Good morning and welcome to the Lithia & Driveway third 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 now like to turn the call over to Jack Evert, Director of FP&A. Please begin.

Thank you and welcome to the Lithia & Driveway third 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 third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you Jack. Good morning and welcome everyone. Earlier today, we reported the highest adjusted third quarter earnings in company history at $11.21 per share, a 63% increase over last year's strong results. Record revenues of $6.2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses. During the quarter, total revenue grew 70% while total gross profit increased 83%. On a same-store basis, used vehicles led our revenue growth up 40%, followed by a 22% increase in F&I income, a 7% increase in service, body and parts revenues, and a relatively modest 3% decrease in new vehicle revenues. Additionally, same-store gross profit increased 23%. Our operational teams executed our best-in-class used inventory procurement model to source and recondition a large volume of used vehicles in a highly cost-effective manner. Our ability to reposition vehicles within our nationwide network and our Driveway procurement technology allowed for optimal inventory levels throughout the quarter. On the new vehicle side, increased GPUs more than offset the decline in volume. Chris will be providing additional details on our same-store sales, inventory levels, and operational highlights in a few moments. Through our omnichannel strategy and by expanding our network by acquiring new vehicle franchises, we have rapidly increased our size and scale further growing our significant capital engine. In the third quarter, we generated $530 million in adjusted EBITDA, the greater than any full year in our history before 2019 providing us additional capital to deploy towards network expansion in Driveway, while also accelerating our continued exploration into adjacencies. The robust customer demand we saw in the third quarter was driven by high levels of savings, government subsidies, lower interest rates, and increased equity in trade-ins. Elevated demand and margins are likely to be sustainable into the next few quarters due to the continued strength from these drivers, coupled with tight new vehicle supply and accelerating miles driven as consumers return to work and continue to travel using their vehicles. As our industry transitions towards electrification and more convenient and empowered mobility solutions, LAD will anticipate and adapt to execute and proactively lead this change. Our plan to reach $50 billion in revenue and exceed $50 in EPS by the year 2025, from here on referred to as our 2025 plan, was designed with these and other consumer trends in mind. Lithia & Driveway's full life cycle offerings and adjacencies are evolving to respond to changing preferences. Beyond the Lithia & Driveway channels are complex, expansive, and difficult to replicate design that we have incrementally unveiled over the past 15 months, today includes greencars, the foremost educational marketplace for sustainable vehicles, a quickly growing fintech Driveway Finance, growing fleet in leasing operations, and a Canadian presence to establish the seeds for international growth longer term. We look forward to continuing to share further elements of our design and how our digital solutions can be applied to similar mobility industries and further adjacencies to create a broad-based highly diversified multi-sector disruptive company. Our traditional Lithia businesses are now evolving their offerings. Given our decentralized culture and belief that our stores know their local markets best, they operate as local brands with the autonomy to implement e-commerce solutions that meet their customers' needs. When designing our omnichannel strategy, careful consideration was given to the existing end-to-end digital solutions that many of our Lithia stores' omnichannel offerings already utilized. While continuing to grow these Lithia experiences, LAD established Driveway as a unique independent brand with dedicated leadership, engineering, and marketing teams developing proprietary software and a complete lifecycle of in-home experiences to attract incremental consumers to LAD. This also provided consumer solutions that are broader and lower cost than any of our used-only e-commerce retail peers. In conjunction with the acceleration of consumer demand for in-home retail experiences, we are seeing the massive benefits of having consumer optionality for both Driveway and Lithia in-store and online experiences. Our initial design and early learnings from Driveway continue to guide and expand how our Lithia businesses interact with consumers. While our attention was turned to Driveway's completely incremental revenue growth, we have been remiss in sharing that our Lithia business continues to provide digital experiences through its 300-plus local, regional, and Lithia websites. For the third quarter, these Lithia websites and associated online shopping experiences connected with 11.5 million quarterly unique visitors. These Lithia e-commerce customers accounted for 36,600 or 25% of all units retailed in the quarter, simply estimated at $5.9 billion of annualized revenues attributed to the e-commerce portion of our traditional Lithia channel. These Lithia e-commerce sales are in addition to Driveway's growing successes that we will share in just a few moments. To put this into perspective, these e-commerce sales as a percentage of monthly unique visitors represents a 0.32% or what we call a golden ratio. This performance level is similar to other established digital-only used retailers. To further illustrate the strength of our omnichannel strategy, when our LAD total sales are compared to unique visitors from all channels, our golden ratio was 1.46%, nearly five times more successful than our digital used-only peers. Lastly, it's important to note that we are not incurring incremental spending on our stores' e-commerce tools as we are leveraging third-party vendors similar to our new vehicle franchise peers- e-branding efforts. Though we are pacing significantly ahead of our 2025 plan, we remind everyone that our revenues have experienced drag from inventory constraints and earnings are greatly inflated from vehicle margins. Finally, we are pleased to report that every channel and adjacency is considerably ahead of plan. We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible revenue and margin available to us in this market. As a reminder, the 2025 plan assumes a pre-COVID business environment, margins, and growth rates. Internally, we view the 2025 plan as a base case, and our leaders are