Good morning, and welcome to Lithia and Driveway's Fourth Quarter 2020 Conference Call. I would now like to turn the call over to Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

Thank you, and welcome to the LAD or Lithia and Driveway Fourth Quarter 2020 Earnings Call. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO. Today's discussions may include statements about future events, financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a full reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Eric. Good morning, and welcome, everyone. Earlier today, we reported the highest fourth quarter earnings in company history at $7.02 per share. Adjusted fourth quarter earnings were $5.46 per share, an increase of 85%, eclipsing last year's record $2.95 per share by a wide margin. Tina will provide details on the pro forma adjustments in a moment. Our full year adjusted EPS was $18.19, a 55% increase over last year's $11.76 per share. These record results were driven by an acceleration in our acquisition engine, including the purchase of nearly $1.8 billion in expected annualized revenues during the fourth quarter, underpinned by strong operational performance in our core business. We saw continued gross profit strength in new vehicles, revenue growth in used vehicles, normalizing of fixed operation sales and leveraging of our cost structure. Combined, we grew revenue by 3.6% for the year in an industry that was down over 14% and continue to carry the momentum and focus into 2021. Now that our unique strategy and associated 50-50 plan are well underway, we look forward to utilizing our strengths of execution to continue to establish Lithia and Driveway as the consumer channel of choice. I want to start by congratulating our LAD Partners Group, or LPG winners, for their exceptional performance in 2020. Recognition as an LPG member is a highly coveted award and represents the pinnacle of our mission, Growth Powered by People. Though high performance resides throughout LAD, these stores demonstrate a relentless and elevated focus on culture, customer experiences and continuous improvement to create impressive results. We aspire that all locations within our network rise to a partner level. Thank you to our entire team and well done in 2020. During the quarter, total revenue grew 21% and total gross profit increased 30%. New vehicle revenue increased 19% for the quarter and remains a key driver in sourcing high-quality, scarce-used vehicles and the catalyst to growth in our higher-margin fixed operation business lines. Total used vehicle revenues increased 24%. F&I increased 27%, and service body and parts increased 16%. Total vehicle gross profit per unit for the quarter increased $4,371, a $667 increase over last year, driven largely by a 28% increase in new vehicle gross profit per unit. Gross profit levels began to normalize during the fourth quarter when compared sequentially to the third quarter of 2020, primarily due to more typical supply and demand levels for used vehicles. These elevated gross profit levels in new vehicles, coupled with higher-performing new acquisitions, improvements in all business lines and strategic cost-saving measures executed last year, led us to earning over $750 million in adjusted EBITDA for 2020. We are in an exciting time and in the early stages of executing on our 5-year plan to expand our presence in the over $2 trillion market of automotive products and services. Our strategy focuses on the most expansive addressable market of any retailer in automotive space, is designed to address the full vehicle ownership life cycle, all levels of affordability and ensures our considerable competitive advantages are maximized. We are now well underway towards our $50 billion in revenue and $50 EPS 5-year plan that was designed 3 years ago and began on July 1, 2020. Building on our existing network and multiyear development in Driveway, we are excited to now provide the most comprehensive e-commerce home solution in the automotive retail space. Our multifaceted and disciplined approach to investing to meet changing consumer needs leverages our owned inventory, personnel and national network of locations to thoughtfully focus on gross margin in order to competitively and profitably modernize the industry. Beginning with our first proprietary technology released in Pittsburgh in May of 2019, Driveway empowered consumers to simply and transparently sell their vehicles through our application from home. This release included key functionality such as workflow management for our valets, consumer scheduling, and geofencing for logistics on a national level and are now mature and the backbone of our recent released offerings. We expanded the Driveway application functionality with the launch of in-home service options in September of 2020 in Portland, Oregon, and established the first MyDriveway consumer portal in our interface. This expansion of the Driveway experience allowed us to provide consumers with convenient in-home service solutions while further leveraging our physical network and decades of rich consumer data. Earlier in the fourth quarter of 2020, we launched the ability for consumers to shop for our 20,000 high-quality used vehicles available for delivery anywhere in the United States with assistance in checkout from our Driveway care center. Later that quarter, we achieved our most crucial milestone by providing consumers with a complete end-to-end digital shopping solution with consumer-driven fully automated checkout. This advancement integrated immediate financing from 23 financial institutions and the option for in-home F&I subscription services to protect their vehicles through their entire ownership life cycle. With this functionality, consumers can choose to complete their entire life cycle of vehicle ownership from the comfort of their own home and never set foot in a traditional dealership again. Two weeks ago, Driveway also became the first e-commerce retailer in the country to offer negotiation-free new vehicles with free in-home delivery and a 7-day money-back guarantee at a national level. Driveway's new vehicle solution, now with vehicle leasing and captive manufacturer financing, added another 6 lender APIs, now totaling 29 available to consumers with auto approvals in a matter of seconds. This lease and finance auto approval optionality was released 2 quarters ahead of our previously shared plans. Driveway now offers a selection of 57,000 new and used vehicles, the largest negotiation-free inventory selection of any retailer in the country. Our new vehicle inventory represents all major brands, and our selection of scarce-used vehicles spans the entire spectrum from certified used vehicles to 20-year-old value autos. Although consumers today can purchase all vehicles accompanied with our brand guarantees and receive in-home delivery anywhere in the country, our marketing dollars are currently focused only in the Portland and Pittsburgh markets. As we continue to perfect our execution in these two markets, demand from existing network and competitive positioning has allowed us to accelerate our further network rollout plans to key top 10 largest U.S. metropolitan areas. Driveway will now enter 4 of these markets by April and a minimum of 12 total major markets located in all six of our regions by the end of this year. Our data science continues to show us that although Driveway customers now have the option to purchase and finance their vehicles fully online, the complexity of their own financeability and desires will usually require the assistance of a Driveway care center and network. Our financing virtual centers of excellence connect our existing finance specialists with our Driveway care centers. Behind the scenes, these 900 finance experts are using their relationships with over 150 lenders throughout the United States to quickly gain approval for consumers that are not auto approved. In addition to leveraging our third-party financial partners, we have continued to expand Lithia and Driveway's fintech arm. Driveway Finance Corporation, or DFC, is a fully integrated captive finance company that further strengthens our ability to auto-decision consumers by leveraging Driveway's powerful data science engines. DFC also utilizes the rich data history of our legacy Southern Cascades Finance Corp., which was started nearly a decade ago. For the last 3 months, DFC has originated an average of 1,000 loans per month across all channels. Longer term, we expect that Driveway's fintech platform will play a larger role in elevating the experience for our consumers and capture up to 20% of all vehicle sales transactions, further differentiating LAD in profitability. Driveway remains competitively positioned to be the leading provider of personal transportation solutions with 210 existing reconditioning and vehicle storage locations, over 500 nationally distributed inventory procurement specialists, and now 9,000 existing underutilized associates that currently perform in a negotiation-free environment. While Driveway was still in its infancy, we embarked on 2021 with a clear pathway for Driveway to become the online buying, selling, and servicing brand of choice. Today, the team of 90 Driveway engineers have developed a suite of consumer solutions and functionality that provide the first complete end-to-end digital ownership experience, spanning the full vehicle ownership life cycle. Our team continues an aggressive network rollout cadence and will be releasing improved functionality updates approximately every 2 weeks in 2021. Consumer convenience, cost advantages, and competitive pricing are achieved through having a physical network of locations closest to our customers. These elements are the foundation for how we designed our experiences and future network needs. The density of this network provides massive competitive advantages over any of our digital and used-only competitors, building our network with new vehicle franchise positions Lithia and Driveway with other advantages such as: upstream procurement from new and certified vehicle trade-ins with more attractive valuations; distributed inventory and reconditioning network that eliminates logistics costs by being closest to the customer; and access to the industry's highest-margin service, body and parts businesses that brings 10x the consumer life cycle touch points than vehicle sales-only retailers. These advantages are delivered through a network cost similar or lower than used-only retailers. Please reference Slide 16 of our investor presentation to learn more about our network cost and utilization rate relative to our competition. The opportunities for rapid consolidation within our industry remain plentiful and our pipeline remains full. During the quarter, we completed the acquisition of Latham Ford in Albany, New York; Keyes Automotive Group in California and Arizona; Sterling Luxury Group in Washington, D.C.; and the important Region 3 addition of Ramsey Subaru/Mazda in Iowa. These strategic acquisitions in key geographic locations are anticipated to generate nearly $1.8 billion in annualized steady state revenues. For the entire year, this brings our total network expansion to $3.5 billion, of which $3.3 billion occurred since launching our 5-year plan 7 months ago. With the addition of key franchise dealerships in the Mid-Atlantic, the Lithia and Driveway network now reaches 100% of the U.S. population within a 400-mile radius. This allows for efficient and competitively priced reconditioning delivery and pick-up of vehicles across all business lines. Our nationwide network continues to grow in each of our six regions, and we continue to target a 100-mile reach to allow for convenient, affordable, and timely consumer servicing experiences during and after the purchase of their vehicles. With nearly $1.4 billion in available liquidity, we remain poised for further growth and acceleration of our network. We continue to seek acquisitions to improve our reach, more conveniently serve our customers, and grow our highest-margin business lines. With the acquisition of more than $3.3 billion of revenue in the last 6 months, we are well ahead of our base case 5-year plan that outlined acquiring $4 billion per year. We now have more than $3 billion of additional revenue under definitive purchase agreements that are expected to close in early 2021 and numerous others under LOI. Lastly, we have another $7 billion to $10 billion of potential acquisitions that we believe are priced to meet our disciplined return hurdles. As such, we expect our network expansion in 2021 to far exceed our record levels achieved last year. Coming off our highest annual earnings in company history and doubling our quarterly earnings again over the prior year, we remain humble, never quite satisfied, and acutely focused on our growth aspirations. History has shown that our complex and diversified high-growth business strategy is difficult, if not impossible, to replicate. Our growing network composed of our people, inventory, and physical locations, combined with our Driveway digital home solution, completes our unique omnichannel strategy. Our mission of Growth Powered by People and our values of customer for life improving constantly and taking personal ownership are the driving forces behind our ability to outperform and compete in any environment. This strategy and culture position us to continue to lead our industry's transformation and progress towards our 5-year plan of $50 billion in revenue and $50 of EPS. With that, I'd like to turn the call over to Chris.

