Thank you and welcome to the Lithia & Driveway First Quarter 2021 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 reconciliation to comparable GAAP measures. We have also posted an updated investor presentation on our website, lithiainvestorrelations.com, highlighting our first 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 adjusted first quarter earnings in company history at $5.89 per share, a 193% increase over last year, and record revenues of $4.3 billion. These results were driven by strong operational performance across all business lines and channels and acceleration of acquisitions and the strengthening retail environment. During the quarter, total revenue grew 55% over last year and 52% over 2019, while total gross profit increased 55% over last year and 58% compared to 2019. As a reminder, the pandemic only impacted our first quarter 2020 results for the last two weeks of March. New vehicle revenue increased 60%; used vehicle increased 55%; F&I increased 63%; and service, body, and parts increased 30% compared to the first quarter of 2020. Total vehicle gross profit per unit for the quarter increased to $4,392 per unit, a $692 increase over last year driven largely by a 24% increase in new vehicle gross profit per unit. Chris will be giving our same-store sales results and further color on inventory levels and their respective impact on vehicle margins in just a few moments. Earlier this month, we announced one of the largest acquisitions in the history of the automotive industry. The Suburban Collection adds $2.4 billion in annual revenues, over 2,000 team members, 34 locations, and is a key pillar of the Lithia & Driveway footprint in our most sparse North Central Region 3. With nearly $6.5 billion in expected annualized revenues purchased since the launch of our five-year plan in July 2020, we are considerably ahead of our expectations. The combination of elevated gross profit levels in the new and used vehicles, rapid integration of high-performing acquisitions, incremental lift from the new Driveway channel, significant improvements in all business lines, and strategic cost savings measures instituted last year, led us to earning over $0.25 billion of adjusted EBITDA in the quarter. Entering our 75th year in operations, we reflect on how our history of exponential growth, coupled with our team's ability to execute, has positioned us to pragmatically and profitably disrupt the status quo of the industry. Our multifaceted strategy for disruption begins by combining our proprietary technology with the scale of our people, inventory, and network to modernize the industry. As we continue to develop and enhance our digital home solutions, our Lithia & Driveway teams are ready to serve not only our traditional customers but incremental e-commerce customers as well. Our focus on the most expansive addressable market of any retailer in the automotive space allows us to leverage our massive competitive advantages to demonstrate that e-commerce can be highly profitable and ultimately yield the highest possible EBITDA returns in the space. The used car business lacks barriers to entry. However, success requires infrastructure, financing solutions for all customers, reconditioning expertise, and the procurement of high-demand, scarce vehicles to quickly achieve scale with smooth execution, all of which Lithia & Driveway have established and have proven to be effective at executing on since 1946. Hopefully, Dick Heimann, our former COO, is listening in today as the 1946 comment was especially made for him. Building on the broadest nationwide network and multiyear design and technology development of Driveway, we are excited by our initial success and continue to enhance the most comprehensive e-commerce home solution in the automotive retail space. Our proprietary consumer applications are maturing and now ready to quickly scale across our existing network that is the broadest in the country. Now entering our second quarter with a full spectrum of offerings, Driveway is empowering consumers to simply and transparently shop, sell, and service their vehicles from the convenience of their homes. The Driveway brand was designed to attract a different and incrementally new consumer than the Lithia channel. This is the first time in our history that we've been able to market and deliver our 77,000-vehicle inventory to the entire country under a single brand name and experience. We knew our used inventory was broader and more scarce than our competitors', and we are now realizing these advantages, as evidenced in our same-store and margin results. While Driveway's full-spectrum offerings have only been live for a few months, our early learnings and data are showing a clear pathway for Driveway to become the brand of choice for online buying, selling, and servicing both domestically and internationally. We are on target to achieve a run rate of 15,000 Driveway shop and sell transactions by year-end. Important to note that this target does not include Driveway finance and service transactions. On our pathway towards this first volume milestone that took other e-commerce use-only competitors 2 to 3 years to reach, we are finding several interesting early trends we'd like to share with you today. First, 97.8% of our Driveway customers during our first quarter were incremental and had never done business with a Lithia dealership before. Second, we are seeing that it takes 19 minutes on average for a customer to complete a full vehicle purchase transaction online with financing included. We are also seeing that about 15% of all credit decisions are auto-approved. An overwhelming majority of our consumers still need help from our Driveway care center to structure their purchase, balance their credit with their desires, and get through the financing process. 43% of our sales are out of region and our average shipping distance is 732 miles, with an average shipping fee of $477. Lastly, we continue to build our online reputation with an average Google review score of 4.98 stars out of 5. During the first quarter, 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 financing solutions with new vehicle leasing and captive manufacturer financing now totals 29 lenders and are available to consumers with auto approvals in a matter of seconds. This lease and finance auto-approval optionality was released two quarters ahead of our previously shared plans. Driveway now offers the largest selection of negotiation-free new and used vehicles of any retailer in the country. Our new vehicle inventory represents all major brands, and our selection of used vehicles spans the entire spectrum, from certified used vehicles to 20-year-old value autos. Today, consumers can purchase any vehicle accompanied with our full brand guarantees, subscribe to full ownership repair and maintenance options, and receive in-home delivery anywhere in the country. In addition, our marketing dollars have recently expanded outside the original Portland and Pittsburgh markets. As such, our Driveway brand marketing is now live in Tampa Bay, Dallas, Houston, Metro New York and New Jersey, Los Angeles, Riverside, Oxnard, Des Moines, and the surrounding markets. With these recent market launches, the Driveway brand message is now reaching over 67 million individuals or 21% of the population, a sixteenfold increase over our 2 initial launch markets. As we continue to perfect our execution in these markets, our innovation and product teams are working relentlessly on improving the Driveway experience. Driveway receives continuous enhancements that will be released every two weeks throughout the year and is on its way to becoming the e-commerce leader of automotive retail. During the quarter, LAD's fintech arm, Driveway Finance Corporation, originated over 1,000 loans per month across the channels. We continue to see Driveway's fintech platform elevating the experience for consumers with the ability to capture up to 20% of all vehicle sales transactions, further differentiating LAD in profitability. Today, our team of 110 Driveway engineers and data scientists have developed a suite of consumer solutions and functionality that provides the first complete end-to-end digital ownership experience spanning the full vehicle ownership life cycle. In addition, our exclusive Driveway care center and inventory procurement teams are growing rapidly to mirror the exponential growth in consumer demand. The foundation to our omnichannel plan is the growth and expansion of our physical network. Having the ability for consumers to conveniently access all of our business lines and for us to store and recondition vehicles closer to them ensures a highly profitable digital experience across the United States. The opportunities for rapid consolidation within our industry remain plentiful, and our acquisition pipeline remains full. For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after-tax return of over 25% annually. During the quarter, we completed the acquisition of the Fields Auto Group in the Greater Orlando market; the Fink Auto Group in Tampa, Florida area; and Avondale Nissan in Phoenix, Arizona. We also opened a previously awarded Infiniti location in downtown Los Angeles. As mentioned earlier, we completed the acquisition of The Suburban Collection in the Detroit, Michigan area earlier this month, adding a massive platform of 34 locations to our North Central region. Combined, these acquisitions strengthened our strategic network density in regions 2, 3 and 6 and are anticipated to generate nearly $3.1 billion in annualized steady-state revenues. Since launching our 5-year plan 9 months ago, this brings our total network expansion to over $6.5 billion, adding more than $4 in future annualized EPS. Important to note that the consolidation of the largest retail segment in the country can be accomplished in a highly accretive way, and these cash flow-positive businesses further add to our massive capital engine. We are in the most active consolidation environment that we have seen in the last two decades. Even with the pace being well ahead of schedule, we continue to replenish the more than $3 billion in revenue still under LOI and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our disciplined hurdle rates. As such, we are expecting our network expansion in 2021 to far exceed our record levels achieved last year as we seek to continue improving our network density especially in the Central and Southeastern regions. As our top priority for allocating capital continues to be to accretively expand our network with new vehicle locations, it is important to highlight the competitive advantages and points of differentiation for Lithia & Driveway's network growth strategy. First, new vehicle franchises create an accretive growth model with a self-generating profit engine of nearly $1 billion of EBITDA annually. Second, network costs are considerably lower investment when compared to any new entrants into the industry. Please refer to Slide 16 of our investor presentation to learn more about our network costs and utilization rates relative to our competition. High-ticket new vehicle margins are quite strong at 10%, and the carrying costs are subsidized by our manufacturer partners. Upstream procurement from new and certified vehicle trade-ins have more attractive valuations than direct from consumer or auction purchases. Fifth, affordable offerings at all levels allow the customers to remain in the Lithia & Driveway ecosystem their entire lives with vehicles and services that match a full spectrum of income and credit levels that change over time. A sophisticated reconditioning network with specialized diagnostic equipment located closest to the customer to eliminate any logistics costs. These reconditioning centers are also utilized for the industry's highest or 50% margin service, body, and parts businesses. These businesses bring 10x the consumer life cycle touch points as compared to used vehicle-only retailers and allow for substantially lower marketing costs per vehicle sold. Captive leasing through our OEM-affiliated partners provides new vehicles with attractive, competitively priced monthly payments when compared to 1- to 3-year-old used vehicles. Additional financing support from our manufacturer partners through rate subvention with their captive financing arm and new vehicle incentives or rebates that allow for the highest level of financeability and absorption of negative equity plus lower down payments for our consumers. Tenth, a diverse upstream offering of zero-emission products and supporting repair and maintenance services through manufacturer partners' product lines. Also, leading advocacy for lower and zero-emission vehicle ownership with a comprehensive resource center, providing education on vehicles, incentives, charging infrastructure, ownership, affordability guides, and a sustainable vehicle marketplace through green cars. Lastly, new vehicle franchises create loaner and fleet management opportunities to build a factory-like used vehicle inventory pipeline. As our nationwide network continues to grow in each of our 6 regions, 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 vehicle. As a reminder, infrastructure costs for delivering the Driveway e-commerce experience are zero as it resides in the underutilized capacity of our growing network. Key to our design three years ago was allowing the flexibility to adjust our investments between channels and multiple business lines to align with consumer demand, weather any economic cycle, compete with any future competitor, and expand our cash engines to advance into further adjacencies. These, combined with our many competitive advantages, strongly position us to achieve our 5-year plan and pave the way to even greater aspirations. In closing, our first quarter results doubled the previous highest first quarter earnings in our history as we live our mission of growth powered by people. We continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities. The advantages of a responsive and adaptable team with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment. With our technology poised for rapid scalability across our existing and future network, we are positioned to, as quickly as possible, lead Lithia & Driveway's progress towards $50 billion in revenue and $50 of EPS, the first leg of our journey. With that, I'll turn the call over to Chris.