focused on taking our execution to the next level and delinking $1 billion of revenue to produce more than $1 of EPS. Key drivers of this are no further equity capital raises, meaning no further dilution to EPS, leveraging our underutilized network to support a two to three times increase in vehicle sales, and a four times increase in parts and service sales through the existing network, further improvements in personnel productivity, economies of scale in marketing from national brand awareness, an investment-grade credit rating to reduce borrowing costs, and most importantly, further adjacencies with higher margins and structurally lower SG&A costs. The adjacency we are furthest along with is Driveway Finance or DFC that has experienced rapid growth since expanding in the spring of 2020. During the quarter, DFC originated 6,200 loans and now has a portfolio of $530 million. We are planning to enter the ADS term market by the end of the year, which will allow us to quickly and profitably scale future consumer offering and lending volumes. Important to note is that a loan originated with Driveway Finance earns three times the amount earned when we arrange financing with a third-party lender on a fully discounted basis. We believe that Driveway Finance can penetrate 20% of our financed retail unit sales. This percentage is lower than used-only peers finance companies, as subvented leases and finance contracts with our manufacturer captives will always account for a sizable portion of our new and certified business. The frontloading of our M&A provides a larger base for Driveway Finance to draw from and increases the potential contribution above what our current 2025 plan includes. We are excited about the continued growth of Driveway and the interest and engagement it's seeing from our consumers. Driveway generated over 530,000 monthly unique visitors in September, a 68% increase over June. 96% of our customers were incremental and had never transacted with Lithia or Driveway before. Monthly shop transactions increased 86% during the quarter. Strong Google and Facebook reviews and a net promoter score of 90 indicate Driveway is building an online reputation for exceeding consumer expectations for a fully digital frictionless experience. We recently launched Driveway marketing in Las Vegas and Phoenix, our 9th and 10th markets. Continued improvement in our existing markets improved our overall Driveway golden ratio even with the early dilution from these two new markets. We anticipate entering further new markets soon and remain on pace to expand nationwide marketing by the end of next year. To support consumer demand, we accelerated the opening of our third Driveway care center in Dallas, which occurred in September. In addition, we have ramped hiring at all three time zone care centers and believe we are well-positioned to support the increased volume of traffic we expect to see in the coming months. Driveway is on track for its 2021 target of a 15,000 annual transaction run rate exiting December. Looking forward to 2022, we are forecasting 40,000 transactions with a 2.2 to one sell to shop ratio. Driveway's dedicated management, operation, engineering, and marketing teams are continuously testing and learning as they enhance the Driveway website and consumer experiences, recently deploying another powerful new feature. Driveway now offers consumers the ability to sort by distance. This enables consumers to see which vehicles are in the closest proximity to them and delivered the fastest with the lowest or no shipping fee. This new feature will decrease delivery times and increase our golden ratio. Viewing our dealership's omnichannel tools and Driveway together, we are well-positioned to retain our existing dealership customers by interacting with them in new ways that are aligned with their ever-evolving preferences. Additionally, we believe our digital infrastructure will enable us to conquest market share from competitors that lack the resources to invest in technologies and/or a nationwide network or choose not to commit to a transparent, empowered, negotiation-free experience to effectively attract incremental customers. Acquisition growth, the backbone of our strategy, continues to expand our physical network to support all our business lines, whether in-store or in-home. In our future state, we expect our optimal physical network to be approximately 500 stores across the U.S., placing us within 100 miles of all U.S. consumers. This enables us to offer timely, convenient, and affordable in-home solutions while realizing the economies of scale that will come from a nationwide footprint and brand. While several large deals were announced recently, the automotive retail industry remains highly fragmented and unconsolidated with the market share of the 10 largest groups at only about 10%. We have nearly $1.5 billion in annual revenue commitments as well as over $12 billion in the pipeline, which excludes our peers' large transactions. We remain confident in our ability to find deals that best fit our regional network strategy and are priced that represent 15% to 30% of revenues and three to seven times EBITDA. This ensures we meet our after-tax return threshold of 15% in a post-pandemic profit environment. Lithia & Driveway are known in the industry as the buyer of choice, obtaining manufacturer approval, timely and certain closing of transactions, and retaining over 95% of the employees. During the quarter, we completed acquisitions that are expected to generate $1.7 billion in annualized revenues and year-to-date we have completed $6.2 billion. Included in the total, we made our first international acquisition partnering with Pfaff Automotive in Canada. With a strong presence in Toronto, Canada's largest market, we are excited to have Chris Pfaff and his high-performing teams join us. In addition to its stores, Pfaff operates a leasing business furthering our learnings of synergistic adjacencies. We also expanded our U.S. footprint, particularly in the Southeast Region, entering the Atlanta, Georgia, and Mobile, Alabama markets. In closing, we are acutely focused on executing our omnichannel strategy designed to continue our track record of earnings and revenue growth for decades to come. Though our plan may seem complex, our fast-moving and hyper-proactive team with multiple decades working together is ready for any challenge or competitor. We have grown exponentially while maintaining industry-low leverage of around two times for nearly a decade. With our various channels meeting customers wherever, whenever, and however they desire, we are well positioned to gain share, outperform the market, and exceed our 2025 plan. With that, I would like to turn the call over to Chris.

