Good morning, and welcome to the Lithia & Driveway first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the call over to Jack Evert, Director of FP&A. Please begin.
Thank you. 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. 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 subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures.
Please refer to the text of today's press release for a reconciliation to comparable GAAP measures. We have also posted an updated investor presentation to our website, investors.lithiadriveway.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.
Thank you, Jack. Good morning and welcome everyone. Earlier today, we reported the highest adjusted first quarter EPS in company history at $11.96 per share, 103% increase over last year. Record first quarter revenues of $6.7 billion were driven by strong performance across the Lithia channel and growing contributions from Driveway. The first quarter reflected the responsiveness and adaptability of our model. Elevated GPUs earned in new and used in F&I business lines, along with the increased contributions from after sales, generated $551 million in adjusted EBITDA, providing significant optionality in our plan execution. We accelerated investment in Driveway and Driveway Finance, or DFC, while maintaining our aggressive acquisition cadence.
Last quarter, we shared our updated plan to generate $50 billion in revenue and $55-$60 in EPS by 2025, and we are excited with the progress being made. Total revenues increased 54% over last year, driven by contributions from acquired businesses. Driveway sales grew sequentially through the quarter, reaching the milestone of 1 million monthly unique visitors, or MUVs, in February and completing 3,100 transactions in the month of March for an annual run rate of 37,000 transactions. We're really excited about our consumer thirst for Driveway and the momentum that continues to build. In the first quarter, we retailed or wholesaled 4,250 units that contributed over $120 million in revenue. We continue to target $1 billion in incremental revenue through Driveway in 2022.
This represents shop transactions and the subsequent retail and wholesale of sell transactions, as similarly reported by our e-commerce peers. In addition, we retailed over 30,000 vehicles for approximately $1.2 billion in the quarter through our Lithia e-commerce channels. Driveway Finance achieved milestones within the quarter, originating over $100 million in loans in a month and becoming LAD's number one lender. Overall, DFC originated over 8,600 loans during Q1, and as of quarter end, the portfolio stands at over $900 million. Since announcing our plan in mid 2020, we have acquired businesses that are now contributing $11.5 billion in annualized steady-state revenues, and the pipeline has never been larger.
De-linking $1 of EPS production from every $1 billion in revenue in 2025 will be driven by several key factors to follow that I'd like to reiterate now. Achieving a blended 2.6% new and used vehicle U.S. market share, total vehicle GPUs returning to pre-pandemic levels, driving SG&A as a percentage of gross profit down towards 60% through increased leverage of our cost structure, acquiring a further $9 billion-$10 billion in annual revenues to complete the build-out of our North American footprint of 400-500 locations. No further equity capital raises, meaning no further dilution of EPS. An investment-grade credit rating driving decreases in borrowing costs. Flexibility and headroom in capital allocation for share buybacks in the event of valuation disconnects.
Continued drag on DFC's profitability due to building of CECL reserves as we scale towards a targeted 15% penetration rate. Finally, early benefits from adjacencies with higher pre-tax margins that also carry structurally lower SG&A costs. It's important to remember that contributions from new businesses and adjacencies may still be in the development stages in 2025 and will not fully reflect the magnitude of our future earnings power. Layering on the contributions of additional future aspirations at maturity, we see opportunity for each $1 billion in revenue to produce up to $2 in EPS. Key factors underlying our future state and totally within our control are as follows. Up to 20% of units are financed with DFC, and there is no longer a headwind from our recording of CECL reserves.
An optimized cost structure taking SG&A as a percentage of gross profit below 50%. Finally, mature contributions from our other horizontals such as fleet, lease management, charging infrastructure, consumer insurance, and other new verticals. Foundational to our strategy is convenient proximity to the consumer and our physical infrastructure efficiently leveraging for vehicle procurement, reconditioning, and storage. The LAD network is comprised of nearly 300 locations strategically positioned at 250 miles from 95% of the population and within 100 miles from 60% of the population. This puts us in considerably closer proximity to consumers than any other industry player.