Thank you, Bryan. We continued the momentum from last year and delivered another record performance in the quarter. The demand from consumers remains strong for both in-home and in-network solutions, and we accelerated the rollout of Driveway through our key strategic markets and our platform. Each day, our leaders are rising to the challenge of achieving our 50-50 plan, evolving to meet consumer demand, developing our talent, and living our mission of growth powered by people. Our team remains humble and never satisfied as they look to continue record performance levels throughout 2021 and beyond. Following the discussion about our quarterly results and is on a same-store basis, and as Bryan mentioned earlier, the pandemic impacted only the last two weeks of our first quarter 2020 results. For the 3 months ended March 31, 2021, total same-store sales increased 28% over last year. These increases were driven by a 29% increase in new vehicle sales, a 32% increase in used vehicle sales, a 30% increase in F&I revenue, and a slight increase in service, body, and parts revenues. Comparing our 2021 results to a 2019 baseline, first quarter same-store sales increased 28%, with new vehicle revenue up 23%, used vehicle revenue up 43%, F&I increasing 32%, and service, body, and parts increasing 6%. For the quarter, our new vehicle business line increased 29% over last year. Our average selling price increased 6% and unit sales increased 22%. Gross profit per unit increased to $2,979 compared to $2,188, a $791 increase or up 36%. Total new vehicle gross profit per unit, including F&I, was $4,778, an increase of $897 per unit or 23%. At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with a 12% margin, similar selling cost per unit as used vehicles and inventory carrying costs that are subsidized by our manufacturer partners. As of the end of the quarter, we had a 41-day supply of new vehicle inventory, excluding in-transit orders, indicating we have well over a month's supply of vehicles on the ground and an adequate supply of in-transits that are replenishing our on-ground inventory every day. However, new vehicle margins may remain elevated in the near term due to continued microchip and other supply chain shortages, coupled with elevated consumer demand levels driven by additional stimulus funds. While select OEMs are experiencing a reduced level of inventory, we currently have sufficient inventory to balance the current supply and demand trends expected over the coming months. For used vehicles, we saw a 32% increase in revenues for the quarter. Gross profit per unit for the quarter was $2,426, an increase of 14% or $295 over last year. Total used vehicle gross profit per unit, including F&I, was $3,994, an increase of $421 or up 12%. Total used vehicle gross profit per unit began to normalize early in the quarter but accelerated again in March, finishing at $4,384 per unit. Our used vehicle sales mix in the quarter was 20% certified, 59% core or vehicles 3 to 7 years old; and 21% value auto or vehicles older than 8 years. With over 60% of the annual 40 million used vehicles sold in the U.S. being 9 years or older, our continued strategy of selling deeper into the used vehicle age spectrum and our ability to procure the right scarce vehicles from multiple channels remains the catalyst for the future success and growth of Lithia & Driveway. As of March 31, we had a 42-day supply of used vehicles, and our 800 used vehicles procurement specialists are working diligently to ensure we are meeting the current demand environment with their focus on procuring scarce, high-demand used vehicles through the most profitable channels. As a top-of-funnel new car dealer, 80% of our inventory comes from non-auction sources, which allows us to meet consumer demand in a low-supply environment. New and used vehicle sales are supported by our 1,500 experienced finance specialists that help match the complexity of consumers' financial position with lending options at over 150 financial institutions, including Driveway Financial. In the quarter, our finance and insurance business line continued to show substantial improvement, averaging $1,674 per retail unit compared to $1,557 the prior year, an increase of $117 per unit. New and used vehicle sales create incremental profit opportunities through the resale of trade-in vehicles, greater 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 $4,388 this quarter, an increase of $664 per unit or 18% over last year. Our stores remain focused on the highest-margin business line, service, body, and parts, which decreased 1% for the quarter. Adjusting for one less day of production compared to last year, service, body, and parts showed a slight increase for the quarter. This was driven by a 7% increase in customer pay, a 12% decrease in warranty, a 6% decrease in wholesale parts, and a 14% decrease in body shop revenue. Over in March, we saw double-digit increases in service, body, and parts driven by a 32% increase in our highest-margin customer pay work. We expect these trends to continue into the second quarter as the economy reopens further and consumers look to get back on the road and return to their normal routines. As a reminder, our service, body, and parts business sees over 5 million paying consumers and brand impressions annually, which generate over 50% margins and remain a huge competitive advantage for Lithia & Driveway. Same-store adjusted SG&A-to-gross profit was 64% in the quarter, an improvement of 990 basis points over the prior year driven largely by the gross profit expansion in our new and used vehicles segment and recovery in service, body, and parts. We expect to see the normalization of SG&A-to-gross profit as supply constraints are alleviated later in the year and gross margins return to normalized levels. With our highest-performing stores consistently maintaining an SG&A-to-gross profit metric in the mid-50s, our five-year plan continues to target an SG&A-to-gross profit level in the low 60% range. As we continue to properly modernize the consumer experience, the opportunity to leverage our cost structure will continue as we maximize the utilization and integration of our existing locations and as our digital home solution, Driveway, adds meaningful additional incremental sales. In summary, our teams continued to be responsive to the changing environment and the opportunities available to continuously improve in the evolving personal transportation industry. We are innovating and meeting consumers' increasing digital and in-home expectations and are focused on meeting the preferences of our consumers wherever, whenever, and however they desire. With the integration of several regional platforms that come with performing teams, including strong operational leaders and customer-focused associates, we remain humble and confident that we continue to deliver industry-leading results while pragmatically modernizing automotive retail. While taking a moment to welcome David Fisher, Jr. and the entire team of over 2,000 associates at The Suburban Collection, we also reiterate that we remain focused on our five-year plan to achieve $50 billion in revenue and $50 of earnings per share. With that, I'd like to turn the call over to Tina.

