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Text: Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.
Today's discussions may include statements about future events, financial projections, and expectations about the Company's products, markets and growth.
We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.
Our results discussed today include references to non-GAAP financial measures.
Earlier today, we reported the highest adjusted second quarter earnings in Company history at $11.12 per share, a 199% increase over last year, including the impact of the two recent equity offerings.
Record revenues of $6 billion were driven by robust consumer demand and an acceleration of acquisitions to produce strong operational performance across all business lines and channels.
During the quarter, total revenue grew 87% over 2019, while total gross profit increased to 125% compared to 2019.
On a same store basis, compared to 2019, we recorded a 20% increase in new vehicle revenues, 49% increase in used vehicle revenues, 39% increase in F&I income, and 3% increase in service body and parts revenues.
Our operational teams continue to excel in procuring used vehicles, delivering impressive gross margins and continuing to grow the business.
Chris will be providing additional details on our same-store sales results, the inventory levels and other operational results in a few moments.
Reflecting back on the first year of our five-year plan, we are considerably ahead of schedule and have the required capital to carry us to and beyond $50 in earnings per share and $50 billion in revenue.
At $8 billion in added revenues since planned inception, we have acquired 40% of our targeted $20 billion in annualized revenues.
In addition, both Driveway and our core business are contributing at higher than expected levels as we enter our second year of the plan.
We remain disciplined in our execution and actively focused on adjacencies, cost management and leveraging our network to increase productivity and lower SG&A costs.
Despite the cost of the acquisition integration and Driveway's development and expansion, our SG&A as a percentage of gross profit was 55.7% during the quarter.
This level of SG&A is typical of our top quartile of locations in a pre-COVID environment.
Our 50/50 plan, which is a base case, assumes mid to low 60% SG&A, though our management team is constructively focused on greater aspirations.
Our past few decades have yielded a $1 of earnings per share for every $1 billion in revenue.
We believe that there is significant potential in increasing profitability and constructively changing the calculus, so that $1 billion of revenue can produce more than $1 of EPS.
To follow on some thoughts on just how much more than $50 in earnings per share can be generated from $50 billion in revenue.
First, with capital raise is behind us, there is no further drag on earnings per share from equity dilution.
Second, we can leverage our underutilized network by substantially increasing the volumes that are being produced by them.
In service, the magnitude increases 4X, and in sales, 2X.
Improving personnel productivity by associates and consumer utilization of technology to improve and simplify experience in workflows.
Next, we are in the early innings of our exploration in high-margin and low cost adjacencies, such as our Driveway Financial FinTech, consumer insurance and fleet management.
National advertising now driving economies of scale through greater brand awareness.
And lastly, an investment grade credit rating will further decrease our borrowing costs.
As a reminder, our base five-year plan assumes a pre-COVID business environment, margins and growth rates.
We are not assuming that the current margin levels will continue, and most likely will subside by early next year.
In the recently released Fortune 500, we jumped considerably to number 231.
We are particularly proud of our performance on three metrics demonstrating our proven ability to grow our top line, increase earnings and create long-term shareholder value.
We were number 12 in 10-year annual growth in revenues of 19.9%.
LAD was number two in 10-year annual growth in earnings per share with 43.7% growth, more than double what we achieved in revenues, demonstrating our ability to integrate and increase profitability.
And finally, we were number three in 10-year total return to shareholders, reflecting a 36.7% return rate, which speaks for the ability to transform and execute.
This growth continues as our current annual run rate is approximately $21 billion as compared to $12 billion in the base year of our plan.
In May, we raised $1.3 billion in equity and $500 million in net additional debt, and plan to deploy this over the next two to four quarters.
Along with the cash flows generated from our existing business and future acquisitions, we have the funds necessary to execute all aspects of our five-year plan, and do not expect to return to the capital equity markets aside from a transformative acquisition.
Across the board, our teams are focused on execution through both channels.
We continued to rapidly integrate recent acquisitions and Driveway expanded offerings are attracting incremental customers who are seeking to fully transact online.
Together, we generated approximately $492 million of adjusted EBITDA in the second quarter.
Our unique high-growth strategy with a massive regenerating capital engine is speeding toward our goal of $50 billion in revenue and over $50 in EPS.
Driveway is empowering consumers to simply and transparently shop, sell and service their vehicles from the convenience of their home.
The Driveway experience is designed to attract a different and incrementally new consumer than the Lithia channel.
We can now market and deliver our 57,000 vehicle inventory to the entire country under a single brand name and negotiation-free experience.
Leveraging our nationwide network and Driveway's broad functionality, we are excited with our endless growth possibilities.
Our used inventory is broader and more scarce, addressing over four times the number of customers than the e-commerce retailers focused on selling only one- to five-year-old used vehicles.
We are now realizing these advantages as evidenced by our same-store sales growth and strengthened margins.
