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Text: Presenting today are Bryan DeBoer, president and CEO; Chris Holzshu, executive vice president and COO; Tina Miller, senior vice president and CFO; and Chuck Lietz, vice president of Driveway Finance Corporation.
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 fourth-quarter earnings per share in company history at $11.39 per share, 109% increase over last year.
Our full-year adjusted earnings per share was also a record, coming in at $40.03, 120% increase over last year's $18.19 per share.
Record annual revenues of $22.8 billion were driven by contributions from acquired businesses, our growing e-commerce platform and successful navigation of the supply and-demand environment.
SG&A as a percentage of gross profit decreased to 57.2%, 730 basis points better than last year, resulting in SG&A generating over $1.8 billion in adjusted EBITDA for the year.
Given the higher-than-expected EBITDA generated and our M&A cadence since the launch of the plan, we are excited to provide an updated 2025 plan and our vision of the future state for Lithia & Driveway.
18 months ago, we launched our plan to grow from just under $13 billion in revenue and $12 in earnings per share to $50 billion in revenue and $50 in EPS.
The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.
to grow from just under $13 billion in revenue and $12 in earnings per share to $50 billion in revenue and $50 in EPS.
The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway.
Today, we are eclipsing our initial plan and seeing early returns from leveraging our scale, adjacencies, data, and growing network.
Through these efforts, we are de-linking the historical relationship of each $1 billion of revenue producing only $1 of earnings per share as follows: We just completed a year where, despite inventory constraints, we generated nearly $23 billion in revenue and earned $40 in EPS.
Including a full year of performance from 2021 acquisitions, our annual run rate is well beyond $25 billion in revenue.
Next, we have acquired businesses that will contribute $11.1 billion in annualized steady-state revenues and entered the Canadian market.
Our physical footprint now reaches 95% of consumers within a 250-mile radius.
In January, the 13th month since the inception of Driveway, we achieved over 2,000 transactions.
In addition, 28,000 of our Lithia channel sales in Q4 were e-commerce, representing a combined annual revenue run rate of $6 billion in LAD e-commerce revenues.
Driveway Finance or DFC's portfolio stands at over $700 million as of December 31.
When we reach $50 billion in revenue in 2025, we now believe that every $1 billion in revenue will produce $1.10 to $1.20 in earnings per share or $55 to $60 in EPS.
The increased profit target considers the following factors.
Sales volumes reflect a blended 2.5% new and used vehicle U.S. market share; next, continued investment to scale Driveway and GreenCars is included; total vehicle GPUs returning to pre-pandemic levels; improvements in personnel productivity, increased leverage of our underutilized network and economies of scale in marketing from national brand awareness, driving SG&A as a percentage of gross profit toward 60%; acquiring a further $9 billion to $10 billion in annual revenues to complete the build-out of our North American footprint of 400 to 500 locations.
We do not expect any further equity capital raises, meaning no further dilution of EPS.
Next, an investment-grade rating and utilization of free cash flows for M&A and internal investment, driving decreased borrowing costs; flexibility and headroom and capital allocation for share buybacks in the event of valuation disconnect; continued drag on DFC's profitability due to building of CECL reserves as we scale from our current penetration rate of approximately 4% to a targeted 15%; and finally, early benefits from adjacencies with higher pre-tax margins that also carry structurally lower SG&A costs.
Given that the contributions from new businesses will still be in growth stages in 2025, as such, the above outline doesn't fully extrapolate our earnings per share potential.
As such, we are also providing insights into a longer-term future state that reflects the contributions from these factors at maturity, along with other known adjacencies.
market share, we see opportunity for each $1 billion of revenue to produce up to $2 in EPS.
Our future state contemplates the following additional drivers: up to 20% of units are financed with DFC, and there is no headwind from recording the CECL reserves outpacing the recognition of interest income; our cost structure is optimized to below 50% SG&A as a percentage of gross profit; and finally, our horizontals, such as fleet and lease management, consumer insurance and new verticals, are further developed.
Please take a few minutes and review our new slide deck and IR website.
More specifically, Slide 10 now provides a glimpse into how LAD will look in 2025 and beyond.
We have also refreshed the time line, competitive advantages and new market information slides in the appendices.
