to acquisitions in the fourth quarter, we made four notable acquisitions, including grant Glens Freedom C. J D R and Kentucky Ferrari of Denver, the sole dealership of its kind in the center of Rockies.
Matter C. J D R. In the Dallas Fort worth area further expanding our footprint in the Lone Star State and finally, the air stream portfolio. We've mentioned on our last earnings call. So far in 2023, we've kept pace with the momentum we built through 2022 acquiring another $50 million in annualized revenue.
To start the year off.
We expect this to be another significant significant year of growth for the network.
We acquired over $3 $5 billion in annualized revenues during the full year of 2022 and nearly all public company M&A activity for the year as shown on our slide 11 of our recently updated investor presentation since launching our five year plan in mid 2020, we have acquired a total of 13.
<unk> 9 billion.
63% of the total $20 billion originally targeted by 2025.
Our patient disciplined and consistent approach towards acquisitions continues to generate massive value by maintaining our multi decade long valuation methodology of 3% to seven times normalized environment earnings levels.
We have made a conscious decision to utilize the majority of our cash flows towards acquisitions, rather than redistributing them, primarily towards shareholders or paying down debt.
As such we have and will continue to establish the foundation for massive competitive advantages in size scale SG&A cost leverage interest cost profitability levels, and most importantly, consumer optionality and attachment.
As we hit the midpoint of our 2025 plan, we remain confident that our strategy is durable and have clear sight to achieving the $50 billion revenue target our portfolio mix, new Adjacencies and focus on profitability transit late into better operating leverage with the ability for $1 billion.
Revenue to drive up to a $1 20 in EPS by 2025 up from our historical ratio of a dollar in EPS and eventually achieve the $2 in EPS future target.
Let me take a few moments and outlined the drivers to achieve our 2025 plan.
First we continued to drive consumer optionality operational efficiency across all platforms.
We are prioritizing our profitability goals as we optimize and integrate our omnichannel options, which will result in improved margins and leverage our network and cost structure.
In addition to continually driving high performance. This will help drive SG&A as a percentage of gross profit below 60% and a normalized GPU environment enhance liquidity and continued cash flow generation.
Second the investment in our financing operations Dfc will grow our earnings power and diversify our portfolio as demonstrated by Dfc's capital structure moving to sustainable self funding DSC is maturing and effectively managing its growth.
We're targeting a 15% to 20% penetration rate of Dfc, primarily driven by used vehicles and we are well on our way to profitability later this year.
Third we continue our cadence of growing our network the backbone of our plan through acquisitions and.
Growth of our physical network to reach 95% of our consumers within 100 miles creates the foundation.
<unk> of our business it gives us the ability to physically reach customers throughout their ownership lifecycle within a two hour proximity.
Acquisitions continue to be the core competency of lad to consistently generate strong returns, while optimizing the network with timely profitable and strategic divestitures of smaller poor performing stores that lack strategic value to the network.
Lastly, we remain financially disciplined with a strong balance sheet and committed to capital allocation strategy focused on the best risk reward for our shareholders, we've reduced our leverage over the past several quarters, while still growing through acquisitions we.
We invested in network growth, our omni channel tools growing our captive finance business and generated meaningful shareholder returns through dividends and share repurchase.
As crafted a half a decade ago, we continue to believe in our longer term strategy, while finding the balance between smaller shorter term gains and long term strategic positioning.
Lithium driveway is well underway towards building, a differentiated diversified mobility and transportation platform across multiple geographies.
We're focusing on making the experience of owning a vehicle easy and hassle free with strategically designed and position options for all types of owners across our network and e-commerce platforms, including our captive finance arm.
Core to our business is delivering highly profitable growth as we continued to execute on our 2025 planned to reach $50 billion in revenue and our longer term ambition of $2 of EPS for every $1 billion in revenue with that I'll turn the call over to Chris.
Bryan it's good to join everyone on the call today to provide a brief overview of our operating results and discuss our focus areas for 2023, however, before jumping in I'd like to congratulate our 2022 class of Lithia Partners group winners better known internally as the LPG. These 56 leaders and their teams generated the highest performance levels among their peers.