We are on target to achieve an annual run rate of 15,000 Driveway shop and sell transactions in the month of December.
Important to note, this target does not include Driveway Finance and service transactions.
On our pathway toward this volume milestone that took other e-commerce used-only retailers two to three years to reach, there are several interesting early trends we'd like to share with you today.
Driveway generated over 350,000 monthly unique visitors in June.
Driveway eclipsed the 500 unit milestone with 550 transactions in June, only six months after launch.
98% of our Driveway customers during our second quarter were incremental and have never done business with Lithia or Driveway before.
95% of our dealership network is actively participating in Driveway with reconditioning, logistics, transaction fulfillment, inventory procurement and last mile delivery.
We continue to build on our online reputation, with an average Google review score of 4.98 stars out of 5.
In addition, our Driveway Google Domain Authority score, which ranks online search, is now at 57, which is higher than all three used only e-commerce competitors, who have also been in operation for a significantly longer than Driveway.
Driveway receives continuous enhancements that are released every two weeks throughout the year, and we recently launched three powerful new features.
First, customers can now shop and filter our nationwide inventory by price or monthly payment.
Remember that over 80% of customers purchase a vehicle based on monthly payment, and this provides them upfront transparency and allows customers to focus their search.
Second, Driveway now offers a budget and payment calculator.
Once the customer has selected a vehicle and obtained the trade-in value, the calculator allows them to adjust down payment in term to see how these affect their monthly payments.
Finally, prior to submitting a credit application, our instant AI financing feedback tool informs consumers of the likelihood their credit will be approved based on their identified down payment, loan term and credit profile.
The tool provides customers with the opportunity to modify key terms to increase their likelihood, providing them with the confidence that they will be approved prior to running a formal credit check.
This predictive indicator is essential to improving the consumers' progress through a technology happy path and our Care associates' productivity levels.
While our entire inventory is available nationwide, we are currently reaching approximately 25% of the population with Driveway advertising that we are far from saturating these markets.
We are targeting our marketing dollars and believe that our omnichannel offerings enable us to scale on a cost-effective and highly competitive basis.
We continue to measure the impact of both our own and e-commerce competitors' marketing dollars using what we call the golden ratio, the relationship between monthly unique visitors and completed sales.
Our decision to expand Driveway advertising to additional markets will be based on achieving certain golden ratio levels, and we expect the next level of scaling to occur by the end of this year.
This is expected to be the final increase in marketing needed to fully assess and most effectively deploy nationwide marketing.
We anticipate nationwide marketing occurring in the second half of 2022, allowing considerably more time for all markets to season prior to completion of our five-year plan.
Today, our team of Driveway engineers, data scientists, procurement specialist, care center associates and Driveway Finance associate number over 300, and are growing rapidly to mirror the exponential growth in consumer demand.
We have developed a suite of consumer solutions and functionality that provide the first complete end-to-end digital ownership experience, spanning the full vehicle ownership life cycle.
The foundation of our omnichannel plan is the growth expansion and leveraging of our physical network to provide consumers convenient access to all of our business lines, in-store and home through Driveway.
Our highly fragmented industry provides ample opportunity to grow and accretively invest in increasing the reach and density of our physical network.
For decades, we have demonstrated the ability to successfully purchase and integrate acquisitions with an over 80% success rate of exceeding our 15% return threshold and actual after tax returns averaging 25%.
During the quarter, we completed acquisitions, which are expected to generate $3.7 billion in annualized revenues, and year-to-date, we have acquired $4.4 billion.
We expanded our national footprint, entering the Detroit, Las Vegas and Jackson, Mississippi markets, substantially increasing our density and reach in North Central Region 3, Southwest Region 2 and Southeast Regions 6.
It's important to note that automotive, the largest retail segment in the country, remains totally unconsolidated.
We believe consolidation can be accomplished in a highly accretive way and these cash flow positive businesses can further add to our massive cash engine and consumer offerings.
Our pipeline for acquisitions remains full and we are focused on continuing to improve the density of our network to ensure a full and convenient lifetime of consumer experiences.
Despite a slightly more competitive environment, we continue to successfully target after-tax returns of 15% plus, investments of 15% to 30% of revenues, and three to seven times EBITDA.
The higher end of the range is reserved for targets located in key markets that strategically increase our network density, and the lower end of our range is paid when density is already achieved.
Even with our pace being well ahead of schedule, we continue to replenish our more than $2 billion under LOI, and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our return thresholds.
As such, we are expecting the acquisition cadence for the remainder of 2021 to remain strong, as we build out our network within the United States and potentially internationally with a focus on English-speaking countries.
As our nationwide network continues to grow in each of our six regions, we continue to target a 100-mile reach to allow for convenient, affordable and timely consumer service experiences during and after the purchase of their vehicles.
