Good morning and welcome to the Lithia & Driveway First Quarter 2022 Conference Call. All lines have been placed on mute to prevent any 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. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Vice President of Driveway Finance. 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 materially differ 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 reconciliation to comparable GAAP measures. We have also posted an updated investor presentation to our website, investors.lithiadriveway.com, highlighting our first 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 first quarter EPS in company history at $11.96 per share, a 103% increase over last year. Record first quarter revenues of $6.7 billion were driven by strong performance across the Lithia channel and growing contributions from Driveway. The first quarter reflected the responsiveness and adaptability of our model, elevated GPUs earned in new and used and F&I business lines, along with the increased contributions from after sales generated $551 million in adjusted EBITDA providing significant optionality in our plan execution. We accelerated investment in Driveway and Driveway Finance while maintaining our aggressive acquisition cadence. Last quarter, we shared our updated plan to generate $50 billion in revenue and $55 to $60 in EPS by 2025, and we are excited with the progress being made. Total revenues increased 54% over last year driven by contributions from acquired businesses. Driveway sales grew sequentially through the quarter reaching the milestone of 1 million monthly unique visitors in February and completing 3,100 transactions in the month of March for an annual run rate of 37,000 transactions. We're really excited about our consumer interest in Driveway and the momentum that continues to build. In the first quarter, we retailed or wholesaled 4,250 units that contributed over $120 million in revenue. We continue to target $1 billion in incremental revenue through Driveway in 2022. This represents shop transactions and the subsequent retail and wholesale of sale transactions, as similarly reported by our e-commerce peers. In addition, we retailed over 30,000 vehicles for approximately $1.2 billion in the quarter through our Lithia e-commerce channels. Driveway Finance achieved milestones within the quarter originating over $100 million in loans in a month and becoming LAD’s number one lender. Overall, DFC originated over 8,600 loans during Q1, and as of quarter end, the portfolio stands at over $900 million. Since announcing our plan in mid-2020, we have acquired businesses that are now contributing 11.5 billion in annualized steady state revenues and the pipeline has never been larger. De-linking $1 of EPS production from every $1 billion in revenue in 2025 will be driven by several key factors to follow that I'd like to reiterate now. Achieving a blended 2.6% new and used vehicle U.S. market share, total vehicle GPUs returning to pre-pandemic levels, driving SG&A as a percentage of gross profit down towards 60% through increased leverage of our cost structure, acquiring a further $9 billion to $10 billion in annual revenues to complete the buildout of our North American footprint of 400 to 500 locations, no further equity capital raises meaning no further dilution of EPS, an investment grade credit rating driving decreases in borrowing costs, flexibility and headroom in capital allocation for share buybacks in the event of valuation disconnects, continued drag on DFC's profitability due to building of CECL reserves as we scale towards a targeted 15% penetration rate, and finally early benefits from adjacencies with higher pre-tax margins that also carry structurally lower SG&A costs. It's important to remember that contributions from new businesses and adjacencies may still be in the development stages in 2025 and will not fully reflect the magnitude of our future earnings power. Layering on the contributions of additional future aspirations at maturity, we see opportunity for each $1 billion in revenue to produce up to $2 in EPS. Key factors underlying our future state and totally within our control are as follows. Up to 20% of units are financed with DFC, and there is no longer a headwind from our recording of CECL reserves, and optimized cost structure taking SG&A as a percentage of gross profit below 50%, and finally, mature contributions from our other horizontal such as fleet, lease management, charging infrastructure, consumer insurance and other new verticals. Foundational to our strategy is convenient proximity to the consumer and our physical infrastructure efficiently leveraging for vehicle procurement, reconditioning and storage. The LAD network is comprised of nearly 300 locations strategically positioned at 250 miles from 95% of the population and within 100 miles from 60% of the population. This puts us in considerably closer proximity to consumers than any other industry player. As we add density to our network this synergistic overlay with Driveway deepens enabling faster delivery, quicker turnaround times for reconditioning, structurally lower logistics costs, a higher proportion of sales with no shipping fees, while also providing DFC with a larger base of loans to penetrate from. In addition to the previously announced Sullivan transaction, we acquired three Stellantis, Dodge, CJD stores in Las Vegas that are expected to generate $400 million in annualized revenue and diversify our brand mix in the Las Vegas market. Total acquisition revenue completed year-to-date totaled $1.1 billion. Since the announcement of our 2025 plan, we have acquired a total of $11.5 billion in annualized revenues, representing 58% of our initial goal. Additionally, we have another $1.9 billion in annualized revenue under contract or LOI. The acquisition climate remains robust and we continue to add to our pipeline, which sits now at over $15 billion. We have not altered our return thresholds of 15% to 30% of revenue or 3 times to 7 times normalized EBITDA and are confident in our ability to find partners excited to join us at reasonable prices. This discipline ensures we hit our after-tax return thresholds of 15% and stay below our targeted leverage of 3 times in a normalized earnings environment. Whether motivated by succession planning or monetization, sellers are attracted by Lithia's track record of closing deals timely and confidentially retaining over 95% of employees and becoming part of our industry's future. With the benefit of the elevated earnings environment, businesses acquired since the launch of the 2025 plan have contributed 875 million in adjusted EBITDA, adding considerable fuel to our capital engine. Now turning to Driveway, our investments over the past three years in personnel, software and logistics layered over the physical network of our Lithia channel have created an innovative consumer-centric platform that is finding a receptive audience and scaling rapidly. Driveway now offers the largest selection of negotiation-free new and used vehicles, deliverable anywhere in the country. Different from our traditional or e-commerce peers, our new vehicle inventory represents all major brands and selection of used vehicles ranges from certified used vehicles to 20-year-old value autos. These offerings were designed to attract a full spectrum of consumer affordability and full life cycle of after-sales experiences, creating the largest TAM of any single company in personal mobility. Considering our growing physical network of over 1,100 associates distributed across North America focused on procuring used vehicles, our design is quite difficult to replicate or compete with. In the first quarter, over 97% of Driveway transactions were incremental with consumers we had never transacted with in the past 15 years and the average shipping distance of approximately 920 miles. Amidst this growth, our average Google review was 4.6 stars, driven by our focus on building the business sustainably and earning consumer trust for the entire vehicle ownership life cycle. So far in 2022, we have opened 17 new markets and now directly reach 29% of the U.S. population with targeted local advertising. Recently, we also expanded our marketing spend to include the March Madness Basketball Tournament and our upcoming sponsorship of the iHeartRadio Music Awards. These strategic investments have driven meaningful additional traffic while still improving our conversion rates. As we continue to expand our nationwide campaigns throughout the year, we reinforce our view that Driveway is well on its way to becoming the dominant profitable e-commerce online retailer. Our engineering teams have also continued to innovate. Earlier this quarter, we launched our first in-market proprietary new vehicle shopping experience. Consumers now have all the transparent and convenient Driveway used vehicle functionality that they've come to love on used vehicles now on new vehicles too. Expanded functionality for new includes the convenience of seeing all applicable incentives and rebates factored into pricing upfront, along with the instant online financing approvals. These new features have meaningfully improved our conversion rate and increased the volume of new vehicles sold. Doing the coding ourselves means we can deploy continuous enhancements plus nimbly and proactively respond to consumer feedback and trends. In March, we announced our collaboration with U.S. Bank to offer real-time payments to consumers selling their vehicles making Driveway the first online platform to offer this exciting new functionality. Instead of waiting several days for checks to clear, funds are deposited into the bank account instantly before the vehicle even leaves their driveway. Increased efficiency in our care centers, fine-tuning of our finance algorithms, and the deployment of our new vehicle offerings drove the first quarter's considerable outperformance. In the context of tight inventories and seasonality, the sequential growth being realized is even more impressive. We are more confident than ever that we will exceed our 2022 target of 40,000 transactions established only two short quarters ago. Turning to sustainable vehicles, we have seen significant consumer demand for highly competitive new vehicles being launched by our OEM partners. In our conversations with our OEM partners, they view the dealer as an integral part of the sales experience, their communities and throughout the ownership life cycle. In addition to our advocacy of sustainable vehicles on GreenCars and in the Lithia channel, we are actively investing in our physical footprint and installing charging stations. With over 600 installed to date, we can effectively sell, service and charge electric vehicles. Web traffic to GreenCars has significantly increased with 260,000 MUVs in March. We also recently powered up GreenCars marketplace with Driveway’s shop and sell technology. Organic traffic grew faster than paid search and education drives 80% of the MUVs. Assigning all marketing costs to the 20% of unique visitors that are GreenCars marketplace still results in the lowest cost per MUV of any of our channels. Consumers interested in zero or low-emission vehicles can now easily jump from educational offerings directly to LAD’s largest sustainable inventory seamlessly accessing the convenience and transparency of the Driveway experiences. As our most mature adjacency, DFC has become an integral part of our strategy, transforming the margin profile of our business. It is important to reiterate DFC’s position as a top-of-funnel captive lender for the quickly growing LAD customer base. Chuck Lietz will be providing information on DFC and our first detailed guidance on the business in just a few moments. In closing, LAD’s 2025 plan is well underway and our future is clearer than ever. Our massive competitive advantages, difficult to replicate optionality and synergistic design across adjacencies has positioned us as the consumer choice for complete ownership lifecycle experiences. Please spend some time on our newly revised Investor Presentation and our new Slide 6 that illustrates the design, timing and drivers of our current and future verticals and horizontal adjacencies. The incremental free cash flows we are earning allow us to accelerate our plan and transformation while also providing for near-term shareholder return. Lastly, we manage our business for the long term, remain nimble and aware while not being distracted by the supply levels, monthly price changes or factors outside of our immediate control. Some believed our 2025 plan was ambitious when announced 21 months ago, reflecting now at the first-third of the initial timeline and we are considerably ahead of that plan. Today, we look beyond 2025 to meaningfully position Lithia, Driveway and GreenCars as the dominant leader in auto, the largest retail sector in the country. With that, I'd like to turn the call over to Chuck.