Last year independent of store size franchise representation or geographic location. These stores led their market share with exceptional consumer satisfaction and solid profitability. They were also key supporters of driveway Dfc and green cars executed the majority of our mobile service and at home pickup in.
Delivery, all while growing future team leaders, we now have over 40% of our eligible store leaders attaining this covenant status and we look forward to all of our teams attaining LPG status in future years now to the quarter overall same store gross profit declined 12% as the recovery in new vehicle volume trends did not offset the expected.
Declines in vehicle gross profit per unit, our GPU as we transitioned out of the Covid fueled retail environment.
New vehicle Gpus, including F&I was $7719 per unit compared to $8593 to prior year.
Used vehicle Gpus, including F&I were down to $4028 from $5341 in the prior quarter.
F&I results were strong at just over 2117 per unit down from 2160 $2 million the previous year.
As a reminder, new vehicle GPU levels are still significantly above our historical levels from 2019 of around $3600 per unit.
Used vehicle Gpus have returned to pre COVID-19 levels.
During the quarter combined important luxury vehicle sales were relatively strong growing in the low single digits offset by domestic sales, which fell over 10% on a same store basis, while domestic Oems make up about 27% of our new vehicle sales were starting to see a shift towards additional incentives from these Oems on certain product lines.
Which we expect to continue into 2023 as normalization in the market continues.
Used vehicle prices averaged $29545 up nearly 2% from last year as a top of funnel franchise dealer, we remain aggressive on retaining trades, we are offering as well as the continued procurement of inventory from all external channels, even as pricing pressure on used continues with the rising interest rate environment and recovering.
Vehicle inventory supply transitory issues and pricing pressure on used vehicles should have a minimal impact on 2023, as we carry less than 60 days supply and a shortage of late model used vehicles from the abnormally depressed new vehicle Saar environment takes years to normalize.
At the end of December new and used vehicle days' supply were 47 days and 55 days compared to 39 days and 65 days at the end of the third quarter customers. Appreciate our vast range of products at all price levels, including the option to purchase and service vehicles up to 20 years and older as represented in our value Auto segment, which is 17.
The percent of our used vehicle sales volumes.
Our nationwide network align with the execution by local market leadership cast a wide net across all geographies and allows us to service a diverse set of demographics and purchasing preferences with one team working together, we can service local markets individually, our ship vehicles regionally or across North America as represented by driveway.
Or the average distance delivered is over 900 miles.
Providing a negotiated experienced in our local network and a negotiation free process through the driveway National channel allows consumers empowerment and the option to choose their pathway as.
As we continue to gain further insights on the consumers and the relationship between product demand by market, our stores are making better decisions to price and merchandise our products across platforms, resulting in better economics.
Her time this will translate to significantly more leverage in our network.
Our after sales business remains strong across all business lines up eight 4% in the quarter with a record units in operation and an average age of vehicle over 13 years, we anticipate continued growth throughout 2023.
Shifting to SG&A core operations, excluding adjacencies generated SG&A as a percentage of growth below 60% on the quarter.
However, even in the core business, there remains ample opportunity to improve our operating leverage and our lower quartile segments of stores, which vary across geography and size. We estimate there is upward of 250 basis points or $125 million in additional profitability, we can achieve by solely moving this bottom.
For tile to an average level of performance.
These focused stores are expected to continue to improve topline growth boost productivity drive down costs and enhance utilization of our innovative technology solutions as illustrated our best stores in this environment aligned with LPG attainment achieve SG&A to growth of 48% or better Conversely, theres a cluster.
Our stores operating at 75% SG&A to growth in our operation and our operations team is focused on improving the results at these locations.
Over the past three years, we've invested nearly 40 locations with an average revenue per store, a $42 million and replace them with larger stores, averaging over $100 million in revenue and performance level in our upper quartile in many cases, we remain diligent on optimizing our network, where it makes sense and look forward to continuing our high cadence M&A growth trajectory.
Great.
In summary, each day, our team is rising to the challenge to aggressively to meet the needs of consumers in the ever changing future of automotive retail.
Motivated by the evolution in our core business and look forward to navigating through the transformation to become a more diversified greater consumer Optionality company. The team is looking to improve across all of our business lines leveling up our digital retail readiness, leveraging our cost structure at new levels and driving incremental profit to the bottom line and will eventually.
