Good morning. And welcome to the Lithia & Driveway Fourth Quarter 2022 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 Amit Marwaha, Director of Investor Relations. Please begin.

Thank you. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion 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 a reconciliation to comparable GAAP measures. We have also posted an updated Investor Presentation on our website investors.driveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thanks, Amit, and good morning, everyone. We appreciate you joining us today and look forward to updating you on our business growth and how our differentiated strategy is progressing. We posted another record year of revenues and earnings. In 2022, we grew revenues to $28.2 billion, up 24% from 2021. Over the past three years and since the launch of our 2025 plan, we have more than doubled the size of our company from $12.7 billion in revenues and have nearly quadrupled EPS from $11.76 back in 2018 to $44.42 in 2022, driven by a team and a culture of high performance, a focus on customer optionality to attract and interact with customers, and investments in adjacencies to expand our profitability. We are well positioned for continued growth. We have a constructed and nimble platform that combines our experienced, knowledgeable customer-centric team with the most expansive and diversified nationwide network in North America. With a massive capacity to continue to scale the network, we are truly living our mission of growth powered by people. This foundation has been key to our consistent results, growth, and ability to consolidate a highly fragmented industry. What began as a regional platform is moving towards a global platform with innovative technology, diversified products, brands, and financial solutions. In the fourth quarter, we reported adjusted EPS of $9.05. Our teams are navigating through the used vehicle market as it rebalances at a gradual and orderly pace as shared on previous calls. Our vehicle operations, SG&A as a percentage of gross was 60%, excluding the burn rates of our two adjacencies. Secondly, revenue was impacted by our new vehicle mix, having tepid volumes at two of our domestic manufacturer partners. New car inventory is also rebuilding, but at a less uniform rate and varied by OEM. After experiencing the lowest new vehicle SAAR since 2012, we anticipate SAAR in 2023 to be between 14.5 million and 15 million units. As perspective, the industry averaged a 17 million vehicle SAAR between 2015 to 2019, implying a future lift of 17% in addition to conquesting market share. We are pleased to have Chris back at home this call to provide additional color on the quarter in a few minutes. Our vehicle operations continue to lead the omni-channel auto retail evolution. Our quickly growing infrastructure of omni-channel options ranges from physical store footprint to technologies offered by our stores to Driveway and GreenCars combined to provide customers with a variety of flexible options throughout their vehicle ownership life cycle. Our core store operations' massive growth and performance remain strong and continue to produce one of the highest operating margins and lowest SG&A costs in the industry. Moving to our digital channels, our combined average monthly unique visitors reached 10 million in the quarter, an increase of 94% compared to last year with our spend only increasing 33%. Driveway and GreenCars traffic was particularly strong, growing 236% to nearly 2.5 million visitors per month during the quarter. Traffic across all digital channels continues to gain momentum driven by a robust inventory selection and a variety of products and experiences. During the year, 22% of our vehicles were sold to customers utilizing our omni-channel technology in our stores, Driveway, and GreenCars, representing just shy of $5 billion in revenue. Driveway, our innovative technology platform with a negotiation-free fully online vehicle shopping and selling experience generated revenues of nearly $900 million in 2022. This combination of in-store options and our Driveway experience expands the reach of our network, with our stores interacting with over 90% of customers in the country within 100 miles now. Driveway continues to conquest new customers, with over 97% of its business coming from new customers to LAD within the last decade. Moving to our financing operations, Driveway Finance Corporation or DFC for short, ended the year with over $2 billion in receivables, solidly positioning DFC as the largest lender in our network. The penetration rate rose 200 basis points from the previous quarter to over 13%, and we originated over 19,000 loans in the fourth quarter. Last week, we completed our third ABS securitization accompanied by an investment-grade rating by both Moody's and KBRA. We believe this reiterates the strength, quality, and disciplined nature of our captive finance decision-making and the differentiation from our other used-only retailers with captive finance arms. As such, we are extremely pleased with how this adjacency has laid the foundation for expanding our profitability in the future. I'd like to commend our entire DFC team and Chuck, who will be providing more color on the results and outlook later in the call. Now turning to acquisitions. In the fourth quarter, we made four notable acquisitions, including Glenn's Freedom CDJR in Kentucky, Ferrari of Denver, the sole dealership of its kind in the Central Rockies, Meador CJDR in the Dallas-Fort Worth area, further expanding our footprint in the Lone Star state, and finally, the Airstream portfolio we mentioned on our last earnings call. So far in 2023, we have kept pace with the momentum we built through 2022, acquiring another $50 million in annualized revenues to start the year off. We expect this to be another significant year of growth for the network. We acquired over $3.5 billion in annualized revenues during the full year of 2022 and nearly all public company M&A activity for the year, as shown on slide 11 of our recently updated Investor Presentation. Since launching our five-year plan in mid-2020, we have acquired a total of $13.9 billion, 63% of the total $20 billion originally targeted by 2025. Our patience, disciplined, and consistent approach towards acquisitions continues to generate massive value by maintaining our multi-decade long valuation methodology of 3 times to 7 times normalized environment earnings levels. We have made a conscious decision to utilize the majority of our cash flows towards acquisitions rather than redistributing them primarily towards shareholders or paying down debt. As such, we have and we will continue to establish the foundation for massive competitive advantages in size, scale, SG&A cost leverage, interest costs, profitability levels, and most importantly, consumer optionality and attachment. As we hit the midpoint of our 2025 plan, we remain confident that our strategy is durable and have clear sight to achieving the $50 billion revenue target. Our portfolio mix, new adjacencies, and focus on profitability translates into better operating leverage, with the ability for $1 billion in revenue to drive up to $1.20 in EPS by 2025, up from our historical ratio of $1 in EPS and eventually achieve the $2 in EPS future target. Let me take a few moments and outline the drivers to achieve our 2025 plan. First, we continue to drive consumer optionality and operational efficiency across all platforms. We are prioritizing our profitability goals as we optimize and integrate our omni-channel options, which will result in improved margins and leverage our network and cost structure. In addition to continually driving high performance, this will help drive SG&A as a percentage of gross profit below 60% in a normalized GPU environment, enhanced liquidity, and continued cash flow generation. Second, the investment in our financing operations DFC will grow our earnings power and diversify our portfolio. As demonstrated by DFC's capital structure moving to sustainable self-funding, DFC is maturing and effectively managing its growth. We are targeting a 15% to 20% penetration rate at DFC, primarily driven by used vehicles, and we are well on our way to profitability later this year. Third, we continue our cadence of growing our network, the backbone of our plan through acquisitions. Growth of our physical network to reach 95% of our consumers within 100 miles creates the foundation of our business. It gives us the ability to physically reach customers throughout their ownership life cycle within a two-hour proximity. Acquisitions continue to be the core competency of LAD to consistently generate strong returns, while optimizing the network with timely, profitable, and strategic divestitures of smaller poor-performing stores that lack strategic value to the network. Lastly, we remain financially disciplined with a strong balance sheet and committed to capital allocation strategy focused on the best risk-reward for our shareholders. We have reduced our leverage over the past several quarters while still growing through acquisitions. We invested in network growth, our omni-channel tools, growing our captive finance business and generated meaningful shareholder returns through dividends and share repurchase. As crafted a half a decade ago, we continue to believe in a longer-term strategy while finding the balance between smaller shorter-term gains and long-term strategic positioning. Lithia & Driveway is well underway towards building a differentiated diversified mobility and transportation platform across multiple geographies. We have focused on making the experience of owning a vehicle easy and hassle-free with strategically designed and positioned options for all types of owners across our network and e-commerce platforms including our captive finance arm. Core to our business is delivering highly profitable growth as we continue to execute on our 2025 plan to reach $50 billion in revenue and our longer-term ambition of $2 of EPS for every $1 billion in revenue. With that, I will turn the call over to Chris.