It's important to emphasize the synergistic relationship between our expanding physical network, driveway, and adjacencies like DFC and more.
In addition to being cash flow positive and highly accretive to earnings per share at inception, acquired businesses support Driveway's in-home solutions, enabling faster delivery, aftersales experiences, quicker turnaround times for reconditioning, lower logistics costs, and a higher proportion of sales with no shipping fees.
In addition to these competitive advantages, acquired businesses also expand the base from which DFC originates loans, accelerating its growth.
Together, these create services, experiences, and lasting brand impressions throughout the vehicle ownership life cycle.
Since the end of the third quarter, we have completed acquisitions that are expected to generate $1.4 billion in annualized revenues, adding critical density to the North Central Region 3 and the Southeast Region 6.
Looking forward, we have $1.1 billion in annualized revenue under contract or LOI.
In addition, our active deal pipeline has grown to over $13 billion.
We remain confident in our ability to find deals that build out our physical network and that are priced at 15% to 30% of revenues or three to seven times EBITDA.
This discipline ensures that we will meet our after-tax return threshold of 15% in a post-pandemic profit environment.
LAD is known in the industry as the buyer of choice due to smooth manufacturer approvability, timely, confidential and certain completion of transactions and retaining over 95% of its employees.
Last month, we shared that Driveway had significantly outperformed its December volume target by 32% with 1,650 transactions.
This momentum continued into January with over 2,000 transactions, taking us one step closer to our 2022 target of over 40,000 transactions or an estimated $1 billion in revenue.
With a little over a year since Driveway entered the marketplace, we are excited with the positive response it's receiving from consumers, the growing brand awareness and how it is expanding our reach beyond the local markets in which our Lithia channel operates.
Over 97% of our transactions were incremental to Lithia or Driveway and have never transacted with us in the past 15 years.
In addition, our average shipping distance was 932 miles, though we believe once the network is fully built out and inventories return to normal, shipping distances will be meaningfully less.
We continue to learn, improve and add new functionality to driveway.com.
Earlier this year, we launched our fully proprietary new car platform and a more robust finance prequalification module.
Well done, George and team.
On the used vehicle side, our technology is now more advanced or at parity with our e-commerce peers that have been in the market significantly longer.
These new features will enable us to increase our conversion rates by further expanding our consumer optionality.
Driveway continues to provide shop and sale functionality and in-home delivery to every part of our country.
While continuing to expand budgets in key markets, we recently launched our first nationwide advertising campaign on SportsRadio, laying the groundwork for the full rollout of nationwide advertising as the year progresses.
Our team is laser focused on targeting advertising spend, increasing conversion rates and improving performance in our three Driveway care centers.
For 2022, the expected $1 billion in revenues contributed by Driveway represents the amount generated from shop transactions, along with the revenue associated with the subsequent retailing or wholesaling of vehicles procured by Driveway.
This reflects similar revenue recognition to our e-commerce used-only peers.
Driveway Finance, or DFC, is the adjacency that is the most mature and has the potential to massively disconnect revenue and EPS.
Chuck Lietz, our Vice President of DFC, with decades of executive-level experience in the space has overseen the development and expansion of DFC since early 2019.
Under his leadership, we completed the inaugural offering and today have grown the DFC portfolio to nearly $0.75 billion.
Chuck joins us today on the call and will be providing additional insights on DFC's performance in just a moment.
Before closing, I want to briefly touch on electrification and potential future evolution of the current industry sales model.
We are excited and will continue to lead the future move to sustainable transportation and more seamless and convenient ownership experiences.
First, LAD believes that sustainable vehicles are the future and that educating consumers to drive greater adoption is not just good for our business, it's good for our planet.
To that end, in 2019, we launched greencars.com, the leading educational site and marketplace for consumers to research the environmental benefits, performance and affordability of sustainable vehicles.
During 2022, we will be further upgrading and powering up the GreenCars marketplace with Driveway's industry-leading proprietary new and used technology.
This will be supported by a twentyfold increase in our marketing spend to champion education about sustainable vehicle ownership.
In addition, our early learnings have shown that these affinity buyers convert at a higher rate and cost about half the amount of our other e-commerce leads.
Moving on to aftersales.
Sustainable vehicles appear to have lower repair and maintenance needs than comparable ICE vehicles through their first seven to 10 years of ownership.
