Good day and welcome to the Asbury Automotive Group Q1 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Karen Reid. Please go ahead. Thanks, Mary, and good morning, everyone. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's First Quarter 2022 Earnings Call. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Senior VP of Operations; and Michael Welch, our Senior VP and Chief Financial Officer. At the conclusion of our remarks, we will open the call for questions, and I will be available later for any follow-up questions that you may have. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts, and current expectations, each of which are subject to certain uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2021 and any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. We've also posted an updated investor presentation on our website, asburyauto.com, highlighting our first quarter results. It is now my pleasure to hand the call over to our CEO, David Hult. David?

Thank you, Karen, and good morning, everyone. Welcome to our first-quarter earnings call. Our first-quarter results were an all-time record for any quarter in Asbury's history. We continue to experience strong consumer demand, although our ability to meet this demand was constrained by very low new vehicle inventory. For the quarter, we grew adjusted EBITDA by $195 million to $336 million, and adjusted EPS from $4.68 to $9.27, an increase of 98%. We delivered an 8.2% adjusted operating margin, up 210 basis points. We increased revenue by $1.7 billion to $3.9 billion and increased gross profit by $409 million to $792 million. We drove F&I gross profit per vehicle to a record $2,481, up $742. We continue to have a disciplined approach around SG&A, resulting in a decline of 520 basis points from the prior year's first quarter. This was the first full quarter reflecting all of our 2021 acquisitions under the Asbury umbrella, and the strategic fit is clear. We are excited about our team and our ability to execute on our '25 plan. We see tremendous opportunity ahead of us as we roll out Clicklane to all acquired dealerships and integrate TCA into the legacy Asbury stores. Due to our record performance and strong cash flow, our balance sheet remains strong. Our adjusted operating cash flow for the first quarter was $406 million, an increase of $290 million over the first quarter of 2021. Our net leverage ended this quarter at 2.2x. During the quarter, we repurchased $200 million of our stock, which completed our share reauthorization. As we announced in our earnings release this morning, our Board of Directors has approved a new $200 million share repurchase authorization. Our near-term priority is to continue to integrate our recent acquisitions and use our strong free cash flow to lower our net debt level and return cash to shareholders through opportunistic share repurchases. At the same time, we'll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio. Due to the strong pace of acquisitions last year, we exceeded our 5-year acquisition target in the first year of the plan. Today, we'll be providing an update to our strategic growth plan that I will briefly discuss later in the call. We continue to operate in an unusual macro environment and experienced strong demand across all of our revenue streams. We do not anticipate a meaningful recovery in inventory levels in 2022 and believe these levels are unlikely to fully normalize until 2023. In these unusual times, our industry has benefited, which is reflected in our first-quarter results and demonstrates the value and the resilience of the franchise model. We look forward to continuing to deliver strong results for our shareholders, be outstanding partners with our OEMs to steward their great brands and offer an environment where our team members can thrive while providing the most guest-centric experience in automotive retail. Dan?

Thank you, David, and good morning, everyone. First, thank you to all of our dedicated teammates who work so hard to fulfill our commitment to being the most guest-centric automotive retailer. This quarter was a busy one for Asbury, as we continued to integrate acquisitions made in the fourth quarter of 2021, worked to close on our divestitures and developed a plan to expand Clicklane to acquired stores and TCA to legacy Asbury stores. Now I'll turn to our same-store performance compared to the first quarter of 2021, unless stated otherwise. Starting with new vehicles. In the first quarter, new vehicle inventory remained well below normalized levels and consumer demand continued to outstrip supply. At the end of March, our total new vehicle inventory was $207 million, and our days' supply was at 10 days, down 24 days from the prior year quarter. Given this dynamic, our new vehicle volume declined 20% year-over-year. However, we experienced a significant increase in our new average gross profit per vehicle, which increased $2,995 from the first quarter 2021 to a total of $5,750. We anticipate new inventory levels to remain low through 2022, and we are focused on maximizing profitability while also remaining steadfast in our commitment to our guests and our mission to be the most guest-centric automotive retailer. Turning to used vehicles. Our used vehicle retail volume increased 6%, which contributed to a 32% increase in used vehicle retail revenue. Used gross profit PVR increased by $209 to $2,228 compared to the first quarter of 2021, resulting in a 17% increase in used retail gross profit. Our total used vehicle inventory ended the quarter at $378 million, which represents a 28-day supply, up 1 day from the prior year. Our used to new ratio for the quarter was 114%. Shifting to F&I. Our strong, consistent sustainable growth in F&I delivered an increase of $634 to $2,376 per vehicle retailed from the prior year quarter. I'd like to thank our F&I team for this tremendous result. In addition, in the first quarter, our total front-end yield per vehicle increased $2,096 per vehicle to a record of $6,253. Moving to parts and service. Our parts and service revenue increased 14% in the quarter, while warranty revenue, which is outside of our control, dropped 12%. Our customer pay revenue continued its strong rebound, posting 17% growth, which is triple our normal growth. We achieved over 176,000 online service appointments, a 29% increase over the prior year quarter. Benefits of increasing online service appointments include enhancement to the customer experience, higher customer retention, higher conversion rates and higher dollars generated per repair order, which ultimately provides higher returns to our shareholders. We now have 4 full quarters with Clicklane at all legacy stores, and we couldn't be more pleased with the results we're seeing. We sold over 5,600 vehicles through Clicklane in the first quarter, of which 38% of them were new vehicles and 62% were used. In fact, March was Clicklane's best month ever. We believe sales of new vehicles were depressed due to a lack of inventory. 92% of our transactions this quarter were with customers that were incremental to Asbury's dealership network. Average transaction time remained roughly in line with prior quarters, as we saw a 0.5-minute increase to 8.5 minutes for cash and about a 0.5-minute decrease to 13.6 minutes for finance deals. In Q1, Clicklane deals had a front-end yield of $3,804 and an F&I per vehicle retail of $2,291, which equates to a $6,095 total front-end yield. The average Clicklane customer credit score continues to be over 700, which is higher than the average credit score at our stores. The average down payment for new vehicles was $8,921 and for used, was $6,869. 81% of consumers seeking financing received instant approval, while an additional 9% required some offline assistance. 90% of those that applied were approved for financing. 43% of Clicklane sales had trade-ins, with 62% of such trades reconditioned and retailed to consumers. And 95% of our Clicklane deliveries are within a 50-mile radius of our stores, thus allowing us the opportunity to retain our new customers in our parts and service department. Clicklane customers are converting at nearly double the rate of traditional Internet leads, but we won't see the full potential until inventory levels normalize. We are excited about the continued growth of Clicklane and the opportunity to accelerate that growth as we roll it out to our newly acquired stores. I will now hand the call over to Michael to discuss our financial performance. Michael?