Thank you, Bryan. It’s good to join everyone on the call today to provide a brief overview of our operating results and discuss our focus areas for 2023. However, before jumping in, I’d like to congratulate our 2022 class of Lithia Partners Group winners, better known internally as LPG. These 56 leaders and their teams generated the highest performance levels among their peers last year, independent of store size, franchise representation, or geographic location. These stores led their market share with exceptional consumer satisfaction and solid profitability. They were also key supporters of Driveway, DFC, and GreenCars, executed the majority of our mobile service, and at-home pickup and delivery—all our growing future team leaders. We now have over 40% of our eligible store leaders attaining this coveted status, and we look forward to all of our teams attaining LPG status in future years. Now to the quarter. Overall, same-store gross profit declined 12% as the recovery in new vehicle volume trends did not offset the expected declines in vehicle gross profit per unit or GPU as we transitioned out of the COVID-fueled retail environment. New vehicle GPUs, including F&I, were $7,719 per unit, compared to $8,593 the prior year. Used vehicle GPUs, including F&I, were down to $4,028 from $5,341 in the prior quarter. F&I results were strong at just over $2,117 per unit, down from $2,162 the previous year. As a reminder, new vehicle GPU levels are still significantly above our historical levels from 2019 of around $3,600 per unit, while used vehicle GPUs have returned to pre-COVID levels. During the quarter, combined import and luxury vehicle sales were relatively strong, growing in the low-single digits, offset by domestic sales, which fell over 10% on a same-store basis. While domestic OEMs make up about 27% of our new vehicle sales, we are starting to see a shift towards additional incentives from these OEMs on certain product lines, which we expect to continue into 2023 as normalization in the market continues. Used vehicle prices averaged $29,545, up nearly 2% from last year. As a top-of-funnel franchise dealer, we remain aggressive on retaining trades we are offered, as well as the continued procurement of inventory from all external channels, even as pricing pressure on used continues with the rising interest rate environment and recovering new vehicle inventory supply. Transitory issues and pricing pressure on used vehicles should have a minimal impact on 2023, as we carry less than a 60-day supply, and the shortage of late-model used vehicles from the abnormally depressed new vehicle SAAR environment takes years to normalize. At the end of December, new and used vehicle day supply were 47 days and 55 days compared to 39 days and 65 days at the end of the third quarter. Customers appreciate our vast range of products at all price levels, including the option to purchase and service vehicles up to 20 years and older, as represented in our value auto segment, which is 17% of our used vehicle sales volume. Our nationwide network aligned with the execution by local market leadership casts a wide net across all geographies and allows us to service a diverse set of demographics and purchasing preferences with one team. Working together, we can service local markets individually or ship vehicles regionally or across North America, as represented by Driveway, where the average distance delivered is over 900 miles, providing a negotiated experience in our local network and a negotiation-free process through the Driveway national channel allows consumers empowerment and the option to choose their pathway. As we continue to gain further insights on the consumers and the relationship between product demand by market, our stores are making better decisions to price and merchandise our product across platforms, resulting in better economics. Over time, this will translate to significantly more leverage in our network. Our aftersales business remains strong across all business lines, up 8.4% in the quarter. With the record units in operation and an average age of vehicle over 13 years, we anticipate continued growth throughout 2023. Shifting to SG&A, core operations, excluding adjacencies, generated SG&A as a percentage of growth below 60% on the quarter. However, even in the core business, there remains ample opportunity to improve our operating leverage in our lower quartile segments of stores, which vary across geography and size. We estimate there’s upward of 250 basis points or $125 million in additional profitability we can achieve by solely moving this bottom quartile to an average level of performance. These focused stores are expected to continue to improve topline growth, boost productivity, drive down costs, and enhance utilization of our innovative technology solutions. As illustrated, our best stores in this environment aligned with LPG attainment achieved SG&A to gross of 48% or better. Conversely, there’s a cluster of stores operating at 75% SG&A to gross, and our operations team is focused on improving the results at these locations. Over the past three years, we have invested in nearly 40 locations with an average revenue per store of $42 million and replaced them with larger stores averaging over $100 million in revenue and performance levels in our upper quartile in many cases. We remain diligent on optimizing our network where it makes sense and look forward to continuing our high cadence M&A growth trajectory. In summary, each day, our team is rising to the challenge to aggressively meet the needs of consumers in the ever-changing future of automotive retail. We are motivated by the evolution in our core business and look forward to navigating through the transformation to become a more diversified, greater consumer optionality company. The team is looking to improve across all of our business lines, leveling up our digital retail readiness, leveraging our cost structure at new levels, and driving incremental profit to the bottom line that will eventually translate to $2 in EPS for every $1 billion in revenue we generate. Their efforts will continue to evolve our in-store and at-home solutions to meet consumers wherever, whenever, and however they choose. We remain humble and look towards another strong year, and we remain laser focused on achieving our plan. With that, I’d like to turn the call over to Chuck.

