Good morning, and welcome to the Lithia & Driveway First Quarter 2021 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. I would like to turn the call over to Eric Pitt, Vice President of Investor Relations and Treasurer. Please begin.

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 full 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, an 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 by 60%; Used vehicle increased by 55%; F&I increased by 63%; and service, body, and parts increased by 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. 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 $250 million 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 this 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 multi-year 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 two to three 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 is taking 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 Reviews 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 16-fold increase over our two 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 lifecycle. 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 omni-channel 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 the 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 five-year plan nine 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 Letter of Intent 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 the 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 allows 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 10 times the consumer lifecycle touch points as compared to used-vehicle-only retailers and allow for substantially lower marketing cost per vehicle sold. Captive leasing through our OEM-affiliated partners provides new vehicles with attractive competitively priced monthly payments when compared to one- to three-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 financibility, 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 our 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 six 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, whether any economic cycle compete with any future competitor and expand our cash engines to expand into further adjacencies. These combined with our many competitive advantages strongly position us to achieve our five-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 remained 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 is a 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 three 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 increased 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-transit 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 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 vehicles three to seven years old and 21% value autos or vehicles older than eight years. With over 60% of the annual 40 million used vehicles sold in the U.S. being nine 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 our 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 lines, 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 saw 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 revenues. But 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 profitably modernize the consumer experience, the opportunity to leverage our cost structure will continue as we maximize the utilization and integration of our existing location and as our digital home solution, Driveway, adds meaningful additional incremental sales. In summary, our teams continue 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 Fischer 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 flows, 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 in EBITDA and excludes this debt from balance sheet leverage calculations. On adjusted, our total debt to EBITDA is overstated at 4.3 times. Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.7 times. This means we could 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 3 times for a sustained period, we would look to deleverage quickly through the equity capital market. As a reminder, our disciplined approach is to maintain leverage between 2 and 3 times as we continue to 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% in internal investment, 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 toward 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. Operator?

Thank you. Our first question comes from Rick Nelson with Stephens. Please go ahead with your question.

Thanks a lot. Good morning. And congrats on a great start to 2021.

Thanks, Rick.

Sounds like the acquisition pipeline remains robust. I'm 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 we consider our OEM partnerships, they are built on a foundation of value-based acquisitions over the past couple of decades, allowing us to enhance underperforming stores. Most of our manufacturer partners, if not all, are stable and actively engaged in discussions about our growth goals, supporting those ambitions. We believe the $15 billion target is appropriately priced. We still evaluate data, especially in contiguous markets or regions limited by a manufacturer's framework agreement to provide a clear picture of our growth potential, despite any issues that may arise. For example, with the Keyes acquisitions, we reached our Western limitations and ended up divesting two businesses, even though we acquired larger businesses. This is part of our M&A strategies, which we typically address in asset purchase agreements. Regarding our $50 billion base case five-year plan, we see no barriers to achieving that goal. Nearly $10 billion of that is expected to come from Driveway, and while those projections may change, we believe there is significant potential beyond that in line with our framework agreements and the comfort level of our manufacturers.

Okay. Thanks for that color. Also, there is a follow-up on inventory that remains very tight across the industry; you're at 41 days' supply for new. Curious, your thoughts on when you see inventory normalizing and the implications for GPU and expense ratios? And one of your peers was suggesting that this tight supply condition continues through 2021.

Yeah. Hey, Rick, it's Chris. Good morning. At a 41-day supply right now, I think we feel really comfortable that without even counting in-transits, which is probably another similar day supply that we feel like is still coming into the pipeline, most of our OEMs have plenty of inventory on the ground right now to meet customers' demand. And with that and the supply issues that we have, you're also seeing the impact of that on two things. First of all, new vehicle margins obviously up $800 per unit is definitely a byproduct of supply and demand. And then used car valuations as well are definitely ramping up, which actually gives new car customers the advantage of the positive equity or more equity, I guess, on a used vehicle trade. But our days supply is calculated at 41-day supply coming off a 17.7 million SAAR run rate for March. And so based on what we're getting right now and the feedback that we're getting, we may have some tight inventory issues running through the summer months. But at the same time, because of supply and demand, I think the margin offset on that and our ability to procure used cars to offset any issues that we see on the used cars side, or on the new cars side, we feel pretty comfortable that we're in a good spot right now today.