Thank you Bryan. Entering the final quarter of 2021, with another record year already behind us, our store leaders continue to challenge their teams to embrace the future, evolving all business lines and achieving the 2025 plan. This includes ensuring that our 22,000 associates continue to lead the digital transformation of automotive retail in their respective markets while exceeding customer expectations, increasing market share, and improving profitability. As most of you are aware, our manufacturer partners were impacted by microchip shortages and struggled to supply a sufficient volume of new vehicles to meet customer demand during the third quarter. As a result, same-store new vehicle unit sales decreased 3% in revenue and 14% in units, consistent with a nationwide SAAR decrease. We were able to offset the decreased volume with higher total variable GPUs, averaging $7,446 in the third quarter compared to $6,082 in the second quarter of 2021 and $4,754 in the prior year. As of September 30, we had a 24-day supply of new vehicles on the ground, which excludes in-transit vehicles. While the new vehicle day supply environment was challenging, our 58-day supply of used vehicle inventory exiting June 2021 positioned us well for the third quarter where we saw a 40% increase in revenue on a 13% increase in units. Our 1,000-plus procurement personnel did excellent work sourcing vehicles, enabling us to offer customers a wide spectrum of vehicles meeting all levels of affordability. We currently sit at a 48-day supply of used units and anticipate we will be able to continue to mitigate pressure on the new vehicle supply by maintaining solid used car comps and strong profitability. In the third quarter, we sourced 74% of our used vehicles direct from consumers, such as trade-ins and off-lease where we as top-of-funnel franchise dealers get first look at the used vehicle inventory pipeline. Only 26% of our vehicles were procured from other channels such as auctions, other dealers, or wholesalers. During the third quarter, we earned $3,897 in gross profit on used vehicles sourced from customer channels which turned in an average of 33 days. For used vehicles sourced from other channels, on the other hand, we earned $2,696 in gross profit per unit and those turned in an average of 51 days, which again demonstrates the benefits of an omnichannel strategy for Lithia & Driveway. Our expanding physical network of new vehicle franchises and the benefits of Driveway allow us to offer the most diverse inventory in North America. We offer vehicles that meet all affordability levels with the largest number of both manufacturer-certified pre-owned vehicles and those priced under $10,000 or over 10 years old. Again, these vehicles also turned the fastest and yield the highest margin percentages. Additionally, our internal dealer trade network creates an opportunity for our own network to have the first shot at the 100,000 units we wholesale annually allows us to cost-effectively move vehicles to better match supply and demand and increase our retail versus wholesale mix. Turning to parts and service, same-store revenues increased 7.3% over last year. The growth was distributed across all business lines except warranty. We anticipate a continued tailwind benefiting service into 2022 as the substantial losses in the miles driven rebounds well positions our highest profit margin business line. With SG&A, we are focused on improving productivity of our personnel, targeting investments in marketing, and further leveraging our fixed expenses. These actions will improve our gross profit throughput when margins subside. We believe that these actions reduce our normalized SG&A levels at least 300 basis points below pre-COVID levels or to approximately 65% of gross profit. As our teams prepare their 2022 annual operating plans, they remain hyper-focused on executing to ensure that top-line growth is aligned with further productivity improvements that result from our investment in the omnichannel model wherever, whenever, and however customers choose. These efforts along with our exploration of adjacencies translate to significant potential to increase leverage and drive additional profit as expected in our 2025 plan. With that, I would like to turn the call over to Tina.