Thank you, Chris. For the quarter, we generated nearly $265 million of adjusted EBITDA, an increase of 154% compared to 2020; and $189 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 and available credit. In addition, our unfinanced real estate could provide additional liquidity of approximately $552 million for a combined nearly $2 billion of liquidity. As of March 31, we had $4 billion outstanding of debt, of which $1.8 billion was floor plan, used vehicle and service loaner financing. The remaining portion of our debt is primarily related to senior notes and the financing of real estate as we own over 85% of our physical network. A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt. The 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 balance sheet leverage calculations. Unadjusted, our total debt-to-EBITDA is overstated at 4.3x. Adjusted to treat these items as an operating expense, our net debt-to-adjusted EBITDA is 1.7x. This means we can add over $1.2 billion in additional debt, which equals acquiring $4.8 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 beyond 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 continue to progress towards another sizable competitive cost advantage of achieving an investment-grade credit rating. Our capital allocation priorities for the deployment of our annual free cash flows generated remain unchanged. We target 65% investment in acquisitions; 25% internal investments, including capital expenditures, modernization and diversification; and 10% in shareholder return in the form of dividends and share repurchases. Earlier this morning, we announced a 13% increase in our dividend to $0.35 per share. Even with the acquisition of The Suburban Collection announced earlier this month, we continue to have the capacity to grow and are well-positioned for accelerated, disciplined growth. We continue to make strong progress in modernizing the consumer experience through Driveway and building a robust balance sheet, positioning us to be the leader in consolidating this massive industry, all while progressing towards our five-year plan of achieving $50 billion in revenue and $50 of earnings per share. This concludes our prepared remarks. We would now like the call to open for questions.