Translate to $2 in EPS for every $1 billion in revenue we generate there.
Our efforts will continue to evolve our in store and at home solutions to meet consumers wherever whenever and however, they choose we remain humble and look towards another strong year as we remain laser focused on achieving our plan with that I'd like to turn the call over to Chuck.
Thanks, Chris.
<unk> posted a solid finish to the year and continues to be the premier lender for lithium driveway. Our business strategy has remained consistent as we continue to maximize the economic returns by managing risk, while leveraging the benefits of being a captive lender. We continue to move upmarket in terms of credit quality to help mitigate the overall risk.
And the portfolio, our near term objectives continue to be growing the portfolio, creating a systematic and scalable capital structure and achieving segment profitability in 2023.
In Q4, the portfolio grew to just over 2 billion driven by the measured growth in originations, which totaled $605 million.
Clearly loan originations had a weighted average APR of eight 2%, while our cost of funds rose to four 8% in line with recent rate increases by the Federal reserve we.
We have continued to pass along rate increases to our customers at an incremental rate without degradation to our credit quality, our underwriting standards for the quarter. Our financing operations achieved a net interest margin of $23 million with a loss of $8 million, including provision expenses of $19 million.
In the fourth quarter Dfc's penetration rate rose to over 13% and averaged just over 10% for the full year going into 2023, we expect penetration rates to remain stable between 12 and 13% our decision.
To adjust the pace of originations growth, particularly in the near term stems from our goal of achieving profitability this year and maintaining our current portfolio risk profile.
The average FICO score for loans originated in Q4 was 732 up from 721 in Q3 total portfolio weighted average FICO scores increased from 700 to 700 ways. During the same period, we reviewed reduced front and ltvs for three consecutive quarters with Q4 originations at 97, 2%.
A reduction of nearly 200 basis points sequentially and over a 700 basis point reduction from Q4 2021.
At the end of December our allowance for loan losses, as a percentage of managed receivables rose slightly but in line with expectations to three 1%, bringing our total allowance to $65 1 million overall, we're seeing some signs of stability and delinquency rates, especially at the tail end of Q4 were <unk> 30, plus.
Delinquency fell approximately 40 basis points to four 1%. This was primarily driven by a combination of dfc's improved credit quality and deployment of advanced telephony system in Q4.
Net charge offs increased slightly quarter over quarter, which was primarily a result of the rapid growth in our portfolio, but also a deterioration in net recovery rates as wholesale vehicle auction values declined.
While the increase in net charge offs due to the rapid growth of the portfolio was expected we will continue to optimize vehicle recovery activities, while waiting for 2022 originations with a lower average LTV to help mitigate reductions in used car values last week, we closed and our third ABS term offering for $480 million.
This offering was dsc's first where tranche carried a AAA rated as rated by both Moody's and KBR rate.
ABS term market was particularly receptive to this offering with all tranches being materially oversubscribed, which allowed significant tightening of final credit spreads versus initial pricing guidance Dfc remains committed to utilizing the avs term market as our primary near term source of capital as this is a critical step towards becoming a materially.
Funding entity.
Becoming a periodic programmatic avs term issue will lessen dsc's reliance on parent company capital, thereby allowing labs to deploy forward looking liquidity towards other growth initiatives for 2023 business fundamentals across Dfc should result in a near term improvement in profitability. However, the <unk>.
Negative impact of further volatility in either Gse's cost of funds our credit performance with some results could impact gse's profitability on a forward looking basis.
In closing we are excited by the results Dfc has achieved up to this point, we are constructive on hitting penetration rates of 20% by 2025 as lab moves towards achieving $50 billion in revenues, which as a reminder, this should result in excess of $500 million of pre tax income once dfc reaches a steady state portfolio and <unk>.
Normalizing for this vessel reserves DMC at end state will become a major contributor to labs future where $2 of earnings per share is generated for every $1 billion of revenue. We are particularly excited about achieving segment profitability in 2023, and the breakout of our financial results as a foundational milestones to drive visibility.