Thanks, Chris. DFC posted a solid finish to the year and continues to be the premier lender for Lithia & Driveway. Our business strategies remain consistent as we continue to maximize the economic returns by managing risk while leveraging the benefits of being a captive lender. We continue to move upmarket in terms of credit quality to help mitigate the overall risk in the portfolio. Our near-term objectives continue to be growing the portfolio, creating a systematic and scalable capital structure, and achieving segment profitability in 2023. In Q4, the portfolio grew to just over $2 billion, driven by the measured growth in originations, which totaled $605 million. Quarterly loan originations had a weighted average APR of 8.2%, while our cost of funds rose to 4.8% in line with recent rate increases by the Federal Reserve. We have continued to pass along rate increases to our customers at an incremental rate without degradation to our credit quality or underwriting standards. For the quarter, our financing operations achieved a net interest margin of $23 million with a loss of $8 million, including provision expenses of $19 million. In the fourth quarter, DFC penetration rate rose to over 13% and averaged just over 10% for the full year. Going into 2023, we expect penetration rates to remain stable between 12% and 13%. Our decision to adjust the pace of originations growth, particularly in the near-term, stems from our goal of achieving profitability this year and maintaining our current portfolio risk profile. The average FICO score for loans originated in Q4 was 732, up from 721 in Q3. Total portfolio weighted average FICO scores increased from 700 to 708 during the same period. We reduced front-end LTVs for three consecutive quarters with Q4 originations at 97.2%, a reduction of nearly 200 basis points sequentially and over a 700-basis-point reduction from Q4 2021. At the end of December, our allowance for loan losses as a percentage of managed receivables rose slightly but in line with expectations to 3.1%, bringing our total allowance to $65.1 million. Overall, we have seen some signs of stability in delinquency rates, especially at the tail ends of Q4 where 30-plus delinquency fell approximately 40 basis points to 4.1%. This is primarily driven by a combination of DFC’s improved credit quality and the deployment of an advanced telephony system in Q4. Net charge-offs increased slightly quarter-over-quarter, which was primarily a result of the rapid growth in our portfolio but also a deterioration in net recovery rates as wholesale vehicle auction values declined. While the increase in net charge-offs due to the rapid growth of the portfolio was expected, we will continue to optimize vehicle recovery activities while waiting for 2022 originations with a lower average LTV to help mitigate reductions in used car values. Last week, we closed our third ABS term offering for $480 million. This offering is DFC’s first where a tranche carried a AAA rating as rated by both Moody's and KBRA. The ABS term market was particularly receptive to this offering, with all tranches being materially oversubscribed, which allowed significant tightening of final credit spreads versus initial pricing guidance. DFC remains committed to utilizing the ABS term market as our primary near-term source of capital as this is a critical step towards becoming a materially self-funding entity. Becoming a periodic programmatic ABS term issuer will lessen DFC’s reliance on parent company capital, thereby allowing LAD to deploy forward-looking liquidity towards other growth initiatives. The 2023 business fundamentals across DFC should result in a near-term prominent profitability. However, the negative impact of further volatility in either DFC’s cost of funds or our credit performance results could impact DFC’s profitability on a forward-looking basis. In closing, we are excited by the results DFC has achieved up to this point. We are constructive on hitting penetration rates of 20% by 2025 as LAD moves towards achieving $50 billion in revenues, which, as a reminder, should result in excess of $500 million of pre-tax income once DFC reaches a steady state portfolio and normalizes the vessel reserves. DFC’s end state will become a major contributor to LAD’s future where $2 of earnings per share is generated for every $1 billion of revenue. We are particularly excited about achieving segment profitability in 2023, and the breakout of our financial results is a foundational milestone to provide visibility as we look to meet this goal. Our prudent approach towards managing credit risk while balancing growth positions DFC to achieve our KPIs going forward. I will now turn the call over to our Chief Financial Officer, Tina.