Thank you, Dan. To our investors, analysts, team members and other participants on our call, good morning. I would like to provide some financial highlights, which marked another record quarter for our company. For additional details on our financial performance for the quarter, please see our financial supplement, our press release today, and our investor presentation on our website. As Dan mentioned, the first quarter was a busy one, with a number of internal initiatives going on. Overall, compared to the first quarter last year, we generated significant adjusted operating cash flow of $406 million, a year-over-year increase of $290 million, which combined with the proceeds from divested stores, allowed us to pay down $374 million of debt and our used vehicle floor plan line, and repurchased $200 million of our shares. Adjusted net income increased 134% to $212 million, and adjusted EPS increased 98% to $9.27. The net income for the first quarter of 2022 was adjusted for one-time pretax gains totaling $34 million or $1.11 per diluted share, primarily related to the sale of 4 dealerships in the quarter. Net income for the first quarter of 2021 was adjusted for one-time pretax gains of $4.6 million or $0.17 per diluted share, primarily related to gains on legal settlements, and pretax real estate-related charges of $1.8 million or $0.07 per diluted share. Excluding real estate purchases, we spent approximately $21 million on capital expenditures in the first quarter. Our balance sheet remains strong as we ended the quarter with approximately $805 million of liquidity, comprised of cash, excluding cash at Total Care Auto, floor plan offset accounts, and availability on both our used line and revolving credit facility. Also, at the end of the quarter, our pro forma adjusted net leverage ratio stood at 2.2x, down from 2.7x at year-end. As David stated, today we announced that our Board has approved a new $200 million share repurchase authorization. For 2022, we are planning on CapEx of approximately $175 million. This amount excludes real estate-related purchases and potential lease buyout opportunities that we consider to be financing transactions. One item that has a bit of a change is how we account for TCA revenue and expenses, and we've included a breakdown of TCA versus dealership operations in our earnings release. This quarter was our first full quarter of TCA. For the quarter, TCA made $16 million of pretax income, which included $2.7 million of unrealized losses on equity investments. Excluding the unrealized losses, TCA would have made $19 million for the quarter. We are currently working on the system integration and state licensing requirements for the Asbury rollout of TCA and plan to start our pilots for rollout in Q2. In closing, I would also like to thank all of our teammates throughout Asbury, who dedicate themselves to building a brighter future for ourselves, our communities, our shareholders, and all of our stakeholders. I will now hand the call back over to David to discuss the update to our strategic plan. David?

