Lithia Motors, Inc. (LAD) Earnings Call Transcript & Summary

Good morning, and welcome to the Driveway Investor and Analyst Day. Presenting today are Bryan DeBoer, President and CEO; and George Hines, Chief Innovation and Technology Officer. 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 are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. We urge you to carefully consider this and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements. Each section today will be followed by a live question-and-answer session, where attendees can submit questions via the webcast for consideration. A replay of today's webcast will be accessible for 1 year on our website, lithiainvestorrelations.com. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Eric. Good morning, and welcome, everyone, to the Driveway Investor and Analyst Day. My team and I are excited to spend the next few hours together, sharing how Lithia and Driveway are expanding our presence in the over $2 trillion market of automotive products and services. We are progressing well ahead of our 5-year base plan to reach $50 billion in revenue and $50 in EPS. The strategy and design were conceived in conjunction with our Board nearly 5 years ago and then formalized 3 years ago with execution beginning in July of last year. We are excited to have George Hines on the call with us today to demonstrate and share our Driveway technology, associated design elements and industry-leading customer experiences that our teams have developed in-house over the past 2 years. George's presentation on Driveway functionality and associated Q&A will make up the majority of our time with you today. Our strategy focuses on the most expansive addressable market of any retailer in the automotive space and is designed for the full vehicle ownership life cycle, all levels of affordability and ensures our considerable competitive advantages are maximized. It includes new and certified vehicle sales from over 30 manufacturers, a full spectrum of used vehicles from 0 to 20 years in age and the high-margin aftermarket business, which includes service, repair and maintenance, collision work and part sales. Customers can choose from either of 2 channels: first, a Driveway in-home e-commerce ownership experience, empowering customers to never set foot in a traditional dealership again and the focus of our content today; and secondly, our more traditional 215 local brand experiences. Our history of exponential growth within the industry, coupled with our team's ability to execute, has positioned us to pragmatically and profitably disrupt the status quo of the industry. In addition, we will leverage our massive competitive advantages to demonstrate that e-commerce can be initially profitable and ultimately yield the industry's highest possible EBITDA margins. The used car space lacks barriers to entry. However, successful operations require infrastructure, financing solutions for consumers, reconditioning expertise and the procurement of high-demand scarce vehicles to achieve scale and smooth execution, all of which Lithia and Driveway have established and are experienced at. Our multifaceted strategy for disruption begins by combining our proprietary technology with the scale of our people, inventory and network to modernize the industry. As we continue to develop and enhance our digital home solutions, our Lithia and Driveway teams are ready to serve not only our traditional customers but incremental e-commerce customers as well. The past few years of research and development of this new and incremental revenue channel and the recent acceleration in customer demand for in-home solutions culminated with the launch of our national brand Driveway late last year. Driveway as the foundation of our e-commerce digital home solutions is designed to reach consumers thirsting for transparent, empowered, flexible and simple buying and servicing experiences. We are excited to now provide the most comprehensive national e-commerce home solution in the automotive retail space. Driveway is a completely negotiation-free shopping experience across all consumer offerings. Driveway is home enabled with the ability to deliver anywhere in the country through our coast-to-coast logistics network with free home pickup and delivery for customers. Driveway now includes our owned inventory of over 52,000 competitively priced vehicles, providing consumers selection, in addition to leveraging 2/3 of our existing employees as customer-facing valets, reconditioning experts and behind-the-scenes specialists to fulfill the Driveway experience. Our 215 existing locations retain their local brands while a few future locations may carry the Driveway name or utilize Driveway in their brand messaging. Over time, we expect marketing efforts from our local brands to also support the Driveway national brand through the My Driveway portal, a customer experience hub. The My Driveway portal will allow our existing 5 million and growing paying customers from our local brands as well as new Driveway brand customers to shop, sell and service and manage their vehicles. Simply put, in a single location, a customer can manage any needs throughout their vehicle ownership life cycle, including reviewing vehicle information and maintenance history, financing information, valuing their vehicles, scheduling service and managing F&I product subscriptions. Beginning with our first proprietary technology released in Pittsburgh in May of 2019, Driveway empowered customers to simply and transparently sell their vehicles through our application from home. This procurement technology included the key components of geofencing for logistics on a national level, workflow management and scheduling that are the engines for the other home digital solutions. The inventory procurement component expands our 5 channels of procurement and is key to generating incremental vehicle sales through our e-commerce platform. Further leveraging key proprietary technologies, our in-home Driveway service experience launched in September of 2020. This experience allows consumers to schedule service work with free pickup and delivery, including loaner vehicles within a predefined geofenced area. This service is a key differentiator in our model as it allows for over 10x the brand impressions compared to digital competitors that only sell a customer a vehicle once every 5 years or so. This service includes premium-level pricing and allows for consumers to subscribe to services for the lifetime that they own their vehicle. In October 2020, we formally launched the brand name Driveway and the ability for consumers to shop for our 20,000 high-quality used vehicles available for delivery anywhere in the United States. Later that quarter, we launched the ability for consumers to complete an end-to-end digital shopping experience with consumer-driven, fully automated checkout. This functionality integrated immediate financing from 23 financial institutions and the option for in-home F&I subscription services to protect their vehicles through their entire ownership life cycle. Our selection includes the entire spectrum of used vehicles, from certified used vehicles to 20-year-old value auto vehicles. All vehicles are backed by a 7-day return policy and other brand guarantees to reassure customers of their purchase and include in-home delivery, fulfilled by our existing logistics network. With this functionality, consumers can now choose to complete their entire life cycle of vehicle ownership from the comfort of their own home and never set foot in a traditional dealership again. Earlier this quarter, Driveway became the first e-commerce retailer in the country to offer negotiation-free new vehicles with free in-home delivery and 7-day money back guarantee at a national level. Driveway's new vehicle solution with vehicle leasing and captive manufacturer financing added another 6 lender APIs, totaling 29 available to consumers with auto approvals in a matter of seconds. This lease and finance auto approval optionality was released 2 quarters ahead of our previously shared plan. Driveway now offers the largest negotiation-free new and used inventory of any retailer in the country. Although consumers located anywhere in the country can purchase any of our vehicles complete with in- delivery and Driveway full brand guarantees today, our marketing dollars were focused only in Portland and Pittsburgh markets. Our data science continues to show us that although Driveway customers now have the option to purchase and finance their vehicles fully online, the complexity of their own financeability and desires will usually require the assistance of our Driveway care center and network. Our virtual centers of excellence or VCEs connect our existing finance specialists with our Driveway care centers. Behind the scenes, these 900 finance experts are using their relationships with over 150 lenders throughout the United States to quickly gain approval for consumers that are not auto approved. In addition to leveraging our third-party financial partners, we have continued to expand Lithia and Driveway's fintech arm. Driveway Finance Corporation or DFC is a fully integrated captive finance company that further strengthens our ability to auto decision consumers by leveraging Driveway's powerful data science engines. DFC also utilizes the rich data history of our legacy Southern Cascades Financial Corporation, which was started nearly a decade ago. Driveway remains competitively positioned to be the leading provider of personal transportation solutions with 215 existing reconditioning and vehicle storage locations, over 800 nationally dispersed inventory procurement specialists and now 9,000 existing underutilized associates that currently perform in a negotiation-free environment. All of Driveway's offerings are focused on attracting new incremental customers and will leverage our VCEs to provide a helping hand behind the scenes for buyers that need support along the way. Our VCEs include finance and sales management to assist in financing the more complex transactions, used vehicle specialists to value the few one-off vehicles that our AI is unable to value and service advisers to offer customer support on pricing for more complex repairs generated from upsell opportunities for service work. Though not assumed in our model, which can be found on Page 11 of our updated investor presentation, we believe there is opportunity for margin expansion and considerable SG&A reduction as we further leverage our extremely profitable network. As we continue to perfect our execution, demand from our existing network and competitive positioning has allowed us to accelerate our network expansion plans to key U.S. metropolitan areas. Later on the call, we will be sharing Driveway's market launch cadence and how we will reach national scale by year-end. Following a quick Q&A on the overall strategy, George will be guiding us through each of the 3 Driveway consumer offerings, associated guarantees, underlying technology and further details on the design that has allowed us to quickly reach parity or exceed most other e-commerce competitors. With that, the call is open for questions.