As we look to meet this goal our prudent approach towards managing credit risk, while balancing growth positions BSC to achieve our kpis going forward I'll now turn the call over to our Chief Financial Officer Gina.
Thanks, Chuck. Thank you again for joining US today, we have received great feedback from our investors and appreciate your support and patience as we outlined the multiple financial levers, we navigate within our 2025 plan the growth and expansion of DSP with that we have restated our segments to vehicle operations and financing operations.
Adding greater visibility to the operational results of DSC as a result of this we have added a financing operations income loss line to our income statement. This line represents the interest income earned less the interest expense associated with DSC directly associated SG&A expenses and the change in provision and depreciation.
From our leasing portfolio.
Most of these items, except depreciation were previously reported within SG&A to assist in understanding the impact that these re classes. We've added a reconciliation to our investor presentation on slide 24.
During the fourth quarter, we reported adjusted EBITDA of $421 million down 22% from last year. The change was attributable to a decline in gross profit and higher interest costs associated with DFT as the portfolio grows we ended the year with leverage at one five times flat with the prior quarter and providing substantial headroom for.
Growth in 2023.
During the year, we generated over $1 1 billion in free cash flow and deployed over $2 billion in capital.
Of this amount approximately half went toward acquisitions and a third towards share buybacks. This resulted in the repurchasing of approximately 8% of our flow in 2022.
Our strong earnings year provided us the opportunity to concurrently return value to shareholders through share repurchases and an increased dividend, while maintaining strong growth through acquisition.
2023, our outlook remains constructive and optimistic overall, we expect new and used vehicle Saar to grow 3% to 5% as a reminder, we believe earnings will be impacted by declining Gpus and are assuming the following.
Store unit growth for new in the mid to low single digits and used in the high single digits as we navigate this transitory environment with supply and demand normalizing new vehicle Gpus will continue to moderate assuming a decline of about $200 per unit. Each month throughout 2023. This would average to a GPU of $3800.
And end the year, a little above pre pandemic levels.
F&I per unit may be impacted by rising interest rates and consumer affordability and are estimated to be around $18 50 for the year.
We expect service body and parts revenues to grow in the mid to high single digits with margins consistent with historical levels and.
And finally, we target SG&A as a percentage of gross profit in the range of 61% to 64%, which includes the impact of strategic investments, we are making for the future give.
Given these assumptions, we estimate free cash flow net of capital expenditures and dividends to roughly exceed a $1 billion in 2023 at our disciplined hurdle rates deployment of all of our free cash to acquisitions with represent 4 billion in annualized revenue.
Balancing growth and returns for our shareholders, our pillars to us reaching $50 billion in revenue our proven consistent ability to grow through acquisition underlies our strategy and provides us a size and scale to optimize our profitability and fully leverage our in store and online channels, incorporating adjacencies bite Dfc Diversifies our business.
Leaves the foundation for significantly expanding margins in the future.
Our strong balance sheet and capital generation positions us well to continue the growth we have achieved since the launch of the 2025 plan, we see a clear line of sight to increasing profitability from our historical 1 billion in revenue generating $1 EPS to generating up to a $1 20 in EPS by 2025, and then lock in the long term and ambitious too.
And EPS per $1 billion in revenue.
This concludes our prepared remarks with that I'll turn the call over to the audience for questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
We ask that you limit your questions to one so that others may have the opportunity to ask questions. You may reenter the queue by pressing star one for <unk>.
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Your first question comes from Daniel <unk> with Stephens. Please go ahead.
Yes, good morning, everybody. Thanks for taking our question.
Brian I wanted to start on SG&A I think given how strong Gpus date. It was a bit surprising just some of the deleverage there I think in your prepared remarks, you mentioned that burn rate to do Adjacencies, where at least a couple of hundred basis points of deleverage there, but could you maybe help quantify other than Dfc, maybe what the burn rate was from some of those adjacency growth.
And then looking forward what gives you that confidence to go to get back towards that sub 60% SG&A to gross within Youre talking to me about targets. Thanks.
Sure Daniel and good morning, everyone.
I think most importantly.
What we saw in the quarter was those two domestic manufacturers that had massive drops in there year over year sales it made up about.
It made up about 20% of our total volume.