Now that we are approaching the expected battery replacement windows for Gen 1 DEV and paid PHEVs, ultimate affordability will become much clearer.
Today, there is still limited data on battery replacement and the impact it will have on total ownership cost, residuals or even salvage values.
Combined with income streams from battery replacements and reconditioning, lads in-home service offerings, proprietary diagnostic service equipment and expanded customer retention through longer warranty periods on sustainable vehicles will enable us to both retain and conquest business from third-party after-sales competitors.
Second, franchise laws are determined state-by-state and are an integral part of the U.S. economy.
They established a framework not just for dealers, but for franchisors and franchisees in many industries, not just mobility, though we believe we could benefit from the removal of franchise laws, we view the model's future evolution being driven by removing friction and creating a more seamless experience from build to drive ways for consumers.
The design thesis of our 2025 plan was built on providing consumer optionality and diversifying LAD so that it thrives in any environment.
In closing, our company is just beginning to leverage the benefits of the massive customer data we possess and proprietary technology, growing adjacency and what's possible with a national network and branding.
Unlike other retail sectors, automotive retail is totally unconsolidated, and our 2025 plan is the first to activate the potential of these various components and integrate them into a cohesive, holistic, dynamic and transformative customer experience and business model.
LAD has a track record of exceeding targets through strong execution in any environment, as demonstrated in the 18 months since the launch of its 2025 plan, the 25 years since becoming a high-growth public company and our 75-year history since our inception here in Southern Oregon.
-- delighting our customers and responding to evolving trends while growing revenue and profitability is in our DNA.
In the next few years and those beyond 2025 will be no different.
DFC's value proposition is to provide seamless financing options to consumers governed by an internal credit risk appetite designed to maximize our risk-adjusted cash flows while minimizing volatility during periods of economic stress.
We are a full credit spectrum lender targeting near-prime portfolio which we feel appropriately balance credit risk with the financial spread we earn.
In November of 2021, we completed our inaugural ABS offering, and we're excited with the market's reaction and pricing of the deal.
During 2021, DFC originated over 21,000 loans, penetrating approximately 4% of our retail units and in Q4 became LAD's largest retail lender.
We plan to become a programmatic ABS issuer going forward, allowing us to balance the growth of the portfolio with capital required and credit risk.
Of the loans originated in 2021, the average loan amount was $33,000, the average interest rate was 8%, and the average FICO score was 670.
We have adopted the CECL accounting standards where we record loan loss reserves upon origination and recognize the interest income over the life of the loan.
As a result, individual loans generally are not accretive to earnings until the second year.
Given our plan to ramp originations through 2025 and beyond, we'll be growing loss reserves faster than profits.
In our future state, however, DFC's contribution is clear, assuming a 15% to 20% penetration rate on 1.5 million units sold, DFC could originate between 225,000 and 300,000 loans and contribute up to $650 million of pre-tax earnings annually.
We believe DFC's targeted penetration rate will not impact our relationship with our lending partners.
Looking at the future state and DFC's contributions, DFC alone has the potential to significantly grow earnings per share faster than revenue.
The amount of incremental capital generated by DFC will enable us to further grow and transform LAD in a cost-effective manner.
We appreciate the job you and your team have done to scale and integrate this adjacency within LAD's powerful network.
This will be a huge complement to our core business and a massive profit engine for Lithia & Driveway.
Despite the impacts of the pandemic and inventory shortages, the Lithia channel achieved record levels of profitability and continue to evolve the business to ensure that all customers can buy, sell or service their vehicles wherever, whenever, or however they desire.
This also enabled the company to significantly outperform our 2021 annual operating plans and set us up for another year of high performance in 2022.
I also want to congratulate our LAD Partners Group or LPG winners for their exceptional performance in 2021.
Recognition of an LPG member is a highly coveted award and represents the pinnacle of our mission of growth, powered by people.
Though high-performance resides throughout LAD, these locations demonstrate a relentless and elevated focus on culture, customer experience, and continuous improvement to create the highest level of execution in automotive retail.
Looking forward to 2022 and beyond, our leaders continue to evolve our business practices to address changing consumer preferences or what we call retail readiness.
That means upping our game on how we present vehicles in-store or online, how we price and recondition vehicles, and how we use technology to elevate transparency and convenience in the sales and service experience.