Thank you, Michael. As we mentioned on our last earnings call, today we are providing an update to our strategic plan which can be referenced on Slides 12 through 25 of our investor presentation. The acquisitions we made in 2021 almost doubled our annual revenue. Today, Asbury Automotive is a much larger, more productive and financially sound company with more opportunities to drive top-line growth. One example, with TCA, we are able to stay involved in the entire customer life cycle as well as now benefit from the claims side, which was never available to us before. Regarding Clicklane, given the metrics we spoke about earlier, we see a significant opportunity to leverage the high conversion rate as we roll out to the stores we acquired and provide a common digital platform. Our original plan for revenue growth or revenues was to grow from $8 billion to $20 billion by 2025. Because of the significant progress we made in 2021, on a pro forma basis, we are now just over $15 billion in revenue. I will now simply refer to Slide 24 of the presentation deck. Our new revenue goal is $32 billion by '25, representing an incremental $12 billion. The $12 billion is comprised of an additional same-store growth of $2 billion, an additional $3 billion in Clicklane revenue, and $7 billion from acquisitions. In terms of earnings per share, we are targeting EPS to be greater than $55 per share. This assumes a 1x leverage. If we were to increase our leverage to 2x and use those proceeds to purchase additional stores or buy back our stock, our EPS could exceed $72 per share. Now referring to Slide #25. Our free cash flow generated from our business of $3 billion and a modest increase to 2x leverage for an incremental $3 billion, we would have over $6 billion in cash to deploy between 2022 to 2025. So in closing, we believe that we have the right brands in the right states with the right people to execute our strategy to grow and improve our business. We are generating strong cash flow that will continue to lower our net leverage while allowing us the flexibility to balance acquiring additional assets and returning cash to shareholders through share repurchases. Finally, I would like to acknowledge the hard work and dedication of my fellow Asbury teammates. It is through your efforts that Asbury continues to produce strong results for our shareholders while bringing us closer to our goal of being the most guest-centric automotive retailer. Thank you all very much. This concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator?

We can now take our first question from Daniel Imbro of Stephen Inc.

David, I want to start on the used side of the business. I mean, the organic used growth uptick was near the best of the peer group and GPU really hung in there. So could you talk about maybe what you're seeing in terms of used demand, and how are you guys successfully capturing that used sale while maintaining GPUs?

This is Dan. I'll be glad to take that question. So we're pretty satisfied with the results even though we continue to focus on the acquisition of the inventory. We all know that is in used cars, where the return is generated. Close to 85%, 86% of our acquisition is coming through the consumer, whether it is in the form of our leased earnings, trades or buying cars directly from the consumers. And we know and we believe that, that is what is allowing us to continue to report the margins and the PVRs that you are seeing today. In addition to that, the benefits Clicklane brings, to be able to provide a digital retail environment online, we see the benefit of that as well from a used car perspective. So overall, we will continue to focus on that strategy and continue to execute as we move forward.

The one thing I'll add to that, we decoupled our trade tool inside of Clicklane to allow consumers to sell their vehicles direct to us. We'll talk about it in detail at the end of the second quarter because we're fully launched in the month of April, and we had it going at pilot stores or half our company, if you will, in the prior quarter or the current quarter we're talking about, the first quarter. We're seeing tremendous results in acquiring cars direct from consumers, which is helping stabilize our inventory. But most importantly, our ability to create margin or gross profit per vehicle on used vehicles is really all about the acquisition of the car. The market dictates a price. If you cannot acquire the car at the proper price, you will dramatically be impacted in the margin is our belief. So we're really trying to be opportunistic and really make it easy for consumers to sell their vehicles to us, which we believe is helping support our gross profit per vehicle.

Great. That's really helpful. And then my follow-up, I wanted to ask on the rollout of TCA. You have some really bullish commentary in the slides about the opportunity. But should we expect this rollout to be linear or is there a training of store employees or some kind of infrastructure that needs to be stood up first at the Asbury stores before we can really accelerate the rollout of the product?

I'll start and then Michael can jump in and clean up anything I screw up. I'll tell you the easiest piece of it will be the rollout of the stores because the folks in the stores are used to selling the product. So that will be very quick and efficient. We've really been working on the backside of the plumbing. I mean it's a stand-alone insurance company, to get it right in all the stores before we start to implement it. Michael discussed in the script that in Q2, we will start to roll out the legacy Asbury stores. Our goal isn't the quarter-to-quarter race. It's the long-term vision of where we're going as an organization. We plan to roll out the whole company within 12 to 18 months, so somewhere in that timeframe, 100% of the Asbury stores will be on TCA.

And just a reminder from, as David said, 12 to 18 months for the rollout to the stores, from the impact on the financial statement because we have to defer the revenue, there will be a lag in terms of when you'll see those results come through the financials because we now have to defer that revenue over the life of the contract. And so from a P&L perspective, it's probably 2 to 3 years away before you start seeing the positive results through the P&L.

We can now take our next question from John Murphy, Bank of America.

Maybe just to follow up on the TCA to stay on the same topic. I mean the funding and the balance sheet, I mean that's going to be in a tax-advantaged state or offshore. I'm just curious how, in addition to sort of the benefits of just the ongoing earnings, the potential tax implications or the lack thereof might be even more beneficial than what we just see in the earnings.

Currently, TCA is established as a Utah entity. We're examining potential tax advantages as we scale up, but at this moment, we haven't incorporated any of those considerations into our forecast. We're evaluating whether it makes sense to maintain this setup in Utah or possibly move it elsewhere.

I've got to imagine it makes sense to have it elsewhere, right? I mean it can be meaningfully positive to write the ongoing earnings distribution as far as cash versus what you would reasonably expect.

Yes. There is a tax benefit.

Yes, that's huge, right? I mean on just the structure of that, forget about the rollout, isn't it?