And their growth on those manufacturers were down almost 35%. So it was hard to outpace that that made up.
We're estimating about 30% to 40% of the SG&A impact, which you think gross and how does that impact SG&A, but it does when the topline number goes down a fairly big amount and its a direct reflection on SG&A. So we think about a third of it is that okay. The remaining two thirds is coming.
The Adjacencies and like we've discussed before I mean, we really believe that those adjacencies are the right answers long term to be able to continue to aggregate this sector and really show.
A competitive advantage versus.
The rest of the marketplace in terms of looking forward, we're still looking at an approximate 200 dollar decrease in new Gpus throughout the year and as Tina mentioned on the prepared remarks that gets us a little bit higher than pre pandemic levels are about.
Down about <unk>.
<unk> hundred dollars.
For the year, Okay, and then obviously F&I were modeling a little bit down as well, but all in all I mean, if it wasn't for those domestic to.
Domestic manufacturers and Chris can talk about it in just a little bit, but we're fortunate they're starting to react now to the higher inventories. It may look a little different than some of the others in the space.
And if I can follow up on SG&A, Brian I guess just to clarify I think it was my understanding. This is the last quarter you can do write down any of the shift options you guys have in that investment was there any charge on the P&L from that investment kind of flowing through or was that in SG&A or or was that somewhere else.
Hey, Daniel this is Tina any adjustments, we make on this shift investment they actually flow through either so it won't be within that SG&A line and the answer is I don't believe we had any for the quarter and theres only about $7 million remaining on that investment.
Well minor amount, we call that out in the pro forma adjustments in the press release got it perfect I'll stick to one question I'll hop back in the queue. Thanks guys.
Next question comes from Rajat Gupta with Jpmorgan. Please go ahead.
Great. Thanks for taking the question.
On DSP it looks like the average coupon was greater than 10% in <unk>.
Why is it taking a step lower in 2023.
5% to 10% range or was it a bit perplexed by Bob.
Just more mix shift to higher FICO scores or Oregon.
Nothing to do with the newest amusement.
Any color on that would be helpful and I have a follow up.
Yes, Hey, Raj. This is Chuck thanks for your question.
With regards to yields on Dfc, we've had some price increases in the second half of the year and we're continuing to closely monitor what's happening in the marketplace as the federal reserve continues to increase rates in terms of where we see our yields eventually leveling out in the near term is probably in that 9% to 10%. So we still got a ways to.
Go to move that up as we continue to monitor but.
We will move as the market moves.
Got it got it.
Follow up on this ethanol, but the 18 50 numbers you mentioned.
Is that taking into account the fact that you lost your.
You'll have more DSP alarmed or just trying to understand like it seems like a pretty sizable step down for the full year average so just curious.
How that progresses through the year.
And the impact on Dfc.
Yes. Good morning. This is Chris I think operationally, what we're trying to anticipate the impact in a rising rate environment.
Consumers are able to absorb in F&I and just trying to be a little bit proactive and probably a little conservative on what F&I might look like in 2023% to $18 50, which is about $150 drop off of where we have seen things. The last couple of years here.
Nothing to do with DSC.
Next question comes from John Murphy with Bank of America. Please go ahead.
Good morning, guys I just wanted to follow up on the G&A.
Gross because theres, a kind of a lot of moving pieces here and I think there's a lot of.
Confusion.
As we think about sort of a standard forget about the adjacencies for a second decline in dollar gross theres typically sort of a natural response, particularly on new Gpus from about 30%, 30% just naturally on SG&A I think I'm just going to correct me if I'm wrong I just wanted to clarify that.
And how we really shouldnt be thinking about sort of aggregate GPU or it's down.
Gross if it's down 100 should we think about SG&A sort of subsequently because of the way that variable comp works being down 30 ran I'm just I'm just trying to understand sort of a rule of thumb here and then if we could also just clarify as we think about the adjacencies how much of that spend will go up on a on an sort of an absolute basis year over year.
In 2023 versus 2022 or does that level off.
Yes, good morning, John This is Chris.
Youre right I think the way that we look at kind of our overall gross profit decline of our gross profit improvement the expectation that we have in our stores at a minimum is at 50% will be called throughput, meaning that for every incremental dollar in gross or every dollar that you're losing gross you should see at least 50% of that impact the net profit either direction.