Thanks, Bryan. DFC is now Lithia’s number one lender, and in the first quarter, this translated to a penetration rate of 6.2%. Loans to prime or near-prime customers with a FICO score above 660 accounted for 67% of the loans, while loans to subprime customers with a FICO score below 620 accounted for 7% of DFC’s loans. Used vehicles accounted for 78% of the 8,600-plus origination, up from 65% a year ago. DFC is top of funnel, which from a risk management perspective is highly beneficial, particularly in a rising rate environment as we continue to leverage LAD’s vast transactional data to evaluate and adjust our lending practices. During the quarter, DFC modified our credit policies to mitigate risk by limiting loans with elevated LTVs and selectively adjusted our offer rates to reflect the impact of rising interest rates. The average FICO score in Q1 organically increased to 677 with DFC not seeing any degradation in yield helping DFC maintain an appropriate readjusted return. For the quarter, DFC’s pre-tax loss was $2.1 million, as our interest rate margin of $13.6 million reflected a yield of 8.5%, which was offset by an increase in the loss provision driven by the growth of originations. For 2022, we are guiding a mid-7% penetration rate with a 10% rate exiting December and an average loan balance of $30,000 with a 70-30 used to new mix. Due to the recording of CECL reserves, we forecast a net loss of $9 million to be generated. DFC’s growing penetration impacts 2022 F&I revenues, but it's important to note that the interest income earned and recognized over the life of the loan is at least 3 times the amount earned from third-party commissions on a fully discounted basis. I encourage you to review Slide 11 in our deck for long-term guidance. With DFC’s current operational platform scaling concurrently with LAD’s growth, the opportunity to achieve our penetration rate targets while striking the optimal balance of capital requirements, risk mitigation, financial objectives and maintaining the relationships with our current strategic lending partners is high. DFC's contribution today is masked due to the growth of our CECL reserves, which are outpacing the interest income earned on the portfolio in the short term. If originations stopped growing and stayed flat at the $100 million per month we saw in March, DFC would breakeven on a monthly basis in August and start contributing earnings. As a reminder, we see a clear pathway for DFC to contribute $650 million in earnings at a future state of 15% to 20% penetration on our $50 billion revenue base. As a captive lender, the earnings growth will be fueled by capturing a greater share of the vehicles we are already selling.