There are two components to TCA. One is a regulated insurance company and the other is related to an F&I product. There are indeed some tax advantages that offset the setup costs and the value of the components on a tax basis. I agree that these benefits exist. We need to analyze the various elements and prepare it for a larger company.

Got it, okay. That seems like there might be more upside. And I get to the sort of second question on Slide 25. When you're looking at this range, I understand the benefit of leverage and being maybe more aggressive in expansion. But David, as you look at this, how do you think about leverage? I mean, going from 1 to 2 turns, going from $55 to $70 plus, seems like 2 turns is not too aggressive or really risky. I mean, how are you thinking about leverage in general as you're redeploying capital for growth here?

Yes, to clarify, the leverage is projected for 2025, suggesting a return to a more typical margin environment. This 2x leverage is considered normal. I agree that a target of 2x is not overly ambitious. I believe that a leverage range of 2 to 3x is ideal in a normalized setting, but maintaining leverage below 2x offers the flexibility to pursue larger acquisitions. If leverage approaches 3x, that flexibility is limited. Therefore, I think maintaining leverage between 1x and 2x is the best position to pursue those larger opportunities.

And I would just add, I mean, our history is we're a conservative company and any targets we put out there, we certainly hit or exceed, and usually exceed them. It's difficult to know what the environment is going to be at that moment in time. This was a conservative approach to us. And certainly, in this '25 year plan, we've normalized margins as well. This whole plan is not baked on current margins. We certainly brought them back down to a normalization in the future years coming up to '25.

Okay. And I mean, I guess, the big question is, what does normal mean going forward? Is it 2019 and prior margins is what you're thinking there? Or is there some potential benefit from automakers now being much more disciplined on supply versus demand and maybe getting a little bit better growth on the new side? And then the mix of the business obviously shifting to used in part, more parts and service. That means that there could be just from a mixed basis upside in margins. Is that how you're thinking about it? Is it you just kept the 2019 levels to just get the benefit from the mix of what you're driving in the business or there is some potential slight upside from the 2019 levels?

Yes, no. And everyone keeps referring to 2019, and I brought this up a few times. I'll bring it up again. We will never see 2019 margins again in our company. We're a different company, not because of our size, but because of the accretive acquisitions that we've done. We sold off all of Mississippi, which was our lowest margin platform. And we've increased through Park Place, LHM, and Stevinson, all of them are accretive in margins to where we were in '19. We're also, from a productivity standpoint, under the legacy Asbury stores alone, it hasn't been integrated into any of the acquisitions yet. But from a productivity standpoint, from 2019, we've had a 50% increase on the variable side for production per employee for sales advisers. So that's significant, and we see more upside with where technology is going and where Clicklane is going. So I would tell you, John, and I'll just speak specifically to Asbury. We're in that high 4%, 5% margin business. My belief is we'll be somewhere in the 6% or higher range on new car margins when things normalize. Now as it relates to margins on used cars, I would simply tell you the cost of sales is a reflection of margin. Our gross profit now is in the $2,200 range. We don't see that materially changing much when we get back to a normalized environment.

I understand. Regarding SG&A, we typically view it as a percentage of gross margin, which is a reasonable approach. However, it's also important to consider it in terms of absolute dollar amounts and the technological efficiencies we've discussed. What is your perspective on SG&A moving forward? A straightforward approach might suggest it's in the mid-50% to 60% range, but it could be higher or lower than that. How do you approach this, considering the complexities involved beyond just a percentage of gross margin?

Sure. I'll start, and Michael can finish. The way we've modeled this and looked at it, and we're tracking exactly where we expect it to be at this point. So it gives us confidence that we're on the right track to execute the 25-year plan. We believe that there is an opportunity to improve SG&A significantly over where we were in 2019, but somewhere around where we are today. So I don't see it. What's going on in the macro sense, what's going on in the economy, what interest rates, different things looking like at that moment in time. But as we sit here today and we forecast it out, and you see our SAAR plan that we’ve forecasted, that doesn't assume a recession. So assuming, as we sit here today, we model this out, we have the opportunity through the efficiency of our software production per employee to have a tailwind with SG&A.

So baseline, we should think about high 50s and with an opportunity to maybe grind better as grosses improve and you get efficiency in the system. Is that a fair way to say, but you're not even really assuming that just yet?

Yes. So look, when we did these 5-year plans, we don't aggregate the numbers. We do it literally by store, by market. I would tell you, if things play out the way we anticipate, we should be in the mid-50s to upper 50s somewhere in that bracket.

And we can now take our next question from Ryan Sigdahl of Craig-Hallum Capital Group.

Curious on 2 kind of, I guess, financial questions. One, divesting 7 stores, what's the annual revenue you're going to lose from those? And then secondly, on parts and service, same-store sales strong at 14%, even excluding TCA, but the gross margin was a bit weaker year-over-year. Anything to call out there?

Regarding the divestitures, I want to mention that a quarter of those stores generated $162 million in revenue during the quarter. This provides a useful reference point for understanding that figure.

And similar for the other 3, I guess, are they all similar sized?