Thank you, Bryan. As we enter 2021, our Lithia operations team continues to build on the success of last year and find ways to exceed customer expectations, increase market share, and improve profitability. The demand from our consumers for both in-home and in-network solutions continues to grow and has shifted the mindset of our teams, which includes accelerating the adoption of Driveway throughout our network. Our store leaders are also challenging their teams to maximize performance by setting individual departmental goals to achieve their 2021 annual operating plans or AOP. These AOPs are a key foundation in defining the specific actions necessary to continue to drive the highest levels of performance throughout the network. Following is a discussion about our quarterly results and is on a same-store basis. For the 3 months ended December 31, 2020, total same-store sales increased 3%, driven by a slight increase in new vehicle sales, a 9% increase in used vehicle sales, a 4% increase in F&I revenue, and a 3% decrease in service body and parts revenues. The new vehicle business line increased slightly for the entire quarter and improved to an increase of 4% for the month of December. For the quarter, our average selling price increased 6% and unit sales decreased 5%. Gross profit per unit increased to $3,023 compared to $2,263 last year, a $760 increase or up 34%. Total new vehicle gross profit per unit, including F&I, was $4,814, an increase of $897 per unit or 23%. At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with an 11% margin. Similar selling cost per unit as used vehicles and inventory carrying costs that are subsidized by our manufacturer partners. For used vehicles, we saw a 9% increase in revenues for the quarter. Gross profit per unit for the quarter was $2,456, an increase of 16% or $334 over last year. Total used vehicle gross profit per unit, including F&I, was $3,963, an increase of $467 or up 13%. Our used vehicle mix for the quarter was 20% certified; 58% core, or vehicles 3 to 7 years old; and 22% value auto, or vehicles older than 8 years. As Bryan mentioned earlier, our strategy of selling deep into the used vehicle age spectrum and our ability to procure the right scarce vehicles remains the catalyst for future success and growth of Driveway buy and sell consumer offerings. New and used vehicle sales are supported by our experienced financing specialists that help match the complexity of a consumer's financial position with lending options at over 150 financial institutions. In the quarter, our finance and insurance business line continued to show a substantial improvement, averaging $1,635 per unit compared to $1,520 the prior year, an increase of $115 per unit. New and used vehicle sales create incremental profit opportunities through the resale of trade-in vehicles, great manufacturer incentives, F&I sales, and future parts and service work. We continue to monitor this through the growth of our total gross profit per unit, which was $4,398 this quarter, an increase of $683 per unit or over 18% over last year. Although we experienced a significant increase over last year, we expect continued sequential moderation of gross margins as the supply and demand environment continues to normalize. New vehicle margins may remain elevated as our varying manufacturers idle their factories due to the recent microchip shortages and continued county and city COVID-19 business mandates in some states. As used vehicle supply returned to seasonal levels in the fourth quarter, margins have mostly normalized, and we do not expect any material gross profit elevation in 2021. Our stores remain focused on the highest-margin business lines, service body and parts, which decreased 3% for the quarter. This was driven by a 2% increase in customer pay work, offset by a 7% decrease in warranty, a 10% decrease in wholesale parts, and a 13% decrease in body shop revenue. In December, these negative trends reversed course, and we saw single-digit increases in our service body and parts, which was driven by double-digit growth in our highest-margin customer pay work. Our service body and parts business sees over 5 million paying consumers and brand impressions annually, generating over 50% margins, which remains a huge competitive advantage for Lithia and Driveway. Same-store adjusted SG&A to gross profit was 62.3% in the quarter, an improvement of 760 basis points over the prior year, driven largely by the gross profit expansion in our new vehicle segment. We expect to see the continued normalization of margins throughout the first half of 2021 and SG&A to gross profit returning to 67% in the second half of the year. Our 5-year plan continues to target SG&A to gross in the low 60% range. As we continue to properly modernize the consumer experience, the opportunity to leverage our existing cost structure will continue as we maximize the utilization and integration of our existing locations and as our digital home solution Driveway adds additional incremental sales. The flexibility and synergies with SG&A provide significant earnings opportunities as our highest-performing stores consistently maintain an SG&A to gross profit metric below these long-term levels. For the year, the LAD consumer funnel saw 31.5 million unique website visits, an increase of 7.4 million unique visits over the prior year. In addition, our 4 business lines generated more than 5.5 million paying consumer brand experiences for the year. And through our acquisitions, we added another 600,000 annual paying consumer brand experiences. As evident in recent months, we are ready now, more than ever, to accelerate our growth engine. We took measures over the past few years to strengthen our operational leadership team and now have 10 platform vice presidents that are experienced in acquisition integration and culture transformation while being geographically positioned to support all 6 regions. Partnering with our home office teams, these leaders are the backbone of our growth and can be relied upon to support multiple individual and group acquisitions at any time. We continue to source our pipeline of high-performing leaders through internal development and higher-performing acquisitions, which together, provide a massive bench for the continued growth in front of us. Our leaders are all innovating and meeting consumers' increasing digital in-home expectations through incremental and pragmatic modernization and are prepared for the continued growth that will occur in 2021 and beyond. I would also like to congratulate our 2020 LAD Partner Group winners for an amazing year. While we saw incredible performance throughout the platform, these leaders embodied high performance and set a high bar for all our teams to exceed in 2021. Our team's ability to achieve high performance in any environment continues to be the foundation of our culture as we remain focused on profitably modernizing and consolidating the industry and reaching our 50-50 plan. With that, I'd like to turn the call over to Tina.