Thank you Chris. For the quarter, we generated over $530 million of adjusted EBITDA, a 104% increase over 2020 and $304 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. We ended the quarter with $1.7 billion in cash and available credit which if deployed to support network growth could purchase up to $6.8 billion in annualized revenues. As of September 30, we have $3.8 billion outstanding in debt, of which $1 billion was floor plan and used vehicle and service loan or financing. The remaining portion of our debt primarily relates to senior notes and financed real estate as we own over 85% of our physical network. Our disciplined approach is to maintain leverage between two and three times as part of our commitment to obtaining an investment-grade credit rating which could be another sizable competitive advantage once obtained. As of quarter-end, our ratio of net debt to adjusted EBITDA is 1.25 times. Our capital allocation priorities for deployment of our annual free cash flows generated remains unchanged. We target 65% investment in acquisitions, 25% internal investment including capital expenditures, modernization, and diversification, and 10% in shareholder returns in the form of dividends and share repurchases. Earlier this morning, we announced a $0.35 per share dividend related to our Q3 performance. With capital raises completed earlier this year and elevated free cash flows generated as a result of the current environment, we accelerated our investment in Driveway and DFC incurring over $50 million in SG&A and capital expenditures year-to-date. The personnel costs for over 500 associates who support the scaling and continued buildout of Driveway and DFC, the marketing investment for Driveway and IT development costs are current period headwinds and most importantly support the buildout of our future state and provides the foundation for a new generation of incremental profitability. We are well-positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and exceed $50 of earnings per share by the year 2025. This concludes our prepared remarks. We would now like to open the call to questions. Operator?

Our first question is from Rick Nelson with Stephens. Please proceed.

Thanks. Good morning. Congrats on another nice quarter.

Thanks Rick.

I want to ask you about new car inventory in 24-days supply at the end of the quarter. I am curious where we go from here? Do things get tighter? Do lead stars start to build inventory levels? Your confidence, I guess, from the fourth quarter that some of the trends we saw in Q3 can continue into the fourth quarter?

Sure Rick. I do believe that those trends strength continue into the fourth quarter. I think we are looking at a few more quarters of strength but I also know that a lot of this is going to be dependent upon what happens with the stimulus packages because if they renew those job credits now all of a sudden we have, you know, more income in that middle-income and lower-income pockets which could be a catalyst for continued demand for maybe throughout 2022. Chris, do you have some specifics for us?

Yes. Rick, good morning. I mean I think part of this is, the line of sight on inventories are still a bit murky and we are kind of day-by-day and manufacturer-by-manufacture on kind of what's going on. But as you said, we had a 24-day supply which was actually up one day from last quarter. However, our day supply uses a 30-day look back. So when you are looking at that trend, we have declining sales volumes which would indicate that a 24-day supply is an apples-to-apples when you compare to last quarter. So obviously, more inventory in the pipeline is great. Now the flip side of that is, we do have a 48-day supply of used vehicles and I think the benefits of being a top-of-funnel franchise dealer when it comes to used cars is really evident when you see the massive sales comps that we had, up year-over-year, 18% in volume and 40% in revenue, are some of the benefits that we see that we can kind of outrun, outpace some of the trends that we are feeling across the industry right now in new cars.

Thanks for that color. Also, I would like to follow up on the F&I. We saw that uptick there per unit, despite a mix shift away from new toward used and I guess how it will drive DFC, Driveway Finance, is impacting F&I per unit or how you expect it to impact in the future?

Yes. Rick, this is Chris again. Good morning. So as far as F&A is concerned, I mean this has been a focus that we have talked about for the last several years, obviously lagging some of our competitors as far as where those F&I trends came out and we continue to see the progress of focusing on people, process, products and obviously our comp plans around driving that performance up. We are seeing some benefits from obviously the economic indicators that Bryan mentioned in his prepared remarks as well as valuations that are coming in in used vehicles that give our customers a chance to invest in protection products that support their vehicle purchase. As far as Driveway is concerned, we are seeing probably about right now as they ramp up their business, somewhere around a $50 per unit impact on the overall finance transaction. But as they continue to see record revenue, record deals coming into the Driveway Finance portfolio, we are confident that over time the benefits of having captive finance companies are definitely going to outweigh some of the headwinds that we are seeing right now today.

Great. Thanks very much and good luck as we push forward.

Thanks Rick.

Thanks Rick.

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

Good morning guys. Congrats on another really strong quarter.

Hi Ryan.

Curious on M&A. You guys talked confidently about a lot of opportunity still out there and it seems like your peers have followed suit rather late but a lot of increased activity, multiples going higher there. So does that change some of the negotiations you guys are having and the confidence in continuing the M&A at good valuations?

Yes. Ryan, this is Bryan. I think most importantly, we would keep our eye on the $20 billion that we set out to achieve in the 50/50 plan or what now referred to as the 2025 plan where we were really targeting to get to that 500 store locations to be able to deliver services and products to consumers within about a two hour or about 100 mile reach. That's our ultimate goal. We are very fortunate that we were able to book almost $10 billion worth of revenue over the last 15 to 16 months at very attractive multiples in that middle of our three to seven times EBITDA range. And now we are looking at multiples in, especially those two larger deals that we are close to probably double on a per-COVID or a post-COVID multiple range as to what we paid for those assets. I think what you know about Lithia & Driveway is that we are very disciplined. Okay. We have enough in the funnel that we can still find that the gems in the opportunities of now around $12 billion and that's assuming that the two major deals close with our two peer groups. I wish them the best on that.