Thank you, Chuck. Our operational teams continued last year's momentum and delivered another record performance and we are confident that our team remains nimble and will continue to adapt to the changing market dynamics and evolving supply chain developments by OEM, by region, and by market. The entrepreneurial mindset of our teams is driving this environment and we are excited for the future state we have built under our mission of Growth Powered by People for Lithia and Driveway. With the sales levels of the last two years well below normal, we continue to see strong demand for new and used vehicles. Tight new vehicle inventory supply impacted our ability to satisfy the demand for every manufacturer, with same-store revenues down 3% and volumes down 17%. We expect that pent-up demand will convert into sales as the availability of inventory improves. In this constantly changing environment, our decentralized model and culture of taking personal ownership at the local market level has allowed our 22,000 associates to mitigate these headwinds and increase profitability with total new gross profit per unit including F&I increasing over 84% from last year and consistent with the fourth quarter. Turning to used vehicles, the strength of our model in terms of top of funnel inventory procurement, reconditioning expertise and carrying inventory that matches all levels of consumer affordability enabled us to increase revenues 31% over last year and down only 1% on volume. This outperformance of the market was led by our core and value auto sales, which increased almost 3%, offsetting the headwinds faced and the availability of certified pre-owned vehicles. In addition, Driveway Sell, our procurement channel helped us resupply inventory in the quarter and will continue to contribute to the competitive advantage of our omnichannel strategy as the vehicles purchased on driveway.com contributed an additional $400 in gross profit per unit over auction purchases. Total used gross profit per unit including F&I increased 30% over last year. A key driver of our results was the contribution of our nearly 1,000 finance managers. In today's rising rate environment, their years of experience in matching the complexity of consumers' financial positions with the lending options at over 180 financial institutions, including Chuck’s team at DFC, is essential. Customizing their presentation to each consumer increased our penetration rates in all major product lines driving meaningful increases in F&I per unit, which increased $492 or 28%. As of quarter end, we had a 27-day supply of new vehicles and a 50-day supply of used vehicles. While we saw increasing deliveries in our lots in March, visibility of our new car availability remains fluid and our operational teams are focused on taking actions within their control to increase turn and gain share. These actions and our top-of-funnel procurement position at Lithia & Driveway enabled us to source 76% of used vehicles from consumers with the remainder sourced through the other channels, including auctions and other dealers. Our return on investment on consumer-sourced vehicles was 3.8 times higher than those sourced at auction, as we earn higher GPUs on consumer purchases and turn them at a much higher rate. We have not seen a material impact on our consumer demand from higher gas prices or interest rates and saw a record amount of digital traffic on our websites, with 16.5 million unique visitors visiting our various channels in the quarter or up 40% on a same-store basis. With our wide selection of inventory offerings at all levels of affordability and the GreenCars marketplace powered by Driveway, we are well positioned for any change in consumer preferences. Our After Sales business grew 13% as pandemic restrictions eased and miles driven increased with the aging of units in operation providing a future tailwind for years to come. Performance was led by the wholesale parts business, which was up 35%, customer pay were increasing 15% and body shop, increasing 5%. As expected, warranty work declined 3%. Same-store SG&A as a percentage of gross profit for the quarter was 57.5%, a 500 basis point improvement over last year. While this metric benefited from the flow-through of elevated GPUs, it also contained the investment in Driveway and Driveway Finance in terms of IT, marketing, personnel costs, and CECL reserves that are laying the groundwork for future profitability. We remain focused on structurally increasing the leverage of our cost structure for example by expanding the oversight and span of influence of our highest performing leaders and empowering them to take the actions that bring us closer to 60% SG&A as a percentage of gross profit in a normalized environment. In summary, each day our leadership team is rising to the challenge of navigating the current operating environment, continuously improving all business lines, raising the level of digital retail readiness, leveraging cost and driving incremental profit opportunities at each location. Their efforts will continue to evolve our in-store and in-home solutions to meet consumers wherever, whenever and however they choose. We remain humble and never satisfied and look to continued record performance levels throughout 2022 and stay relentlessly focused on achieving our 2025 plan. With that, I'd like to turn the call over to Tina.