Thanks, Chuck. Thank you again for joining us today. We have received great feedback from our investors and appreciate your support and patience as we outlined the multiple financial levers we navigate within our 2025 plan, the growth and expansion of DFC. With that, we have restated our segments to vehicle operations and financing operations, adding greater visibility to the operational results of DFC. As a result of this, we have added a financing operations income loss line to our income statement. This line represents the interest income earned less the interest expense associated with DFC directly associated SG&A expenses and the change in provisions and depreciation from our leasing portfolio. Most of these items, except depreciation, were previously reported within SG&A. To assist in understanding the impact of these re-classes, we have added a reconciliation to our Investor Presentation on slide 24. During the fourth quarter, we reported adjusted EBITDA of $421 million, down 22% from last year. The change was attributable to a decline in gross profit and higher interest costs associated with DFC as the portfolio grows. We ended the year with leverage at 1.5 times, flat with the prior quarter and providing substantial headroom for growth in 2023. During the year, we generated over $1.1 billion in free cash flow and deployed over $2 billion in capital. Of this amount, approximately half went toward acquisitions and a third toward share buybacks. This resulted in the repurchasing of approximately 8% of our float in 2022. Our strong earnings year provided us the opportunity to concurrently return value to shareholders through share repurchases and an increased dividend while maintaining strong growth through acquisitions. For 2023, our outlook remains constructive and optimistic. Overall, we expect new and used vehicle SAAR to grow 3% to 5%. As a reminder, we believe earnings will be impacted by declining GPUs and are assuming the following: same-store unit growth for new in the mid-to-low single digits and used in the high-single digits, as we navigate this transitory environment with supply and demand normalizing. New vehicle GPUs will continue to moderate, assuming a decline of about $200 per unit each month throughout 2023. This would average to a GPU of $3,800 and end the year a little above pre-pandemic levels. F&I per unit may be impacted by rising interest rates and consumer affordability and are estimated to be around $1,850 for the year. We expect service body and parts revenues to grow in the mid-to-high single digits, with margins consistent with historical levels. And finally, we target SG&A as a percentage of gross profit in the range of 61% to 64%, which includes the impact of strategic investments we are making for the future. Given these assumptions, we estimate free cash flow net of capital expenditures and dividends to roughly exceed $1 billion in 2023. At our disciplined hurdle rates, deployment of all of our free cash to acquisitions would represent $4 billion in annualized revenues. Balancing growth and returns for our shareholders are pillars to us reaching $50 billion in revenue. Our proven consistent ability to grow through acquisitions underlies our strategy and provides us with size and scale to optimize our profitability and fully leverage our in-store and online channels. Incorporating adjacencies like DFC diversifies our business and lays the foundation for significantly expanding margins in the future. Our strong balance sheet and capital generation position us well to continue the growth we have achieved since the launch of the 2025 plan. We see a clear line of sight to increasing profitability from our historical $1 billion in revenue, generating $1 in EPS to generating up to $1.20 in EPS by 2025 and in the long term, an ambitious $2 in EPS per $1 billion in revenue. This concludes our prepared remarks. With that, I will turn the call over to the audience for questions.