Thank you, Bryan. [Operator Instructions] Our first question today. You noted that you are well ahead of your 5-year plan. Have you given color on what happens if you exceed your 5-year plan early? Does the focus shift entirely to Driveway? Can you further build out the network? How do we think about that?

Thanks, Eric. I think as many of you are aware, we've established a 50-50 plan back in July that set forth what we believe is a highly probable situation where we can achieve that with fairly good success. We're currently way ahead of plan in a couple of different areas that I'll run through in just a second. But as we -- if we are able to exceed the 5-year target, then obviously, we'll be looking at the next goal. We actually believe that the 50-50 plan is the first leg of this relay or this journey together and establishes about a 2.6% market share at the end of that initial 50-50 base case. Now the things that we are ahead of plan on obviously are the network development, which we've now completed over $4 billion of revenue additions that are completed, closed and now part of Lithia and Driveway. Secondarily, our SG&A improvements are taking hold nicely. We're really now sitting in the mid- to high-60 percentile, with the goal to be sub-60 percentile in the mid- to later years of the 50-50 plan. And then lastly, our Driveway rollout, which we'll be talking about a lot today, and I have George here with me to be able to express all the nuances and competitive advantages that we're looking at, but that rollout is being accelerated much quicker than we expected, sitting at about 6%, 7% of the U.S. market today with -- reaching about -- a little over 20% U.S. customers by the end of April. Eric?

Thanks, Bryan. The next question comes from Adam Friedman. Bryan, can you clarify your comment on the 9,000 underutilized associates given the shift to a one-price model? Should we expect further SG&A efficiencies over time?

Sure. Thanks for the question. I think most importantly, we have 15,000 current associates at Lithia and Driveway, of which 9,000 of those associates operate today in a negotiation-free environment. Those are the personnel that will be leveraged to be able to provide valet services directly to the consumers over the coming years and ultimately be able to scale our Driveway e-commerce in-home solutions without adding massive personnel costs, so a lot of leverage that can be gained through those personnel costs.

Next question comes from Andrew. Bryan, could you speak to how the job of the general managers evolve as the Driveway business line expands?

Good question, Andrew. That's a fun one. I think the behavioral shift of our general managers as well as the store leadership teams over the last 2.5 years, as we ventured on this Driveway journey together, has changed a little bit. But at this stage, the general managers' jobs are still there, to achieve their annual operating plans and realize the potential within their existing business and ultimately be able to procure more inventory. We believe that the used car space is all about inventory procurement and procuring scarce inventory that yields margins and yields and attracts consumers that can't find those vehicles in other sources. And being a new car retailer allows us the ability to procure cars more upstream and have first shot at that crucial inventory. Eric?

Thanks, Bryan. The next question comes from Rajat. Can you talk about your advertising strategy, how it works nationally versus regionally, split and related timing? Also, how will the reliance on lead generators and things like that in the future play out? And then also, if there's any data around your initial cohorts in Portland and Pittsburgh. Do you see that performing?

Thanks, Rajat. That was a mouthful. Let's start with our advertising plan. So we announced previously that our marketing dollars are going to follow the rollout of all 3: shop, sell and service. We bifurcated that 60 days ago and now are having marketing dollars on 2 pathways. First is that it will follow shop and sell, which is now live in 7% of the country, okay, and soon to be 20% of the country. That is supported by brand marketing as well as a specific shop and sell functionality to be able to attract consumers in those markets and really, I would say, minimize the logistics cost for consumers to be able to really leverage the inventory that resides within 100-mile radius, which is the free delivery radius under our Driveway products. So I think first and foremost, those advertising dollars moved from around $200,000 over the first 90 days or until the start of March and will now be about 5 to 6x that amount in those specific markets. So we're not to national scale yet. We intend to get to national scale by year-end, which would increase our marketing budgets but also the effective utilization of that inventory that's distributed across the country where a marketing presence on a national scale could be effective. And I think as we think about how we go to market, we want to make sure that our inventory and our marketing dollars match so when we market, we're able to gain the benefits of the shop and sell and then followed closely behind is the service functionality that still resides on only a couple of different markets. So that will come along with the F&I products and F&I subscription services that will allow for in-home functionality in both service or in the F&I products. The second part of that question, Rajat, was about lead generation. As a traditional retailer over the last number of, what, 7.5 decades or 75 years of being in business since 1946, we've always looked to lead generation sources because we really didn't have a national brand presence. Today, with the advancement of the Driveway national brand, that becomes the lead generator ultimately over time, and those lead generation partners will most likely be adapting to other types of target marketing rather than more of a listing site that we currently use them for within the Lithia channel. So over time, we believe that Driveway can generate the traffic independently to be able to do that, utilizing independent lead sources to really target market, whether it's a new vehicle lease or whether it's a used vehicle program -- vehicle or certified vehicle, whatever that may be.

Our next question comes from Ryan Sigdahl. You indicated that future dealerships may use the Driveway brand. Any consideration of converting branding on existing stores to Driveway? Or how do we think about that?

Well, thanks, Ryan. We're fortunate that most of our manufacturer partners allow for national brand names to be used on our local traditional brand names. And as best practices are shared between the 2 channels of Lithia and Driveway, we believe that some stores will adapt to a more transparent, simple, empowered state where the consumer isn't negotiating. And in those events where the teams have converted, we would look within certain manufacturers and only in certain pockets of the country where we may have 1 or 2 Dodge stores, one in the East, one in the West, that could perform the entire Driveway experience and be able to be powered by the technology of Driveway. So it's not an entirely focused initiative that all existing Lithia network stores could become Driveway. We don't expect that. We allow our general managers to make the decisions, what's best for their local competition, their local market and their local teams, and I think that's an important delineation that we will be sharing best practices. And we believe that many of the stores may adopt some of those, and in the event that they do, the Driveway brand name could be shown in a little bit more sense. Like a -- let's use Portland for example, Driveway price for Jeep Dodge in Portland, okay, where they would have a full negotiation-free experience with in-home delivery in the 3 product lines of shop, sell and service and so on.

Thanks, Bryan. The next question comes from John Murphy. How will the age spectrum of used vehicle sales change as Driveway continues to ramp up, if at all?

Great question, John, and I think when we think about age spectrum of vehicles, I would note that today, we are seeing a propensity in the e-commerce Driveway channel that consumers are looking -- are price-sensitive. There's no question. And they're credit-sensitive. So we are getting a fair amount of consumers in a little bit lower credit scores than what we see in the Lithia channel. That is changing what our mix should be, meaning that we may have to buy more 1- to 5-year-old products that we can buy for back of a Kelley Blue Book or a Manheim auction amount to be able to absorb this equity and allow for lower credit scores to be able to be satisfied and financeability, which we all know that financeability is the secret sauce of the industry as well as inventory procurement. So I would also state that, if you look back at Lithia's historic margins, our largest margins are in the over 8-year-old vehicles. Our margins are close to 28%, including our finance subscription services, whereas our core product of 3- to 8-year-old vehicles is around 16%. And our certified product is in the 14% range. So that is where a lot of the money is made with very low capital cost, about half the average inventory cost of what is normally there. We believe that, that scarce vehicle of over 8 years old are those value autos, are hyper crucial. And our ability to procure those is done through having wonderful staff that pay the right money for those vehicles and have the resources internally to be able to recondition them, whether it's expert-certified manufacturer technicians or whether it's the diagnostic equipment or just the mindset that we believe that, that customer will eventually buy a certified and new car. So we want to make sure that we can sell them that $7,000 vehicle on their first purchase as well.

Great. Next question comes from Mike Montani. Can you talk about consumer retention historically in the traditional model and how you see that trending for Driveway given the continuous touch points of service and F&I?