Thank you, Chris. As Bryan mentioned earlier, our fourth quarter unadjusted earnings per share was $7.02 compared to an adjusted earnings per share of $5.46. The difference was related to a $1.19 unrealized gain in our investment in Shift Technologies, which went public in the fourth quarter through a SPAC transaction, and a $0.41 gain from the sale of stores as we continued to optimize our network. These gains were offset by acquisition expenses of $0.04. For the quarter, we generated nearly $250 million of adjusted EBITDA and over $123 million of free cash flow, defined as adjusted EBITDA plus stock-based compensation less the following items paid in cash: interest, income taxes, dividends and capital expenditures. As a result, we ended the quarter with $1.4 billion in cash, available credit and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $471 million for a combined $1.8 billion of liquidity. As of December 31, we had $3.9 billion outstanding in debt, of which $1.9 billion was floor plan, used vehicle and service loaner financing. The remaining portion of our debt is primarily related to the financing of real estate associated with owning over 85% of our physical network. A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt. This financing is integral to our operations and collateralized by these assets. The industry treats the associated interest expense as an operating expense and EBITDA and excludes this debt from the balance sheet leverage calculations. Unadjusted, our total debt-to-EBITDA is overstated at 5.1x. Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.8x. This means we could add over $900 million in additional debt, which equals acquiring $3.6 billion in annualized revenues at our 25% purchase price to revenue metric while remaining within our targeted range. If our network growth and associated planned capital deployment would increase our leverage down to 3x for a sustained period, we would look to deleverage quickly through the equity capital markets. As a reminder, our disciplined approach is to maintain leverage between 2 and 3x as we quickly progress toward another sizable competitive cost advantage of achieving an investment-grade credit rating. Our capital allocation priorities for deployment of our annual free cash flows generated remain unchanged. We target 65% investment in acquisitions; 25% internal investment, including capital expenditures, modernization and diversification; and 10% in shareholder return in the form of dividends and share repurchases. Our plan to achieve $50 billion in revenues includes nearly doubling our physical network of stores through acquisitions, which are accretive on day 1. As we execute this strategy, our capital deployment strategy will prioritize using our free cash flows, debt and equity efficiently while maintaining leverage between 2 and 3x. Earlier this morning, we announced a $0.31 per share dividend. Our adjusted tax rate was 26.9% in the quarter and 27.5% for the year. Our quarterly tax rate was positively affected by the profitability mix of our states due to acquisitions and a reduction in nondeductible expenses. With over $1.4 billion in available credit and unfloored inventory, unfinanced real estate that could add an additional $471 million in liquidity and over $750 million in EBITDA produced annually and an adjusted leverage ratio of approximately 2x, we are well positioned for accelerated growth. Assuming an average equity investment of approximately 25% of our revenues, our available liquidity and annual free cash flows could add up to over $7.5 billion in revenues or more than 50% growth. We have made strong progress in our pragmatic investment in modernizing the consumer experience through Driveway and building the teams needed to support our growth. With our robust balance sheet and a massive capital engine, we remain confident in our ability to achieve our 5-year plan of $50 billion in revenue and $50 of earnings per share. This concludes our prepared remarks. We would now like to open the call to questions.