Thank you. Your first question comes from Daniel Imbro with Stephens. Please go ahead.

Yeah. Good morning, everybody. Thanks for taking my question. Bryan, I want to start on SG&A. I think given how strong GPU stayed, it was a bit surprising just some of the deleverage there. I think in your prepared remarks, you mentioned that the burn rate to two adjacencies were at least a couple of hundred basis points of deleverage there. But could you maybe help quantify other than DFC, maybe what the burn rate was from some of those adjacency growth and then looking forward, what gives you that confidence to be able to get back towards that sub-60% SG&A to growth within your 2025 targets? Thanks.

Sure, Daniel, and good morning, everyone. I think, most importantly, what we saw in the quarter was those two domestic manufacturers that had massive drops in their year-over-year sales. It made up about 20% of our total volume, and their growth on those manufacturers was down almost 35%. So it was hard to outpace that. We are estimating about 30% to 40% of the SG&A impact, which you think grows and how does that impact SG&A. But it does when the topline number goes down, a fairly big amount, and it’s a direct reflection on SG&A. So we think about a third of it is that, okay? The remaining two-thirds is coming from the adjacencies and like we have discussed before, I mean, we really believe that those adjacencies are the right answers long term to be able to continue to aggregate the sector and really show a competitive advantage versus the rest of the marketplace. In terms of looking forward, we are still looking at an approximate $200 decrease in new GPUs throughout the year, and as Tina mentioned on the prepared remarks, that gets us a little bit higher than pre-pandemic levels, about down about $1,500 for the year, okay? And then, obviously, F&I, we are modeling a little bit down as well. But all in all, I mean, if it wasn’t four of those domestic — those two domestic manufacturers, and Chris is going to talk about it in just a little bit, but we are fortunate they have started to react now to the higher inventories that may look a little different than some of the others in the space.

And if I could follow up on SG&A, Bryan, I guess, just to clarify, I think it was my understanding that this is the last quarter you can maybe write down any of the shift options you guys had from that investment. Was there any charge on the P&L from that investment kind of flowing through, was that in SG&A or was that somewhere else?

Hey, Daniel. This is Tina. Any adjustments we make on the shift investment, they actually flow through others, so it won’t be within that SG&A line.

The answer is I don’t believe we had any for the quarter, and there’s only about $7 million remaining on that investment.

Yeah. It was a minor amount. We called it out in the pro forma adjustments in the press release.

Got it. Perfect. I will stay to one question. I will hop back in the queue. Thanks, guys.

Next question comes from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking the question. On DFC, it looks like the average coupon was greater than 10% in Q4. Why is it taking a step lower in 2023 to the 8.5% to 10% range? I was a little bit perplexed by that. Is it just more mix shift to higher FICO score or is this something to do with the network of use mix? Any color on that would be helpful? And I have a follow-up.

Yeah. Hey, Raj. This is Chuck. Thanks for your question. With regards to yields on DFC, we have had eight price increases in the second half of the year, and we are continuing to closely monitor what’s happening in the marketplace as the Federal Reserve continues to increase rates. In terms of where we see our yields eventually leveling out in the near-term, it’s probably in that 9% to 10%. So we still have ways to go to move that up as we continue to monitor, but we will move as the market moves.

I have a follow-up on the F&I numbers of $1,850 that Tina mentioned. Does that take into account that you will have more DFC loans? I'm trying to understand why there seems to be such a significant decrease for the full year average. I'm curious about how that will develop throughout the year and the effect of DFC orders.