Thank you, Chris. For the quarter, we generated $551 million in adjusted EBITDA, a 108% increase over last year, and $461 million in 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. Over the last 12 months, we have generated over $1.3 billion in free cash flows, which if fully deployed to fund network growth would support the acquisition of up to $5.2 billion in annualized revenues. We target maintaining leverage between 2 times and 3 times and remain committed to obtaining an investment-grade credit rating, which would be another sizable competitive cost advantage. As of quarter end, our ratio of net debt to adjusted EBITDA was 1.35 times. And as a reminder, this does not include pro forma contributions from acquired businesses that have been operated for less than a year. Our disciplined capital management provides us ample opportunity to fund our accelerated growth and acquisitions Driveway and DFC while being positioned well for the future. With the elevated earnings environment and our current liquidity position, we funded DFC’s portfolio growth through a mix of working capital and availability on our ABS warehouse lines. Our targets for the deployment of our free cash flow remain unchanged at 65% toward acquisitions, 25% toward internal investments, including Driveway and DFC along with capital expenditures, modernization and diversification, and 10% towards shareholder return in the form of dividends and share repurchases. We have repurchased approximately 515,000 shares so far in 2022 at an average price of $292.80. With $572 million remaining on our authorization, we have optionality to take advantage of market volatility and opportunistically repurchase shares going forward to provide immediate shareholder return. Factoring in last year's activity, we have repurchased approximately 4% of our float. Additionally, earlier this morning, we announced a 20% increase to our dividend to $0.42 per share. We are well positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion in revenue and $55 to $60 in EPS by 2025, with even more significant upside in the future. This concludes our prepared remarks. We would now like to open the call for questions.

Thank you. Our first question is from Daniel Imbro with Stephens, Inc. Please proceed.

Hey. Good morning, everybody. Thanks for taking our questions.

Good morning, Daniel.

Bryan, I wanted to start on just inventory. The days inventory on new actually stepped up. I think up to the high-20s. It seems like it's above peer levels, but GPUs also stepped up. So can you maybe break down what drove that sequential step up in GPU even as inventory improved a bit?

Good morning, Daniel, this is Chris. I want to highlight that demand continues to outpace our supply with any OEM. Although we are noticing a slight increase in inventory DSO, there is still a significant number of new car customers ready to make their purchases. For example, we began the month with 13,000 vehicles in stock and sold about 24,700, which is an increase of around 4,300 units from the previous month. We received 23,700 units, an increase of 1,800, yet demand still exceeded supply, leaving us with an ending inventory of 12,000 units ready for sale. This situation is quite dynamic, and we need to take it month by month, ensuring we sell every vehicle we can and receive more allocations than some of our competitors.

Okay. Chris was just speaking about new as well. We ended at 50-day supply unused and we're pretty active in being able to find that, find vehicles including the zero to 10-year-old vehicles that we’re able to get off of lease a lot easier than some of our peers.

Got it. That's really helpful. And then, one for Tina or maybe actually for Chuck, but on Driveway Finance, I appreciate the detailed long-term outlook in the slides. So can you talk about any changes you're seeing in credit performance in any areas of the credit spectrum? And if you had to tighten your lending standards, how would that affect the long-term projections you provided today in the slide deck?

Thank you, Daniel. This is Chuck. You raised great questions. To start, regarding our lending credit policies and practices, I mentioned earlier that in the first quarter, we actually limited the loan-to-value ratios for some of our lower credit spectrum to a lower percentage, which should help reduce our risk and exposure. Concerning your second question about long-term performance, it's important to highlight that we will continue leveraging Lithia’s strong position and extensive data, allowing us to react in real-time to ensure we're not taking on excessive risk in relation to returns. This is crucial, as we will adjust our credit policies and maintain a disciplined approach to ensure our risk-adjusted returns meet our target rates. This strategy will enable us to achieve our projections irrespective of the economic cycle as we move forward.

That's really helpful. And if I could sneak one more in there. Affordability and maybe used demand has been really topical to Bryan, could you address maybe how that progressed through the quarter and then any changes you've seen through March or maybe even into April tax refunds that got paid? Thanks.

Sure, Daniel. We haven't seen any material changes in affordability as of yet. We're assuming that at some point those funds that much of the population receives do begin to run out, but for the time being, it looks pretty good. I think in April, we're trending up about 9% in unit sales in used. So it still looks strong and the balance between certified core and value is still looking similar.

That's great. Thanks so much for the color, guys and best of luck.