As we add density to our network, the synergistic overlay with Driveway deepens, enabling faster delivery, quicker turnaround times for reconditioning, structurally lower logistics costs, a higher proportion of sales with no shipping fees, while also providing DFC with a larger base of loans to penetrate from. In addition to the previously announced Sullivan transaction, we acquired Three Stellantis, Dodge, CJD stores in Las Vegas that are expected to generate $400 million in annualized revenue and diversify our brand mix in the Las Vegas market. Total acquisition revenue completed year to date totals $1.1 billion. Since the announcement of our 2025 plan, we have acquired a total of $11.5 billion in annualized revenues, representing 58% of our initial goal. Additionally, we have another $1.9 billion in annualized revenue under contract or LOI.
The acquisition climate remains robust and we continue to add to our pipeline, which sits now at over $15 billion. We have not altered our return thresholds of 15%-30% of revenue or 3x-7x normalized EBITDA and are confident in our ability to find partners excited to join us at reasonable prices. This discipline ensures we hit our after-tax return thresholds of 15% and stay below our targeted leverage of 3x in a normalized earnings environment. Whether motivated by succession planning or monetization, sellers are attracted by Lithia's track record of closing deals timely and confidentially, retaining over 95% of employees and becoming part of our industry's future.
With the benefit of the elevated earnings environment, businesses acquired since the launch of the 2025 plan have contributed $875 million in adjusted EBITDA, adding considerable fuel to our capital engine. Now turning to Driveway. Our investments over the past three years in personnel, software, and logistics layered over the physical network of our Lithia channel have created an innovative consumer-centric platform that is finding a receptive audience and scaling rapidly. Driveway now offers the largest selection of negotiation-free new and used vehicles deliverable anywhere in the country. Different than our traditional or e-commerce peers, our new vehicle inventory represents all major brands and selection of used vehicles ranges from certified used vehicles to 20-year-old value autos. These offerings were designed to attract a full spectrum of consumer affordability and full lifecycle of after-sales experiences, creating the largest TAM of any single company in personal mobility.
Considering our growing physical network of over 1,100 associates distributed across North America focused on procuring used vehicles, our design is quite difficult to replicate or compete with. In the first quarter, over 97% of Driveway transactions were incremental with consumers we had never transacted with in the past 15 years, and the average shipping distance approximately 920 miles. Amidst this growth, our average Google review was 4.6 stars, driven by our focus on building the business sustainably and earning consumer trust for the entire vehicle ownership lifecycle. So far in 2022, we have opened 17 new markets and now directly reach 29% of the U.S. population with targeted local advertising. Recently, we also expanded our marketing spend to include the March Madness Basketball Tournament and our upcoming sponsorship of the iHeartRadio Music Awards.
These strategic investments have driven meaningful additional traffic while still improving our conversion rates. As we continue to expand our nationwide campaigns throughout the year, we reinforce our view that Driveway is well on its way to becoming the dominant profitable e-commerce online retailer. Our engineering teams have also continued to innovate. Earlier this quarter, we launched our first in-market proprietary new vehicle shopping experience. Consumers now have all the transparent and convenient Driveway used vehicle functionality that they've come to love on used vehicles now on new vehicles too. Expanded functionality for new includes the convenience of seeing all applicable incentives and rebates factored into pricing up front, along with instant online F&I-financing approvals. These new features have meaningfully improved our conversion rate and increased the volume of new vehicles sold.
Doing the coding ourselves means we can deploy continuous enhancements plus nimbly and proactively respond to consumer feedback and trends. In March, we announced our collaboration with US Bank to offer real-time payments to consumers selling their vehicles, making Driveway the first online platform to offer this exciting new functionality. Instead of waiting several days for checks to clear, funds are deposited into the bank account instantly before the vehicle even leaves their driveway. Increased efficiency in our care centers, fine-tuning of our finance algorithms, and the deployment of our new vehicle offerings drove the first quarter's considerable outperformance. In the context of tight inventories and seasonality, the sequential growth being realized is even more impressive. We are more confident than ever that we will exceed our 2022 target of 40,000 transactions that was established only two short quarters ago.