That includes the 4 stores sold in the quarter plus the 3 stores that we sold on April 1. So that's all 7 stores and what they represented in the quarter.

And then on parts and service?

$3.75 billion.

Ryan, this is Dan. I'll take the other parts and service. So the parts and service margin is a direct reflection of just the mix that we're seeing. As you see on our tables, our wholesale parts grew up 25%, which carries your lowest margin. And then in addition to that, when you see some of the warranty pullback that we have experienced out there with some of the OEMs, the mix of that warranty pullback in the margin that we carried in there is what is bringing us down.

And I'll say with the Miller organization, we're happy to sacrifice that margin. They're impressive as it relates to wholesale parts and many other areas, but that's just one that sticks out. And there's certainly a lot of learnings there for us for our legacy Asbury stores as well.

Great. One more for me. So on Clicklane, a lot of good incremental progress there. Curious on the traffic sources to get break out, kind of what percent of that is organic versus paid SEM or other paid channels?

So Ryan, this is Dan again. I'll start and then David can provide additional details. Since we launched Clicklane, we haven't invested heavily in advertising for it, and most of our advertising budget is focused on enhancing digital transactions and driving traffic to our websites. I can tell you that the majority of the traffic is generated from organic growth and the marketing efforts we've directed to the website.

And just to put a harder number on it, I'd tell you about 25% is for paid search. There just hasn't been a logical reason for us to really promote it without any inventory. And I can't stress it enough that the 5,600 sales are simply the 90 legacy Asbury stores. We haven't rolled it out to any of the acquisitions yet. Again, because of TCA, the forming Clicklane being a fully transactional tool, not a lead generator, it takes time to do that. We'll start to roll out our first store towards the end of this quarter. But none of the additional 70 stores that we purchased are on Clicklane at all. So that growth, that number is solely the legacy stores.

We can now take our next question from Glenn Chin of Seaport Research Partners.

Congratulations on the upsize plan. Nice to see such an ambitious plan, very encouraging. And thank you for all the detail around it. David, I just want to probe your comments a little about normalized margins, what those might be going forward. I mean, I understood that you will benefit from these terrific acquisitions you've made. But maybe just from a broader industry perspective, I mean, is it safe even to use or look at 2019 as a baseline only because prior to that, I mean new margins, at least if not as much on the used side, but new margins were in secular decline for a very long period. Is that to say that you think 2019 may have been the bottom?

I would say a bottom and kind of the end of an era. You've had a tremendous amount of acquisitions and growth and consolidation since '19. You've had really the disruption of electric EVs coming in, consumers preordering at more acceptable margins, for lack of a better term. The question is if you believe normalized margins are end of '23, '24, what does that mean? How many electric cars are going to be on the road? What's the incentives going to be for the government? The stronger the incentives, the more it supports margins. I just don't think as an industry you'll see '19 again for a long time. I think a lot has changed since then. And you see the profit from our partners with the manufacturers: they found ways to be more efficient in what they do. So I think between technology finally catching up to an archaic space, meaning automotive retail, the introduction of EVs, the consumer perception, demand and their comfort level acquiring online, and oddly enough, when you go online and want prices for lack of a better term, you end up at a better margin place than letting someone negotiate. So I just think our industry has been hampered the last year or two with what happens with EV, does the franchise model go away? As I sit here today and I worry about the franchise model, I feel better every day about the franchise model and know the meaningful role that we play and the strong partner that we can be. And just looking at some of these start-up electric companies and how they're struggling and what they're going through and the quality of the products that our manufacturers make and our ability to present those products and sell them, I just think we're in a different space. And now you add technology to it and you add efficiency to it and you change how you compensate people, I just see this as a much better value proposition, and I use this term around here, so I'll use it again. Right now, we're a plane taking off and we're in the clouds. It's a little bumpy and everyone can't see above the clouds yet. But when we get above the clouds in the next 18 to 24 months, I think things are going to look really good for our industry as a whole. That's my belief.

Okay. Yes, understood. And I appreciate the thoughts. And then next, I apologize if I missed it, but did you guys talk about how the upsize plan will be funded? Do you think it can be funded internally or organically? Or do you anticipate having to access the capital markets?

No. If you look at the one-time leverage number, that is all, the acquisitions are paid for out of free cash flow. So no additional debt needs. Our equity needs to be raised.

Okay. Very good. Also good to hear. And then lastly, just on acquisitions and dispositions, any thoughts, gentlemen, on where those acquisitions will be or the types of stores that you're going to be looking at or looking to build out the network or really just bulking up in markets where you already exist?

In doing this for 36 years on the retail side, you created a lot of relationships and a lot of friends and a lot of dealers see value in partnering with us. we have the ability through relationships today to go out and purchase another $5 billion if we wanted to today. Our goal is not to grow quickly. Our goal is to grow thoughtfully and be great capital allocators for our shareholders. So I think that the timing, cadence and pace is important. I think the states where you've seen us grow in our thought process of balancing the brands with the right states, you won't see us differ from that and acquisitions going forward will be accretive for us. The one thing I don't think our space gets a lot of look at is portfolio management. What do they buy? What do they sell? What did that do from an accretion standpoint? Not from a top line revenue, but what did that really do to them as a whole? And so I think you'll see us really manage the portfolio well. You'll see more divestitures over time, probably at some point in the future. And you'll certainly see more acquisitions as well. But that's just really maximizing the portfolio to generate the highest returns and create the most stable company for our employees and our shareholders.