Okay, great. Finally, can I ask you with The Suburban Collection, I understand that came with some used-only stores? Curious if you have any plans to expand that strategy.

Rick, this is Bryan again. It was actually 34 new car stores. There is 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 is 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 is no specific used car independent stores in the $2.4 billion in revenue.

Sounds good. Thanks for clarifying that. And good luck.

Thanks, Rick.

Thanks, Rick.

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

Good morning. I have a question about Driveway. Can you provide details on the average vehicle and average customer, specifically the types of vehicles sold and the customers who purchased them? Additionally, could you share some information about the 43% of vehicles and customers that were sold out of region? I'm looking to understand Driveway's performance as well as the out of region aspect.

Sure, John. This is Bryan. Most importantly, I mentioned that we have about a 15% auto approval rate for consumers based on credit decisions. However, this 15% does not guarantee a completed purchase. Our successful path represents about one-third of that percentage, indicating that significantly fewer consumers who get auto-approved actually go through with buying. We're noticing that the credit tier is somewhat more impaired and more challenging than anticipated. Initially, we thought achieving 30 units per associate in the Care Center was possible. It might still be, but our current mix of technology and consumer decision-making is yielding around 12 units for each Care associate. To highlight one of our competitors who has had their technology live for seven to eight years, they're seeing about 7 units per Care associate. In the e-commerce space, many consumers have mid to low-tier credit, roughly those with Beacon or FICO Scores between 550 and 700, who prefer a more convenient solution rather than negotiating at traditional dealerships and addressing their credit issues. Regarding logistics, about 43% of our vehicles are sold out of region at around 732 miles, but approximately 32% of our vehicles incur no shipping fees, meaning they are located within 100 miles. It's important to note that our customers appreciate the value of our extremely convenient experience and the ability to find high-demand vehicles across different credit levels within our inventory. I can provide specific data offline as well, but I hope this gives you enough background to keep things moving. 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 cap with FinCo that would grow over time kind of like you have at CarMax?

We almost reached 1,400 contracts in March, with a SAAR of 17.7 million, which is significantly stronger than what we expect to average for the year. At this rate, we should have the right amount of receivables to enter the ABS market later this year. Once we establish that rhythm, we plan to issue these every one to two quarters, allowing us to offload some balance sheet items and reinvest the capital that is currently stored. This leverage will be reintegrated into the network.

And just a follow-up, the bulk of those contracts or those loans would be on the used vehicles 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 a 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 are currently trading at a multiple significantly higher than some of your competitors. The growth is clearly a focus for investors. It may not seem justified, but why not leverage that multiple for a stock-for-stock deal to enhance or expedite your plans? It seems that could be very beneficial, even if it involves paying a 20% premium for another public company. Additionally, I recall that there was a stock issuance around September 30 last year when the stock was about $220, and now it's nearly $380. Why not issue more stock to raise capital for acquisitions, possibly pursuing them at an accelerated pace? So, why not consider a stock-for-stock deal and raising 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 in 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, there is 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 is 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've progressed quite nicely over the first quarter of being live and now about almost two years of having the technology under development.

Sorry, I don't understand you, Bryan. I mean, 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 J.P. Morgan. Please proceed with your question.

Hi. Good morning, everyone, and thanks for taking my questions. Just had a question on the parts and services recovery; pretty, pretty strong numbers here in March. Can you help like just dissect that a little bit? How much of that is just pent-up demand versus like a more normalized level of demand? Just curious as to how you see the trajectory of the recovery into the second quarter and in the second half. I mean, by when do you see the business just getting back to pre-pandemic levels just on a normalized basis, given like you might be in a potentially lower miles driven environment versus pre-pandemic? And I have a follow-up. Thanks.

Good morning, Rajat. This is Chris. Clearly, pent-up demand is a significant factor. We're beginning to notice that since March, where we started experiencing substantial year-over-year volume increases. Our main focus is determining when we will achieve a normalized recovery compared to 2019, our baseline year. In the last quarter, we were about 5% above the 2019 levels. Before the pandemic, we had anticipated a low double-digit growth in our parts and service sector. We expect this positive trend to persist into April and throughout the summer as customers resume their normal lives, get back on the road, and require parts and service.