Our first question is from Rick Nelson with Stephens.

I wanted to ask you, Bryan, about the acquisition pace and pipeline. It sounds like you've got $3 billion lined up soon to close. The release and the call today, it sounds like $7 billion in acquired revenue might be a more realistic expectation of 2021. If you could clarify that, that'd be helpful.

Sure, Rick. This is Bryan. I think first and foremost, we did a fair amount of acquisitions in 2020 and actually had a record year in terms of growth from – in our network. But we expect 2021 to be much more robust than that. And as you mentioned, we do have $3 billion under definitive contract. We completed the almost $2 billion that we had previously announced on our Q3 call and our offering calls. As well as on top of that, we have additional transactions that are now in the under LOI state. And the $7 billion to $10 billion bucket of revenue that's in negotiations are priced right, it's still sitting out there. So we do think that it's going to be a historic year once again. And I would remind everyone that Lithia's practices historically have been that we don't confirm or deny acquisitions until they're completed. So a little bit different than many people do but we think it's usually best for our network and the people in our acquisition or partnerships to be able to stay focused on their customers during any transitions that occur.

Great. Curious about the approval process on acquisitions, how that's going. Are there any major challenges that you're coming up against with the OEMs?

Yes. Great question, Rick. It's Bryan again. I think if you think about the track record of almost, what, 2.5 decades now of being public and being acquisitive, we have had definitive agreements on 254 transactions over our history and we've completed 251 of those. So somewhere around 99% success rate, which would give indications of our ability to gain manufacturer approval. But our experience in that arena and partnerships with our manufacturers are strong and really don't have major limitations during any of the next 5 years or 50-50 plan, which gets us into about 3%, 3.5% new car market share. We're still only at probably 20% to 30% capacity of what the restricted manufacturers that have national limitations would allow us to get to. So keep that in mind that, that's not really an issue, but also remember that one of the major differentiators of Lithia's model has always been to buy value-based investments that underperform. And you can always refer to what we have on Page 20, which shows the lift in new vehicle sales, which shows the lift from below-average performance to above-average performance in terms of owner loyalty and retention. And I think that bond with our manufacturer partners has always been viewed as Lithia and Driveway as being a high-performing company that they want to buy stores and add value to the experiences for their consumers.

Great. Finally, if I could ask you about digital penetration, where that stood in the fourth quarter and with this rollout now to these major markets, where you see that going in 2021?

Sure, Rick. This is Bryan again. If we look at the rollout of our digital initiative, Driveway, which is an in-home e-commerce solution, it didn't fully go live until late in the fourth quarter, so there aren't substantial results to report at this moment. However, in January, we experienced our first full month of sell-and-shop functionality with Driveway, achieving nearly 300 transactions in that initial period. It's important to note that we are still very early in this process. Our care centers and engineers are continuously learning and adjusting as we iterate. We've already made two releases in 2021 to improve functionality and workflows for consumers and our valets. As we evaluate our results in these areas, we anticipate achieving around 15,000 transactions in both shop and sell within the Driveway application throughout 2021. Regarding market rollouts, we previously mentioned aiming to be in five or six of the top ten markets by the end of 2021. We are now on track to reach four of the top ten markets by April, which is a significant acceleration driven by network demand and our capability to procure and sell more used cars through various channels. By the end of 2021, we plan to have 12 major markets operational. This may still be a conservative estimate, as we seek to enhance our valet services instead of maintaining one or two at each location. A strong valet team is essential because marketing investments in these 12 key markets will attract consumers more effectively within those areas. Overall, we will maintain solid coverage in most regions, with the exception of Region 3, the upper Midwest, and some limited presence in Region 6, the Southeast.

Our next question is from Rajat Gupta with JPMorgan.

I just have one clarification and a couple of follow-up questions. Regarding the SG&A to gross, if I heard correctly, did you say it is expected to be around 67% for 2021? Did I understand that correctly?

Yes. Hey, Rajat, this is Chris. Yes, that's exactly right. What we're seeing right now is really a tailwind from the incremental gross profits that we're seeing on new and used vehicles, given some of the supply constraints that carried through the quarter. And so when we anticipate and look forward into 2021, I think normalizing some of the gross profit margins that we expect to see, that's going to put some pressure on our variable cost structure, which then, by in turn, means that we're going to see an increase in our SG&A to gross. And so for us to outrun the increase in expenses that will come, or increase the SG&A to gross calculation, we'll have to see about a 5% lift in gross on a same-store basis, just to keep parity at that 67%, and we're going to work hard to do that.

Got it. And this does not assume or take into account the $3 billion that you expect to close in early 2021, right? Or does that take — is it inclusive of that?