Great question, Mike. We look at retention or stickiness of our customers within the Lithia channel based off the units in operation that are available within that market, whether they're sold by us or whether they're sold by a competitor. That is how we view that. Typically, out of your unit and operation base of your product that you're selling new, we usually service about 60% of that consumer base for that 10-year period. We obviously sell non-OEM parts as well, which allows a lot greater stickiness post warranty period to be able to keep those customers in a more affordable maintenance cycle, and it's something that we pride ourselves on once the warranty period begins to fall behind or be in the rearview mirror to some extent. So we do think about that a little differently, and it's usually around 60% retention. Now extrapolating that into Driveway, we aren't seeing massive attachments yet on service -- body and parts subscriptions, but also it's only in a few markets. So we believe that it's more about price sensitivities where, ultimately, we believe that we may be able to geofence our pricing into a competitively equal state of what in-network service business would be. And I think that's our ultimate state, is if we can get pricing on maintenance of your cars the same in home as it is in network, now we have something that should be able to conquest massive market share from existing competitive new car retailers or others that aren't able to offer that. And remember, we have those free loaner cars that are a nice way to keep less cars in the storage capacity of our lots while still providing wonderful service to our consumers.

Okay. Last question from Bret Jordan. What is the typical shipping distance for online sales have been? And how do you see the free shipping impacting GPU over time?

Great question, Bret, and I may even let George jump in on this a little bit. But we are seeing even in the first 2 markets of Pittsburgh and Portland that about 50% of the transactions are out of market, meaning that we are receiving a logistics fee of the $295, $695 or $1,295. So when we talk about price sensitivities and regional differentiation, we are seeing that consumers are willing to pay in the event that there is a price disconnect from one region to another so long as logistics cost is offset by the cost savings to the consumer. So it's sitting at about 50%. George, do you have anything to add to that? Or is...

Sure. It is -- it's around 50%. The other thing we're seeing is that a lot of consumers are buying cars independent of where they are. They're usually shipping them approximately halfway across the United States. The other thing to emphasize is the fact that we're leveraging labor inside of dealerships to be able to deliver those cars for free within a 100-mile radius. So those are labor that are underutilized that Bryan has talked about. And that's why we haven't seen a degradation in GPU there. We actually see an improvement because the customer perceives that as a major value. So right now, I would say, if drilling down on the 50% that's delivered, it's usually, on average, approximately halfway across the United States.

Perfect. Well, that concludes the time allotted for the strategic overview Q&A section. Let's move to introducing Driveway and the demonstration of the shopping experience.

It's my pleasure to be here today to share details about our brand promises, our proprietary technology and how we envision its evolution and future. When we set about designing the customer experience and technology for Driveway, we knew we had to focus our efforts on addressing the rapidly evolving needs of consumers. That's why the Driveway in-home solutions are digitally enabled but also human centered. The Driveway brand is built on 4 core values I would like to highlight now. First, Driveway is flexible. Consumers desire to do things on their own time and have control. They want the ability to start and stop the buying or selling experience at their leisure. We have enabled this through our My Driveway portal where customers can save their information and manage their entire ownership experience online. Second, Driveway is about empowerment. Driveway customers can shop confidently with our 7-day money back guarantee from the nation's largest online owned inventory of new, used and OEM-certified used vehicles. Third, Driveway is convenient. We offer free in-home pickup and delivery and have established smart geofencing around all of our network markets for these services. And finally, Driveway is transparent. All of our vehicle pricing, our instant cash offers for trades and our services are negotiation-free, creating complete transparency and clear expectations for our customers. Driveway is truly centered around the customer, and we are excited to share this video about our offerings and brand promises. [Presentation]

Wherever, whenever and however a customer chooses, we have enabled this flexibility throughout Driveway, and we are excited to share a demonstration of our shopping experience. Before I get into our product demonstration, I want to highlight 3 factors which are core to the foundation of Driveway: our people, our process and our technology. We are, first and foremost, an organization powered by people. Our proprietary platform is powered by an industry-leading product, experienced design and engineering team with 90 people in our Portland-based Driveway innovation hub. Our highly experienced and talented team brings e-commerce and retail experience from major companies like Amazon, The Home Depot, NIKE and Apple to name a few. Our team's diversity of backgrounds is a core differentiator that fuel our drive to improve and innovate constantly. I am so extremely proud of our leaders who have built this product and who will take us into the future. From a process standpoint, our Driveway team employs the agile methodology, which is an iterative approach to product and software development that enables faster time to market and better business results with a higher degree of predictability and quality. Leveraging data from multiple external and internal sources, our proprietary technology unifies this data and enables us to perform detailed funnel efficacy analysis where we can analyze, on a near real-time basis, how far visitors go in the shopping experience and whether or not they abandon in the top of the funnel or closer to the bottom in our shopping cart checkout experience. This funnel analysis assists us in immediately identifying points in the experience to improve throughput. Furthermore, we identify user behavior in our web experience to generate insights into user interface improvements. Real-time experimentation is also key to the constant improvement of our Driveway technology. We employ tools to execute A/B product testing so that we can get real-time feedback on user preferences in how we present and position our services. We're able to simultaneously present in real time, alternating web experiences to different users and measure the effectiveness of messaging, product positioning and even user interface enhancements. We reach potential customers through a highly targeted audience-based approach. We leverage our own customer and sales and service history data as well as third-party consumer data to inform our marketing efforts about people who are likely to have a higher intent to transact either because they are nearing a lease return or about to pay off their vehicle loan or are in a positive equity situation where they owe less money on the vehicle than what it is currently worth. Additionally, our depth of experience servicing vehicles around our fulfillment network positions us to target consumers when they are likely ready for service. We target these customers in multiple digital realms, including but not limited to web display advertising, social marketing and streaming video through OTT or over-the-top media services. The data sets and partners we have engaged in a digital marketing realm can currently reach over 97% of the U.S. population. We combine data from our customer experience and marketing partners to execute detailed channel attribution analysis, to measure not only our marketing spend and our traffic to our website but also the efficacy of these marketing efforts. We employ artificial intelligence in our approach to paid search marketing and term bidding. We remain keenly aware of our competition through open-source and paid intelligence-based tools about the domain authority and traffic sources in order to create competitive advantage. Our focus on SEO and generating organic traffic leverages our experience in our traditional business as well as best-in-class tactics with a combination of in-house engineering capability and industry-leading third-party expertise. We have an SEO-only focused road map designed to maximize organic traffic to our website. We have developed detailed tactics to ensure the crawlability and indexability of our platform by Google, and we intend to pursue the development of a rich content strategy which both educates consumers on car buying, selling and financing but which also will contribute to the long-term organic traffic to Driveway. Finally, let's focus on technology. Our proprietary technology is based on Microsoft and its cloud-based Azure platform, which is both industry-leading and will accelerate our scale to support our 50-50 plan. Our platform includes workflow, call center, scheduling, geofencing and APIs to various lending partners. Together, these technologies enable the seamless end-to-end customer experience where a customer may shop online and explore their own financing options or consult an expert in our Driveway care center anytime they choose. Underlying Driveway is a sophisticated microservices architecture, which is both much easier to build and maintain. The principle of a microservices architecture is simplicity. This is due to the fact that our modules are split into a smaller set of components which can be more easily maintained and reused throughout the Driveway experience. Elements like customer scheduling, workflows and tax and license fee calculations can easily be propagated throughout the experience in order to enable a more informed customer experience. In summary, the architecture of the Driveway technology platform is scalable with technology as an enabler to a great customer experience. The use of these technologies is also a major factor in attracting top talent and developing our reputation as an employer of choice in the Portland market where the technology scene is both vibrant and full of opportunity. With that, let's take a look at the customer shopping experience on Driveway and explore what drives the user experience. [Presentation]

We are relentlessly focused on the customer, and we have 2 exciting things to share about the future of Driveway's shopping experience. We know that when people are considering a major purchase like a vehicle or a home, they have several questions related to affordability and their ability to get financing. Most importantly, we know that these questions don't always surface in a linear fashion. We're enhancing Driveway shopping experience over the next 2.5 quarters to further empower customers to answer all of these questions early in their shopping experience. In parallel, our data scientists are constantly analyzing how to enable more customers to receive an online first-pass firm offer to lend, and we are introducing a couple of great enhancements to drive this. We will introduce an improved calculator that will guide a customer with personalized suggestions for financing as well as enabling a customer to generate a prequalification with no impact to their credit score. These enhancements are made possible not only by great engineering but also Lithia's experience in automotive financing and its transaction data. Our years of experience operating Southern Cascades Financial, which is now rebranded to Driveway Finance Corporation, and our transaction history give Driveway a major competitive advantage in leveraging data to create predictive models which inform our ability to improve the instant online financing approval rate. Lastly, I want to highlight how our customers feel about us. We've been operating as the Driveway brand since October 1, 2020, and we have earned 85 reviews on Google with all but 2 being 5 stars and the others being 4 stars. We're truly inspiring customer delight, and the rating stand as proof that Driveway is powered by exceptional people who deliver excellent customer service and work hard to earn customers for life. With that, I would like to hand it over now to Eric Pitt for questions on the Driveway shop experience.