Rajat, one other fact that, 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 of that, 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 two-year comp basis, right?

Yes.

Thank you for the insights, Bryan. I wanted to follow up on the earlier discussion regarding SG&A in relation to gross comments. Specifically, I'm looking to understand how this year's deals and the strong start of the first quarter impact our expectations. Assuming there won't be any additional deals, could you provide guidance on what we might anticipate for SG&A to gross for 2021? I may have missed that information. Thank you.

Rajat, this is Bryan. When considering SG&A in relation to growth in the current environment, it's crucial to recognize that margins are more significantly influenced by the gross than by cost reductions. We have substantial ramp-up costs associated with Driveway engineers, marketing budgets, and other areas, yet we are still achieving a level of leverage. As margins stabilize, which appear to be strong heading into Q3 and possibly Q4, you can expect SG&A to remain at what I would characterize as an exceptional level. Once we move beyond COVID-affected or inventory-affected sales, we will see the results of the heavy lifting from last year, which included permanent staff reductions that resulted in a 200 to 300-basis point decline in SG&A. Looking back to the pre-acceleration of network development in 2014 and 2015, we were operating at 64% to 65%. This does not account for any sharing of best practices or technology enhancements that allow consumers to take on more work themselves, which could improve personnel productivity and account for nearly two-thirds of our SG&A expenses. There are various factors to consider, but our goal is to target the low 60 percentile over our five-year plan. We have not incorporated significant synergies or advantages associated with the Driveway channel that could scale over time; this remains an aspirational target we hope to achieve, and we will share more details on that beyond the 50/50 plan.

Got it. So, if that 12-units per care member goes to 30, that's all incremental upside, right?

We're anticipating that in our five-year plan, the SG&A in the Driveway channel will reach 57% as a percentage of growth, which suggests approximately $1,000 in personnel expenses for each unit sold.

Not much lower than our current position in the Lithia channel. Most of the reduction from mid-60% SG&A to 57% is due to new network costs. That's the primary factor for that decline. There aren't many synergies. We're also assuming nearly $1,000 in marketing budget, while we typically spend about $250 to $300 in the traditional channel. I believe we can clearly see a path for Driveway's marketing budgets to scale and achieve a national presence at that level over a longer timeframe. Got it. That's super helpful. I had a follow-up. I'll jump back in queue. Thank you.

Thanks, Rajat.

Our question comes from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your question.

Good morning. Bryan, just want to follow up quickly on the last kind of the customer care center. And you mentioned kind of one or I guess 12 sales per employee, longer-term 30, do you think that's purely kind of a scale thing as you scale Driveway and the Care Center? Or has there been kind of a structural change as you're getting into the Care Center and kind of how much work and time and effort it takes per sale?

Thank you for the question, Ryan. This is Bryan again. It's interesting to reflect on our initial design, which we believed would easily support a ratio of 30 sales per employee. This assumption was largely based on our experiences with Shift Technologies, our ongoing partner. We anticipated that 30 sales per Care Center associate to vehicle would be feasible. However, as we analyze the varying credit profiles and the ages of the vehicles we’re dealing with, it seems that over the next two to three years, a more realistic target might be 12 sales per employee. The good news is that our costs are lower compared to traditional associates in the usual channels. We still believe achieving $1,000 profit per unit over the next five years is attainable. That said, we're not entirely certain that our current technology will meet that expectation. We have established 29 APIs with lenders, which is significantly more than our competitors in the e-commerce space. Despite this, we're still witnessing a considerable amount of missed opportunities in auto finance. Many customers struggle to structure their transactions effectively, even with our digital guidance, to align with what credit providers are willing to accept. This indicates that consumers today are often required to revise their information repeatedly. Our ultimate goal is to simplify this process so that a consumer can simply input their desired details, and we will promptly query all 70,000 vehicles in our inventory against our 29 lender APIs to show them the 100 cars available that meet their criteria and payment preferences. This was the vision we had three years ago, and currently, no one in the industry is close to achieving this. We believe we will be pioneers in realizing this capability later this year or early next year, with multiple enhancements rolled out over the coming quarters to elevate our offering to a more competitive standard compared to our industry peers.

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?

