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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 third-quarter earnings in company history at $11.21 per share, a 63% over last year's strong results.
Record revenues of $6.2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses.
During the quarter, total revenue grew 70%, while total gross profit increased 83%.
On a same-store basis, used vehicles let our revenue growth up 40%, followed by a 22% increase in F&I income, a 7% increase in Service, Body and Parts revenues, and a relatively modest 3% decrease in new-vehicle revenues.
Additionally, same-store gross profit increased 23%.
Our operational teams executed our best-in-class used inventory procurement model to source and recondition a large volume of used vehicles in a highly cost-effective manner.
Our ability to reposition vehicles within our nationwide network and our Driveway procurement technology allowed for optimal inventory levels throughout the quarter.
On the new vehicle side, increased GPUs more than offset the decline in volume.
Chris will be providing additional details on our same-store sales, inventory levels, and operational highlights in a few moments.
Through our omnichannel strategy and expanding our network by acquiring new vehicle franchises, we have rapidly increased our size and scale, further growing our significant capital engine.
In the third quarter, we generated $530 million in adjusted EBITDA, greater than any full-year in our history before 2019, providing us additional capital to deploy toward network expansion and Driveway, while also accelerating our continued exploration into adjacencies.
The robust customer demand we saw in the third quarter was driven by high levels of household savings, government subsidies at lower interest rates, and increased equity in trade-ins.
Elevated demand in margins are likely to be sustainable into the next few quarters due to the continued strength from these drivers, coupled with tight new vehicle supply and accelerating miles driven as [Phonetic] consumers return to work and continue to travel using their vehicles.
As our industry transitions toward electrification and more convenient and empowered mobility solutions, LAD will anticipate and adapt to execute and proactively lead this change.
Our plan to reach $50 billion in revenue and exceed $50 in earnings per share by the year 2025 from here on referred to as our 2025 plan, was designed with these and other consumer trends in mind.
Lithia & Driveway full lifecycle offerings and adjacencies are evolving to respond to changing preferences.
Beyond the Lithia & Driveway channels, are complex, expansive, and difficult to replicate design that we have incrementally unveiled over the past 15 months, today includes green cars, the foremost educational marketplace for sustainable vehicles, a quickly growing FinTech Driveway Finance, growing fleet in leasing operations, and a Canadian presence to establish the seeds for international growth, longer term.
We look forward to continuing to share further elements of our design and how our digital solutions can be applied to similar mobility industries and further adjacencies to create a broad-based, highly diversified multi-sector disruptive company.
Our traditional Lithia business are now evolving their offerings, given our decentralized culture and belief that our stores know their local markets best, they operate as local brands with the autonomy to implement e-commerce solutions that meet their customers' needs.
When designing our omnichannel strategy, careful consideration was given to the existing end-to-end digital solutions that many of our Lithia stores' omnichannel offerings already utilized.
While continuing to grow these Lithia experiences, LAD established Driveway as a unique independent brand with dedicated leadership, engineering and marketing teams, developing proprietary software and a complete lifecycle of in-home experiences to attract incremental consumers to LAD.
This also provided consumer solutions that are broader and lower costs than any of our used-only e-commerce retail peers.
In conjunction with the acceleration of consumer demand for in-home retail experiences, we are seeing the massive benefits of having consumer optionality for both Driveway and Lithia in-store and online experiences.
Our initial design and early learnings from Driveway continue to guide and expand how our Lithia businesses interact with consumers.
While our attentions were turned to Driveway's completely incremental revenue growth, we've been remiss in sharing that our Lithia business continues to provide digital experiences through its 300-plus local, regional, and Lithia websites.
For the third quarter, these Lithia websites and associated online shopping experiences connected with 11.5 million quarterly unique visitors.
These Lithia e-commerce customers accounted for 36,600 or 25% of all units retailed in the quarter, and simply estimated at $5.9 billion of annualized revenues attributed to the e-commerce portion of our traditional Lithia channel.