Rajat, this is Bryan. No, it doesn't include future acquisitions. That's just a base and the acquisitions that we did last year, okay? And what we've been kind of saying is that, that 67% is really our jump-off point for the remaining 4.5 years of our 5-year plan, where ultimately, in the 5-year plan, we get to the low 60 percentile SG&A, okay? And that will come through each of the different channels, performing at certain levels, ultimately with the core getting back to that mid-60 percentile range that it was in 2014 and 2015 before we began to accelerate acquisitions with lower performance. Now on the new acquisitions, most of them are performing in the 65% to 70% range, about 3/4 of them. So we are buying higher-quality businesses than what we typically had or had been purchasing in the past. So keep that in mind, where there's only 1/4. They're really those value investments that start out in the high 80 percentile SG&A, and it takes us 4, 5 years to get those really into the sub-70 percentile range.

Got it. That's useful color. And then I had a question on just the used vehicle side of things. The overall volume growth decelerated here in the fourth quarter. You gave some numbers in December. Could you help like just break that apart in terms of like what's the linearity was through the quarter for the used vehicle business? Were there any specific pockets which were more weak, like California or Oregon that might have that number? And then anything you can give us on now how 2021 has started for you would be useful.

Sure, Raj. I think it's important to note that we always balance volume with margins and what supply chains we see in the future. So we do sit at a 65-day supply in used, which is about the same-day supply as we were last year. So our procurement externally to the e-commerce engines as well as with our 500, what we would call, the virtual center of excellent buyers of high-quality used cars, are doing their jobs to get cars in line. And it's really looking at the marketplace and deciding whether you're going to achieve a little bit higher same-stores rate or whether you're going to hold it in terms of margin. And our stores appear to still be choosing to hold margin because though we were up 9% in revenue on a same-store basis in used, as you noted, we were basically flat in unit volumes in a market that was down a little bit. So we think it's still the right answer. We are getting that lift through our e-commerce strategies and we'll continue to see that. But ultimately, we do balance those two initiatives. I will also say, through the quarter, we did see a lapse for almost 2 weeks that started on about November 20, okay, which is right before Black Friday and Cyber Monday, where the wind came out of our sales, and it was primarily due to California and the Northeast going back into lockdowns, okay? So that did affect things and we were fortunate that moving into the early parts of December, that we were able to carry the strength in the quarter to get back to those levels. And I will say that in January, we were up nice mid-single digits, high single digits in both new and used, which is a big comp relative to the fact that COVID really started in March of last year. So if we can start to lapse comps in January and February at those levels, we're going to see nice results moving into the rest of 2021, where the comps are quite nice for Q2 and Q3, where sales were off and service was off pretty substantially.

Got it. That's helpful. I have one last question regarding SG&A, specifically about marketing excluding acquisitions. Can you quantify the dollars we should expect year-over-year or related to Driveway, considering you're accelerating some of the market rollouts? That's all for me.

I'm going to let Chris answer that. But I'd also note that if you think about our January volumes, we were coming up, January and February, they were up 22% year-over-year from the previous year in same-store. So to be able to lapse the 22% comp in this kind of market in January, we think, is quite impressive and is right on target with what we were hoping while still having a lot of wind at our back in terms of the vaccinations coming out and stimulus packages. Chris, do you want to answer his specific question on...

We are currently spending around $22 million each quarter on a same-store basis and have seen an increase of about 153 basis points in SG&A to gross benefit. As the competitive landscape of our inventory re-emerges, leading to higher pricing, particularly in the digital sector, we expect to increase our advertising spending by approximately 10% on a same-store basis for the remainder of the year.

Remember, that's in the Lithia channel as well, okay? In terms of the Driveway channel, we've got its own budgetary standards that are specifically tied to the volume levels that we achieve in Driveway to fulfill our promise that we're going to make sure that every incremental sale in Driveway is incremental EPS. So keep that in mind as well as you dissect the strategy and your planning.

Our next question is from Nick Jones with Citigroup.

I would like to focus more on Driveway. Is the marketing primarily brand advertising, or do you have plans for more lower funnel targeting? Can you clarify how Driveway will be marketed to ensure it attracts new customers instead of just taking business away from dealerships?

Nick, this is Bryan again. Our approach combines comprehensive brand marketing with targeted efforts focused on shop and service. The emphasis will be on shop and sell, especially since service elements will be driven by F&I subscriptions and the network's shift to in-home fulfillment over the next two years. Regarding our marketing budgets, we are concentrating on those twelve major metropolitan markets, where we will heavily invest in SEO and SEM. Our web crawlers will help optimize our keyword searches, ensuring effective use of marketing funds, including through the MyDriveway portal. We anticipate spending about $1,300 per unit, which constitutes a significant portion of our 57% SG&A costs within our Driveway strategy. While this is a considerable investment, we believe it will be effective. To date, we've seen great success in the Portland and Pittsburgh markets, enhancing our brand presence. By targeting those twelve major markets across all six regions, we expect to achieve a semi-national presence by the end of 2021, increasing brand awareness and promoting our offerings and the Driveway solutions. This strategy is designed to be incremental because Driveway operates independently from the Lithia network as an e-commerce solution. It's important to remember that the successful players in the used car market will be those who can source the highest demand and the most used vehicles since used cars are procured, not manufactured. As long as our buying and selling processes create additional inventory, any sales made through any channel will contribute positively to LAD as a whole. A key point is that we're expanding our network with new vehicle stores, allowing us to obtain about a third of our inventory from new car trades, which are in high demand and have a cost advantage compared to auction vehicles. These cars enter our 214 locations, where they undergo reconditioning, and typically, 70% to 80% are sold within a 100-mile radius, giving us a significant competitive advantage regarding reconditioning logistics and costs.

Great. Can I ask a follow-up then, maybe just on the SEO component? So if most of the cars are kind of staying local, how do you kind of build an advantage in SEO versus maybe companies providing nationwide industry selection, and then also kind of having an upper funnel content strategy, which drives more organic traffic? I guess maybe there's two parts. Kind of one, like is the SEO optimization in-house, are you outsourcing that? How do you get leverage kind of nationwide if most of the cars are staying local because that seems like that would limit kind of the SEO capabilities.