Our first question comes from Rick Nelson with Stephens.

And congrats on a great start to 2021.

Thanks, Rick.

Thanks.

It sounds like the acquisition pipeline remains robust. Curious with the approval process with OEMs, what you're hearing. Do you see any challenges to that $15 billion that is in active discussions and, I guess, from a bigger standpoint, the $50 billion in revenue target that you have out there?

Great question, Rick. This is Bryan. It's good to have you on the call this morning. When considering our OEM partnerships, they are built on a foundation of value-based acquisitions over the past couple of decades, allowing us to enhance the performance of underperforming stores. Most of our manufacturer partners, if not all, are quite stable and are actively engaged in discussions about our growth ambitions, showing support for those goals. We believe the $15 billion is appropriately priced, and we continue to evaluate any data while accounting for contiguous markets or regional limitations set by manufacturer agreements to give a clear picture of our growth potential, unaffected by any issues that may arise. For instance, in the case of the Keyes acquisitions, we reached our Western limitations, and as a result, we divested two businesses, despite acquiring larger businesses in Keyes. This aligns with our M&A strategies, which we typically address in the asset purchase agreements. Regarding the $50 billion base case five-year plan, we see no barriers to achieving that target either. It's important to note that nearly $10 billion of this is expected to come from Driveway. While things may change over time, we believe there is ample opportunity for growth, based on what our framework agreements indicate and what our manufacturers would feel comfortable with.

Got you. Also, a follow-up on inventory. It remains very tight across the industry here at a 41-day supply for new. Curious your thoughts on when you see inventory normalizing and the implications for GPU and expense ratios. I know one of your peers was suggesting that this tight supply condition continues through 2021.

Yes. Hey, Rick, it's Chris. With a 41-day supply currently, we feel confident that even without accounting for in-transit inventory, which likely adds a comparable supply, most of our original equipment manufacturers have sufficient stock to satisfy customer demand. Additionally, the ongoing supply challenges are influencing a couple of key areas. Firstly, new vehicle margins have increased by $800 per unit, clearly indicating a result of supply and demand dynamics. Used car valuations are also rising, giving new car buyers the benefit of higher equity on trade-ins. Our days supply is calculated at 41 days based on a 17.7 million seasonally adjusted annual rate from March. Given our present data and feedback, we may face tighter inventory throughout the summer. However, due to the supply-demand situation, we believe margins will help mitigate this, and our capability to acquire used cars should balance out any challenges we foresee on the new car side. Overall, we are confident in our current position.

Okay. Great. And finally, if I could ask you, with Suburban Collection, I understand that came with some used-only stores and curious if you have any plans to expand that strategy.

Rick, this is Bryan again. It was actually 34 new car stores. There are no stand-alone used car P&Ls. There may be a few used car lots that are attached to new car stores. And I think most importantly, there's a number of body shops as well. But we're really looking at that Detroit being the core for Region 3, which is our Upper Central region, where we don't have a big presence. And I know David and his teams are pretty excited about jumping in and supporting the last-mile delivery and activating their inventories on Driveway as well, and that will come over the next few quarters, I would imagine. But there are no specific used car independent stores in the $2.4 billion in revenue.

Our next question comes from the line of John Murphy with Bank of America.

Could you provide some details about the average vehicle and customer for Driveway, specifically the demographics of the people you sold to? Additionally, I would like to know more about the 43% of vehicles and customers sold outside the region. I'm trying to get a better understanding of Driveway and the out-of-region sales.