Thank you. First question for George, how do you think about the shopping process for cars? And how do you view it changing over time from a consumer standpoint?

Sure. Thanks, Eric. Great question. As I think about how consumers are shopping for cars today, one thing that probably will not change is the fact that it's a highly considered purchase. And the fact that it is a highly considered purchase is something that drives the way we're designing the Driveway experience. So when we think about something that's highly considered, it's something that has a lot of financial or emotional risk, it's something that is conserved generally for a longer period of time and usually have other members of the family involved in the decision. So to that end, I don't think that will change. What will change, however, is how we approach the consumer, especially online. So first and foremost, being helpful generates trust, and that means, really from a consumer standpoint, we have to have rich content in order to educate the consumer on how to go about the car buying process. Many customers don't even realize yet today that they can buy a car online, get instant financing online and ultimately have the vehicle delivered to their driveway. So it's about education, but it's also about providing them helpful tools and content that help them understand how to drive that experience themselves. And then second, another major trend that we're seeing, especially in e-commerce across all industries, is empowerment, and that is having the customer in complete control of that shopping experience. And going up in those places with helpful tools, with helpful suggestions and also building trust early in the process and sharing that expertise on how to get through that car sale or car purchase process will be key to the success of anyone who wants to play in online retail, especially in auto retail.

Thanks, George. Next question, Bryan. You target an SG&A ratio of mid- to high 50s at Driveway versus the average of 70% in 2019 at Lithia. How is this achieved? And what are the drivers?

Great question. Thank you. There's 3 primary areas where we can gain leverage through the Driveway channel. So we're going to speak specifically to the e-commerce channel first, and then we'll overlay that on the Lithia channel to follow. Personnel costs, most importantly. We spend between $1,600 and $1,800 in personnel costs to be able to sell vehicles in the traditional channel that mainly comes from the ability to help with financeability. It's not just negotiations, it's financeability. In the event that our e-commerce solutions and Driveway are solving for that through the happy path, that becomes a lot easier as well as many other functionality that are now in the care center that can be taken out of a traditional process. When a consumer is performing much of the work themselves by self-exploration as well as the ability to pick and choose from different financing choices or different vehicles, it makes it a lot easier. So we think this cost savings is somewhere between $500 and $800 per unit over our traditional Lithia channel. Secondly, in terms of marketing, we've actually allocated $1,200 in terms of marketing budget, of which $300 resides in the 50-50 plan -- in the traditional and the other $900 resides in the Driveway channel. The base 50-50 plan gets us to that $1,200 expense in marketing, and we believe that we need that to be able to nationally promote the Driveway brand in each and every market across the country, where we currently are touching 100% of the country at around 350- to 400-mile radius, really targeting at about 100-mile radius over the next 5 years. In our aspirational plan, okay -- and this isn't something that we typically publicly share, but it's what our operational teams in both Driveway as well in Lithia are focused on. They're focused on $300 a unit as the ultimate cost. So there's further synergies beyond the 50-50 base plan that can be realized. Lastly and probably most importantly, the infrastructure cost of the reconditioning facilities, the storage capacity and lots, that's already built within Lithia. So there's really little to no infrastructure cost. It's about $600 a unit that we don't have within the Driveway channel at all, okay? And as we grow the network, we continue to grow capacity. It's important to remember that we only utilize about 25% today of our reconditioning capacity and about 50% of our storage capacity, which allows us the ability to recondition almost 1.5 million cars at the end of the 5-year 50-50 base plan when we built out that 100-mile density or that 400 to 500 stores. That's about $600 savings, as I mentioned. About $300 of that comes out of SG&A as hard costs. The other $300 is really depreciation and amortization costs. Hopefully, that gives you a little bit of color on the e-commerce channel of Driveway. In addition to that, the sharing of best practices over the past 2 years and more recently, over the last 90 days when both channels have been live have been -- are fostering a different view from our leaders in our traditional Lithia network. And it's important to remember that our best stores within our network are performing in the mid- to low-50 percentile range, meaning our top 25% of our stores perform in the mid-50 percentile SG&A costs, okay? That is what we're getting and targeting. So we believe that as a company, aggregated between Lithia and Driveway, we can have the lowest SG&A costs of any current or future competitor that enters the space primarily because of those 3 drivers of personnel leverage, marketing leverage as well as the infrastructure leverage.

Thank you, Bryan. George, the next question is from Chris Robertson. It's a 2-part question. First, just to hear early learnings on Driveway. What's working and what's not? And then what advantages does that have with an internally built digital solution versus buying an off-the-shelf like some of your peers are doing?

Certainly. Okay. The early learnings are a great question. We have plenty of them. As I think about it, we have -- the thing that I think is most surprising to me is the surprise and delight of our customers. Let's step back and think about the size of the total addressable market of used car sales in the United States. It's 40 million. Well, less than 1% of those are sold online with a delivery at the end. So if you think about that, a lot of the American consumers don't realize that things can, in fact, be done this way. We talk to customers all the time when we're either delivering a vehicle or buying a vehicle from them and take those learnings and incorporate them right away. So as we look at -- one example, we've had customers sell us vehicles where there was an [ inherent risk ] involved. And we worked through those processes and learned from them and now made that a standard practice. These things may sound like edge cases, but they're important to smooth processing and flow-through of all these transactions so that we can grow and scale Driveway. Another thing that we've learned, especially through online analysis and watching consumer behavior online and looking at our data, is the fact that consumers right now, because -- as Bryan talked about earlier, have a little more stressed credit online and they naturally go through a process where they're looping. They're going through, and they're trying to submit a credit application again, for instance, if they didn't get approved on the first round. And they are making natural adjustments. Those natural adjustments include but are not limited to maybe choosing a more affordable car, increasing their down payment or potentially even shortening the length of the loan. We see customers doing that. And because we see them doing that online, we're able to take those learnings immediately and incorporate those into our product experience. And that's a real-life example of something that we've learned in a matter of weeks and have been able to apply it to our product road map. Lastly, I would say that another major learning, and I don't think this will be a big surprise to all of you, is that price really is something that we could throttle quite effectively from both a sales standpoint as well as an acquisition standpoint. And we are able to throttle prices in specific markets, on specific makes and models of vehicles, whether that be, again, on the shop side or on the sell side. And those things do give us a competitive advantage, especially with the large -- with a rather large inventory that we have. Now think about your second question on build versus buy. I really boil this down to 3 things: Dedication, data and testing, okay? So first of all, dedication. If I think about the learnings that I just talked about, if I outsource the product, I'm in a position now where I get to make a suggestion to a third-party agency that is really trying to help me as a customer as well as several others. And I have to get in line. Our 90 product experience, design and engineering folks in Portland are dedicated. So when we have a learning, we immediately get it onto our road map. I don't have to wait in line for anyone else, and that's why dedication is so important. Second is data. When we look at our data, rather than trying to struggle to get it out of different third-party solutions, we have immediate access to it. We can structure it the way we want to. We can actually place other flags inside of our end-to-end platform that help us understand what a customer did at a certain point in time, how did they react, and how did they react to a particular offering. Now lastly, I said is testing, and this really ties to the data we use and employ is, I think you heard just earlier in the video that had the demonstration of the shop experience, we use and employ A/B testing product that helps us to make real-time decisions about what's working well and what's not. There are a lot of things that we can guess about with all of our experience that we can test and test in real time. We're doing that right now, and you'll see an example of it a little bit later on in today's presentation in the service video that we'll take you through later where we're simultaneously testing 3 different approaches to consumers to see which one generates the greatest amount of uptake. So again, dedication, data and testing are huge differentiators for us that are related to having a fully developed stack that we are in complete control of.