These actions will drive higher volumes in store and nationwide on Driveway, increase customer satisfaction and decrease SG&A as a percentage of gross profit.
New vehicle sales volumes continue to be impacted in the fourth quarter by the current supply demand environment with same-store revenues decreasing 8% and volumes decreasing 21% compared to last year, consistent with the decrease in national SAAR.
Volume declines were offset by higher gross profit per unit, including F&I, which increased 84% over last year.
Our teams excelled in increasing used vehicle volumes to offset the decline in new volumes with same-store sales revenues up 39% and volumes up 11% compared to last year.
Used vehicle gross profit per unit, including F&I, increased 37% over last year.
As of December 31, we had 24-day supply of new vehicles and a 61-day supply of used vehicles.
From an inventory procurement perspective, our store leadership team is taking actions that are within their control.
For new vehicles, this means increasing our sales velocity and exceeding manufacturer expectations, allowing us to take market share and obtain incremental allocations.
For used vehicles, it's increasing the proportion of vehicles we're sourcing directly from the consumer and vehicles we retail versus wholesale and retain in our network.
For the fourth quarter, we saw 74% of used vehicles direct from consumers and 26% were from other channels, such as auctions, other dealers, or wholesalers.
In the fourth quarter, we increased the percentage of vehicles we source from consumers by 8%, earned over $1,400 more in gross profit and turn them 14 days faster.
Turning to service, body, and parts.
Same-store revenues grew 12%, which was driven by an 18% increase in customer pay work and a 27% increase in wholesale parts, offset by a 9% decline in warranty and a 2% decline in body shops.
As consumers return to normal driving habits, hold on to vehicles longer while waiting for new vehicle supply to recover, we anticipate this positive trend to continue.
Same-store SG&A as a percentage of gross profit for the fourth quarter was 58.2%, a 320-basis-point improvement over last year.
This metric benefited from the incremental throughput of elevated gross profit dollars, offset by investment costs to grow Driveway and DFC.
The $45 million incurred during the quarter are a headwind to our SG&A but lay the foundation for significantly increasing profitability in the future that Bryan shared with you.
In summary, our teams remain hyper focused on executing at the highest level possible in this unusual operating environment, focusing on retail readiness, supporting adjacencies and continuing to outperform their local markets in all business lines, which translates to continued opportunities to increase leverage and drive additional profitability as expected in our 2025 plan and beyond.
For the quarter, we generated $538 million of adjusted EBITDA, a 118% 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 $1.5 billion in cash and available credit, which is deployed today would support network growth of up to $6 billion in annualized revenues.
We target maintaining leverage between two and three times and remain committed to obtaining an investment-grade credit rating, which would be another sizable competitive cost advantage.
As of quarter end, our ratio to net debt -- of net debt-to-adjusted EBITDA was 1.35 times.
Our targets for the deployment of our free cash flows remain unchanged at 65% toward acquisitions; 25% toward internal investment in Driveway and DFC, along with capital expenditures, modernization, and diversification; and 10% toward shareholder return in the form of dividends and share repurchases.
With recent market volatility, we believed it was prudent to opportunistically repurchase shares.
In the fourth quarter and to date in 2022, we've repurchased approximately 912,000 shares, representing 3% of our outstanding shares at an average price of $284.
In November, we obtained an additional $750 million repurchase authorization from the board, and as of today, have a remaining availability of $679 million.
Deployment of capital for acquisitions and internal investment is always preferred as they reinvest and grow our business.
However, we had excess cash generated from our 2021 performance and saw an opportunity where the returns generated from repurchasing our stock, which has no integration risk, exceeded the return hurdle rate ranges for acquisitions.
Opportunistic share repurchases allow us to efficiently provide immediate shareholder return.
We remain well-positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and $55 to $60 of earnings per share by 2025 with even more significant upside into the future.
We would now like to open the call to questions.

user
compname says q4 revenue rose 60% to $6.3 bln.
lithia & driveway (lad) increases revenue 60%, earnings per share 36%, and adjusted earnings per share 109%, record fourth quarter performance.
q4 revenue rose 60 percent to $6.3 billion.
q4 adjusted earnings per share $11.39.
quarterly total same store sales increased 12%.

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