Yeah. Good morning. This is Chris. I think operationally what we have been trying to anticipate is the impact in a rising rate environment, what consumers are able to absorb in F&I, and just trying to be a little bit proactive and probably a little conservative on what F&I might look like in 2023 at 1,850, which is about a $150 drop off of where we have seen things in the last couple of years here, really nothing to do with DFC.

Next question comes from John Murphy with Bank of America. Please go ahead.

Good morning, guys. I just wanted to follow up on the SG&A to gross, because there’s kind of a lot of moving pieces here and I think there’s a lot of confusion. As we think about sort of a standard, forget about the adjacencies for a second, the decline in dollar grows, there’s typically sort of a natural response, particularly on new GPUs of about 33% just naturally on SG&A, I think. I'm just kind of correct me if I am wrong, I just want to clarify that. And how we really should be thinking about sort of aggregate GPU if it’s down or gross, if it’s down 100, should we think about SG&A sort of subsequently because of the way that variable comp works being down 30%, right? I am just trying to understand sort of a rule of thumb here and then if we could also just clarify, as we think about the adjacencies how much of that spend will go up on a sort of an absolute basis year-over-year in 2023 versus 2022 or does that level off?

Yeah. Good morning, John. This is Chris. I think you are right. I think the way that we look at kind of our overall gross profit decline or our gross profit improvement, the expectation that we have in our stores at a minimum is the 50% what we call throughput, meaning that for every incremental dollar in gross, or every dollar that you lose in gross, you should see at least 50% of that impact the net profit in either direction. But as we laid out on slide nine and the new slide deck, I will just focus on the core operations for a minute. We realize there’s a lot of opportunity now to reset kind of our cost structure off of where we have been kind of in the last couple of years in this COVID environment where high gross and lack of supply and things like that have impacted, I think, negatively the overall productivity and compensation alignment that we have in the stores. And starting in late Q4, we launched a big initiative internally to focus on those stores; it’s not all of them, but you can see that we have a number of stores that are falling well below even average, and what kind of contribution they make on an SG&A to gross basis and bring profit to the bottom line. And so we expect that by the end of Q1, we should pick up probably 100 basis points to 150 basis points annually in savings from the initiatives that we have launching in the core business, okay? And then outside of that, as Bryan and I both reiterated, our core business is running right now at about a 60% SG&A to gross. That leaves about 3% that needs to be explained by the adjacencies and other factors, and I am going to have Bryan talk about the adjacencies.

Thanks, Chris. John, I think as we think about going forward, which I believe was your question. It’s important to understand that how we have built our entire model is built around the foundation that these adjacencies are going to take us to a promised land someday, okay? And whether that’s at a mid-state of 2025 or a future state beyond that, we know that the adjacencies will yield the returns and higher advantages in the long-term. We have built those also to think about how to throttle those up and down, and if we think about the two-thirds impact that came from adjacencies on SG&A in the quarter, okay? We know that most of that is still coming from Driveway, not Driveway Finance, okay? Driveway Finance should be profitable in 2023, okay, important to remember. And outside of the future of Driveway Finance is by 2025, it’s going to make $150 million to $200 million, which has a $0.10 to $0.15 lift on EPS, and in the future state, it’s a $0.30 to $0.40 lift on EPS. So we know where we have going on this, it’s very clear. But as you build CECL reserves, it’s quite punitive as you see, okay? On the Driveway side, it does cost a lot of money to build the brand, okay? And we have found solutions of how to do it more efficiently, and we will continue to be able to throttle that up and down depending on what the market conditions give us and believe in the quarter that the decisions we made to some extent cost ourselves 300 basis points in SG&A were fundamentally because of those decisions that we believe that an omni-channel solution that has the potential to get to $2 EPS and if you layer that over $50 billion in revenue, which we have on a clear trajectory towards, it starts to produce quite a nice number that’s differentiated from others in the space.

Thank you. Our next question comes from Chris Bottiglieri with BNP Paribas. Please go ahead.

Hi. Thanks for taking the question. One quick one, just a clinical one on a follow-up to a couple of questions, I see the growth. Did the Driveway Auto losses step up materially this quarter, like I just—I'm looking at my own model. They asked you to gross ex-DFC, it’s pretty big inflection over the last two quarters. Just trying to understand if Driveway Auto, you saw for some reason, a big step up losses there this quarter?