Okay. Very good. And then lastly, still on acquisition and disposition. Can you confirm this bunch of 7 stores that you disposed of, is that portfolio management or fine-tuning, David? Or is it you need to comply with OEM framework agreements?

Yes. And in this particular case, without getting too much into the weeds, it had nothing to do with the framework. Every manufacturer, and we're thankful to represent the Toyota and Lexus brands, and we love them and the relationship and the senior management teams. But when we went into this, it's a timing situation. We were competing to buy LHM with a group of people. We didn't know who we're competing against and didn't know we were getting the deal. The Stevinson deal was in my 20 group in the '90s when I was the GM of the Toyota store, there was a relationship there that came together quickly. We didn't want to pass on that opportunity not knowing if we're going to get the Miller organization. Then fast forward, we signed Stevinson and then we got the Miller one. So we knew we had an issue because the manufacturer has a limit to how many stores you can own and reach in. So we knew that we would have to sell some stores. Did we want to sell any of them? Of course not. But we had to comply and respect the relationship that we do with the manufacturer, and we fully aligned quickly with what we needed to do. They were tremendous partners in working with us to divest of those stores. So we think it all happened quickly and timely because of the strong relationship, and we're happy with where we are today with our portfolio.

We can now take our next question from Rajat Gupta of JPMorgan.

The first question was on just the used car, used vehicle unit growth trajectory. You're currently run rating roughly close to 150,000 annual units. With the acquisition targets in the 4-year plan, you probably, that run rate becomes like 200,000 to 220,000. And by 2025, we're expecting that to move from that 220,000 to like 340,000, which is roughly like a 15% CAGR. How should we get conviction around that, particularly when supply is a bit tight here in the near term? It just seems like a bit of a hockey stick around to be out here. So maybe if you could help bridge that. And I also like to put that in the context of Clicklane, how much conviction you already have that incremental contribution is going to come through? Then I have a follow-up.

This is Dan. I'll take the first part of the question and then David can clean it up. Let's look at the big picture from a market level. We talk about 40 million used cars that are sold on an annual basis. 45% to 50% of those transactions happened between private parties. We believe that as the digitization of our industry continues to evolve, and with us having been one of the very few that have a fully transactional tool, as that consumer continues to adopt and accept the digital transaction online, those private party customers are not going to want to transact between private parties because that is not going to be available for them. So that is going to give us a competitive advantage that we will certainly take and go after. So we see being able to pull from that market share for a lack of a better term that is out there.

And I'll add to it. And if you look at Slide 19, I don't know how well it's showing up, but there's a hockey stick arrow in there. So I like your terminology with that. I would tell you the reduced cars that are out there now, clearly won't be a problem in the future. When you normalize SAAR and you get the fleets back up to normal levels and you get those cars coming back to market that aren't coming back to market now, it makes it much easier. When you go from 91 stores to 225-ish stores, while I understand the CAGR comment in there, you got $40 million typically on an average year plus of used sales. So when you talk about incremental growth or market share gain, on the franchise side, you're somewhat restricted because of your PMA, but you're unrestricted as it relates to pre-owned. So we looked at our growth from 2019 and 2020 average per store where we're at, where we're going. And again, I'll say it again, I know it's repetitive, but the 5,600 was with 90 legacy stores, none of the acquisitions going forward and with no new car inventory to have on there. And when we originally launched the tool, we're selling more new than used on Clicklane. So we've done this exercise by store. We're looking at SAAR and making our assumptions. We understand and we'll talk about it next quarter, the number of cars we're acquiring directly from consumers. This isn't an overly aggressive number for us. We feel like this is logical to be it. And I made a comment earlier, the Miller organization is phenomenal and a lot of things in wholesale parts is one of them, employee retention, taking care of the guests or others, but a huge opportunity for them is the used to new ratio. Even in the quarter, and it shows between our total and our same-store, they are a pretty good distance behind us in used to new ratio. So we'll work with that very talented team over time to dramatically improve that used to new ratio. When you take their size of an organization, they get them up to our used to new ratio, there's a meaningful tailwind there as well.

Got it. Got it. That's helpful color. And then maybe just last one on parts and services. You have mid-single-digit growth down in there for the next few years. It seems a bit conservative, like pre-COVID, the average franchise dealer averaged 5%, 6%. And with inflation and with customer pay and with the miles even continue to round back and just the opportunity to gain share from smaller independent, just curious as to what's governing that mid-single-digit target? Is that conservative? Or just what's factored into that, that would be helpful to know.