As a reminder, infrastructure cost for delivering a Driveway e-commerce experience is zero, as they reside in the underutilized capacity of our growing network.
Key to our design three years ago was allowing for the flexibility to adjust investments between channels and multiple business lines to align with consumer demand, weather any economic cycle, compete with any future competitor and grow our cash engine to expand into further adjacencies.
These, combined with our many other competitive advantages, strongly position us to gain a meaningful portion of the market and lead our industry's continued transformation.
In closing, we continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities.
The advantages of our responsive and adaptable team with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment.
With our technology poised for rapid scalability across our existing and future network, we are positioned to lead Lithia & Driveway's progress toward $50 billion in revenue to produce more than $50 of EPS, the first leg of our journey.
As we live our mission of Growth Powered by People, we are once again humbled by our extraordinary team of almost 20,000 associates that, in the second quarter, more than doubled our previous earnings records.
As we navigate the back half of 2021, we are confident that the demand from consumers remain strong for both in-home and in-network solutions, and the acceleration of Driveway's incremental sales in key strategic markets be well received.
Each day, our leaders are rising to the challenge of achieving or exceeding our 50/50 plan, evolving their skills, growing their teams and navigating the unprecedented operating environment experienced in the first half of 2021.
Our team remains humbled and never satisfied as they look to continued record performance levels and massive growth throughout the back half of 2021.
Following is a discussion of our quarterly results and is reported on a same store basis.
As Bryan mentioned earlier, we are providing comparisons against 2019, as 2020 results are not meaningful.
For the three months ended June 30, 2021, total same store sales increased 26% over 2019.
These increases were driven by a 20% increase in new vehicle sales, a 49% increase in used vehicle sales, a 39% increase in F&I revenue and the 3% increase in service body and parts revenues.
For the quarter, our new vehicle average selling price increased 13% and unit sales increased 6% over 2019.
Total gross profit per unit, including F&I, was $6,123, an increase of $2,463 per unit or 67%.
Excluding F&I, we are in $4,266 of gross profit per unit, a 10.1% margin.
Strong consumer demand as we exit the pandemic has accelerated inventory returns and increased new vehicle gross profit levels.
For used vehicles, total gross profit per unit, including F&I, was $5,227, an increase of $1,658 or 46%.
Our used vehicle sales mix in the quarter was 19% certified, 60% core or vehicles three to seven years old, and 21% value auto or vehicles older than eight years.
With over 60% of the 40 million used vehicle sold in the U.S. being nine years and older, our continued strategy of selling deeper into the used vehicle age spectrum and our ability to procure the right scarce vehicles remain the catalyst for future success and growth of Lithia & Driveway.
In the quarter, our average used units per rooftop was 96 units, a strong push toward our goal of 100 units per rooftop that we raised in 2020.
We had 21,000 new vehicle units, a 23-day supply, and 36,000 used vehicle units, a 58-day supply.
As a reminder, these amounts do not include in-transit units.
Our success in procuring used vehicle inventory allows us to offer customers a wide spectrum of vehicles and mitigate potential sales leakage due to a tight new vehicle supply.
Our 900 used vehicle procurement specialists have been working diligently to enable us to navigate the current demand environment, with their focus on procuring scarce high-demand used vehicles through the most profitable channels.
Our model gives us access to customer trade-ins, as well as first look at lease returns and service loaners, minimizing our reliance on auctions and other third-party purchases.
In the second quarter, only 14% of our used vehicles were acquired through the auction and over 50% of our inventory came from passive channels only available to new car dealers.
New and used vehicle sales are supported by our experienced financing specialists that help match the complexity of our consumers' financial position with lending options at over 180 financial institutions, including Driveway Financial.
In the quarter, our finance and insurance business line continued to show a substantial improvement, averaging $1,818 per retail unit compared to $1,458 per unit in 2019, an increase of $360.
New and used vehicle sales create incremental profit opportunities through the resale of trade-in vehicles, greater manufacturer incentives, F&I sales, and future parts and service work.
We continue to monitor this through the growth of our total gross profit per unit, which was $5,778 this quarter, an increase of $2,118 per unit or 58% over 2019.
Our stores remain focused on the highest margin business lines, service body and parts, which increased 3.4% in revenue and 11% in gross profit, as consumers returned to work and travelled the roads in the comfort and safety of their vehicle.
The recovery was driven by an 11% increase in customer pay, and a 6% increase in wholesale parts, offset by a 10% decrease in warranty and an 8% decrease in body shop revenue.
We expect these trends to continue into the third quarter as the economy reopens further.
As a reminder, our service body and parts business see over 5 million paying consumers and brand impressions annually, which generate over 50% margins and remain a huge competitive advantage for Lithia & Driveway.
Same-store SG&A to gross profit was 56.4% in the quarter, an improvement of 1,440 basis points over 2019.