Thanks, Daniel.

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

Great. Thanks for taking my question. There have been a lot of emerging concerns that the economy might run into a mild recession or we might see a slowdown in the consumer. Could you give us a sense of like how you expect the business to perform, if you do run into some sort of a mild recession here maybe later this year or early next year? Maybe if you could help address investors' concern around like what levers you have in the business to offset pressures on the volume side of the business and also like other parts of the business. Just what would be the puts and takes? We need to start there and I have a couple of follow-ups.

Sure, Rajat. Good question. I think most importantly consumer confidence currently is at its lowest level in almost 24 months. So we're already seeing the impact of that. Unfortunately the supplies are balancing that out. Even though the consumer confidence numbers are pretty low, we still see a robust environment and we imagine that later this year and maybe even into next year that may begin to soften a little bit, but more importantly, we've built our model off of multiple verticals to create optionality with consumers. That is the most important part of the Lithia & Driveway strategy that we now have Lithia that's robust and growing its network. We have Driveway that provides consumers with in-home transparent experiences in a one-priced environment with considerable numbers of cars and now in both new and used vehicles allowing us to reach deeper into the U.S. population, whereas two years ago or a year and a half ago, we really only touched about 1% of the U.S. population. Today, we actively touch almost 28% of the population now with national advertising and feel like national advertising in the different regions like on March Madness. We're now touching close to 100% of the country. So our ability to bring optionality to new consumers and conquest incremental customers into our business and keep them in that lifecycle through sales shop and service is an important part of our design. Lastly, I would comment on this, when we think about consumer demand changes or consumer shifts in behaviors, we are seeing a nice shift to sustainability. I mean, we were reaching almost 5% market share as a country in BEVs which was quite special. We sold over 10,000 sustainable vehicles in the quarter and it made up 7% of our volume. GreenCars is a commodity that is capturing affinity customers that are looking for sustainability and GreenCars will become not only the current leading educational source, but it will become the leading marketplace for sustainable vehicles, not only nationally but internationally.

Got it. Great. Thanks. Thanks for that color. Maybe on parts and services, strong growth here in the first quarter. Could you maybe give us a sense of how you expect this to progress through the rest of the year, maybe across different buckets? What you're seeing currently and going forward as well, like, which buckets do you expect to recover faster or slower across customer pay, warranty, collision et cetera? And I have one more follow-up.

Hey, Rajat. It’s Chris. Clearly, the increase in miles driven, especially post-pandemic with more people out on the road, is highlighting service opportunities for vehicles that may have experienced deferred maintenance during lockdowns. Additionally, we have 270 million vehicles in our fleet, and due to the current state of the new vehicle supply chain, the aging of these vehicles continues to surpass the 13-year mark we've historically noted. The combination of these factors contributed to the 15% increase in customer pay for the quarter, although warranty claims decreased slightly. Given the two years of reduced sales rates, we can anticipate some warranty declines in the coming months. There has been significant growth in wholesale parts, indicating that many independent shops are servicing consumers with various repair needs. Furthermore, our collision centers are seeing more vehicles on the road, which sometimes leads to increased instances of collisions. Looking ahead to 2022 and beyond, I believe we are well-positioned for continued success in our countercyclical fixed operations business, and we expect this trend to persist through the latter half of the year.

Got it. Great. Just lastly on capital allocation, obviously, the balance sheet continues to delever here. What you are seeing today in the M&A environment, is it still like a favorable time or are you still getting like favorable multiples for the deals you're looking at? And also like, given where we are just from the economy perspective, what would be a more near-term preference in terms of M&A versus buyback given where the shares are trading today versus what you're seeing in the M&A market of that? Thanks.

Sure, Rajat. This is Bryan again. On the M&A market, we're definitely seeing balances in pricing. So we now have either closed or have under contract $3 billion so far year-to-date. That's a big number. It's a little higher than what we expected. Most importantly, we do not adjust our disciplines, okay. We're finding partners that are excited about joining us at multiples that we look at on a normalized basis to be able to do that. Now, we do also balance our stock price, okay and look at the volatility in our space, which is obviously quite high to allow us to utilize capital in the best possible way, okay. And when we're buying back, it doesn't mean that that we think that that's the right stock price. It just means that we've measured the volatility and hit it at an opportune time to be able to do that. Now, even with the $3 billion through the first half of the year run rate, which should put us somewhere between 5 and 6 coming out of the year. And buying shares back at a similar cadence of the 4% that we've bought back of our float over the last 4 months to 5 months. We still have plenty of capital that's being generated, so it's important to remember. We generated almost $500 million in free cash flow in a quarter. So when you do look at that this isn't the same as a start-up that's losing money. When we spend our money on capital, we get network. When we spend it on acquisitions, we get network that persist forever and allows us to get closer to the customer. Others that lose money, the money has gone. So we kind of look at the fact that we make a couple of billion dollars in free cash flows and then apply that to our network or apply it to a less share count to be able to get there whereas, there is a lot of dilution in start-ups of how they think about their business relative to where we both end up in the long run, which ultimately will reflect in what consumers are going to expect in terms of pricing, in terms of the major cost advantages that we sit here with in our design that we're executing now on quite well.

Got it. Very helpful. Thank you and good luck.