These Lithia e-commerce sales are in addition to Driveway's growing successes that we will share in just a few moments.
To put this into perspective, these e-commerce sales as a percentage of monthly unique visitors, represents a 0.32% or what we call a golden ratio.
This performance level is similar to other established, digital-only used retailers.
To further illustrate the strength of our omnichannel strategy, when our LAD total sales are compared to unique visitors from all channels, our golden ratio was 1.46%, nearly 5 times more successful than our digital used-only peers.
Lastly, it's important to note that we are not incurring incremental spending on our stores' e-commerce tools as we are leveraging third-party vendors similar to our new vehicle franchise peers e-branding efforts.
Though we are pacing significantly ahead of our 2025 plan, we remind everyone that our revenues have experienced drag from inventory constraints, and earnings are greatly inflated from vehicle margins.
Finally, we are pleased to report that every channel and adjacency is considerably ahead of plan.
We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible revenue and margin available to us in this market.
As a reminder, the 2025 plan assumes a pre-COVID business environment, margins, and growth rates.
Internally, we view the 2025 plan as a base case and our leaders are focused on taking our execution to the next level and de-linking $1 billion of revenue to produce more than $1 of EPS.
Key drivers of this are no further equity capital raises meaning no further dilution to EPS, leveraging our underutilized network to support a 2 times to 3 times increase in vehicle sales, and a 4 times increase in parts and service sales through the existing network.
Further improvements in personnel productivity, economies of scale, and marketing from national brand awareness; an investment-grade credit rating to reduce borrowing costs, and most importantly, further adjacencies with higher margins and structurally lower SG&A costs.
The adjacency we're furthest [Phonetic] along with is Driveway Finance or DFC, that has experienced rapid growth since expanding in spring of 2020.
During the quarter, DFC originated 6,200 loans, and now has a portfolio of $530 million.
We are planning to enter the ABS term market by the end of the year, which will allow us to quickly and profitably scale future consumer offering and lending volumes.
Important to note is that a loan originated with Driveway Finance earns 3 times the amount earned when we arrange financing with a third-party lender on a fully discounted basis.
We believe that Driveway Finance can penetrate 20% of refinanced [Phonetic] retail unit sales.
This percentage is lower than used-only peers finance companies as subvented leases and finance contracts with our manufacturer captives will always account for a sizable portion of our new and certified businesses.
The front-loading of our M&A provides a larger base for Driveway Finance to draw from and increases the potential contribution above what our current 2025 plan includes.
We are excited about the continued growth of Driveway and the interest and engagement it's seen from our consumers.
Driveway generated over 530,000 monthly unique visitors in September, a 68% increase over June.
96% of our customers were incremental and had never a transaction with Lithia or Driveway before.
Monthly shop transactions increased 86% during the quarter.
Strong Google and Facebook reviews and a net promoter score of 90 indicate Driveway is building an online reputation for exceeding consumer expectations for a fully digital, frictionless experience.
We recently launched Driveway marketing in Las Vegas and Phoenix, our 9th and 10 markets.
Continued improvement in our existing markets improved our overall Driveway golden ratio, even with the early dilution from these two new markets.
We anticipate entering further new markets soon and remain on pace to expand the nationwide marketing by the end of next year.
To support consumer demand, we accelerated the opening of our third Driveway care center in Dallas, which occurred in September.
In addition, we have ramped hiring at all three time zones care centers, and believe we are well-positioned to support the increased volume of traffic we expect to see in the coming months.
Driveway is on track for its 2021 target of 15,000 annual transaction run rate exiting December.
Looking forward to '22, we are forecasting 40,000 transactions with a 2.2 to 1 sell-to-shop ratio.
Driveway's dedicated management, operation, engineering, and marketing teams are continuously testing and learning as they enhance the Driveway website and consumer experiences, recently deploying another powerful new feature.
Driveway now offers consumers the ability to sort by distance.
This enables consumers to see which vehicles are in the closest proximity to them and delivered the fastest, with the lowest or no shipping fee.