Yeah. So, Ryan, it's two things. One is we are specifically focusing our dollars to tech-savvy or credit-based decisioning, where consumer is looking for a simpler, more transparent empowered experience, okay? A little bit different; it's why it's a separate channel. It's not an adjunct to the Lithia channel, okay? Also the 40,000, 50,000 vehicles online today in Driveway are now reaching customers that aren't in our basic AORs or Areas Of Responsibility where we have business. Remember, at 732 miles I believe was the distance average of our customers, while our average reach in our traditional network is around 45 miles. Okay. So those two things together are really leveraging the inventory that we've never leveraged before and then targeting consumers with that inventory to match the two to keep that, what we would call, that incremental level up to a very high level.

Great, thanks. Good luck. And I'll hop back in the queue.

Thanks, Ryan.

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

Hi. This is on behalf of Adam Jonas.

Oh, great. How sweet!

Good morning, everyone. While I may not be as entertaining as the previous speaker, I'll proceed with my questions. Regarding the acquisitions, it appears that Lithia's top priority is to establish an omni-channel strategy. Your mergers and acquisitions strategy seems to stem from that omni-channel goal. My question is, why would you pursue your largest acquisition to date in a metro area with a dealer that has 34 sites? Could you explain how this aligns with the overall omni-channel strategy? It seems that you might be aiming for a more balanced market presence instead of focusing your capital in just one city.

Thank you for your question, Adam and Eram. It makes a lot of sense. Our e-commerce strategy focuses on transparency and empowerment, which we view as interconnected functionalities that must work together. On the network development front, it's important to remember that acquisitions at 15% to 25% of revenue can be quite beneficial, especially as they contribute between $0.25 and $0.50 for every $1 billion of revenue right from day one. We recognize that new car dealers are not going away, as the new car business is quite stable, with four business lines that are profitable. Our expected returns are in the 15% to 25% range, and we anticipate recouping our investment within three to seven years. While we expect Driveway to grow significantly, we also acknowledge that the traditional car business is still vital. In today's market, consumers often require assistance in purchasing cars, which is founded on trust that we can foster through technology or face-to-face interactions. Our acquisition of a dealer with 34 sites offers a diverse selection of luxury, domestic, Honda, Toyota, and import vehicles, enabling us to service and store these vehicles closer to our customers in Region 3.

Awesome. Thank you so much.

Thanks for the question.

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

Great. Thanks for taking the questions. 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 $200,000 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 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 to 1 or 30 to 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-5 times 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.

That's helpful. I have a follow-up regarding the competitive landscape. I know there are some slides in the deck, and investors have discussed this. Given the fragmentation, how should we think about competition? Considering the size of the total addressable market and the number of units the top players are handling, it seems there may be several years before we see significant competitive advantages emerging. Is that the right perspective, or should we focus more on the current competitive dynamics? Or is it more relevant to consider the situation 5, 6, 7, or 10 years down the line when consolidation may be more advanced? Thank you.

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 will 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 as 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.

Great, thank you.

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

Hey, good morning, guys.

Hi, Bret.

With rather a 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?

Absolutely. When discussing our future product lines, affordability is key. Currently, 42% of vehicles sold in the U.S., both new and used, are nine years old or older, which translates to about 58,000 vehicles, consisting of 17,000 new and 40,000 used. This indicates low payment options that are within people's budgets. A significant portion of the remaining 58% offers potential for serviceability impacts, particularly regarding the lower costs associated with BEVs or zero emission vehicles. It's also important to note that only 10% to 15% of consumers can afford vehicles priced at $30,000 or more each year, suggesting a gradual transition. We are optimistic that our current Congress will pass a Zero Emissions Bill, which is crucial, as it encompasses various solutions beyond just BEVs that can enhance vehicle service effectiveness. Typically, hybrids are more affordable due to lower production costs, but battery replacements at the end of life represent a significant expense that affects a vehicle's lease end value. Currently, while hybrids tend to be less expensive in the first five to seven years, they can become pricier later due to battery replacement needs. We are adjusting evaluations for hybrids since the ones we sell today have fewer features compared to our standard vehicles. BEVs, being entirely battery-powered, will present a distinct cost structure, and we are still assessing what the ultimate expenses will be, given the uncertainty of battery replacements. At this time, maintenance for BEVs is estimated to be 30% to 40% cheaper. However, I want to emphasize that diagnostic and repair tools are significantly more expensive, with new car dealers having access to that proprietary technology. Any inefficiencies in BEV ownership that might affect serviceability could be offset by our Driveway in-home service, which we believe will help us capture new vehicle dealers' business in the long run.