Thanks, Rajat.

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

Yes. Thanks for taking the question. Just wanted to ask about the impact of rising rates. I guess, like, to-date have you seen any lenders on average, if you see lenders begin to pass through some of the funding costs to customers yet and if so, how much on average? And then, historically, in rising rate environments what impacts have you seen on your business, when rates have risen, has there any impact on your F&I profit per unit or maybe ability to market loans, has there been any changes to insurance product attach rates, any historical perspective appreciated?

Yeah, Chris. Great question. This is Chuck. I'm going to handle the lender part of your question, first. So as I mentioned in my prepared comments, we did selectively increase in our rate card for DFC about 25 basis points to 50 basis points, particularly where we felt like the market has responded in a similar fashion. And I think that's really sort of what I would say is that most lenders are being proactive in terms of raising rates selectively. We don't see a lot of across-the-board increases, I would say particularly in the prime and the near-prime segments of the market, most lenders are staying very competitive and holding the line, but if there are future rate increases, we do expect that to change as we go forward and DFC will continue to react accordingly.

I'll let Chris run through the business part.

Yeah. I think what I would add to it is if you look over the last 12 years, we saw a really modest increase in what customers were willing to accept as far as monthly payment. So 12 years ago, I think on the used side, we ran at somewhere around the $300 payment per month on average. Coming right now into 2022, and it really accelerated right in the middle of the pandemic that average payment in a high-demand environment went to $456. And I wouldn't say that was no interest rate impact and I think the big question that we've been kind of talking back and forth between our finance teams and our operations teams is that $456 going here to stay or is that something that rising interest rates are going to cause the actual payment to change. And so when you go back in time and the last time that we had to talk about rising interest rate environments in a recessionary period, what we saw customers do is they didn't decide not to buy a car, buy a car. If you want to vehicle, you're going to get a vehicle. You may just drop down in a decontented vehicle or dropdown in a model class to make sure that you get a vehicle.

And I think what the technology advancements that you're seeing in vehicles today a three-year-old newer car that may be step down one level may be more advanced and more technology ahead of where your vehicle was that you bought three years ago, even if it was one up on a class. And so I think this is something that's fluid for us to watch right now, but we are definitely seeing payment levels for consumers at some of the highest that we've ever seen. And the question then is in a higher interest rate environment, are customers going to drop their payment or just drop the evaluation of the vehicle they purchase and we're anticipating launching that throughout the rest of the year.

Thanks for the question. Just to follow up on that, are you observing any significant changes in consumer behavior based on income levels? Specifically, are high-end consumers showing noticeably stronger purchasing trends compared to those with lower incomes? Can you provide some insights on that?

No, Chris, it's very similar to how it has been over the last few years.

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

Good morning, guys. I said one question on the used vehicle side. I think in the revenue mix, wholesale went up from 3.1% to about 5.8% based on what you guys were disclosing, and I know it's on revenue not units, but I'm just curious why that would increase as a percent of the revenue base, if you're trying to retail everything you possibly can and just, it's hard to get these vehicles, I mean why would you wholesale more vehicles?

John, this is Bryan. I would say that it's because I mean we did purchase about 2,300 vehicles last month, and it's not targeted purchasing. So when we purchase off of Driveway, we buy everything, okay. So whereas before our stores always just bought things that they were looking for or took things on trade that they were more aggressive on for things that they wanted, whereas in Driveway were aggressive on everything because we have an exit strategy whether it's wholesale or whether it's a retail channel to be able to do that and I'm thinking that probably had a maybe a 100 basis point impact to that number.

Okay. The percentage margin for used vehicles decreased, but GPU sales have increased. Given the shortage of vehicles, we likely won't see significant declines in used vehicle pricing anytime soon. If there were a slight decrease in prices, how well do you think you could maintain a $1 GPU and potentially increase its margin? A $1 GPU is certainly a key factor.

Yeah. I think it's important to remember that we buy our inventory monthly and that we run at a 50-day supply. So, any changes in market conditions can be offset quickly by new incoming inventory. In terms of the holding margin, it's truly a function of the demand market. So I would say that it depends on what happens if it's a slow economic impact, it's one thing. If it's something more extreme like Russia moving into the Western Ukraine or possibly into Eastern Poland or something. Now, you're starting to talk about massive impacts, it could happen quite quickly. And then you now have these major emotional disconnects and consumers. So I don't know that we can give you an exact indication. I would just look at magnitude and speed of where the demand comes from, because remember, we've been talking about for the last two years that this is a 75% demand cost and 25% inventory costs. Now it's definitely now maybe 50-50 inventory because inventory has prolonged its shortages for a much longer period of time.

Hey, John. This is a reminder as well. As a top-of-funnel, new car dealer that gets to used vehicles coming in on-trade. We're making about $1,900 more on vehicles that come in from consumers than that we buy at auctions or from other dealers and we turn that much faster. So it's a huge advantage that we have won to react to the issues that Bryan talked about but just to continue to make sure that we have a very profitable pipeline of inventory coming in quickly on the used car side.

I'm sorry, but could you share your thoughts on the Carvana acquisition of ADESA as a physical auction? Does this affect your sourcing costs at all, or does it lead you to shift focus away from those auctions to Mannheim for more direct consumer sourcing? What are the implications of such a significant transaction?