But as we laid out in slide nine and the new slide deck I'm just focused on the core operations for a minute, we realize theres a lot of opportunity now to reset kind of our cost structure off of where we've been kind of in the last couple of years in this COVID-19 environment.
No.
Hi, grosses lack of supply things like that kind of impacted.
Negatively the overall.
Productivity and compensation alignment that we have in the stores and starting in late Q4, we launched a big initiative internally operationally to focus on those stores is not all of them, but you can see that we have a number of stores that are falling well below even average and what kind of contribution they make on an SG&A to gross basis.
And bringing profit to the bottom line and so we expect that by the end of Q1.
We should pick up probably 100 to 150 basis points annually and savings from the initiatives that we're launching in the core business. Okay, and then outside of that as Brian and I, both reiterated that our core business is running right now at about a 60% SG&A to gross that leaves about 3%.
That needs to be explained by the Adjacencies and other factors and I'll, let Brian talk about the.
The adjacencies.
Chris.
John I think as we as we think about going forward, which I believe was your question. It's important to understand that how we've built our entire model is built around the foundation that these adjacencies are going to take us to the promised land someday.
And whether that's at at a mid state of 2025 or a future state beyond that we know that the adjacencies will yield the returns and higher higher advantages in the long term. We built those also to think about how you throttle those up and down and if we think.
<unk>.
There are two thirds impact that came from adjacencies on SG&A in the quarter. Okay. We know that that most of that is still coming from driveway not driveway finance, okay driveway finance should be profitable in 2023, okay important to remember in the the outside of the few.
<unk> driveway finances by 2025, it's going to make a $150 million to $200 million, which you know has a.
10, 15 central lift on EPS, and then the future state as a 30 to 40 <unk> lift on EPS. So we know where we're going on this it's very clear, but as you build seasonal reserves, it's quite punitive as you see on the driveway side. It does cost a lot of money to build the brand okay and we're finding.
Solutions of how to do it more efficiently and we will continue to be able to throttle that up and down depending on what the market conditions.
Give us.
And believe in the quarter that the decisions, we made to to some extent the cost ourselves 300300 basis points in SG&A, where fundamentally because of those decisions that we believe they did an omnichannel solution. It has the potential to get to $2 EPS and if you layer that over 50.
$1 billion in revenue, which were unclear trajectory towards you know it starts to it starts to produce quite a nice number that's differentiated from others in this space.
Thank you. Your next question comes from Chris political area with BNP Paribas. Please go ahead.
Hi, Thanks for taking the question.
So one quick one just a clinical one.
Follow up to a couple of questions I see the gross.
At the Detroit Auto losses stepped up materially this quarter.
I'm looking at my own model, they are strategic Roche ex DSD in it.
It's.
Pretty big inflection over the last two quarters two quarters, just trying to understand the driveway auto you saw for some reason a big step up in losses, there this quarter.
Okay.
There was a step up in losses, two quarters ago. So in Q3, we started to see increases in wholesale losses, we had ramped a few other things that our gross profits had had been hit pretty hard and that continued into Q4. Okay. We believe that the market has stabilized and I think we even mentioned this on driveway.
We typically are going through seasonality in Q4 and they it continues typically until about this time and unfortunately over the last few months or few.
Weeks, we have seen stabilization of valuations on used cars, which helps us in terms of our pricing and in terms of our wholesale.
Our evaluations.
Yes. So it leads me to my next question sorry, if this is kind of out of 'twenty.
What is.
One of the industry consultants spoke to kind of used volumes being up in January it seems like a pretty big inflection from Q4 wondering what youre seeing like what was the cadence of your used business throughout Q4, we're on a three year CAGR, one year, everyone and frame. It what have you seen kind of carry into January and February are you seeing signs that like somehow turned the corner on used or is this.
Temporary as dealers were de fleeting.
Inventory at a given price declines.
Yeah, I think Chris it's important to remember that on same stores, you've got to go back to the previous year to look at it and we have we had pretty good comps in Q4, but the comps start to subside a little bit in Q3, we're looking at an annual same store sales increase of of high single digits on used car. So yes, we are.