And then on GPU, it seemed like Q2 was exceptionally strong and things can get better and then you trumped new by well over $1,000 into Q3. So you mentioned strength in margins continuing for the next several quarters. Lack of new inventory, that's obvious out there. But do you think these Q3 levels are sustainable? Or is it kind of a blend between the two? But any kind of directional help would be helpful.

Yes. I think as Chris mentioned, we believe that we have troughed in terms of inventory and probably at least 50% of the manufacturers and the remaining 50% they are troughing either now or in the next 30 days. So we really believe that once inventories start to return that we should be sitting at, I would say, more like Q2 levels and maybe at some point even Q1. And it's really hard to predict. I mean we could have never predicted another $1,600, $1,700 used margins and $7,400 new vehicle margins, including F&I and now pushing what, 16.5% total margins on new. That's pretty massive when pre-COVID we were flirting with just below 10%. So it is somewhat supply-based, but we would also say and remind you that this is a demand-based dilemma that's being caused more than anything. And days supply isn't really an indicative measure of what margins are going to do long term because we have many manufacturers we have run at these 20-day supply levels for decades and the margins aren't there. So in the short term, yes, there's a disconnect. But hopefully, we can constructively have lower day supply but it doesn't translate into automatic substantial profit increases.

Nice job guys. I will turn it over to the others. Thanks.

Thanks Ryan.

Thanks Ryan.

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

Hi. Good morning everyone. This is TT Fletcher, on for John Murphy. Sorry.

Hi TT.

Hi. So I guess to start, you guys have touched on this a little bit but how much of the diverging performance on new and used same-store comps do you attribute to your increasing focus on the used vehicle market and your various initiatives like value auto versus typically new vehicle consumers shifting down into used given the pervasive inventory shortage? So just trying to get a sense of whether you think it's more kind of a structural shift versus more transitory?

Sure. TT, this is Bryan again. I think it's important to remember that in the Lithia & Driveway procurement model, we specifically focus on channels of procurement that are a little different than most. We actually hit and I would say that is the major driver of our performances is those that can find the vehicles then recondition the vehicles are going to be the ones that are able to expand their same-store sales at a greater rate. So we actually hit an all-time high and procured 74% of our inventory directly from consumers and much different lead than maybe a used-only retailer that we had 58% of our vehicles coming from trade-ins. We had another 6% come off-lease. And another 10% come from private-party. And probably the most important thing that we look at is, we also had a low ever in auction procurement which is only 13% of our mix. And Chris had mentioned that the importance of the consumer channels is that we don't have to transport cars and pay auction fees both directions. So we make about $1,100 more in that channel on that three-quarters of cars and you can relate that. Now in terms of what was Driveway's influence on the overall business, okay, whether it was a shop or sale functionality is important to keep in mind that the sale functionality or creating more inventory is another channel that we haven't really explored until nine months ago and that's quite attractive and we would attribute about 20% of our volume in same-store sale increases coming from that channel at the current time.

Okay. Got it. That makes lot of sense. And then just a last housekeeping questions. Is it fair to assume that the non-cash unrealized loss on investment in the quarter would shift? Was there any realized or cash-off on investment? And kind of how do you think about the nature of that investment over time, whether it be core or non-core to the Lithia & Driveway business model?

So there was a large adjustment that was based off the value of the shift of what they traded that as well as we had a possibility to get other shares of shift but the stock, the performance of the company didn't reach the level. So we basically just adjusted that that balance. Tina, anything to add on that?

No. That's correct. It's related to valuation of shifts tied to the stock price. And then as Bryan mentioned, we had some shares that were held in escrow that didn't meet the performance metrics.

Okay. I understand. Thank you. That's all for me.

Thanks TT.

Our next question is from Chris Bottiglieri with BNP Paribas. Please proceed.

Hi everyone. Thanks for taking the call.

Hi Chris.

I wanted to ask about the used business. So you are 14.5% using the growth and two-year CAGR 9% share with the market. Can you give us a sense for how that fared monthly throughout the quarter and into October? Was it relatively consistent? Was it volatile? And then just related, the inventory levels are still pretty strong but not as strong as they were in Q2. Do you feel good about it?

I feel good. We saw consistency throughout the quarter, Chris and exiting the quarter even though we are at a 10-day lower supply. If you take the increase even quarter-over-quarter, our used car sales were up considerably. So that actually 30-day look back when you take that into account our actual static inventory numbers were about the same as they were exiting Q2 which we like and we are continuing to buy more. Also, October is looking pretty good. And I would remind everyone that our quarter-over-quarter look back versus 2020, that was a good quarter, okay. So it's not we stopped talking about 2019 which was really for that one quarter of Q2 when we had half a quarter where we were basically shut because of regulatory closures.