George, one thing to add on there. I think what George is expressing is the nimbleness of our ability to modify product. Within every 2 weeks, we're having releases through the end of the year and probably beyond, gives us the ability to integrate all 3 of the shop, sell and service products in a way that the consumers can gain massive advantages in their experience. And that will eventually be fully recognized and maximized through the MyDriveway consumer portal that we'll be speaking about in just a little bit. Also remember that our fintech, Driveway Financial Corporation, is needing to be integrated and allows us greater flexibility with consumers to be able to provide more seamless and transparent processes that are all happening around the modification of these early learnings to be able to create an experience that competitors will not be able to replicate, primarily because of the full life cycle of the consumer, as well as the fact that we do have the broadest national presence in the country of any national retailer.

Next question comes from Ravi Patna. When do you anticipate combining your new and used shopping experiences into a unified platform?

Got it. Thanks for the question, Ravi. We're looking at unifying those experiences in Q4 of this year. Let me give you a little color behind why we're looking at that because it's not just a matter of do we have it on the -- all in the same place. When I think about a consumer's life cycle as they go through this long consideration, consumers are primarily, and we've learned this from our consumer feedback and watching their actions online, they are primarily considering financeability and affordability. What most folks don't realize is that they can oftentimes lease a new vehicle at a lower payment or lower price point per month, than they can to acquire a used vehicle that is a very late model. Having that optionality and being able to do that because of our network, because of the broad array of our inventory, which includes OEM-certified use as well as new cars, gives us a distinct competitive advantage, which is exactly why we're putting time into developing that platform to be able to present the 2 together because we believe that meeting consumer needs is king, and that is indeed a major consumer need from an affordability standpoint.

Thanks, George. Next question comes from Kate McShane. What is conversion like currently? Has it improved as inventories grew? How do we think about cart abandonment, et cetera?

Sure. Kate, thanks for the question. I think that's an excellent question. When you get into the world of e-commerce, it's all about cart abandonment and conversion. The way that we look at conversion is by looking at our unique views in -- on the denominator and then the numerator, how many vehicles we're actually selling. When we first started out, we were at approximately 1/20th the efficacy where our used-only vehicle competitors are today. However, we've advanced that to where now we're at 1/8th of their efficacy. We've seen significant improvements. And I think as you reflect a little bit on the video that you just saw and some of the improvements we plan around shopping by payment, around prequalifications, around being able to shop and sort by shipping fees, all of those things address a product road map North Star where we are really addressing all of those consumer questions about affordability and financeability as early in the shopping experience as possible, but not doing it in a linear fashion and enabling them to do that. Those are the items that we're confident will help to continue to improve our conversion. You couple that with our data and an extremely talented Driveway Care Center where we have over 75 folks that are dedicated to assisting consumers, especially those that have the greatest amount of need from a credit standpoint and who opt to speak with them, we believe that we will see our conversion rate continue to move quite positively over time.

Next question comes from [ Adam Friedman ]. Are you seeing customers push back against shipping costs at all?

We've seen only a little bit of pushback against shipping costs, but that has very little to do with the shipping costs. But it has a lot to do with bringing that experience upfront earlier in the shopping experience, which is precisely why we have on our product road map to introduce those shipping fees earlier in the process and allow customers to shop by them. Right now, that is something that is very, very important to consumers from an affordability standpoint, but it also depends on the types of vehicles that they're shopping. So for instance, if you're looking at a late-model Mercedes or some other late-model vehicle that may be OEM-certified, it may be far less of a factor because that customer is looking for a [ newer ] vehicle. If you're looking for an older vehicle, it may be more of a factor. But again, we intend to address it with upfront transparency for one of our core values and getting that into the upfront shopping experience.

George, one other thing to keep in mind is we will be adjusting that depending on what we're seeing in our funnel efficacy with our consumers and the shopping cart being emptied real quickly because of that cost. And I think when we get that [Audio Gap] by logistics costs as well as search by payment with the actual credit of the consumer being utilized, it allows for less attrition within the shopping cart. So we'll see that improve over time. But we also know that our current $295, $695 and $1,295 may not be competitive in every market, and we may be adjusting that depending on our geofencing or competition in each individual market.

Bryan and George, can you discuss the Lithia's innovators dilemma with regard to Driveway. With this new solution, it sounds like you may need less staff at the dealership over time. Is there any operational challenges to work through as you think about the expansion of Driveway?

Great question. And I think the behavioral shift of our stores, though was a massive undertaking that started 2 years ago, we aren't asking our stores, other than the 9,000 negotiation free associates that will perform the final mile valet services to be able to perform those functions in Driveway. The rest of the stores will evolutionary change by sharing of best practices, okay? But we don't intend to push hard them to change because remember, we make almost $750 million in EBITDA, which is the cash that's generating to prevent [ dilution ] of shareholders as well as allows us to have IG-rated debt on the horizon and other types of massive competitive advantages that are out there. And as such, we need that existing engine of the Lithia channel to continue to produce the high profitability levels that they do because that fundamentally is how most consumers today still look at the world, okay? And they need that extra help with associates that can help with financeability or help transition someone to a different product or car because their credit may not allow them to do what they hope to do. And I think both channels provides a different experience, where we're looking for incremental consumers in the Driveway channel, whereas our traditional consumers are looking for something a little different and enjoy the experience of slight negotiation, which most of our stores have -- on the used car side have really moved away from a lot of negotiation, where about 51% of our vehicles sold are negotiation-free even within the Lithia channel. Eric?

Perfect. And our final question for this section comes from Bret Jordan. Can you talk about the trends that you're seeing in negative equity and how this impacts yourselves on Driveway? How do you manage the captive finance company to help with that? And your thoughts around negative equity impacting the sale as a whole?

Bret, great question. Negative equity, obviously, is one of the largest problems that we have to solve for within our AI and our financeability. And this is something that we really pay a lot for in the Lithia channel to be able to have people that can help get transactions financed, okay? We are seeing this equity come down from a high of around $5,000 pre-COVID to just over $4,000 per unit. But also, we are seeing something where cash down has also went up a little bit. We were at about $1,800 pre-pandemic, whereas now, we're looking at almost $2,500, which builds that delta between the disequity and the cash down, which is the part of the disequity that must be carried over into the new vehicle or used vehicle that they purchase, okay? And that means that the loan-to-value has to increase, okay? So we are seeing some changes there, but those changes are primarily being driven off of one thing. The Manheim market prices for used vehicles or the trade-ins have went up substantially, okay, as well as the stimulus packages have put more money into the pockets of consumers and allowed them to have a little more savings to be able to apply for a little bit lower loan-to-value, which allows them to get better interest rates and therefore. So with that, you are absolutely right that equity situation of vehicles is something that's hypercrucial to both of the channels and to our AI as we began to develop it 2 years ago.

Thank you, Bryan. This concludes the shopping experience Q&A section. Let's move on to an overview of our sell products.