There was a step-up in losses two quarters ago. So in Q3, we started to see increases in wholesale losses. We had ramped a few other things, and our gross profits had been hit pretty hard, and that continued into Q4, okay? We believe that the market has stabilized, and I think we even mentioned this on Driveway that we typically are going through seasonality in Q4 and it continues typically until about this time. Fortunately, over the last few months or few weeks, we have seen stabilization of valuations on used cars, which helps us in terms of our pricing and in terms of our wholesale valuations.

Got you. That leads to my next question. Sorry, this is kind of a one would be. What do you—like, one of the industry consultants spoke to kind of used volumes being up in January. It seems like a pretty big inflection from Q4. I am wondering what you have seen, like, what was the cadence of your used business throughout Q4 on a three-year CAGR or one year, everyone to frame it and what have you seen kind of carry into January and February? Are you seeing signs that like we somehow turned a corner unused or is this just temporary as dealers were depleting in clear inventory, given pricing declines?

Yeah. I think, Chris, it’s important to remember that on same stores, you got to go back to the previous year to look at it and we had pretty good comps in Q4, but the comps start to subside a little bit in Q3. We are looking at an annual same-store sales increase of high-single digits on used cars. So, yes, we are looking at increasing our market share and we believe the market will recover to some extent on used, and as far as what’s happening in January, we will give you an update in April.

Next question, Bret Jordan with Jefferies. Please go ahead.

Hey. Good morning, guys.

Good morning, Bret.

As you look longer term, I guess, on the third quarter call, you talked about GPUs on the new side maybe getting back to a pre-COVID level or at least briefly maybe going below that. Do you think, as you look out past 2023, that we are sustainably above historic GPUs and new or are our incentives and inventory recoveries going to take us back to the prior levels?

Yeah. Good morning, Bret. This is Chris. Yeah. I think that’s why Tina laid out kind of our forecast for kind of GPUs on new for the rest of the year kind of dropping at about $200 a month, which the impact for that on an average basis will be about $1,200 this year year-over-year. I will tell you, though, that specifically, as Bryan pointed out, with two of our domestic OEMs, specifically Ford and Stellantis, we saw a pretty big drop in our overall sales volumes in the quarter, which I think when 27% of our sales are domestic, I think it had an outsized kind of impact, as Bryan alluded to, on our overall gross profit. I will tell you, though, that starting in February, we have seen a pretty massive pivot in those OEMs as far as what they have doing specifically to move out 2022 model year inventory, which is about 50% of the overall inventory we have. And so our expectation now is that with kind of this supply and demand equation moderating in 2023, based on product line, based on OEM, we are going to see additional support that we haven’t seen in the last couple of years in overall kind of incentives, rebates, etc., that will help us kind of moderate the impact that we feel in 2023.

Next question comes from Colin Langan with Wells Fargo. Please go ahead.

Oh! Great. Thanks for taking the questions.

Hi, Colin.

Just a follow-up, I kind of confused on the GPU per unit is down, it’s because of Ford and Stellantis having lower volume. I would thought that would affect sales. If you had lower volume, would you be able to sell those at a higher GPU? Yeah, maybe if you could kind of connect the two?

Yeah. Sure, Colin. I think, it’s—this is Bryan talking. The—on Chrysler, our GPUs, our overall gross was down 40% on Stellantis, okay, and it was down 30% on Ford. Inventories are building, and as such, you are trying to move product to help reduce your interest costs and so on, and as such, your GPUs drop, okay? And in terms of the SG&A impact, it’s just that the overall SG&A, you have not adjusting your cost structures as quickly to compensate and to be able to leverage the cost structure that you have.

Got it. Okay. Thanks. Yeah. So a lower GPU for those sites. And then just also…

Yeah.

…up another question. You had talked about 50% SG&A for every sort of dollar of growth. Is that accurate, because that seems quite high to me because you have talking new GPUs are up since COVID $3,500, that would almost be like a $2,000 added sales commission. What are those variable costs that come out from SG&A that we should be thinking about?

Yeah. Good morning. This is Chris again. I’d say that, ultimately, the line of sight that we had on the recovery in both supply and GPU has been pretty difficult over the last couple of years. And given that 75% of our SG&A is personnel that is commission-based, in most cases, high GPUs translate to high commissions, okay. That’s high commissions not just for salespeople, but for our management team, for our store operators, our general managers, our F&I managers—all of those things have been inflated due to kind of this unusual supply and demand equation. And so, if you look back historically, though, our expectation because we didn’t change pay going into that cycle, coming out of that cycle, if you kind of do the quick math on what that represents from a commission basis on a drop in growth when you think about the number of people paid on the GPU on a single car deal, for example, obviously, it’s going to go the other direction, as well as GPUs drop. And so, yeah, our expectation is that 50% throughput. We have done it historically, we manage it operationally, and while we didn’t see it at the level that we thought we should have in Q4, that’s why we launched our whole operational team to focus on those stores that didn’t get that. And as you can see on slide nine, it’s not all of them. We have several stores, especially in our larger store footprint, that we have running 46% SG&A to gross through last year. And I think that what we also see is the other side of that, which is stores that are between 70% and 85%, 90% SG&A to gross, and those are the stores that we have focused on fixing that will translate to getting us quickly back to that 50% throughput number.