This new feature will decrease delivery times and increase our golden ratio.
Viewing our dealerships' omnichannel tools and Driveway together, we are well positioned to retain our existing dealership customers by interacting with them in new ways that are aligned with their ever-evolving preferences.
Additionally, we believe our digital infrastructure will enable us to conquest market share from competitors that lack the resources to invest in technologies and/or nationwide network, or choose not to commit to a transparent, empowered negotiation-free experiences to effectively attract incremental customers.
Acquisition growth, the backbone of our strategy, continues to expand our physical network to support all of our business lines, whether in-store or in-home.
In our future state, we expect our optimal physical network to be approximately 500 stores across the US, placing us within 100 miles of all US consumers.
This enables us to offer timely, convenient, and affordable in-home solutions while realizing the economies of scale that will come from a nationwide footprint and brand.
While several large deals were announced recently, the automotive retail industry remains highly fragmented and unconsolidated with the market share of the 10 largest groups at only about 10%.
We have nearly $1.5 billion in annual revenue commitments as well as over $12 billion in the pipeline, which excludes our peers' large transactions.
We remain confident in our ability to find deals that best fit our regional network strategy and are priced at our disciplined 15% to 30% of revenues, and 3 times to 7 times EBITDA.
This ensures we meet our after-tax return threshold of 15% in a post-pandemic profit environment.
Lithia and Driveway are known in the industry as the buyer of choice, obtaining manufacturer approval, timely in certain closing of transactions, and retaining over 95% of the employees.
During the quarter, we completed acquisitions that are expected to generate $1.7 billion in annualized revenues, and year-to-date, we have completed $6.2 billion.
Included in the total, we made our first international acquisition partnering with Pfaff Automotive in Canada.
With a strong presence in Toronto, Canada's largest market, we are excited to have Chris Pfaff and his high-performing team join us.
In addition to its stores, Pfaff operates the leasing business, furthering our learnings of synergistic adjacencies.
We also expanded our US footprint, particularly in the Southeast Region 6, entering the Atlanta, Georgia and Mobile, Alabama markets.
In closing, we are acutely focused on executing our omnichannel strategy, designed to continue our [Phonetic] track record of earnings and revenue growth for decades to come.
Though our plan may seem complex, our fast-moving and hyper-proactive team with multiple decades working together is ready for any challenge or competitor.
We have grown exponentially, while maintaining industry low leverage of around 2 times, for nearly a decade.
With our various channels meeting customers, wherever, whenever, however they desire; we are well-positioned to gain share, outperform the market, and exceed our 2025 plan.
Entering the final quarter of 2021 with another record year already behind us, our store leaders continue to challenge their teams to embrace the future, evolving all business lines, and achieve the 2025 plan.
This includes ensuring that our 22,000 associates continue to lead the digital transformation of automotive retail in their respective markets, while exceeding customer expectations, increasing market share, and improving profitability.
As most of you are aware our manufacturer partners were impacted by microchip shortages and struggled to supply a sufficient volume of new vehicles to meet customer demand during the third quarter.
As a result, same-store new vehicle unit sales decreased 3% in revenue and 14% in units, consistent with the nationwide SAAR decrease.
We were able to offset the decreased volume with higher total variable GPUs, averaging $7,446 in the third quarter compared to $6,082 in the second quarter of 2021, and $4,754 in the prior year.
As of September 30, we had a 24 days supply of new vehicles on the ground, which excludes in-transits.
While the new vehicle day supply environment was challenging, our 58 days supply of used vehicle inventory exiting June 2021 positioned us well for the third quarter, where we saw a 40% increase in revenue on a 13% increase in units.
Our 1,000-plus procurement personnel did excellent work sourcing vehicles, enabling us to offer customers a wide spectrum of vehicles, meaning all levels of affordability.
We currently sit at a 48 days supply of used units and anticipate we will be able to continue to mitigate pressure on the new vehicle supply by maintaining solid used car comps and strong profitability.