Turning to sustainable vehicles, we have seen significant consumer demand for highly competitive new vehicles being launched by our OEM partners. In our conversations with our OEM partners, they view the dealer as an integral part of the sales experience, their communities, and throughout the ownership life cycle. In addition to our advocacy of sustainable vehicles on GreenCars and in the Lithia channel, we are actively investing in our physical footprint and installing charging stations. With over 600 installed to date, we can effectively sell, service, and charge electric vehicles. Web traffic to GreenCars has significantly increased with 260,000 MUVs in March. We also recently powered up GreenCars Marketplace with Driveway shop and sell technology. Organic traffic grew faster than paid search, and education derives 80% of the MUVs.
Assigning all marketing costs to the 20% of unique visitors that are GreenCars Marketplace still results in the lowest cost per MUV of any of our channels. Consumers interested in zero or low-emission vehicles can now easily jump from educational offerings directly to LAD's largest sustainable inventory, seamlessly accessing the convenience and transparency of the Driveway experiences. As our most mature adjacency, DFC has become an integral part of our strategy, transforming the margin profile of our business. It is important to reiterate DFC's position as a top-of-funnel captive lender for the quickly growing LAD customer base. Chuck Lietz will be providing information on DFC and our first detailed guidance on the business in just a few moments. In closing, LAD's 2025 plan is well underway and our future is clearer than ever.
Our massive competitive advantages, difficult-to-replicate optionality, and synergistic design across adjacencies has positioned us as the consumer choice for complete ownership life cycle experiences. Please spend some time on our newly revised investor presentation and our new slide 6 that illustrates the design, timing, and drivers of our current and future verticals and horizontal adjacencies. The incremental free cash flows we are earning allow us to accelerate our plan and transformation while also providing for near-term shareholder return. Lastly, we manage our business for the long term, remain nimble and aware while not being distracted by the supply levels, monthly price changes, or factors outside of our immediate control. Some believed our 2025 plan was ambitious when announced 21 months ago. Reflecting now at the first third of the initial timeline, we are considerably ahead of that plan.
Today, we look beyond 2025 to meaningfully positioning Lithia, Driveway, and GreenCars as the dominant leader in auto, the largest retail sector in the country. With that, I'd like to turn the call over to Chuck.
Thanks, Bryan. DFC is now Lithia's number one lender, and in the first quarter, this translated to a penetration rate of 6.2%. Loans to prime or near-prime customers with a FICO score above 660 accounted for 67% of the loans, while loans to subprime customers with a FICO score below 620 accounted for 7% of DFC's loans. Used vehicles accounted for 78% of the 8,600+ originations, up from 65% a year ago. DFC is top of funnel, which from a risk management perspective is highly beneficial, particularly in a rising rate environment as we continue to leverage LAD's vast transactional data to evaluate and adjust our lending practices.
During the quarter, DFC modified our credit policies to mitigate risk by limiting loans with elevated LTVs and selectively adjusted our offer rates to reflect the impact of rising interest rates. The average FICO score in Q1 organically increased to 677, with DFC not seeing any degradation in yield, helping DFC maintain an appropriate risk-adjusted return. For the quarter, DFC's pretax loss was $2.1 million as our interest rate margin of $13.6 million reflected a yield of 8.5%, which was offset by an increase in the loss provision driven by the growth of originations. For 2022, we are guiding a mid-7% penetration rate with a 10% rate exiting December and an average loan balance of $30,000 with a 70/30 used to new mix.