Okay, great. And then one question, I guess, you said 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?

In our traditional channel, it's around 50%. There's a significant difference in what we've observed, but keep in mind that we're achieving 98% because we're reaching consumers who had never seen our inventory before, and we didn't have a national brand. Now we can leverage the scale of our inventory in different areas, which I believe is contributing to that 98%, along with our targeted marketing efforts aimed at a different type of consumer, so we aren't really facing any cannibalization of our existing pipeline.

Okay, great. Thank you.

Thanks, Bret.

Your next question comes from the line of David Whiston with Morningstar. Please proceed with your question.

Thanks. Good morning. 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. I want to begin by highlighting that The Suburban organization aligns closely with Lithia Motors in terms of cultural values and history. They were established just two years after us in 1948, which is quite notable. They have developed a community-oriented organization and have been good partners over the years. From a business perspective, it's important to note that Detroit is the strongest metropolitan area in the U.S., and the profitability of those assets is very high. Another key point to consider is the distinction between Plan A and Plan B customers, referring to employees working directly for manufacturers. Nearly 80% of their new car sales come from factory employees or their friends and family, which means those transactions occur at a fixed price without negotiation. This aligns well with the Driveway model, which also adopts a one-price strategy. This approach and the initial insights from a negotiation-free environment were particularly appealing to us, especially since our existing Lithia network sees only a small fraction of sales in that way. Comparatively, about 25% of our new vehicle sales in Lithia use a fixed price strategy, while our used cars stand at around 51%. In contrast, Suburban has over 80% of its new car sales conducted without negotiation. Additionally, this acquisition greatly enhances our presence in Region 3.

That's helpful. Thanks. Regarding the acquisition, you've completed many deals in the past nine months. Why are you consistently successful, particularly with a prime asset like Suburban? With five public competitors, including Berkshire and Terry Taylor's firm, what makes you the seller's choice?

So, most importantly, we fulfill our commitments, and our success rate stands at 286 out of 288 successful closings as a company. We've only lost three deals. Over the last 25 years of mergers and acquisitions, we understand the expectations of our manufacturers and how they assess approvability to meet their qualifications consistently. Currently, we are positioned to leverage the synergies with Driveway, which allows for an additional increment with Driveway Financial and helps expand the profitability of new customers, thus enhancing our competitiveness over time. I want to emphasize, David, that we do not face significant competition in our deals. We have been in this business for 25 years, and it has become part of our culture. We do not have a Vice President of M&A; I believe I was the last to hold that role. Everyone is involved in the process. For instance, Chris Holzshu is closing deals, and our general managers are also engaged. We have established strong relationships with sellers and have maintained 2,600 leads over the past 25 years, allowing us to meet their price expectations while ensuring high accretion. There is no need to go to market, which could create uncertainty for our employees. In our industry, only four out of ten definitive deals close, while we successfully close 98% of the agreements we sign. Many sellers are reluctant to risk their people being involved in potentially unsuccessful negotiations, which is a common occurrence.

Okay, that's helpful, thanks. I know it's early to discuss 2022, but do you envision a scenario where, considering the prolonged low inventory and high consumer demand, 2022 could see significant growth? Would you prefer to increase inventory, or are you satisfied with the current high pricing environment?

I believe that looking ahead to 2022 is quite a stretch. However, I consider a 17 million SAAR a reasonable estimate, with some fluctuations over the next four to five years. This projection would push the average age of vehicles on the road to nearly 12 years. In our perspective, and I think Chris would agree, we remain unconcerned about broader market conditions. Whether the SAAR is 15 million or 19 million, with varying inventory levels, we have established four distinct business lines and three channels, including the Greencar channel, designed several years ago to remain unaffected by those fluctuations. We possess the necessary strategies to maintain profitability and effectively pursue our 50/50 initiative, regardless of market dynamics. With 12 months into Driveway's progression, we find ourselves in control of how we acquire used car inventory and recondition it more effectively than others. We genuinely feel we can shape our own path rather than depend on the market or the decisions made by our 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's 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.