We're looking at at at increasing our market share and we believe the market will recover to some extent unused and as far as what's happening in January we'll give you. It will give you an update in April .
Next question Bret Jordan with Jefferies. Please go ahead, hey, good.
Morning, guys.
Yes.
As you look longer term I guess on the third quarter call you talked about Gpus on the new side may be getting back to a pre COVID-19 level or at least briefly maybe going below that do you think as you look out past 'twenty three that we are sustainably above historic Gpus in new or our incentives and inventory recoveries going to.
Take us back to prior levels.
Yeah. Good morning, Brett. This is Chris Yeah, I think that's why I kind of laid out kind of our forecast for kind of Gpus on new for the rest of the year kind of dropping at about $200 a month, which is the.
Impacts for that on an average basis will be about $200. This year year over year.
I will tell you, though that specifically as Brian pointed out with two of our domestic Oems, specifically Ford and slanted.
We saw a pretty big drop in our overall sales volumes in the quarter, which I think was 27% of our sales are domestic I think it had an outsized kind of impact as Brian alluded to on our overall gross profit I will tell you, though that starting in February we've seen a pretty massive pivot and those Oems as far as.
What they are doing specifically to move out 22 model year inventory, which is about 50% of the overall inventory we have and so our expectation now is that.
With kind of this supply and demand equation moderating in 2023.
Based on product line based on OEM, we're going to see additional support that we haven't seen the last couple of years.
And overall kind of incentives rebates et.
Et cetera that will that will help us kind of moderate the impact that we feel in 2023.
Thank you next question comes from Colin Langan with Wells Fargo. Please go ahead.
Oh, great. Thanks for taking my questions.
Just a follow up.
Kind of confused on that the GPU per unit is down it's because of Florida, Atlanta is having lower volume I would thought that affects sales. If you had lower volume wouldn't you be able to sell those at a higher GPU.
Yeah, I mean, maybe if you could kind of connect the two.
Yeah sure sure Collyn.
It's so this is Brian .
The on Chrysler our Gpus are overall gross was down 40% I'm still lantus, okay, and it was down 30% on forward inventories are building and as such you are trying to move product to help reduce your interest costs and so on and as such your Gpus drop okay and in terms of the.
SG&A impact, it's just that the overall SG&A, you've not adjusting your cost structures as quickly to compensate and to be able to leverage the cost structure that you have.
Got it okay.
Yeah, so leveraging future for them.
And then just also another question you had talked about you know about 50% SG&A for every sort of dollar of growth.
Is that accurate because that seems quite high to me because you're talking new Gpus are.
Since COVID-19.
$3500 that would almost be like a 2000 dollar added sales commission or what what are those variable costs that come out.
From SG&A that we should be thinking about.
Yes. Good morning. This is Chris again, I'd say that ultimately the line of sight that we had on the recovery in both supply.
In GPU has been pretty difficult over the last couple of years and given that 75% of our SG&A is personnel that is commission based in most cases.
Hi, Gpus translate to high Commission, Okay. That's high commissions not just for salespeople, but for our management team for our store operators, our general managers, our F&I managers all of those things have been inflated due to kind of this unusual supply and demand equation and so if you look back historically, though our expectation.
Because we didn't change pay going into that cycle coming out of that cycle. If you kind of do that quick math on on what that represents from a commission basis on a drop in growth. When you think about the number of people paid on the GPU on a single cardio for example, obviously.
It's going to go the other direction as well as Gpus drop and so yeah. Our expectation is that 50% throughput we've done it historically, we manage it operationally and while we didn't see it at the level that we thought we should have in Q4.
That's why we launched our whole operational team to focus on those stores that didn't get that and as you can see on slide nine if not all of them. We had several stores, especially in our larger store footprint that we're running 46% SG&A to growth through last year and I think that what we also see is the other side of that which is stores that are between 70 and 80.
590% SG&A to growth and those are the stores that we're focused on fixing that will translate into getting us quickly back to that 50% throughput number.
Next question comes from Adam Adam Jonas with Morgan Stanley . Please go ahead.
Hi, This is Daniela Hagen on for Adam Jonas.