Let me clarify that everything is done in-house. All our engineering work and web crawlers are built internally from the ground up. Currently, we have 90 engineers at our Driveway innovation center in Portland. It's crucial to look at our inventory and consumer purchasing behaviors. The limited availability of used vehicles is significant, especially since 80% of cars typically remain within a 100-mile radius due to their abundance. They might extend beyond that range today because the market lacks efficiency and transparency. Consumers might seek a more transparent experience but can't find it locally, leading them to consider lower-demand, less scarce cars. In contrast, our inventory is much rarer. In fact, 78% of our Lithia and Driveway inventory consists of vehicles that are over four years old, which differs significantly from our e-commerce competitors who mostly have 1- to 5-year-old vehicles. We don’t consider those younger vehicles as scarce because consumers can generally find many of them within a 20-mile radius, making it less appealing to pay for shipping. We have set our logistics pricing accordingly, offering free shipping within 100 miles from the vehicle's location. For deliveries within the extended region, we charge an additional 2.99, particularly if it's within 400 or 500 miles, especially in the broad Northwest area. The charge is 12.99 for non-adjacent regions and 6.99 for adjacent ones. Our pricing strategy aims to align with vehicle scarcity; if a car is really scarce, consumers might pay for the logistics costs. However, subsidizing the logistics for competitively priced local cars is not a sustainable long-term approach. Additionally, our inventory spans the entire country, including Hawaii and Alaska, within a 400-mile radius, and we have achieved 100% coverage. In our Western regions, we have a density of 100 miles in Region 1 and about 200 miles in Region 2, which is expanding. Ultimately, we believe that 95% of cars should be locally available within their regions without needing to be shipped. As long as we maintain an inventory of around 25,000 to 50,000 cars, which we currently do across the country, we need to improve our density and selection to better serve consumers with closer options. Delivering cars that aren't scarce beyond a 100-mile radius, or within specific regions, doesn't seem necessary.

Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group.

Just wanted to dig in on Driveway a little bit more. I know a lot has been asked, and I know it's early on the new side as well, a few weeks here. But anything you can dissect out of that on kind of buying interest, conversion rates, etc., on new vehicles on Driveway versus used?

Sure. I'd love to, Ryan. This is Bryan again. I think first and foremost, if you go back to the discussion that we just had with Nick about scarcity, new cars are the same everywhere, okay? So let's remember that. Now there are scarce products in every product line, whether it's a Toyota Tacoma or whether it's a Jeep Wrangler, now a Ford Bronco or other products, there is scarcity that occurs that can create a more disparate distribution of vehicles, okay? But ultimately, new vehicles don't have that ability to have a lot of demand outside that reach. So it is going to be more about what we would call affordability, okay? And that affordability, we believe, will be the catalyst for expanded reach in new vehicles, okay? Our affordability is primarily driven off the fact that 85% or so of the consumers on new vehicles finance, okay? Our ability to now have leasing, which you can go online today on Driveway and you can perfect the lease and it's all done automatically, okay? And that's something that we are the first to have. Leasing affordability in most mainstream cars is about 60% the monthly cost of what purchasing is because the leasing value helps cut into that payment because you're not responsible for a good portion of the leasing value of the vehicle. So you have that advantage, which we believe that leasing is an instrumental part of affordability, okay? And you will find that we will be pushing leasing over the coming quarters as well as captive manufacturer financing. So new vehicles are sold and financed about 50% of the time by the captive manufacturer, primarily because of incentives or subvented interest rates, okay? And those subvented interest rates, everyone has the same basic model, it's just how do you disperse those. There's another key delineation in new vehicles that's important to understand. And it will be something that we cut into the 1- to 3-year-old vehicle sales of our competitors when we build momentum in this arena. And that's affordability as it applies to disequity, okay? New vehicles have a massive advantage over the low demand and mid-demand used vehicles that a lot of our competitors today are using as a benefit in e-commerce because they can absorb disequity and still finance the consumer because right now, consumers really can't buy outside of Driveway new cars. But remember, new cars have something that is unique to new cars. It's called manufacturer incentives. Manufacturer incentives are qualified cash down, okay? It helps absorb disequity. So when our average rebate or incentive is $3,000 to $5,000, that advantage, combined with the $2,000 to $3,000 that a consumer puts down can get you into a position where you can absorb $5,000 to $8,000 in disequity, okay? Today, a 1- to 3-year-old vehicle that's low demand, you buy it for $2,000 to $3,000 back a book, okay? And that's what you can absorb in disequity, okay? So in terms of financeability, new cars have different dynamics, where national scale isn't quite as important because the vehicles are very similar, okay? In year 5, just to keep things relevant, we're actually at a 3.5:1 used-to-new ratio. Okay, we're only expecting to sell about 65,000 vehicles new in year 5 and about 215,000 used vehicles, okay? So keep that in mind, and that's partly to do with the discussion that we just had that there's only so many new cars that you can penetrate outside your own market, and turn and earn from each of our manufacturer partners is a little different to be able to maximize that. And we're assuming about 120% to 130% of average in each of our network locations to be able to achieve that. Hopefully, that gives you enough color, Ryan, and we can take it off-line if you had other questions.

Sure. Yes, that's helpful. And then just one follow-up for me. You talked quite a bit about financing, etc. You mentioned, I think in your prepared remarks, you want to grow kind of your in-house captive financing fintech to 20% of your Driveway transactions? Did I catch that right? And then can you remind me what your percent of kind of captive financing is today out of your brick-and-mortar?