It's an excellent question that we've considered for some time. There are many factors involved. To answer directly, our approach is very conservative. We experienced a 30% growth rate over the last four years in consumer spending per transaction. We understand where that growth is coming from and what the future holds. Each quarter, we monitor the revenue per repair order for various types of vehicles including combustion engines, hybrids, and fully electric vehicles. This quarter aligned with previous ones, showing significantly higher dollar amounts for fully electric vehicles. The key will be how the average age of cars impacts the market in 2024 and 2025, especially with the anticipated federal incentives for new vehicles. If there's a lot of car transactions in those years, it could substantially alter the spending in the service department, particularly if the average mileage decreases. Currently, there are over 270 million vehicles on the road, and their average age is quite advanced. Typically, cars that come to our service department have about 70,000 miles on them. Our five-year plan is essentially a snapshot of our forecasting. As we look ahead to 2025, we believe we’ve created a conservative strategy by evaluating it on a store and market basis to identify our growth potential. It's a valid observation that our projections are very conservative, and there may be opportunities for upside, but numerous factors must be considered. We weren’t confident enough to increase our forecasts without solid justification.

Got it. Got it, makes sense. It looks like you win either way, either more units or more service, so it shows the resiliency of the model.

And we can now take our next question from Stephanie Moore of Truist.

I think continuing on the same kind of question towards, here on EVs. Maybe you could talk a little bit about the conversations you're having with the OEMs right now about the introduction of EVs over the next several years. I think you have a nice perspective just given your breadth of OEM brand coverage. So maybe what our expectations from the OEMs in terms of capital investments on your end, everything from just the stores to charging stations, thoughts about agency models, direct-to-consumer or preorders. I would love to get just general color on EV introduction.

Sure. I think we do a good job in running the business day to day, and the manufacturers do a great job at looking ahead and planning for the future, getting us ready for the future and building quality products. We've been installing charging stations for 4 years at our dealerships and very mature with that at this standpoint. I would tell you, Tesla has done extremely well. They've been a great disruptor, but they haven't had anyone to compete against. No one has really been in that space offering a lot of products and going at them. Over the next couple of years, you're going to see that change materially as far as what comes to market. Sitting in my seat, I get the opportunity to drive a lot of cars that have either just come out or are coming out for a year or so. And I would just say from a fit and finish and a quality standpoint, I'm extremely excited with the electric products that are coming out from the manufacturers. And I believe that they're better than the fit and finish and quality of the Tesla product. Everyone has their own opinion. It's just one person's opinion. I'm not knocking them. But that again excites me more about the future and what's happening. And like anything else, like our software and like the battery technology, everything is going to improve over time. The government wants to go down this road, so we believe the incentives are going to be there for a while. So we think we're really well positioned with this, what I would call a mature supply chain, meaning the brick-and-mortar is out there. You see Carvana, you see Tesla, you see all these start-up electric companies or direct-to-consumer companies realizing the need for brick-and-mortar. That's already mature. That's already out there. The investments have already been made. Where we're at, and we've been at the last couple of years, just making significant investments in our team, training our folks to sell electric vehicles and training them on the technology, most importantly, training our technicians to work on these very complicated and quite honestly, dangerous cars to work on. So again, extremely optimistic about the space. Haven't seen from almost every manufacturer from a quality standpoint, what they're coming out with for electric cars. I think it's going to be a fun time to see how these legacy OEMs really stay at all against the disruptors.

Great. That's really helpful. Switching topics, the issue of vehicle affordability has been increasingly relevant lately. New vehicle prices are quite high, and used car prices have also risen significantly. With rising interest rates, what are your thoughts on overall affordability for new and used vehicles? Do you think there has been any change during the quarter or in April?

Sure. The reason we quoted that the average down payments $9,000, I'm rounding numbers. So $9,000 down payment on a new car is significant. We didn't see that pre-pandemic, almost $7,000 on a used car. What that tells me is the consumer has a lot of cash to spend. And even though inflation is running high, their incomes have gone up dramatically, and they've been sitting on cash, and the age of the car is there. So we've had 0 interruption with raising rates as it relates to the consumer side of things or the desired demand to buy vehicles. I can't predict the future. I don't know what's going to happen in Ukraine. It's certainly affecting us on the supply chain issue with some brands. So there's a lot of variables still out there, but we're optimistic where we sit today, how strong and resilient the consumer is, how much cash they have and their propensity and willingness to want to buy. 90% of our business, a little bit over 90%, is prime business. So we're a very small player in the subprime business. I'm sure it affects subprime more in folks living paycheck to paycheck, which where the inflation would affect them more. But we're not seeing any issue at this point.

And we can now take our final question from Bret Jordan of Jefferies.

On the 17% customer pay growth, could you tell us what was price versus traffic?

Yes. I would say it was 60% price, meaning the consumers were spending more and probably almost 40% traffic.

Is there a feeling for like State's new price, like an inflation number in there? Or is it just that obviously, the 60% would include mix shift as well. But is there a feeling for like what pricing on the same job would be?

Yes, there's no inflation in there at all. We haven't adjusted our prices as it relates to that to align with inflation.