So we heard a question about huge volumes I wanted to ask about used prices.
Recent Mannheim prints in conversations with some.
Thanks, Joe that the used market has been firming up so what do you see as driving this recent used car strength and how do you think.
How long does this trend can last.
Yeah. Good morning. This is Chris again, and I think the biggest driver that we see right now is there a seasonality I mean, it was nice to see the modernization of the moderation and the Manheim index.
And good news for US is as we carry only a $50 60 day supply of used car inventory the fluctuations in both directions get cleared pretty quickly through the pipeline and so I think asps in the quarter were still up like I don't see and I can tell you, but I think it was about 2% or something.
Our our bigger fundamental is as you start to see a recovery in new car inventory, how does that impact CPO, how does that in fact trades, how does that impact our ability to continue to drive.
Used car volumes, which is really our biggest driver in profitability because it's all about gross profit.
Which might actually be advantageous for us because consumers that have held their vehicles longer are going to fall more into those core and.
And value auto product lines, which generate a much higher return for us so.
We're very optimistic about the recovery in volume.
We feel like Thats, not just going to be great for new but it's going to be great for used and F&I.
The next question, David Whiston with mortgage Stark. Please go ahead Morningstar. Please go ahead.
Good morning, David.
Hey, everyone.
I guess just a question I wanted to ask you guys because I'm getting this from clients is that they are hearing some critics out there, saying well lithia can't get to their 50 billion dollar goal because the factory approval too much brand concentration one geographic market I'm sure you disagree with that but I'd love to just hear your take on that.
Sure, David and haven't they've been saying that since we were at 13 billion three years ago I think so anyway.
It's it's fun so we've actually run all the modeling and have the actual data.
We should be able to achieve domestic revenue between 70 and $90 billion, Okay based off framework agreements.
That we currently have in place, Okay, and we believe that some of those framework agreement you can grow beyond that through market share. So we can easily get to those numbers. It does require a little bit of optimization that you've seen over the last few years to really be able to maximize that performance, but the $50 billion. We believe is still is still.
Quite achievable, okay by by 2025.
So have you been doing this and given the framework you are citing youre getting absolutely no resistance from the factories on rate.
No I mean, we're back to the same excuses if the other peer group usually make as to why they can't buy deals its because theyre not structurally involved with every seller that debt.
That is what we would call attractive in the country and because lithia typically buys about half of all public deals over the last 10 years I mean look at this slide what slide are we on 13 I think it was <unk>.
<unk> 13 illustrates that but again, it's the same it's the same messaging that we heard for you know for the decade before 2021, when some other public spots in deals that do have problems with manufacturers, we do not have problems with any manufacturer, okay, and we will continue to grow towards the 70% <unk>.
Andy billions domestically.
Okay. I appreciate the clarity can I just ask one question on used real quick which is on value autos. The A&P. There's about 18000 now according to the slide deck.
That's just about pre pandemic asp's for the overall national use average little less so I'm just curious how much of that particular customer demographic struggling right now relative to your other used vehicle customers.
David This is Bryan again.
I think what we're seeing is it's quite difficult to buy those cars just like it always has and we're getting less and less of them through the channel than we typically would I believe pre pandemic and our value bucket, we were $14 million to $15 million.
14 to 15000 per unit, okay. So at the 18th out and that's still higher than what the than what we typically would want but really it's a matter of that the cost of the cars are just more expensive. So you know.
Unfortunately, affordability is still difficult and even though we have you know almost a fifth of our sales coming from the nine year old and older vehicle.
It's not as affordable as it used to be and you know we try to do everything we can to be able to bring consumers in at all price points. They one other kind of fundamental noted we sold about 8% of our cars that were sustainable, okay, which is pretty cool for the year and <unk> and even though there are little more expensive than average <unk>.
Over an ice engine car that we sell is about 50% more expensive on a monthly payment of about $900. Instead of 600 to 300 Bucks more kind.
Kind of fundamental little tidbits, as we learn but it quickly grew to 758% of our total volume.
Thank you I will now turn the floor over to Brian for closing remarks.
Excellent well, thank you for joining us today, and we look forward to updating you on lithium driveways first quarter results in April .
All the best.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.