Now let's pivot and demonstrate how easy it can be for a customer to sell their car to Driveway. We designed the process to be easy and to address the questions, doubts and concerns that customer naturally experiences when selling or trading in their car. First, our data science teams have worked hard to make instant cash offers, which take into account the customer's location, market-specific demand for their car and the details of their car to deliver a competitive negotiation-free offer. To achieve this, we scan millions of listings across the country and develop cohorts of similar vehicles in a given region. Additionally, we incorporate all of Lithia's new and used car sales data with transaction prices in order to create a more accurate prediction of the car's value. We also leverage our detailed reconditioning data to accurately predict the reconditioning investment each acquired vehicle will need. In short, leveraging these Lithia data sets creates competitive advantage for Driveway. Second, we offer customers the flexibility of having a quick 30-minute inspection of their car in their driveway or ours. Again, we have built intelligent geofencing technology to instantly identify the method we employ for an in-home inspection anywhere in the United States of America. Third, we have taken away the uncertainty of the paperwork associated with selling a car by offering a free inspection by our trained valets, who take care of everything in advance, so our customers can rest easy knowing their transaction is being handled with both accuracy and completeness. Our workflow management systems inform our valets of the customers' details so that they may deliver informed, anticipatory and warm customer service. At this time, I am pleased to share a demo of our customer sell experience on Driveway. [Presentation]

Our customers have repeatedly shared their surprise and delight with our sell offering. And we are only going to make it better. Our selling experience also applies to a customer's trade-in experience. Again, I will remind you that later this year we will introduce the ability to get an instant and precise payoff amount for a customer's car through an API to provide even greater convenience and quicker processing of vehicle sales with trade-ins. We have also applied funnel efficacy analysis to understand how to improve throughput to ultimately acquire more cars. Recent learnings generated by analyzing our funnels and customer behavior yielded a 50% improvement on how many customers will complete the instant cash offer process. We plan to relentlessly pursue opportunities such as these as we seek to drive greater market share. With that, I would like to hand it over now to Eric Pitt for questions on the Driveway sell experience.

Thank you, George. First question for you, George. Why would a customer only want to sell their car. What are you learning from customers through this process?

Certainly, that's a great question. We -- as we've talked to a lot of the customers that have sold their cars to us, and they've expressed the delight in the service and how it's structured, we've learned a lot about what drives them to do it. There are really 3 things. First, there is a natural fear among consumers when they're selling their car or trading it in that am I getting the most for my vehicle, okay? And am I getting that most for my vehicle, we've obviously built an algorithm that allows us to throttle very specifically the valuations to get -- to offer the most for the car where it's competitive, obviously, for both the customer as well as Driveway. A second thing that we learned from customers is that they're really worried about convenience, okay? And the idea of taking their vehicle into multiple places to get it valued, they would rather avoid that and so if you can have someone come to your home, that has been another major learning for us. And finally, as I think about it, it's also really rooted in paperwork and simplicity. The process that a customer goes through when they sell their car has a lot of paperwork involved and some paperwork that's done locally through the DMV. We take away all of that complexity from them and handle it. And as I think you probably heard just a little bit earlier in the demo video, we absolutely simplify their lives in terms of doing that. And that's really what has inspired quite a bit of delight. And I also want to go back to a question that came in from a gentleman named Nick, just earlier, your question was with regard to the innovator's dilemma, and you're asking, hey, what job are -- is a customer hiring Driveway to do? Well, we look at that as simplicity and convenience and also to address the entire full ownership life cycle. So when you think about the Innovator's Dilemma, and I love that book myself, I actually got to meet Clayton Christensen when he presented to a small group, I was a part of -- I think we're really solving for convenience. We're solving for simplicity, and we're ultimately solving for being able to address the entire full ownership life cycle.

Thanks, George.

Eric, one second real quickly. In terms of simplicity, what we find in both channels is the trade-in creates confusion in the customer's experience because it's a second moving part besides price. Well, obviously, in Driveway, price isn't a factor because it's fixed. Okay? And it's not negotiated. But what we find is there is a fear in consumers' minds that having 2 moving parts, meaning the trade-in and the price of the vehicle that they're buying, that complexity makes it difficult to know what's really happening in the transaction and where is my value coming from, either discounting on the vehicle they're buying? Or how much am I getting for our trade? So one of our early studies told us a lot about that consumers want to bifurcate those two transactions. And many of our stores today and the traditional network are doing the same exact thing because of this idea of simplicity on top of the things that George was speaking to that we're trying to solve for with the AI. Eric?

Thanks, Bryan. Bryan, do you expect the sell functionality to account for a large source of your units? Do you view one-sided transactions being a material part of Driveway's inventory sourcing mix going forward.

We currently procure about 6% of our units in inventory directly from consumers on a one-sided transaction. We believe that, that can grow to about 10% of our inventory mix. Now remember, Lithia Motors and Driveway procures over 51% of its inventory directly off of new and used vehicle trade-ins, which is also from the consumer. So about 57% of our inventory comes directly from the consumers, okay? There's a differentiation, though, that needs to be noted. First, the vehicles that come on off of trade-in have about $1,100 disadvantage -- advantage in terms of cost over vehicles that are procured at auction. Okay? The vehicles that we procure directly from consumers only have a slight advantage over auction, okay? So -- and that's primarily because we're willing to pay more for those cars because we know we're sitting in a competitive environment to be able to buy those cars. Ultimately, our ability to procure cars is fundamentally built on the backs of 800 experts that reside today within our network that are out finding the scarce vehicles before they even go to auction. We only ultimately use auctions as a source of last resort when we're unable to procure cars through trade-ins, directly from wholesalers or, most importantly, from dealers and fleet sources prior to them going to auction, where we typically can still have the $1,100 cost advantage because we don't have auction fees and we don't have logistics costs to and from the auctions. Eric?

Thanks, Bryan. George, from Rick Nelson, you launched the sell app in Pittsburgh in 2019. What have you learned?

That's a great question, Rick. A lot. When I think about all the different lessons learned, we already talked a lot about the consumer standpoint. But now, let's talk about some of the operational aspects. So first of all, in terms of where we target, we have a highly flexible geofence that we've been able to expand and contract at will. In fact, it takes seconds to be able to do that so that we can target this offering to -- real-time to different parts of a city and to different populations. We've even gone as far as highly targeted marketing in this case. So we've learned that we're able to increase the efficacy of this by greater amounts of targeting. Second of all, as I think about our valuations, we have complete control over being able to throttle those valuations. You couple that with our knowledge as an auto retailer for 75 years, we know what we're looking for. We know what to buy. We have our buying plans. And the ability to real-time adjust those throttles puts us in a really highly competitive position. So we've learned that we can actually throttle those valuations near real-time and make a big difference in how many vehicles that we're acquiring. We've also learned a lot about conditions. So most folks might think naturally that, hey, if you're buying a car like this, are you going to run into a situation where the vehicle's condition is a lot less than what your online offer was. Well, that's why we do a really, really short inspection. It takes well less than 30 minutes of the customer's time. Bottom line is, we're able to, in a very, very short period of time, identify those things that would really drive a valuation difference, if there is one. More importantly, what we found out and learned from consumers is that consumers are definitely trying their hardest to tell the truth about the condition of their vehicle. We've done a lot of work in terms of developing our online descriptions of what those different condition levels are. And we've adjusted them as we've learned from consumers how they think about reporting conditions. Lastly, I would say, from a learning standpoint and very much on a positive side, you saw our highlight of our Google reviews, we have about 85 of them. And of those 85, 83 are 5 stars and the other 2 are 4 stars. Independent of this, I would also say we have a couple of teams that are set up specifically to constantly and relentlessly research what consumer feedback is. We do this internally, and we also do it externally. And so when you combine all of these learnings, it's helped to increase our funnel efficacy. You also may recall in the video that you just saw that there was a learning that we had that increased our funnel efficacy by 50%. These were based on online A/B testing of product and by simply improving the experience online. And we are going to continue pursuing those types of learnings again and again, so that we can maximize our car purchases. Eric?

Thanks, George. Last question for this section comes from [ David Grimner ]. Are there plans in the future to use the data for what the consumer is shopping for online to determine what kind of inventory you are sourcing?