Okay. And I think investor perception is that battery electric vehicles don't need any service, and you're saying that they have a higher repair bill. Is that something you see going forward? Or do you think this is just because these are new vehicles with bugs that will be worked out over time? I mean, as you look at the BEV population, are they additive to your service business long term or negative?

Yes. Again, one person's opinion, my belief is the propensity or the frequency of them coming to the shop will be less. But the time in dollars will be greater, not just what they spend, but what we end up charging because of the sophistication to work at it. And putting electric aside and not talking about autonomous, there are some technology features in cars today, breaking where your car can break with someone in front of you, lane changing, the shifting and learning you. That's all technology that could have bugs in them. So while the cars really get heavy content with technology, not just the battery piece, it allows for more opportunity for things to go wrong. And when you talk about driving a 5,000-pound vehicle at 60 miles an hour down the road, there's a lot of liability in touching those cars. So you've really got to be thoughtful and think about what you're going to do over the airwaves that are nice to have and what you're going to do that may have a real liability issue in driving the vehicle. So we see that we're really positioned well. We're not surprised by the additional dollars, to your point, technology will get better over time. It's going to take a while. And then you factor in the roads and the potholes and the weather; they all play a role with the software and technology in these vehicles as far as their performance.

We can now take our final question from David Whiston of Morningstar Equity Research.

On Clicklane, is the conversion rate so much higher versus traditional digital because of the tool itself being so good, which I think it is or is it because your customers are already more committed to buying than other customers would be just because they do enter the Clicklane portal?

David, this is Dan. I'll begin and then hand it over to David. Looking at our data from Clicklane, with an average credit score above 700, we can see that these consumers are aware of our fully transactional tool, which gives us a competitive edge. They prefer not to go through the traditional process of spending 3 or 4 hours in a store and are utilizing our technology that allows for a more efficient way to purchase and acquire inventory according to their preferences and at their convenience. We believe that this tool attracts customers with strong credit scores, and its status as one of the very few fully transactional tools contributes to our positive results as well.

And I would just say, just to add on top of that, we had prior tools and then what I would call more lead generators to what a lot of the tools are out there now. We saw a lower credit score customer. We saw lower down payments. I think the consumer appreciates their time and to be able to do a transaction in 14 minutes instead of sitting in a showroom for 2 hours is meaningful. If you have a fully autonomous transactional digital platform, you don't have a need for a call center. If you have a call center, that only frustrates the consumer more. Think about if you're trying to buy any kind of product online, you can't finish it; you need to get on with a call center to figure things out, that's not a fun experience. It's frustrating. So we don't have a call center. We believe that the tool speaks for itself, and it's only going to continue to grow. And that old stupid adage we're all consumers, we'd love to buy things. We don't love to be sold things. So the ability in your own safe environment to go through a tool, select which one that you want to use, decide what F&I products, if any, you want, be able to sign in your home and pay for it is meaningful. We have this software called Invite to Pay, which people pay via text and email. In 2018, we did $12 million annually on this Invite to Pay tool online or via text. We did over $100 million last year because it's convenient. So we're constantly focused on that North Star. It's not about what's best for us to generate the most money, what's best for the manufacturer for them, it's what's best for the consumer. And our logic is if we give them the best tool and be most transparent, logically they want to transact with us more. And again, going back to that concept, people like to buy. We believe that's why the F&I number is so high. We're not repitching. We're not selling. There's no interruption on that F&I process. That almost $2,300 per in F&I is the customer self-selecting themselves, so we think that's the power. And no different than the first smartphone or any technology, this is year one. As people become more comfortable with the software, the software improves, later in this quarter, we'll roll out our second iteration of our F&I platform on Clicklane. It's a significant improvement to our card version. So we're constantly working on it, and we will continue to improve the tool as well. But it's just logic-based. Convenience, time, transparency is going to win out every time for the consumer.

Yes, I completely understand your point about the efficiency and convenience attracting wealthier customers or those with higher credit quality. However, doesn't the digital aspect also make it easier for individuals with lower credit quality who might be hesitant to visit a store? It seems that isn't the case with Clicklane, and I’m curious if Clicklane is perhaps sidelining that lower credit quality customer.

No, that's a great comment, and it's one that we really never talk about. We all journey through life with our ups and downs, and we never judge any one situation regarding why they might be affected by a low credit score. This isn't to disparage anyone. I entered the car business in the mid-'80s, and from that time until today, anyone in need of assistance with financing has always been the first to reach out for help. That was before websites when people showed up at the store to disclose their situation. After websites became common, they reached out through leads asking for help. That business has existed for decades and will always be there; it doesn't stop with Clicklane. We didn't get everyone financed; we helped 90% of the people who needed assistance, while 10% we couldn't finance. Most individuals with such situations prefer to discuss them personally. This requires more human intervention along with understanding and empathy to best assist them. The software isn't currently advanced enough to identify and resolve issues for subprime customers.

We have no further questions at this time. I would like to now hand the call back to David Hult for any additional or closing remarks.

Thank you very much, operator. This concludes today's discussion. We appreciate your participation today and look forward to talking to you at the end of the next quarter. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.