Due to the recording of CECL reserves, we forecast a net loss of $9 million to be generated. DFC's growing penetration impacts 2022 F&I revenue, but it's important to note that the interest income earned and recognized over the life of the loan is at least three times the amount earned from third-party commissions on a fully discounted basis. I encourage you to review slide 11 in our deck for long-term guidance. With DFC's current operational platform scaling concurrently with LAD's growth, the opportunity to achieve our penetration rate targets while striking the optimal balance of capital requirements, risk mitigation, financial objectives, and maintaining the relationships with our current strategic lending partners is high. DFC's contribution today is masked due to the growth of our CECL reserves, which are outpacing the interest income earned on the portfolio in the short term.
If originations stopped growing and stayed flat at the $100 million per month we saw in March, DFC would break even on a monthly basis in August and start contributing earnings. As a reminder, we see a clear pathway for DFC to contribute $650 million in earnings at a future state of 15%-20% penetration on our $50 billion revenue base. As a captive lender, the earnings growth will be fueled by capturing a greater share of the vehicles we are already selling. Now, I'd like to turn the call over to Chris.
Thank you, Chuck. Our operational teams continued last year's momentum and delivered another record performance, and we are confident that our team remains nimble and will continue to adapt to the changing market dynamics and evolving supply chain developments by OEM, by region and by market. The entrepreneurial mindset of our teams is thriving in this environment, and we're excited for the future state we have built under our mission of growth powered by people for Lithia and Driveway. With the sales levels of the last two years well below normal, we continue to see strong demand for new and used vehicles. Tight new vehicle inventory supply impacted our ability to satisfy the demand for every manufacturer, with same-store revenues down 3% and volumes down 17%. We expect that pent-up demand will convert into sales as the availability of inventory improves.
In this constantly changing environment, our decentralized model and culture of taking personal ownership at the local market level has allowed our 22,000 associates to mitigate these headwinds and increase profitability with total new gross profit per unit, including F&I, increasing over 84% from last year and consistent with the fourth quarter. Turning to used vehicles, the strength of our model in terms of top-of-funnel inventory procurement, reconditioning expertise, and carrying inventory that matches all levels of consumer affordability enabled us to increase revenues 31% over last year and down only 1% on volume. This outperformance of the market was led by our core and value auto sales, which increased almost 3%, offsetting the headwind faced and the availability of certified pre-owned vehicles.
In addition, Driveway Sell, our procurement channel, helped us resupply inventory in the quarter and will continue to contribute to the competitive advantage of our omni-channel strategy as the vehicles purchased on driveway.com contributed an additional $400 in gross profit per unit over auction purchases. Total used gross profit per unit, including F&I, increased 30% over last year. A key driver of our results was the contribution of our nearly 1,000 finance managers. In today's rising rate environment, their years of experience in matching the complexity of consumers' financial position with the lending options at over 180 financial institutions, including Chuck's team at DFC, is essential. Customizing their presentation to each consumer increased our penetration rates in all major product lines, driving meaningful increases in F&I per unit, which increased $492 or 28%.
As of quarter end, we had a 27-day supply of new vehicles and a 50-day supply of used vehicles. While we saw increasing deliveries in our lots in March, visibility of our new car availability remains fluid and our operational teams are focused on taking actions within their control to increase turn and gain share. These actions and our top-of-funnel procurement position at Lithia and Driveway enabled us to source 76% of used vehicles from consumers with the remainder sourced through the other channels, including auctions and other dealers. Our return on investment on consumer-sourced vehicles was 3.8 times higher than those sourced at auction, as we earn higher GPUs on consumer purchases and term them at a much higher rate.
We have not seen a material impact on our consumer demand from higher gas prices or interest rates and saw a record amount of digital traffic on our websites with 16.5 million unique visitors visiting our various channels in the quarter, are up 40% on a same-store basis. With our wide selection of inventory offerings at all levels of affordability and the GreenCars marketplace powered by Driveway, we are well positioned for any change in consumer preferences. Our after-sales business grew 13% as pandemic restrictions eased and miles driven increased, with the aging of units in operation providing a future tailwind for years to come. Performance was led by the wholesale parts business, which was up 35%, customer pay increasing 15%, and body shop increasing 5%. As expected, warranty work declined 3%.