Yes, definitely. So when we take a look at where consumers are shopping, we have a way right now, when a consumer is shopping, to know, are they shopping for a specific vehicle? Or are they shopping more in a price range? Or are they shopping a payment? And so I think of it on a more broad basis because it's not just a make, a model and a trim or a particular year. But how is the customer fundamentally approaching that shopping experience? We usually are seeing customers approach the shopping experience in one of several ways. Number one, they're looking from an affordability standpoint, and they're looking for a payment. Number two, they're looking for a specific -- a highly specific vehicle, independent of affordability. Or number three, they're also out there oftentimes trying to compare vehicles because they still are not at the point in their consideration where they have made a decision about the type of vehicle they want. We have data on all of that. And we're using that data to better inform our shopping process. We're also going to use that data in addition to the data that we already get from all Lithia sales transaction data to understand what we should acquire. Because when we acquire a car through Driveway, we can sell it on Driveway or we can sell it through any of our 215 profitable fulfillment centers around the United States. So we intend to leverage that data in far more ways than just on Driveway, but that's a great question.

Thanks, George. This concludes the selling experience Q&A section. Let's move on to the demonstration of the Driveway service experience.

Driveway addresses the full vehicle ownership life cycle experience. And we built a proprietary platform, which integrates with our fulfillment centers and Driveway Care Center to create the industry's most convenient car maintenance and service offering available. Geofencing, scheduling technologies and service history data enable our fulfillment centers to deliver these services seamlessly. Customers enjoy free pickup and drop-off of their vehicle in their driveway as well as a free loaner vehicle with every service so that they can go about their lives without the hassle of a dealership waiting room or courtesy shuttle. Backing all of this up is our greatest asset, our people. Our valets who provide friendly drop off and pickup of the customer's vehicle, our Driveway Care Center who are always there to help, if needed, and our certified technicians in our 215 fulfillment centers who perform professional car maintenance and repair services enable this convenient service. Our Driveway technology, coupled with our fulfillment centers' technology, use scheduling and appointment data to understand the utilization of our certified technician and service bay capacity and can easily allocate capacity for additional servicing. Customers can conveniently communicate directly with the certified technicians who are working on their cars, if necessary, to better understand and make decisions about repair via chat, text, e-mail or phone, whichever they choose. Moreover, customers can pay via their phone or online and never set foot in the dealership again. Driveway is uniquely positioned to profitably grow its service business with incremental revenues to take advantage of available service bay capacity. Our fulfillment centers are profitable service centers, which also happen to perform reconditioning. The strength of our expanding fulfillment network will continue to grow and open up even more service capacity in major consumer markets as we pursue our proven acquisitive strategy. Now let's take a look at a short demo of the car service experience on Driveway. [Presentation]

We see our service experience as a core differentiator to engage customers throughout their ownership life cycle. We will also build loyalty through convenience and subscription-based services being offered today like lifetime oil and our Driveway Valet Service, which will be introduced within the next quarter. I would now like to hand it over to Eric Pitt for questions on the Driveway service experience.

Thank you, George. First question. If a customer reserves a time online, does that mean you've guaranteed to have capacity to service that vehicle?

Yes. When we make a promise to a customer online by fulfilling an appointment, we keep our promise. So there is integration between the technology that the customer is using and the technology in the fulfillment center, which automatically sets aside the capacity for that customer service appointment so that they can get their service and maintenance performed at the time that they've scheduled. Excellent question.

Bryan, can you talk a little bit about the service experience? We know service is the key to increase brand impressions with a customer and really speaks to the full life cycle of ownership. How does Driveway capitalize on that, how about that?

Thanks, Eric. I think most importantly, it closes the loop of the life cycle, meaning that all experiences that the consumer have in terms of their personal transportation needs can be completed in home in the convenience or, as we say, service in your slippers. And that's a fun component. When you also think about brand impressions and the ability to drive our marketing costs from the base 50-50 plan of $1,200, down to $300, it allows you to keep top of mind the consumers knowing the Driveway brand name in the event that they're subscribing to in-home service experiences, okay, which will allow us to get more organic search through not only our MyDriveway portal, but through the memory or the repetition of those 10x more brand impressions. We built Driveway and began to strategize on that 5 years ago, formulated the plan 3 years ago with one basic idea in mind. Great convenience for our customers and allow them to do it in a way that they don't have to set foot in a traditional dealership again. And that's what we've set out to accomplish. And we sit here today at the brink of our 5-year plan and now almost, what, 8 months into that plan, and we're seeing that come to life and consumers really enjoying the fact that they can do all those things in a convenient manner with themselves and not to say the least that our service, body and parts business generate 50% margin, which allows us to have massive competitive advantages over used-only retailers when it comes to pricing methodology.

Thanks, Bryan. In order to stay on track with the time of the event, this will conclude the Q&A section for the service experience. So let's move on to Lithia and Driveway's competitive advantages and announcement.

The foundation of our omnichannel plan is the growth and expansion of our physical network. Having the ability for consumers to conveniently access all of our business lines and for us to recondition vehicles closer to them ensures a highly profitable digital experience across the United States. Our customers' proximity to our physical network is a key element of our design as it can all but eliminate the costs of logistics for all services. Building our network with new vehicle franchises positions Lithia and Driveway with other advantages such as upstream procurement from new and certified vehicle trade-ins with more attractive valuations, distributed inventory, a sophisticated reconditioning network with specialized diagnostic equipment located closer to the customer, and finally, access to the industry's highest or 50% margin service, body and parts businesses. These businesses bring 10x the consumer life cycle touch points than vehicle sale only retailers and allows for substantially lower marketing costs per vehicles sold. Other competitive advantages and points of differentiation for Lithia and Driveway include the following. First, an accretive growth model with a self-generating profit engine of over $750 million EBITDA annually. Second, a considerably lower cost of capital compared to any new entrant into the industry. Third, affordable offerings at all levels allows for consumers to remain in the Driveway ecosystem their entire lives and adjust as their income and credit levels change over time. Next, captive leasing through our OEM affiliated partners to provide new vehicles at monthly payments, typically less than 1- to 3-year-old used vehicles. Fifth, additional financing support from our manufacturer partners through rate subvention with their captive financing arm and new vehicle incentives that allow for the highest level of financeability and absorption of negative equity for the consumer. Next, we lead retailers in sustainability education, charging infrastructure and ownership functionality through green cars. Seventh, we provide a diverse upstream offering of zero-emission product sales and services through manufacturer partner product lines. Eight, we create loaner and fleet management opportunities to build a factory-like used vehicle inventory pipeline. Lastly, Lithia and Driveway have the broadest national network of any retailer in the automotive space. These advantages are delivered through a network with costs that are similar or lower than used-only retailers. Today, all of our locations are now reconditioning Driveway inventory and providing valet services as needed. We currently utilize approximately 25% of our reconditioning capacity and only about half of our storage capacity for inventory. As such, we have the capacity to recondition over 700,000 vehicles annually with today's network, and we'll be able to recondition over 1.5 million vehicles annually upon reaching our network growth aspirations in the coming years. Please take a moment to review the comparison of our current physical network cost compared to other national used vehicle e-commerce retailers, which can be found on Slide 16 of our fourth quarter investor presentation. Increasing our physical network to approximately 400 locations in 6 regions gives us the ability to reach over 90% of U.S. consumers in 2 hours or less. As such, our top priority for allocating capital will continue to be accretively expanding our network by acquiring strong cash-generating locations. The opportunities for rapid consolidation within our industry remain plentiful, and our pipeline remains jampacked. This highly fragmented market has allowed us to consistently invest in increasing the reach and density of our physical network by acquiring strong assets. For more than a decade, we have successfully purchased and integrated acquisitions that have yielded after-tax returns of over 25% annually. Since launching our 5-year plan, we have acquired $4 billion in expected annual revenue, reaching our annual target 4 months ahead of schedule. We continue to replenish the more than $3 billion of additional revenue under definitive purchase agreement that is expected to close in the coming months. In addition, we now have more than double that amount under LOI or in late-stage negotiation. Lastly, we are in the most active consolidation environment that we've ever seen over the past 2 decades. And on a daily basis, we add to the $15 billion pipeline of potential acquisitions that we believe are priced to meet our disciplined return hurdles. As such, we are expecting our network expansion in 2021 to far exceed our record levels achieved last year and continue to improve network density in Regions 3, 4 and 6. As our nationwide network continues to grow in our 6 regions, we continue to target a 100-mile reach to allow for convenient, affordable and timely consumer servicing experiences during and after the purchase of their vehicles. As a reminder, we have 0 e-commerce infrastructure costs for developing Driveway, as it utilizes the capacity of our growing network. Lastly, we are excited to update that we have officially launched our Driveway brand marketing in Tampa, Dallas, Houston and the surrounding markets. With these recent market launches, the Driveway brand messaging is now reaching 23 million individuals or nearly 7% of the U.S. population. By the end of March, we will also have launched our marketing campaigns in 12 total major markets, reaching over 67 million individuals or 21% of the population or a 20-fold increase over our initial launch markets of Portland and Pittsburgh. Our technology has been developed for rapid scalability across our existing and future network. Full deployment throughout all U.S. markets will be completed in the next 18 months compared to other competitors that intend to take nearly a decade from inception to reach full national deployment. Alongside the accelerated rollout of Driveway brand nationally, our innovation and product teams are working relentlessly on improving the Driveway experience. Driveway will receive continuous enhancements released every 2 weeks throughout the year, with the goal to become the e-commerce benchmark for automotive retail by year-end. With that, I would like to turn the call back over to Eric for Q&A.