Sure. So that was 20% of our entire business stream, okay? Now our manufacturer partners, our captive finance companies with our manufacturers are hyper important to our relationship, and they give you the subvented rates, which are hyper important in leasing and financing. So we don't plan on attacking that at all. It's really in the noncertified used cars and the older vehicles where we believe that, that prime customer or even that sub or deep prime customer is something that we could look at, which today, our focus is really prime and subprime, okay? We have been in the deep prime and subprime business for over a decade in Southern Cascades Financial. And what we really did is build all our decisioning models over the last 2 years to move into the prime business, which is a hyper low-risk type of environment. So we think that it's approximately 10 to 15 of incremental profit dollars as an entire company in lift. And if you look at some of our competitors, somewhere between 30% and 45% of their profits are coming specifically from their captive finance company, okay? And you can take the 1,100 units each of the last 3 months and divide that into our unit sales and get you what our penetration rates are today. But we think ultimately, it's more around 20% of our total volume that we can achieve to then realize about 10% profit lift in our overall profitability model.

Our next question is from John Murphy with Bank of America.

I joined a bit late, so I apologize if this is repetitive. When discussing $1.4 billion of liquidity, if we consider acquiring at 20% of revenue, it could be slightly higher or lower than that, which relates to the $7 billion mentioned for 2021. This suggests that a capital raise might be likely. Is it correct to think that you could pursue another equity deal given your current stock situation? That seems reasonable.

Great. Yes. Great question, John. Let me just clarify. So the $1.4 billion, the $7 billion related to that or 20% purchase price to revenue isn't a target for 2021. It's illustrating that at $1.4 billion, you could buy $7 billion. Now we did also comment that we have $3 billion plus some additional transactions under contract in LOI. So you can get to that assumption, but we aren't targeting $7 billion in 2021, even though we believe that, that's achievable because you do still bump up against leverage ratios. And I think that's what's going to determine really whether or not we have to go back to the market and reissue equity or debt to be able to cover that. And we really target that 2 to 3x leverage. And I think if you watch that, and we'll make sure to be able to let you know where we always stand on that so you can see that. But it would make sense that if you take the $3 billion that we've now announced that's under contract and a little bit more, you are starting to put to work the original $1.3 billion that we got, and we're probably at around 2/3 of deployment of that capital, which is great. I would also remind everyone that whatever our volume is in acquisitions or network growth, this is what Lithia Motors has done for 25 years and it's what we're built to do. People in integration, in our mind, is the core competency of Lithia Motors and is much different than most companies out there. So whether we do $3 billion or whether we do $10 billion, to us, it's just a matter of accretion and the ability to control leverage below that 3x.

Yes. I would also note that when you're making acquisitions, you're purchasing companies that generate earnings, which helps with leveraging the deal. However, it ultimately depends on various factors.

You nailed it, you nailed it. I mean we don't do acquisitions that aren't accretive typically out of the chute. And obviously, on the high-performing ones, we're really targeting 12 to 18 months to get them to seasoned level, whereas that other 25% that's our typical value investing does take 3 to 5 years. So keep that in mind as you're thinking about forecasting, and we'll try to give you good insights on that.

Yes. To clarify, the $7 billion revenue figure aligns closely with what Asbury achieved in 2020. If you're aiming for substantial acquisition years, it suggests that a significant acquisition could be a possibility, perhaps involving a large private group. I'm interested to know if a major acquisition like that could be feasible, especially since you indicated there's room within your strategic framework. I'm trying to understand what the actual targets could be since a couple of smaller acquisitions might not suffice.

Yes, that's an excellent question, John. The $7 billion to $10 billion I mentioned earlier does not include any public entities. We believe that the most effective approach for the entire industry is for the public to consolidate. Whether this can happen remains to be seen, but it's not limited by our framework agreements. We have solid relationships, and our national limits with three or four manufacturers that have set ceilings do not restrict us from acquiring other public entities or collaborating with them. I also appreciate that many of them seem to be adopting some of the strategies we've prioritized over the past three years. We're encouraged by this because if we can effectively limit the flow of used vehicles to new entrants in this space, and they have access only to auction cars or late-model vehicles, we can achieve significant margins on cars over three years old. This could allow new car dealers to maintain a strong position in the market for many years, even as changes like electrification or connectivity evolve in the future.

Yes. And given your multiple on your stock right now, which at least by our estimates, is a little bit of a premium to others, I mean, stock-for-stock deal could be possible. Is that correct?

That is correct. We appreciate the three individuals who geographically align well with the LAD network and could help us reach near-full capacity quickly, allowing us to be more selective with our network growth going forward. For us, it's about how the new car groups come together to ensure further stability and whether they can manage that independently. We believe that having scale now is crucial since our 50-50 plan serves as a baseline and is not aspirational in terms of best practices or leveraging the benefits of having a higher density within the network sooner. This would enable us to manage costs and national marketing budgets effectively, which isn't part of our current five-year plan. Those are valuable insights, and I genuinely wish our peers would recognize the advantages of collaborating with us. Chris and our operational teams are prepared for this opportunity if it arises. We can still pursue the hypothetical $10 billion to $13 billion range that is under contract or in negotiations within the $7 billion to $10 billion price range. Over the last three years, we have been reorganizing and redesigning our operations to address these challenges. It's important to note that as we secure better deals, our risk of integration is even lower than the 80% success rate we have achieved with previously underperforming acquisitions.

That's incredibly helpful. Lastly, there were questions about Driveway potentially affecting consumer behavior. However, it seems like you believe there’s an opportunity to expand Driveway beyond traditional limits, allowing you to reach deeper into the market and target older vehicles. This could lead to significant incremental growth. I'm interested in how you view the two factors of distance and vehicle age in this context. Regarding your used vehicle mix, you mentioned that 20% are certified pre-owned, 58% are mid-aged vehicles, and 22% are over eight years old. Can you discuss how these factors of distance and vehicle age influence your strategy?