In the third quarter, we saw a 74% of our used vehicles direct from consumer, such as trade-ins and off-lease, where we as top-of-funnel franchise dealers get first look at the used vehicle inventory pipeline.
Only 26% of our vehicles were procured from other channels such as auctions, other dealers, or wholesalers.
During the third quarter, we earned $3,897 in gross profit on used-vehicle sourced from customer channels, which turns in an average of 33 days.
For used vehicle sourced from other channels, on the other hand, we earned $2,696 in gross profit per unit, and those turned in an average of 51 days, which again, demonstrates the benefits of an omnichannel strategy for Lithia & Driveway.
Our expanding physical network of new vehicle franchises and the benefits of Driveway allow us to offer the most diverse inventory in North America.
We offer vehicles that meet all affordability levels, but the largest number of bulk manufacturer certified pre-owned vehicles and those priced under $10,000, or are over 10 years old.
Again these vehicles also turn the fastest and yield the highest margin percentages.
Additionally, our internal dealer trade network, which creates an opportunity for our own network to have first shot at the 100,000 units we wholesale annually, allows us to cost-effectively move vehicles to better match supply and demand, and increase our retail versus wholesale mix.
Turning to Parts and Service.
Same-store revenues increased 7.3% over last year.
The growth was distributed across all business lines except warranty.
We anticipate a continued tailwind benefiting service into 2022, as the substantial losses in the miles-driven rebounds and well positions our highest profit margin business line.
With SG&A, we are focused on improving productivity of our personnel, targeting investments in marketing, and further leveraging our fixed expenses.
These actions will improve our gross profit throughput when margins subside.
We believe that these actions reduce our normalized SG&A levels at least 300 basis points below pre-COVID levels, or to approximately 65% of gross profit.
As our teams prepare their 2022 annual operating plans, they remain hyper-focused on executing to ensure the topline growth is aligned with further productivity improvements that result from our investment in the omnichannel model wherever, whenever, and however customers choose.
These efforts, along with our exploration of adjacencies, translate to significant potential to increase leverage and drive additional profit as expected in our 2025 plan.
For the quarter, we generated over $530 million of adjusted EBITDA, a 104% increase over 2020.
And $304 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.
We ended the quarter with $1.7 billion in cash and available credit, which if deployed to support network growth, could purchase up to $6.8 billion in annualized revenues.
As of September 30, we have $3.8 billion outstanding in debt, of which $1 billion was floor plan and used vehicle and service loaner financing.
The remaining portion of our debt primarily relates to senior notes and financed real estate as we own over 85% of our physical network.
Our disciplined approach is to maintain leverage between 2 times and 3 times as part of our commitment to obtaining an investment-grade credit rating, which would be another sizable competitive advantage once obtained.
As of quarter-end, our ratio of net debt to adjusted EBITDA is 1.25 times.
Our capital allocation priorities for deployment of our annual free cash flows generated remains unchanged.
We target 65% investment in acquisitions, 25% internal investment including capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share repurchases.
With capital raises completed earlier this year and elevated free cash flows generated as a result of the current environment, we accelerated our investment in Driveway and DFC, incurring over $50 million in SG&A and capital expenditures, year-to-date.
The personnel cost for our over 500 associates who support the scaling and continued build-out of Driveway and DFC; the marketing investment for Driveway; and IT development cost, or current period headwinds.
And most importantly, supports the build-out of our future state and provides the foundation for a new generation of incremental profitability.
We are well-positioned for accelerated, disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and exceed $50 of earnings per share by the year 2025.
We would now like to open up the call to questions.

user
compname reports q3 adj earnings per share $11.21.
lithia & driveway (lad) increases revenue 70%, earnings per share 47%, and adjusted earnings per share 63%, record third quarter performance.
q3 revenue $6.2 billion versus refinitiv ibes estimate of $5.78 billion.
adjusted q3 2021 net income attributable to lad per diluted share was $11.21.

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