While we expect SG&A to gross profit to normalize as new vehicle supply and gross margins bounce back to historical levels, we continue to benefit from the permanent headcount reductions of 20% or almost 300 basis points of SG&A, and other efficiency measures implemented last year.
Given these improvements to our model and the realization that our highest performing stores consistently maintain in SG&A to gross profit metric in the mid 50%s pre-pandemic, we believe that we are well on our way to exceeding our five-year plan and look to improve beyond our top quartile.
The opportunity to leverage our cost structure will further be enhanced as we maximize the utilization of our existing locations with our digital home solutions Driveway and continue to add incremental sales.
Turning to Driveway, the recently launched features, Bryan spoke to earlier, provide consumers with a massive selection with upfront transparency that allows you to solve your financing needs quickly, easily and independently.
While financing is one of the most complex components of the vehicle buying process, the changes have already enabled us to see better qualified leads and increased transaction efficiency.
Driveway's financing solutions, which include new vehicle leasing and captive OEM finance options, now represent 29 lenders that are fully integrated with Driveway technology and are available to consumers with approvals they can occur in a matter of seconds.
With a variety of financing sources to match consumers' needs, our offerings are uniquely positioned and difficult to replicate.
We plan to add an additional care center location by the end of the year as we scale to supporting growing consumer demand.
We anticipate expanding our Driveway support teams 10 times by the end of 2022 to support expected demand.
During the quarter, LAD's fintech arm, Driveway Finance Corporation, originated over 1,500 loans per month, resulting in a 400% increase in business over 2020.
At quarter end, our loan portfolio exceeded $370 million.
Our underwriting decisioning is supported by Driveway financials, proprietary credit scoring model, which is supported by years of historical data, allowing us to offer the customer attractive rates and mitigating the risk of loss.
Driveway Finance allows us to synergistically retain more of the profit generated from our existing retail businesses and is another example of the further diversity available to our business model.
We continue to see Driveway's fintech platform elevating the experience for consumers and our goal over the next five years is to scale Driveway Finance to capture 20% of all vehicle sales transactions.
Given the acceleration of acquisitions, we are expanding the base for Driveway Finance Corp. to draw from [Phonetic].
In summary, our teams remain humble and responsive to the changing environment and the opportunities available to continuously improve the evolving consumer demand in personal transportation.
We are innovating and meeting consumers' increasing digital and in-home expectations, and are focused on meeting the preferences of our consumers wherever, whenever and however they desire.
With the integration of several regional platforms that transitioned with strong operational leaders and customer-focused teams, we remain humble and confident that we can continue to deliver industry-leading results while pragmatically modernizing automotive retail.
We are focused on our five-year plan to achieve $50 billion in revenue and exceed $50 of earnings per share.
For the quarter, we generated over $492 million of adjusted EBITDA, an increase of 284% compared to 2019, and $282 million of free cash flow, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash: interest, income taxes, dividends and capital expenditures.
As a result, we ended the quarter with $2.6 billion in cash and available credit.
In addition, our unfinanced real estate could provide additional liquidity of approximately $655 million for a combined nearly $3.3 billion of liquidity.
As of June 30th, we had $4.3 billion outstanding in debt, of which $1.3 billion was floor plan, used vehicle and service loaner financing.
The remaining portion of our debt is primarily related to senior notes and financed real estate, as we own over 85% of our physical network.
The current environment offers attractive returns on lending, and to expand our reach, last month, we increased the financing available on our ABS warehouse line from $150 million to $300 million with the ability to expand the line to $400 million.
We expect to enter the ABS term market late this year.
That, along with the efficiencies that would be realized upon obtaining an investment grade credit rating, will further increase our returns on the Driveway Finance portfolio.
A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt.
This financing is integral to our operations and collateralized by these assets.
The industry treats the associated interest expense as an operating expense in EBITDA and excludes this debt from balance sheet leverage calculation.
On adjusted, our total debt to EBITDA is overstated at 3.37 times.
Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.25 times.
As a reminder, our disciplined approach is to maintain leverage between two and three times as we continue to progress toward another sizable competitive cost advantage of achieving an investment-grade credit rating.
Our capital allocation priorities for deployment of our annual free cash flows generated remains unchanged.
We target 65% investment in acquisitions, 25% internal investment, including capital expenditures, modernization and diversification, and 10% in shareholder returns in the form of dividends and share repurchases.
With the capital raise completed, we are well positioned for accelerated disciplined growth.
We continue to make strong progress and modernizing an omnichannel consumer experience both in-store and through Driveway.
Combined with a robust balance sheet, we are well positioned to be the leader in consolidating this massive industry, all while progressing toward our five-year plan of achieving $50 billion in revenue and exceeding $50 in earnings per share.

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q2 adjusted earnings per share $11.12.

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