Yeah. We're kind of benign to it. I mean we haven't given specific instructions like I believe there are now seven manufacturers that have pulled cars from ADESA, important to remember, and I believe the rest are planning to do it soon, which is part of that profit stream. I would also remember that ADESA lost money pre-COVID and they lost tons of money during COVID. So to us, it was more of an infrastructure play. Now I believe Carvana goes from about 22 reconditioning centers to about 70. So even sitting there they still have about a $500 logistical advantage over our network. This sits within 240 miles from the average customer in the country. This still sits at about 550 with 70 locations. So I guess that's how we kind of look at it is, what are the cost advantages that we can transpose into our consumers’ pockets and a little bit different way and maybe what you thought about it but that's another drag I would think on their earnings at some point, especially knowing that most of the inventory is getting pulled.

That's incredibly helpful. As you reflect on the past two years and into this year, considering the supply challenges, new vehicle demand is expected to remain at recessionary levels for three consecutive years. Although there's considerable discussion around a potential recession, there isn't much data to support it. When we examine the automotive sector, even if we fall into a recession, isn't there a likelihood that new vehicle sales could still increase in the coming years? This industry often leads the economy as it emerges from downturns. How do you perceive this situation? It seems to me that concerns regarding the automotive market might be somewhat exaggerated.

We would agree with you that when we've been running at 13 million, 14 million SARs there is massive pent-up demand. Obviously, the average car in the car park is now almost a year older and despite the fact that maybe we're over earning on GPUs a little bit, if you can add 20% to the volume, which has a trickle-down effect into used vehicles in the service body and parts. We believe there are massive tailwinds coming and we're excited about whatever environment possibly is there even if it's recessionary because I believe it's going to allow more consumers to get into the market that today aren't willing to buy at MSRP, because that's something that's quite important to remember. Okay. and that obviously has its own implications on the 15% or 20% of consumers that have bought over the last 18 months may have a little bit more this equity in the coming years. But ultimately, we think that there is more there is a lot of tailwinds coming in whatever environment, whether it's continued strength in demand or whether there is a little bit of softening which will allow more consumers to come into the market.

Okay. That's helpful. Thank you very much guys.

Thanks, John.

Thanks, John.

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

Hey. Good morning, guys.

Hi, Bret.

On that topic of negative equity that you just mentioned, I guess, if there is going to be a move to maybe a lower loan to value in conjunction with maybe some negative equity showing up. Do you see that having any real impact on sort of our national SAR level or is it small enough it really doesn't count?

Bret, you're right, it's small enough, I mean that's why I made the comment, it's 15% to 20% of the consumer base that have transacted. Remember also that when you're calculating that this equity, it's not just this equity on the car they're buying, their offsetting about half of that on over valuations of the trade and that they're dealing with. So you're only taking about half of that problem and carrying it forward on about 15% to 20% of the consumers. So we don't think it will have a material impact even if margins continue for another couple of years.

Okay. And then a question on this wholesale parts business, I mean obviously pretty significant growth there. Is there anything driving that I guess from a mix standpoint, I mean some of the collision guys have talked about supply chain problems. Are your wholesale parts growth more mechanical or in the collision space or what's driving that strength?

We did have body shop that was finally up, but I really believe that it's what Chris spoke to, which is really that we got do-it-yourselfers that are still working from home and they figure out how to manage their time better and as such they are buying parts directly and we're not putting them on the cars for them or we're selling them to the shops that maybe you're a little bit more cost-effective in the normal dealer. Now, we do sell non-OEM parts to consumers as well and we've done that for now almost three decades. So post-warranty period we're pretty price competitive in our markets. There's not a lot of aftermarket business leftover after we take it post-warranty period.

Okay. Great. Appreciate it. Thank you.

Thanks, Bret.

Thank you. Our last question is from Kate McShane with Goldman Sachs. Please proceed.

Hi. Good morning. Thanks for taking our question. Most of our questions have been answered, but just in the sense of just the impact of higher gas prices, I know you've mentioned overall it's had no effect on demand, but has there been any change in mix in terms of demand for larger vehicles and SUVs has that changed at all given the change in gas prices?

Thank you for your question, Kate. We've experienced a 58% increase in sustainable vehicle sales, indicating a significant shift in units. This may be influenced by gas prices and the affordability challenges associated with sustainable options. With consumers having a bit more disposable income, we are witnessing a transition towards sustainability happening faster than anticipated. However, when it comes to our traditional vehicle sales, particularly larger SUVs and trucks, we aren't seeing the massive shifts away from these vehicles that we experienced about a decade ago during the gas price spike. Currently, the situation appears stable. I do anticipate that as government funds diminish, we might see a slowdown in growth rates for sustainable vehicles. Nevertheless, I hope we can continue to gain market share and surpass national trends. Thank you. Thanks, Kate.

And our final question is from David Whiston with Morningstar. Please proceed.

Thank you. Good morning. Regarding DFC, you mentioned earlier that you provide customers with a tailwind presentation. I'm curious about how you communicate the value opportunity for customers to choose DFC over other lending partners like Chase Capital or Ally. I suspect it's not just about offering lower interest rates, so any additional details would be appreciated.