Sure. Sure, John. This is Bryan. I think most importantly, I mentioned that we're having about a 15% credit decisioning auto approval on consumers. But let's also remember that that 15% doesn't automatically complete the purchase, okay? So our what we would call happy path is about a third of that, okay, meaning it's a lot lower of those consumers that go all the way through, get auto approved, and end up buying. We are seeing that the credit tier is a little more impaired and a little more challenging than what we expected. Whereas originally, we were thinking that the ideas of a 30-unit per associate in the care center could be achievable. It still may be, but our early blend of technology with consumer decisioning is really yielding about a 12-unit to every 1 care associate. And I think to highlight one of our competitors that's 7 to 8 years old, with their technology being live for now that long, they're really looking at about a 7 unit per care associate. So technology in the e-commerce space, it's a lot of people that are mid- to low-tier credit, okay, and I'd say a 550 to 700 Beacon score or FICO Score that are looking for an easier solution than going into a traditional dealership where they're having to negotiate and then also solve for their credit issues where now they're able to solve for it themselves. Secondarily, you asked about the logistics fees at about 732 miles or about 43% out of region. We have about 32% of our vehicles that have no shipping fee, meaning that they're within 100 miles of the location of the vehicle, okay? An important thing to remember, okay? So also, our customers are seeing the value of our extremely convenient experience and being able to find scarce, high-demand vehicles, which is a different credit spectrum at each level of our inventory, which we'll be able to give you some specific data offline as well, but hopefully that gives you enough color to keep us moving along. Thanks, John.

That's helpful. Just a second question on Driveway FinCo. Is there any potential over time to start underwriting directly and maybe float an ABS deal to fund that? I mean having a captive finco that would grow over time kind of like CAF at CarMax?

Yes. In March, we approached 1,400 contracts, resulting in a 17.7 million SAAR, which is significantly stronger than what we expect to see as an average for the year. Based on this pace, we anticipate having a suitable amount of receivables to enter the ABS market later this year. Once we establish this rhythm, we plan to have offerings every one to two quarters, allowing us to take receivables off our balance sheet and reinvest that capital back into the network.

And just to follow up, the bulk of those contracts or those loans would be on the used vehicle side, is that correct? Or almost all of them, right?

You're correct, John. So we believe that our aggregated population of all vehicle sales should be around 20%, but it's massively tainted towards used, okay? We would say that we should be able to achieve a 40% to 50% penetration rate on our used finance contracts, with 5% to 10% on new being that new vehicles are subsidized with subvented rates from the manufacturers and have the advantages of leasing, okay? So we think our penetration rates will be quite low. As well as, certified vehicles a lot of times have subvented rates. So obviously, the deeper you go into the age of vehicles, the higher penetration we'll have on Driveway Finance Corp.

Okay. Lastly, regarding the stock, you're trading at a much higher multiple compared to some of your peers. Clearly, the growth is what's attracting attention. I'm not arguing that it's not justified, but why not leverage that multiple to pursue a stock-for-stock deal and enhance your strategy? It seems that this would be very beneficial, even if you pay a 20% premium for another public company. Additionally, I believe it was around September 30 of last year when you did a stock issuance, and the stock was priced at about $220. Now, it's nearly $380. Why not issue more stock to generate capital to pursue these acquisitions at a quicker pace? So why consider a stock-for-stock deal? And why not raise more capital?

John, I think maybe the easy answer is you're probably right. I mean it does make sense. That's in our repertoire of solutions, and we always try to balance the long-term opportunities and stabilize the likelihood of getting it through capital. And we do sit there nicely today, and we're fortunate that we do trade at a little bit of a premium to the sector, but we still also trade at a discount to some of the new entrants by a pretty considerable amount. And obviously, our early learnings in Driveway have taught us it is a more formulaic business, okay? And I think it's going to be exciting over our second, third, and fourth quarters of being in business and e-commerce to be able to actually extrapolate that when we open markets and we have top-of-funnel that's at X number of unique visitors, that translates into X number of sales. It's quite different than what we've experienced in auto traditional retail on the vehicle side that there's some art in it, okay? And this is not as much art. It's a lot of science, okay? And it's exciting to be able to see that there's a trajectory that is different with unique customers than our traditional channel, where we've had to really roll up our sleeves and fight those battles and find solutions for customers, whereas here, you're throwing a much broader net with a lot lower closing ratio, but it is somewhat formulaic based off your investments in marketing and care associates and the technology. And we think that we progressed quite nicely over the first quarter of being live and now about almost 2 years of having the technology under development.

So if I understand you, Bryan, I mean, do you think that you could use the stock for an acquisition or potentially use it to raise capital to accelerate the plan? Is that a fair characterization?

That's an accurate statement, John.

Our next question comes from the line of Rajat Gupta with JPMorgan.

I have a question about the recovery in parts and services. The numbers in March were quite strong. Could you explain a bit more about this? How much of it is due to pent-up demand compared to a more typical level of demand? I'm interested in your view on the recovery trajectory for the second quarter and the latter half of the year. When do you expect the business to return to pre-pandemic levels on a normalized basis, especially considering that we might be seeing lower miles-driven compared to the time before the pandemic? I have a follow-up question as well.

Hey, Rajat, this is Chris. Clearly, pent-up demand is a significant factor, and we're beginning to notice that since March, where we saw substantial year-over-year volume increases. However, our main focus is on determining when we will reach a normalized recovery compared to 2019, which we are using as a baseline. In the quarter, our figures were about 5% above the 2019 level. Before the pandemic struck last year, we had forecasted a low double-digit increase in our parts and service business. We certainly anticipate that trend to carry on into April and expect it to persist through the summer months as customers return to their usual routines, get back on the road, and require parts and service work.