Yes. That's really impressive. So then my next question is, you seem to be scaling Driveway and making a lot of incremental investments too. Of the $50 million, can you give the sense for like what the split is SG&A and CapEx? And then separately, if I heard you correctly, it sounds like you are becoming more confident on the level of structural cost takeout. It seems like at least 300 basis points of improvement versus pre-COVID. I just want to make sure I heard that correctly. And then two, kind of maybe just speak to what making you more confident? What do you see in the business like some of the structural and if inventory ever normalizes, you retain at least the 300?

Yes. I think most importantly, Chris, this is an investment in our future in a channel that's growing. So of the $50 million, about one-third or $15 million of it was actual CapEx. The remainder is those 500 associates that we are building into our future for. And we think it's the right investments including the expansion into Phoenix, Arizona and Las Vegas, Nevada which is now our 9th and 10th market because we did see two of our markets, our initial two markets Portland and Pittsburgh have, one has actually reached the point of a 1.5 golden ratio which was our next level of scaling. The other one's trajectory looks imminent in the next month or two. So we felt it was an appropriate time to expand that. And we are somewhat fortunate that we are in a hyper-inflated gross profit environment which allows us the flexibility to expand that business at a probably a little more rapid rate than we initially expected 15 months ago.

That's it. Okay. Thank you for the time. I appreciate it.

Thanks Chris.

Our next question is from Rajat Gupta with JPMorgan. Please proceed.

Hi. Great. Thanks for taking the questions. I just had a question on the M&A environment and just capital allocation in general. You raised $1.5 billion or so in May. So you still have like a lot more acquisitions to do, just to finish that capital that you raised. And given like what you are seeing in the LOI and what you have closed so far, how quickly do you think you need or how do you think you need to deploy all of that capital that you raised? Or if you are not finding the right deals at the right multiples, would there be other sources for that capital? Or would that capital go into some other uses? And I had a follow-up. Thanks.

Understood. Rajat, this is Bryan again. Obviously, we spent about two-thirds of our capital on the network strategy and the growth of M&A. We had $1.7 billion remaining of the approximately $4 billion that you mentioned off the two capital raises plus internal cash flows which were way more than expected. We do have about $1.5 billion contracted, okay or under commitments which is about a quarter of the amount that we would need if we deployed 100% of the $1.7 billion, because as Tina mentioned, it's about $6 billion that we could buy with the $1.7 based off what we have been paying traditionally. I would also say this, Rajat we are pretty disciplined at what we do. Okay. And the network strategy and what we pay is hyper important to how we value things. And if we look at maybe those two larger deals that we were active on but maybe not as aggressive because we didn't believe that the network strategy was as good for us is maybe it was for one of our peers and we wish them all the best in that as well. So I think that our ability to deploy the remaining, let's say about $1.2 billion probably takes us two to four more quarters and the environment may change a little bit. But also remember that transactions aren't just about how much you pay, it's about what you do post-signing and what you provide the teams that exist there and what those dealers or those sellers are really looking for for their culture and for their succession to achieve the things. Remember Lithia & Driveway is an experienced M&A company for the last two decades. It is a core value of our company. Okay. And that $12 billion that's in the pipeline, there's a good chance that there's plenty of volume there to at least achieve that $6 billion over the coming quarters and years or the remaining $10 billion that we have in the 50-50 plan.

Got it. So it looks like M&A is still like the number one priority for the use of that capital. So I had a question on the 36,600 e-commerce units. Could you just baseline us on like how do you define that transaction? Is it a few parts of transactions being done online? Or like one part online? Just curious just any good comparable maybe versus off your peers?

So, Rajat and I apologize to everyone. This is something that we just assumed it was part of our business and when we did the design six years ago, we were at about a 5% to 6% of our total volume at that time and it's since grown through our own proprietary solutions or partners like Roadster, a model that provides end to end solutions. But the way that we are looking at this is that digital funnel engagement that created a sale, okay, much like what we do in Driveway or much like any of our e-commerce retail competitors do. We just had discounted it instead. All right, it's just part of our business when it's really not. It is a digital e-commerce channel. It's just not aggregated under one umbrella like it is under Driveway. So it's all e-commerce business in the 300 local and regional brands as well as the Lithia direct brands.

Understood. However, the consumer isn't always completing the entire transaction online. They're primarily just making a booking for the car.