Thank you, David. This is Chuck. So first, within our environment, we have the direct and indirect lending model. So it's actually our F&I specialists within our dealerships who actually are placing the paper with the lender of best fit. So they really are looking at each individual consumer's needs in terms of how they want to structure the deal in terms of potentially down payment, interest rate, term and other factors to make sure that they have the optimal mix of meeting their needs and their individual financial situation. And then matching that to a lender like DFC, I think one of the big advantages for DFC is that we can communicate with our fellow employees on a real-time basis to make sure that when we have optimized what's best for the consumer, we can respond with an offer that fits those needs, and that's one of our big competitive advantages.

Okay. And then on shifting gears over to the continued growth of Tesla that their direct-to-consumer model, I'm just curious if your either your premium brands or any of your brand stores are getting hurt at all by Tesla’s growth and if not, would there be if there was no chip shortage impacting production?

So we are not seeing it, okay. And though Tesla's market share continues to grow. We were up in the quarter. BMW was up 31% in unit sales, and Mercedes was down just a touch, okay. So the two big competitors are looking pretty good and the super high lines, I mean, I'm not sure those are that relevant. Genesis was up almost double over last year. There is some real key at the rest of it's all premium lux, probably not that relevant even though some of them were up over 100%. So we think that the DTC model is how we mirrored Driveway and GreenCars experiences. And I think that's important to remember, we also, I would imagine one of the largest resellers of Tesla vehicles in the country knowing that we sold the 10,000. You know and to be fair, it's setting a high bar for our manufacturers to aspire to compete with within today, they're doing a pretty good job at it because 70% of those sustainable vehicles we sold in the quarter were from our traditional manufacturers and we're new. Okay. We got every manufacturer pretty much now that has a full EV. They also have plug-in hybrids, which are almost 30% lower in cost. In fact, I think I'm buying a BMW X5 hybrid that goes 32 miles on a charge, which means that I pretty much never have to put gas in my car and that's out at $60,000 fully loaded X5 with the federal funds. So we think that they're nicely positioned and most of the mainstream manufacturers have quite a bit of cars coming through as well. And I think maybe even more importantly in terms of the DTC, we are very well aligned with our manufacturer partners from a Tier-1 and Tier-3 level in marketing and from consumer experience from factory to Driveway, that is the right answer for the consumers that will ultimately drive market share for their growth in the sustainability sector as well.

That's helpful. Just real quick finally, do you guys still own your stake in shifts and if you do what are the long-term plans for that?

We do. We still, I don't even know what our percentage, I'm going to guess 15%, 16% of shift, it's still a wonderful source to be able to share information and ideas and still like to have that as a resource, knowing that they are 300 miles away and their views on the new world of e-commerce is, it's important to how we think about things and I hope they feel the same about us.

Okay. Thank you, everyone.

Thanks, David.

And our final question is from Glenn Chin with Seaport Research Partners. Please proceed.

Good morning, folks.

Hi, Glenn.

Industry chatter has it that Lithia sold several stores in the quarter. Can you talk to us about why the stores were sold, the annualized revenue they contributed and if you can, the multiples that you're getting on those stores?

Sure. I think most importantly, we always optimize our network to make sure that it's clean. We bought stores over the years that were in groups typically that weren't right for Lithia and it's a matter of divesting those. I believe it was annual run rate of about $90 million, is it, right, Chuck, 90 million, about $90 million were sold in the quarter, okay? And a number of those were assets that we just don't believe are assets that were to some extent salable okay and in this environment, everything is kind of salable. So we took advantage of that and divested of those stores. And you'll see, you'll probably see more of that in the next few quarters. You probably have a half a dozen stores that are typically smaller stores maybe located in an area where it's not helping our network at all, meaning, it's a duplicate store, secondary store or it's into smaller markets where you're utilizing a General Manager talent and you can reposition them in a better and bigger store.

Okay. And I think likewise Bryan, you sold several stores also from the own group in the fourth quarter is annualized revenue contribution from that sort of store is also not material, just this portion?

The stores sold in the Carbone Group included a small Chevy and GMC dealership, a small Hyundai dealership, and a Nissan dealership. These stores are not significant. To give you some context, Utica has a population of about 300,000 and sees around 12,000 to 13,000 vehicles registered. This means that new car franchises there typically sell between 200 to 300 units each year. What we have in the market now is a strong Dodge and Jeep dealership, a strong Ford dealership, a strong Honda dealership, and a strong Subaru dealership, which will define our presence in Utica moving forward.

Yeah. Okay. And then just one more, so on the flip side, any movement on the multiples that you're seeing in the marketplace that sort of the asks?

I would say that the overall marketplace probably has moved, but with $15 billion in the pipeline, we haven't, okay. Even though we believe that we're the best buyer for most businesses. We're very discerning. So when we assemble that $15 billion that's assets that fit our network strategy model in the six regional strategies. So we don't typically have to flex on price and most of our sellers are not just looking to sell their business. They are looking to provide opportunities for their team and the people that they build for year, and be part of the next evolution of automotive retail of whether that's in-network or whether that's in-home.

Okay. Very good. Thanks very much.

Thanks, Glenn.

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.

Thanks everyone for joining us today. We look forward to updating you on Lithia & Driveway second quarter results in July again. Bye-bye.

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