First question here from Kate McShane. Of your proprietary offerings and technology, what do you think is creating the deepest competitive moat. Is it your inventory, your technology, the history of company data? I know they all work together, but is one less replicable than the other?

Maybe the easiest way, Kate, is to just prioritize. I would give us 5 different items with inventory and the ability to procure inventory as the #1 competitive advantage. We believe that those 800 people on the ground, not only builds revenue, but most importantly, builds high margin and go back to our value, our core and our certified used car strategy, and that is the pipeline to be able to get that. So I would rank that, number one. I would layer in second, people, okay? The ability to have people at a cost-effective level that are in the negotiation-free environment is highly important in the strategy because they're the ones that work on #3 priority, which I believe is financeability. So that relationship with 150-plus lenders in the country, regionally dispersed, allows for differentiation lending to create better financeability, plus the virtual centers of excellence behind the scenes with the 900 finance specialists that work directly with our Driveway Care Center just below us here is also there to be able to create and solve for the difficult parts of the transaction, and that, again, is financeability. Fourth, I would put technology. I believe that there is somewhat of a quality in what we would call proprietary solutions, meaning that the nimbleness is there, the functionality is really there so long as you have the engineering teams to be able to build it, and George and his teams have done a nice job up north in our Driveway Innovation Hub which is pretty special. So -- but I believe, over time, most people can build that, okay? Whether it takes them 8 years or whether it takes them 18 months like it took us, that's yet to be determined, and we still have a lot to learn and imagine that we'll continue to be perfecting that product over the coming decade or so. Lastly, I would overlay #5, which is our data of now our 75th year in business, being founded in 1946 by my grandfather. We just entered our 75th year. Our data is rich. Though it's really only about a decade and half where it's usable and in a form that we can actually target market and look at consumer behaviors, that is an important delineation that we believe is only found by being top of funnel in the new car business and seeing where the process starts. Eric?

Bryan, next question is from [ Ben Jacobs ]. Are you guys setting up centralized reconditioning centers to process used cars for Driveway? If not, why? And if I were to look at the capacity utilization of your entire network, how much excess capacity do you have for reconditioning units to sell on Driveway?

Well, Ben, thanks for one of the final questions of our time together today. I think most importantly, we believe that a distributed reconditioning center, which is what we have of now 220 reconditioning centers across the country, have a massive competitive advantage and the fact that we not only have expertise distributed, but logistics costs are eliminated. That same advantage is seen in storage, meaning that the consumers are closer to the product lines. And I would also state that you should go back to our 6 region strategy that we ultimately believe though we're seeing further logistics at the current time, we believe it's primarily because our inventories sit at 52,000 vehicles. And when our inventories sit at 200,000 or 300,000 vehicles, most consumers should be able to find their cars, they should be able to be reconditioned closest to the customers in that distributed recondition network over -- as the network grows. Eric, there was a second part of that question.

And how much capacity do you have?

Oh, yes. I mentioned this a little bit earlier. We currently have the capacity to recondition about 700,000 vehicles. We're selling just shy of 200,000 used vehicles on a 12-month run rate, okay? So that gives us about 4, 5x lift. Remember that every time that we grow the network, what do we also do? We grow capacity, okay? And we believe that, that ultimately comes with very little infrastructure cost, which, again, is another massive advantage over having centralized reconditioning. Eric, final question?

Yes. Our final question today. On top of expanding your digital capabilities, you noted that your position of growing the network through new car dealerships gives Driveway a structural advantage. Can you talk about that a little bit? And how your network growth strategy is panning out?

Sure. I think we've touched a little bit on that throughout the call. I think most importantly, new vehicles allows us to touch the customer throughout a broad array of business lines as well as top to bottom affordability, meaning new cars that could be $100,000 plus, all the way down to $5,000 used cars that what we call value auto. On top of that, the ability to take in trade-ins is a massive competitive advantage because we have first shot at those transactions. Remember, again, the disequity prevents most consumers from being able to bifurcate or separate their trade-ins because their cash down doesn't offset their disequity, meaning that they have to be able to clear the loan to be able to accomplish that, which again puts them back into our model, where we're financing disequity for the consumer. Also the ability to have the 10x more brand impressions than used-only retailers creates brand experience that will ultimately drive down SG&A costs and marketing as well as in personnel costs as well as in infrastructure costs, that's something that is quite special. We've talked about the other major competitive advantages that we believe that we have. Real briefly, I'm going to leave you with this final thought. We are extremely aggressive in terms of our ability to expand the network. We've developed the technologies and the dual channels and believe that the network needs to be there closer to the customers to be able to maximize the advantages and get to the 50-50 plan as quick as we possibly can and then eventually progress towards more aspirational plans of 5% plus market share. I would also give you the recap, the $4 billion we've achieved. We have over $3 billion under a definitive contract. We have more than double that amount under late-stage LOI or late-stage negotiations or LOI at about $3.5 billion to $4 billion in revenue. There's an aggregate of everything that's in negotiations that still needs some work at times on pricing as well as some other finite details that gets us to almost $15 billion in network expansion opportunity that sits in front of us. Outside the $15 billion, there's a heck of a lot more that may still be overpriced or isn't something that's quite as attractive for what we're really looking for to build our network out. With that, let's turn to the final sections, Eric?

Yes. Thanks, Bryan. This concludes all of the question-and-answer sessions for today. We leave you with a parting Driveway video and a few prepared remarks from Bryan.

Bye-bye. [Presentation]

Coming off the past 2 quarters, which more than doubled our highest annual earnings in company history and launching our national e-commerce brand, Driveway, we are just getting started. Our company and all of our team members live our mission of growth powered by people and the corresponding value to improve constantly. As such, we remain humble and never quite satisfied as we are tenaciously committed to improve, grow and find new opportunities. Our diversified high-growth business strategy that we walk through today is highly complex and has been built despite the industry's considerable barriers to entry making it difficult, if not impossible, to replicate. Our industry remains ripe for consolidation and is thirsting for modernization. Our growing network composed of people, inventory and physical infrastructure, combined with our Driveway digital home solutions that George demonstrated for us today, completes our unique omnichannel strategy. The advantages of our responsive and adaptable teams with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment. This strategy positions us to continue to lead our industry's transformation and quickly progress towards $50 billion in revenue and $50 of EPS, the first leg of our journey. On behalf of the entire Lithia and Driveway team, I want to thank each of you for joining us today and look forward to scheduling one-on-one meetings over the coming Wednesdays.