Yes. Rajat, let's remember this. Okay. The consumers at our competitors that are e-commerce retailers are not either or they wouldn't need 13,000 employees to be able to sell those cars. So remember the funnel efficacy. We are seeing 7% of our consumers in Driveway that are happy-path, remember, that stay within the technology the whole way through and that's a hundred percent savvy e-commerce solution, okay. So keep that in mind. Remember this also, that because of disequity, a lot of transactions require human involvement, whether it's through chat or whether it's through email or phone calls to be able to do that. And I can surely share, if anyone would like, some of the Driveway numbers as a comparison to our traditional Lithia channels.

Got it. Just one last one. On the 15% approvability for financing, it seems a little below versus what we have heard from other peers and maybe it's not like-for-like, but what's the customer credit mix that you are seeing there? Is that something that's coming in the way also? And can Driveway Finance help reduce that friction? Or just help increase that approvability rate?

Sure. So, Rajat, there is a difference between 15% approval rate and 7% actually buy rate, okay, meaning that consumers actually carry forward with the approval that was given them, okay. So keep that in mind. I don't want to confuse anyone there. In terms of our funnel efficacy in Driveway, we are seeing that the average consumer and I will comment a little bit on Driveway financials influence in just a second, but the Driveway consumer is averaging exactly 50 points lower on their FICO scores. So there are at 671 versus a 721 in Lithia. But I would accredit that primarily to new car customers, okay. That is a difference that most consumers believe or have the financial wherewithal to be able to buy new, okay, which will have a higher credit spectrum, okay. We did finance a higher percentage of customers in Driveway at 75% and only financed 67% of Lithia customers. So there is a little bit of a difference there. Now, in terms of what we would call our golden ratio that we talk about all the time, what we do notice is there is a difference. And when we get to the ADS market in the next few months, it could allow us to portfolio lend, okay. And that basically means that you are lending at not a one-to-one lending, meaning you have standards that you lend on and that individual customer has to meet that standard or not. And if they are not above it, they don't get approved, okay. So what some of our competitors do is what's called 'portfolio lending,' meaning that if they have got three customers in a row that were above the standard and this is just an example of four customers and one that was below that standard, that one other customer gets approved, okay. And that's called portfolio lending where you are a broad-based lender. We don't technically do that today at Driveway Finance. But we are building the API in the software. It's one of our two major roadmap initiatives on the technology that will require some backend funneling to specific lenders, or if we choose to keep that loan directly in the Driveway Finance, we will have the ability to do that. But it is something that does allow the funnel efficacy from finance approvability to be improved at a pretty dramatic pace. Now, remember Rajat, you have 30 lenders that are API. But remember, it's a one-to-one lending. So you still have that dilemma, okay. I will also say this, there is a different way that people seem to count, okay. And what you are getting is pretty raw numbers from us as to how we would look at it in an equitable way, from a traditional retailer standpoint like we do at the Lithia business that you are traditionally used to.

I understood. Great. Thanks for all the color and good luck.

You bet. Thanks, Rajat.

Our next question is from Nick Jones with Citigroup. Please proceed.

Great. Thanks for taking the questions. I guess, maybe I will take a bigger picture view here or a bigger picture question. You have talked about wanting to be around 100 miles from all U.S. shoppers. Once you kind of build out that footprint, how should we think about consolidation from there? I mean, how are you thinking about the strategy of consolidating the environment which you kind of touched on earlier that like top 10, maybe a 10% share? So once you have the footprint, is there capacity across your footprint to increase volume and continue to take share? And I guess more broadly, do you think this can consolidate like maybe like auto insurance or top 10, or closer to 70% or 80%? Thanks.

Sure, Nick. This is Bryan again. So I would say that the 100 miles is important to us because of the life cycle of the interactions with your consumers, let's remember that. When we think about the 500 locations in the country, that gets us to about 3.5% to 4% new car market share. But we believe that with wonderful customer offerings that are providing solutions where, when, and how consumers choose, that that could be expanded. Now I would also make this comment that our ability to get much past, I would say, 10% of U.S. market share on new is a little bit restricted by our manufacturer partnerships which many have a 5% to 7% of their national footprint. And then, if you assume that you could get two times the throughput through those existing stores, then you can get somewhere a little bit north of 10%. Remember that in all, both new and used, okay, vehicles in new, they are allocated, okay. So manufacturers do control. It's not like you are greenfielding like in insurance business where the top 10 could get to 80% of the country. Now, if each one of them got to 10% in theory, yes. But I don't believe that the marketplace is that unified that could ever really do that, okay. Remember also on the used car side, it's all about inventory procurement. And those that are further up funnel and have lower cost reconditioning are going to be the ones that are able to capture more used car market. Those kind of go hand-in-hand to some extent. So I could see a day where the top 10 own 20% to 30%. But remember that ability to get there with the manufacturers is all dependent upon performance and relationship with those manufacturers. And it's probably fair to say that there are two or three of our peer groups that actually are looking at that relationship as long term, okay and as collaborative by what they buy and yield performance levels that are in step and stride with those manufacturer partners.