Rajat, one other fact. As Chris was talking, I was looking at March year-over-year over year or 2021 as compared to 2019, okay? And our service, body, and parts were up 9%, okay? So we're starting to get back into those comparatives that we've been running at for the last half a decade, like Chris said, in certain quarters, we're low double digits; in most quarters, we're high single digits.

Got it. Got it. And that's continued into April so far on a 2-year comp basis, right?

Yes.

I wanted to follow up on the SG&A-to-gross comment made earlier. Given the deals we've completed this year and the strong start to the first quarter, could you provide some insight on what we should anticipate for the SG&A-to-gross ratio for 2021 overall? I'm not certain if that was mentioned already, and I may have overlooked it.

Rajat, this is Bryan. When considering SG&A-to-gross in the current environment, it's crucial to understand that margins are affecting gross more than cost reductions because we have significant ramp-up costs related to Driveway engineers and marketing budgets, yet we are still achieving a good level of leverage. As margins stabilize, which I believe will remain solid in Q3 and possibly Q4, as Chris mentioned, you should observe stable SG&A at what I see as an exceptional or anomalous level. Once we move beyond COVID-impacted or inventory-affected sales, it is more about the heavy lifting we did last year, which led to permanent staff reductions resulting in a 200 to 300 basis point decrease in SG&A. You can refer back to the period before the acceleration of network development in 2014 and 2015 when we were operating at 64% to 65%. This does not account for the sharing of best practices and technology that enables consumers to perform more tasks themselves, which would result in productivity gains in personnel, making up nearly two-thirds of our SG&A costs. There are various considerations to keep in mind, but our target remains in the low 60 percentile in our 5-year plan. We have not factored in many synergies or advantages for the Driveway channel that could be scaled over time, as this represents more of an aspirational goal for us. Over time, we will be able to provide more details about what that looks like beyond the 50-50 plan.

Got it. So say if that 12 units per care member goes to 30, that's all incremental upside, right? Is that what you guys...

You got it. You got it. And we're assuming in the 57% SG&A in the Driveway channel of the 5-year plan that we get to 57% SG&A as a percentage of gross. And that would imply about $1,000 in personnel costs per unit sold, okay, which is not much lower than what we currently sit at in the Lithia channel. So most of that drop from a mid-60% SG&A to the 57% is no network cost, okay? So that's the biggest part of what that drop is. There's not a lot of synergies. We're also assuming almost $1,000 in marketing budget. And as we know, we only spend about $250 to $300 in the traditional channel. And I think we can clearly see a pathway to Driveway's marketing budgets at scale and national presence getting to that level over some longer period of time.

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum.

Bryan, I want to briefly follow up on the customer care center. You mentioned achieving about 12 sales per employee, with a longer-term goal of 30. Do you think that this is mainly related to scaling Driveway and the care center, or have there been structural changes affecting the amount of work, time, and effort required per sale?

This is Bryan again. It's surprising that our original design suggested a 30:1 ratio, which we thought was straightforward based on our experiences with Shift Technologies, who is still our partner. We anticipated that ratio for care center associates to vehicles. However, as we examine the credit spectrum and the age of vehicles, it appears that over the next 2 to 3 years, a 12:1 ratio may be more realistic. Fortunately, these associates have a lower cost than traditional ones. We still believe that achieving $1,000 per unit over the next 5 years is feasible. We are uncertain if our current technology is effective enough. We have 29 APIs with lenders, almost four times more than our e-commerce competitors. Despite this, a significant portion of auto finance transactions are still falling through the gaps, meaning many customers struggle to structure their transactions, even with our digital guidance, to meet credit company requirements. Consumers using Driveway must often modify their information, whereas our goal is a streamlined process where consumers input their details, and we compare all 70,000 vehicles in inventory against our 29 lender APIs, presenting them with the 900 cars they can purchase according to their payment preferences. That was our ultimate design from three years ago, and currently, no one in the industry is close to achieving this. We believe we will be the first to reach this capability later this year or early next year, with several iterations of this logic improving our system to meet or exceed the competitive level of others in the industry.

Great. And then just on the Driveway, 97.8% of customers are incremental. Is that a function of marketing specifically to a new customer? Or I guess why do you think that's such a high percent of out-of-network customers today?

Yes, Ryan, we are focusing our resources on tech-savvy consumers or those making credit-based decisions who are seeking a more straightforward, transparent, and empowering experience. This is why we operate through a separate channel rather than as an extension of the Lithia channel. Additionally, the 40,000 to 50,000 vehicles currently listed on Driveway are reaching customers outside of our typical areas of responsibility. On average, our customers live about 732 miles away, while our traditional network usually services locations within a 45-mile radius. Together, these factors allow us to utilize inventory that previously went untapped and to effectively target consumers, ensuring we maintain a high level of incremental engagement.

Our next question comes from the line of Eram Zaghi with Morgan Stanley.

And this is on behalf of Adam Jonas.

Oh, great.

It's more about the acquisitions. It appears that Lithia's main focus is on developing an omnichannel strategy, which also guides your M&A approach. So, my question is, why would you choose to make your largest acquisition to date a dealer with 34 sites in one metropolitan area? Can you help clarify how this aligns with the broader omnichannel strategy, which might typically suggest a more balanced and expansive market presence instead of concentrating such significant investment in a single city?