Next question comes from Adam Jonas with Morgan Stanley. Please go ahead.

Hi. This is Danielle Hagen on for Adam Jonas. So we heard a question about used volumes; I wanted to ask about used prices. Recent Manheim prints and conversations with some show that the used market has been firming up. So what do you see as driving this recent used car strength and how do you think—how long this trend can last?

Yeah. Good morning, this is Chris again. I think the biggest driver that we see right now is the seasonality. I mean, it was nice to see the moderation in the Manheim Index, and good news for us is, as we carry only a 50-day, 60-day supply of used car inventory, the fluctuations in both directions get cleared pretty quickly through the pipeline. And so I think ASPs in the quarter were still up like Tina can tell you, but I think it was about 2% or something. Our bigger fundamental is, as you start to see a recovery in new car inventory, how does that impact CPO? How does that impact trade? How does that impact our ability to continue to drive used car volumes, which is really our biggest driver in profitability because it’s all about gross profit, which might actually be advantageous for us because consumers that have held their vehicles longer are going to fall more into those core and value auto product lines which generate a much higher return for us. So we are very optimistic about the recovery in volume; we feel like that’s not just going to be great for new, but it’s going to be great for used and F&I.

Next question, David Whiston with Morningstar. Please go ahead.

Good morning, everyone. I guess just a question I wanted to ask you guys, because I am getting this from clients is they are hearing some critics out there saying, well, Lithia can’t get to their $50 billion goal because of factory approval, too much brand concentration in one geographic market. I am sure you disagree with that, but I’d love to just hear your take on that.

Sure, David. And haven’t they been saying that since we were at $13 billion three years ago? I think so, anyway, it’s fun. So we have actually run all the modeling and have the actual data. We should be able to achieve domestic revenue of between $70 billion and $90 billion, okay, based off framework agreements that we currently have in place. And we believe that some of those framework agreements, you can grow beyond that through market share. So we can easily get to those numbers. It does require a little bit of optimization that you have seen over the last few years to really be able to maximize that performance, but the $50 billion we believe is still quite achievable, okay, by 2025.

So as you have been doing this, given the framework you have citing, you have getting absolutely no resistance from the factories, right?

No. I mean, we have gone back to the same excuses that the other peer group usually makes as to why they can’t buy deals. It’s because they have not structurally involved with every seller that is what we would call attractive in the country, and because Lithia typically buys about half of all public deals over the last 10 years. I mean, look at the slide, what slide are we on? I think it was slide 13, but again, it’s the same messaging that we heard for the decade before 2021 when some other publics bought some deals that do have problems with manufacturers. We do not have problems with any manufacturer, okay, and we will continue to grow towards the $70 billion to $90 billion domestically.

Okay. I appreciate the clarity. Can I just ask one question on used real quick, which is on value autos. The ASP there is about $18,000 now according to the slide deck, and that’s just about pre-pandemic ASPs for the overall national used average—a little less. So I am just curious, how much of that particular customer demographic struggling right now relative to the other used vehicle customers?

David, it’s Bryan again. I think what we have seen is it’s quite difficult to buy those cars just like it always has, and we have been getting less of them through the channel than we typically would. I believe pre-pandemic in our value bucket, we were $14 million to $15 million or $14,000 per unit to $15,000 per unit, okay? So at the $18,000 per unit, that’s a little higher than what we typically would want. But really, it’s a matter of that the cost of the cars are just more expensive. So, unfortunately, affordability is still difficult and even though we have almost a fifth of our sales coming from the nine-year-old and older vehicle, it’s not as affordable as it used to be, and we try to do everything we can to be able to bring consumers in at all price points. One other kind of fun little note is we sold about 8% of our cars that were sustainable, okay, which is pretty cool for the year in BEVs. And even though they have a little more expensive at an average BEV over an ICE engine car that we sell is about 50% more expensive on a monthly payment, about $900 instead of $600, a $300 more, so kind of fun that is okay that as we learned, but it quickly grew to 7.5%, 8% of our total volume.

Thank you. I will now turn the floor over to Bryan for closing remarks.

Excellent. Well, thank you for joining us today and we look forward to updating you on Lithia & Driveway’s first quarter results in April. All the best.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.