Got it. As you move towards the goal of being about 100 miles from every consumer, does that mean M&A will slow down and more investment will be funneled into Driveway and the direct-to-consumer approach? Is that the correct way to think about what will occur? Or will that develop naturally?

Yes. Nick, let me share that, obviously the adjacencies domestically can take some of the capital. But part of that strategy on Canada was to start planting seeds that you could now move internationally to be able to deploy capital as well. More importantly than that, we believe that there are opportunities to overlay our digital e-commerce strategies as well as our underlying network strategy into two-wheel mobility and the tractor-trailer mobility and the farming mobility. So as we begin to grow domestically, that's where you would have the same type of disciplines that are in automotive retail, which is the most proactive in terms of customer desirability, okay, could be overlaid into those three other industries at some point as well. And I think you will see us start to plant seeds in those areas domestically because they are based off the same four business strategy which is new vehicles, disposing of the used vehicles through your network, okay and then having the service, body, and parts operations much like what we have in new vehicle sales.

Great. Thanks for taking the question.

You bet, Nick. Thanks.

Our next question is from Bret Jordan with Jefferies. Please proceed.

Hi. Good morning guys.

Hi, Bret.

Have you seen any manufacturer push back at all on the consolidation? Obviously, you have done a lot. Some of your peers are ramping it up. Is there any conversation as far as or any more complicated conversations involved in the transfer of franchises?

No. There really hasn't been a change. I think that because most of our relationships with our manufacturers are contractual in what's called a framework agreement that as long as you achieve their performance standards, you have the ability to grow to a certain level. So I don't really see that as an impediment for us or to others, if they are able to get their performance to a level that’s broad enough to be able to buy multiple brands, okay, which is usually the hang-up when you are buying large groups.

Okay. And then, I guess a question on the structural profitability change and you talked about historic new GPUs little under 10. I guess, from a labor model, is there anything that sort of when you think about going forward in the normal sort of post-2021 environment, is the new GPU, that couple of hundred, few hundred points higher forever? Or do we in a cyclical slowdown go back to the old profit levels?

So I want to define that in the 2025 plan, it's very clearly that it goes back to old profit levels. But we will be updating that in the coming quarter, okay, in February to April, okay. And I can give you a little color in some of the areas. There may be margin expansion. We probably won't predict margin expansion even though today, the negotiation-free or fixed-price models are generating approximately $600 higher sale prices than post-negotiated prices of negotiated dealers, which makes up 98% of the transactions, okay. So there is a case that could be made, but I believe and I think our team believes that as the world becomes more transparent and more business is transacted through e-commerce, okay, that pricing becomes more transparent with that, which ultimately that gap will most likely go away. Now, if we are able to compete and buy cars at lower prices and recondition those logistically closer to our customers, then there are ways to be able to expand margins and we will be able to give you more color on that. But hopefully, that gives you a tidbit of information. Chris, did you have something to add to that?

Yes. Just, I mean, as a call-out to maybe our own team is that, historically, prior to these margin levels, our top 25% of our dealers were running at SG&A levels at where we are seeing things today on average. So I think that our expectation is that as we continue to see margins return to normalized levels, our focus on personnel and marketing and leveraging our facilities to maintain this level of profitability is something that we have called out 65% as kind of our mid-term goal. But obviously, we would like to see it better than that longer term.

Great. And just a data point. I think, in past calls, we have talked about the geographic reach of Driveway, how far customers are buying. Do you have that number for the third quarter?

I do. In fact, it's one mile further than it was last quarter. It's 931 miles was the average distance. The average shipping fee was actually a little bit higher, it was $576 versus $561 last year. And I would say that that continues to grow so long as there are shortages in new and used inventory, okay. And it's something that we are really thinking about as inventories start to build back, does that read start to shrink a little bit again. One other piece of information that we do provide is that, incrementally, new customers to Lithia & Driveway, it did drop one percentage point down to 96% from the 97.8% last quarter. And the quarter before that was actually 95%. So it's back to where Q1 was, which we are really pleased and I think that's an important notation between our Lithia e-commerce business that has a good portion of repeat business. Our Driveway was specifically designed to get incrementally new customers and that's holding strong even as we spread our wings and start to overlap with consumers that we have already touched once before. So it truly is a new customer that is either needing financial assistance, okay, in getting the correct vehicle for them or a consumer that's looking for more of a tech type of experience that are empowered, it's transparent and convenient of the in-home delivery.

Great. Thank you.

You bet, Bret. Thanks for the questions.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thank you Cherie. I would make this comment, hold on, we are just getting started. And again, thank you for joining us today and we look forward to updating you on Lithia and Driveway's fourth-quarter results in February and also, a little update on the 50-50 plan. Thanks all.

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