Thank you for the question, Adam and Eram. I understand your point. Our approach to e-commerce focuses on transparency and empowerment, which we see as interconnected with our network. We don’t view these components separately; rather, they must function together effectively. On the network development front, it’s essential to remember that when we acquire companies at about 15% to 25% of their revenue, they contribute significantly from day one, adding between $0.25 to $0.50 for every $1 billion in revenue. This allows us to maintain our competitive edge while recognizing that new car dealerships will continue to exist. The new car market is quite stable, with four key business lines that are profitable and beneficial. Our returns typically fall within the 15% to 25% investment range, and we can expect to recover our investments within 3 to 7 years. Although we anticipate that Driveway will represent a larger part of our business moving forward, we acknowledge that substantial effort is still required in the car sector. If we can recoup our investment within 3 to 7 years, that’s advantageous for us. Today’s car buying landscape, enhanced by technology and Driveway, shows that most consumers still need assistance throughout the process. This assistance fosters trust, which we can establish either through technology or face-to-face interactions. We recognize the significance of the 34 stores in the Midwest, as they provide a diverse selection of luxury vehicles alongside domestic and popular import brands like Honda and Toyota, allowing us to service and store vehicles closer to our customers in Region 3.

Our next question comes from the line of Nick Jones with Citi.

I have two. The first one, as you roll out advertising for Driveway into new markets, how should we be thinking and how are you thinking about the transition to more kind of national advertising where you can get more leverage on that spend?

Nick, that's a great question, and it's something that our Digital Steering Committee is dealing with every single week, is how do we balance that. I think if you remember, we increased our budgets from a couple of hundred thousand dollars a month to over $1 million a month starting in April. So this is our first month of a quadrupling or quintupling of our budget, okay? And what we're balancing is really what is our funnel efficacy, okay? So what are we getting in brand impressions? How many unique visitors does that produce? And how effective are we at what we call our golden ratio, okay, which is ultimately what's our sales or actually revenue generated off of top-of-funnel, okay? And until we see that really start to take hold, it gives us indications that we still need work in improving our care center, that our technology may not be solving as much for the consumers as we like. We look at the happy path to be able to determine what personnel cost do we need outside of happy path to support that, and we look at that 12:1 or 30:1 eventual ratio of vehicle sales-to-associate to be able to determine that. Nick, I will say this. We're definitely leaning, and some of it is even coming from your challenges and aspirations that why would you not spend more money on marketing if you can sell more cars. And I think that's accurate. We're leaning towards that level of accelerating to get to national scale when the numbers really drop back to a reasonable level. And we'll be able to talk more about that in the coming months and quarters. But right now, we're at a 4 to 5x of where we started 90 days ago, and that may end up doubling or tripling again depending on how we think about allocating our capital in different types of buckets.

Great. That's helpful. And then a follow-up just kind of on the competitive landscape. I know there are some slides in the deck and investors talk about it, we talk about it. But given the fragmentation from here, how are you and how should we be thinking about competition? I guess given the size of the TAM, the number of units that kind of the top players are doing, it seems like there's probably many years before these competitive moats really start to show. Is that the right way to think about it? Or is it more important to focus on kind of the competitive dynamics today? Or is this really more of kind of 5, 6, 7, 10 years out when the consolidation is a little bit more penetrated?

Nick, great question. And I think it's great insights to the largest retail sector in the country and probably the world. If you take it in the United States, it sits at $2 trillion. I don't believe this is a winner-take-all, even though I believe that we're nicely positioned to get as much as we possibly can and really strive to that 5% of U.S. market share and beyond that we've talked about now for a couple of years. But ultimately, this is not a winner-take-all game, okay, because you have to solve, especially on the used vehicle side, for inventory. It's not a factory that you just are able to turn your inventory quicker and get a larger portion of that. You actually have to go buy the vehicles or take them in on trade, then you have to recondition those and have expertise to be able to do that. And that's something that's highly competitive and ultimately the most efficient channel. We'll be able to pay the most for the vehicles to be able to do that. And by having all four business lines, I really believe that we've designed a structure that will put us into the best competitive positioning with anyone that comes into that used car space. And obviously, we know the barriers to entry in the new car space as well as that high-margin, 60-plus percent repair business. That is really how we've thought about our design, is those higher-margin businesses because we know that, that's what allows us the ability to boost marketing and boost care associates and expand our innovation solutions to be able to go to market with the next best thing for our consumers as the world changes.

Our next question is a question from the line of Bret Jordan with Jefferies.

With another quarter under your belt, I guess, with zero emissions experience, could you talk about how you see zero emissions products impacting that maintenance service business going forward?

Certainly. When discussing the serviceability of our future product lines, it's crucial to focus on affordability. Currently, 42% of vehicles sold in America, both new and used, are nine years or older, which represents about 58,000 vehicles — 17,000 being new and 40,000 used. These older vehicles come with lower payments, aligning with what people can afford. Additionally, a significant portion of the remaining vehicles presents the potential for improvement in serviceability and lower costs through battery electric vehicles or zero-emission models. Affordability is key in this equation. Currently, only 10% to 15% of consumers can afford a vehicle priced at $30,000 or more. This transition will be gradual. We hope our Congress will pass a zero-emission bill, but it's important to note that this is not limited to battery electric vehicles; it encompasses various solutions that could enhance vehicle performance. More affordable options are generally hybrids due to their lower production costs. However, at the end of their life cycle, replacing batteries can be quite pricey, impacting the vehicle’s lease end value. Presently, hybrids may incur lower costs in the initial 5 to 7 years but become more expensive later on due to battery replacement needs. We're also adjusting for the content in these vehicles since our current hybrids have less content than typical vehicles. As we shift to fully battery-powered electric vehicles, we're still in the early stages of understanding their overall costs, particularly regarding battery replacement. Right now, battery electric vehicles are around 30% to 40% cheaper to maintain, but the diagnostic and repair tools necessary for their upkeep are significantly more expensive, primarily available through new car dealers who hold the proprietary technology required for repairs. Any efficiencies gained from owning a battery electric vehicle could potentially reduce our serviceability. We believe we can attract some independent mechanics, and with our Driveway in-home service initiative, we think we can also capture business from new vehicle dealers in the long term, which has influenced our design approach.