Certainly. When comparing distance to age, I believe that as a vehicle ages, it becomes scarcer. Consequently, an older vehicle theoretically has a greater appeal compared to a vehicle that is just 1 to 3 years old, as there is ample supply of newer vehicles. Our design strategy from five years ago, solidified three years ago, was centered around ensuring that we could effectively market our value autos, particularly vehicles that are 8 years old and those between 4 to 7 years old, which form our core product line. In our thesis, we aimed to always be competitive on pricing for 1 to 3-year-old vehicles, as long as we maintained a strong inventory of higher-margin vehicles. This allows us to compete directly with e-commerce retailers who specialize in these newer models, as they have the expertise in reconditioning such vehicles. Reconditioning older vehicles is more challenging and requires advanced technology, diagnostic tools, and skilled technicians. Currently, our network includes over 3,000 technicians who have the necessary expertise in maintaining and repairing vehicles. For some key figures, our sales indicate that 20% of our vehicles are value autos, while 58% are core 4 to 7-year-old vehicles. This totals nearly 80% of our inventory being in high-demand segments. It's worth noting that our value auto vehicles generate a 28% gross margin, core vehicles around 16%, and certified 1 to 3-year-old vehicles only about 13% to 14% gross margin. Therefore, to remain competitive in the market for the abundant 1 to 3-year-old vehicles, we focus on selling vehicles that are 4 to 20 years old. Ultimately, the more scarce a vehicle is, whether it is new, certified, or used, the greater its market appeal will be to consumers.

That's incredibly helpful. And maybe if I could just sneak in one last one just on inventories in the short term here. I mean obviously, we're hearing a lot of concern around chip shortages and production disruption as a result of that. What are you guys seeing as far as deliveries and stuff that's on the come or on the trucks on the way to you? And where you think this kind of lands, where, you in the first quarter, you might be even shorter and that could help grosses that you think are kind of normalizing right now but it seems like we're going to hit another short-term shortage here that might be helpful on the growth side?

Certainly. On new vehicles, last year we had 71 days' supply, and now we have 50 days' supply. That's nearly a 2-day difference and doesn’t account for in-transit vehicles. Therefore, we don't see their inventory as a significant issue with new vehicles. We are experiencing some shortages with certain manufacturers, particularly General Motors, due to ongoing microchip challenges. We'll navigate that while balancing our margins. It's important to remember that we reached a low in new vehicle day supply around July and August, at just below 40 days, but we've seen an increase since then. Additionally, our turn rate is currently at a low seasonal point. Regarding used vehicles, we are at 65 days' supply, which is unchanged from last year, and we are pleased with this stability. We're anticipating growth in the mid-to-high single digits in January, the first month of the quarter. We are hopeful that the stimulus package and more vaccinations will boost consumer demand, especially since new vehicle supply is comparatively lower than last year, while used vehicle supply remains the same. We are confident in maintaining strong used vehicle supply due to our 500 field experts and the added support from Driveway experts who are purchasing cars in larger quantities.

Our next question is from Bret Jordan with Jefferies.

In the third quarter call, you talked about reevaluating or maybe changing the process on pricing for the Driveway services. And I was wondering whether or not that is something that you've completed and whether sequentially from third quarter to fourth quarter, you saw real changes in Driveway service bookings in the markets you're in.

Great memory and great question, Bret. So actually, on the service side of things, we're seeing initial stages of very little attraction from the consumers in those products. So we didn't redevelop the pricing. It's still sitting at the same level where we have maintenance. We actually raised the pricing back up to where we were and saw very little degradation in volume, which we thought was good, where really today, it's sitting at people that are willing to pay a premium are doing it and those that aren't, aren't really that enamored with it today. We do believe that the easiest way to build volume there, which ultimately drive costs down of our valets, is to be able to sell the F&I subscription services in-home, okay? Remember, that rollout is combined with the in-home service body and parts offerings that will be done in the Lithia network as well as through the Driveway channel. That's a 2- to 3-year rollout, okay? So we believe that the major Driveway in the Driveway service business will come from F&I subscriptions initially to be able to get us the volume necessary to drive down our costs and ultimately have that full life cycle serviceability to a consumer in their home. So it's still there and it's still working, but the revenue dollars that we can generate and incremental EPS dollars are really going to be found in shop and sell.

Okay. Great. And the question that you talked about, pushing leasing more aggressively in '21. I think I used to ask this question years ago, but what is your lease penetration? And is returned lease vehicles improving source of inventory for your used mix? I mean I'd imagine residual assumptions 3 years ago didn't anticipate the spike in used vehicle values. And are you able to source cars by coming in on lease returns?

Yes, Bret, that's a good question. So we lease currently about 25% of our new cars. And we think that, that can grow. And hopefully, we can mirror that on the Driveway side as well and I think the affordability will ultimately drive that. In terms of vehicles coming on lease, it's important for everyone to remember that those vehicles come to dealers before they ever go to auction, meaning that most manufacturers say, if we don't have to ship the car to auction and pay auction fees, we're going to give it to you, which is part of that $1,100 cost advantage, okay? So off-lease vehicles, we still have a $500 to $600 cost advantage of what others end up buying them from fleet agencies or from auctions. So that pipeline is fine. I will also caveat the note that I don't believe that used car values are that inflated anymore. They were inflated in late summer, and they have begun to normalize throughout the winter months as expected. So I think the supply of off-lease vehicles will be close to LEVs as we move into next year. Now in certain manufacturers, we could see overhang effect on 1- to 3-year-old off-lease vehicles, depending on what their supply on new is, okay? So we'll see how that plays out. But this microchip thing looks like it's a Q2 solution. And into Q3, we should see more normalized inventory levels.

Okay. And then one final quick logistics question. I guess you said you're now selling nationally through Driveway in the new side. You found no regional sort of pushback from franchise dealers with you selling from out of state on the new side of the business?

Great question. While our marketing expenditures are on a national level, they are currently focused on Portland and Pittsburgh. New cars can be delivered to homes throughout our network, which operates nationally, and we have not encountered any resistance from our manufacturer partners. They view it similarly to platforms like Cars.com or CarGurus or TrueCar, which serve as lead providers. We continue to offer home delivery, along with a walkthrough for the consumer conducted by a manufacturer specialist who can explain the product. This approach is somewhat different and is made possible through the Driveway care center in collaboration with fulfillment at our stores.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, everyone, for joining us today. We hope everyone stays safe and healthy as we close out this pandemic and look forward to updating you on the first quarter in April on Lithia and Driveway results. Thanks, everyone.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.