Okay. Great. And then one question. I guess you saw almost 98% of the Driveway customers were new to Lithia. I guess to put that in perspective, on a traditional brick-and-mortar footprint, how many of your customers or what percent would be first-time users at Lithia as well?

So in our traditional channel, it's around 50%, okay? So it's a massive difference in terms of what we've seen. But remember, we're getting 98% because we're reaching consumers that never saw our inventory before and we didn't have a national brand. Now we have the ability to leverage the scale of our inventory into areas, and I think that's creating a lot of that 98%, plus the marketing things that we talked about where we're specifically targeting a different type of consumer so we're not really getting into that cannibalization of our existing pipeline.

Our next question comes from David Whiston with Morningstar.

I guess first on The Suburban Collection deal. Obviously, it's a top group nationally. But other than that, I'm just curious why you guys wanted to focus for that region on Detroit metro versus another major Midwestern city like Chicago or Cleveland, St. Louis, et cetera.

Great question, David. First, I want to highlight that the Suburban organization shares cultural values and history that align closely with Lithia Motors. They were established two years after Lithia, in 1948, which is a notable aspect. They have maintained close connections and developed a community-focused organization. From a business perspective, Detroit stands out as the most robust domestic metropolitan area in the country, and the profitability of those assets is quite strong. There is an additional consideration related to customer types, particularly Plan A and Plan B customers, who are employees directly working for manufacturers. Approximately 80% of their new car sales come from factory employees or their friends and families, which means those transactions are typically negotiation-free. Furthermore, our Driveway model also operates on a one-price basis. This emphasis on best practices and the initial advantages of a negotiation-free environment greatly appealed to us, especially since our current Lithia network has only a small portion sold in this manner. To illustrate, around 25% of our new vehicle sales in the Lithia network follow a negotiation-free approach, while about 51% of our used cars are sold without negotiation. In contrast, Suburban achieves over 80% negotiation-free sales for new cars. Additionally, this move significantly enhances our presence in Region 3.

That's helpful. And I guess staying on the acquisition, I mean, as well as Suburban and Baierl, you've done a lot of deals, obviously, in the past roughly 9 months. But, I mean, why are you very often, if not always, successful, especially for a prime asset like Suburban? I mean you've got 5 publics. There's Berkshire and there's Terry Taylor's firm. Why does the seller pick you?

So most importantly, we do what we say we're going to do, and our track record of success is now oh, about 286 out of 288 successful closings as a company. We've only lost, sorry, three deals, I did my math a little bit wrong there, over the last 25 years of M&A. We know what our manufacturers expect of us. We know how they look at approvability to ensure that we meet those qualifications in all cases, okay? And today, we do sit in a capacity with the synergies that we bring with Driveway that allow for an overlay and another incremental lift with Driveway Financial as well as the Driveway leveraging of those new customers to be able to expand their profitability in an even greater sense, which again allows us to be more competitive over time. I will say this, David. We don't see massive competition on our deals. I mean we've now been doing this for 25 years. It's something that is cultural. We don't have a VP of M&A, okay? I mean I think I was the last one that was in that role. It's something that everyone does. In fact, Chris Holzshu is doing deals, and we got general managers that are doing deals. It's a bonded relationship with sellers and those 2,600 leads for the last 25 years that we now can pay the amount that they're looking for, okay, while still making sure that it's highly accretive. And there's not a real reason to put it out to market to put risk in their employees' minds or have things go to market. And our industry closes 4 out of 10 deals even at a definitive level, and we're closing 98% of all deals that we sign. And I think that's a risk that many sellers don't want to put their people in the firing line of having a deal fall apart, which we all know that, that occurs fairly often.

That's helpful. I know it's early to discuss 2022, but do you see a possibility that, considering the low inventory we've been experiencing along with high consumer demand, the beginning of 2022 could see a significant surge? Also, are you aiming to increase your inventory, or are you satisfied with the current pricing power you have?

I believe that if we consider 2022, it seems quite distant. However, a 17 million SAAR appears to be a reasonable estimate, with some fluctuations over the next four to five years. This projection suggests that the average age of vehicles on the road will be nearing 12 years. Regarding our perspective, I think it is important to note, as Chris would agree, that we remain unaffected by the fluctuations in the overall market, whether the SAAR is at 15 million or 19 million, or whether inventories are high or low. We operate across four business lines and have three distinct channels, including the green car segment. Our strategies were designed three to five years ago to mitigate concerns about these market variables. We have sufficient tools at our disposal to maintain high profitability and pursue our 50-50 plan, regardless of market conditions. Notably, after 12 months of developing Driveway, we now find ourselves in a position where we can control how we acquire more used car inventory than anyone else and effectively recondition it. We truly believe we are in command of our future, independent from market fluctuations or the decisions made by manufacturers regarding new car production.

I'd like to hand the call back over to Bryan DeBoer for closing remarks.

Thank you. Thank you, Doug, and thank you, everyone, for joining us today. We look forward to updating you on our Lithia & Driveway second-quarter results in July and wish everyone a wonderful spring and stay safe.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.