Same-store SG&A as a percentage of gross profit for the quarter was 57.5%, a 500 basis point improvement over last year. While this metric benefited from the flow-through of elevated GPUs, it also contained the investment in Driveway and Driveway Finance in terms of IT, marketing, personnel costs, and CECL reserves that are laying the groundwork for future profitability. We remain focused on structurally increasing the leverage of our cost structure, for example, by expanding the oversight and span of influence of our highest-performing leaders and empowering them to take the actions that bring us closer to 60% SG&A as a percentage of gross profit in a normalized environment.
In summary, each day our leadership team is rising to the challenge of navigating the current operating environment, continuously improving all business lines, raising the level of digital retail readiness, leveraging costs, and driving incremental profit opportunities at each location. Their efforts will continue to evolve our in-store and in-home solutions to meet consumers wherever, whenever, and however they choose. We remain humble and never satisfied, and look to continued record performance levels throughout 2022, and stay relentlessly focused on achieving our 2025 plan. With that, I'd like to turn the call over to Tina.
Thank you, Chris. For the quarter, we generated $551 million in adjusted EBITDA, a 108% increase over last year, and $461 million in free cash flows, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash: interest, income taxes, dividends, and capital expenditures. Over the last twelve months, we have generated over $1.3 billion in free cash flows, which, if fully deployed to fund network growth, would support the acquisition of up to $5.2 billion in annualized revenues. We target maintaining leverage between 2x and 3x and remain committed to obtaining an investment-grade credit rating, which would be another sizable competitive cost advantage.
As of quarter end, our ratio of net debt to adjusted EBITDA was 1.35 times, and as a reminder, this does not include pro forma contributions from acquired businesses that have been operated for less than a year. Our disciplined capital management provides us ample opportunity to fund our accelerated growth and acquisitions, Driveway and DFC, while being positioned well for the future. With the elevated earnings environment and our current liquidity position, we funded DFC's portfolio growth through a mix of working capital and availability on our ABS warehouse line. Our targets for the deployment of our free cash flow remains unchanged at 65% toward acquisitions, 25% toward internal investment, including Driveway and DFC, along with capital expenditures, modernization, and diversification, and 10% towards shareholder return in the form of dividends and share repurchases.
We have repurchased approximately 515,000 shares so far in 2022 at an average price of $292.80. With 572 million remaining on our authorization, we have optionality to take advantage of market volatility and opportunistically repurchase shares going forward to provide immediate shareholder return. Factoring in last year's activity, we have repurchased approximately 4% of our float. Additionally, earlier this morning, we announced a 20% increase to our dividend to $0.42 per share. We are well positioned for accelerated, disciplined growth on the path toward achieving our plan to reach $50 billion in revenue and $55-$60 in EPS by 2025, with even more significant upside in the future. This concludes our prepared remarks. We would now like to open the call to questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Daniel Imbro with Stephens Inc. Please proceed.
Hey, good morning, everybody. Thanks for taking our questions.
Good morning, Daniel.
Bryan, I wanted to start on just inventory. You know, the days inventory on new actually stepped up, I think, up to the high 20s. That seems like it's above peer levels, but GPU's also stepped up. Can you maybe break down, you know, what drove that sequential step-up in GPU even as inventory improved a bit?
Yeah. Good morning, Daniel. This is actually Chris. I think you know the first kinda highlight comment we would make is that demand just continues to exceed any supply we have with any OEM. You know, while we're seeing a little step up in inventory DSO, we still have you know really an unlimited supply of new car customers out there right now ready to make those decisions. You know, as an example, we started the month with 13,000 vehicles on the ground, and we sold around 24,700 in the month, which was an increase month-over-month of around 4,300 units. We received 23,700 units, which was an increase of 1,800.
Even with that, you know, increase in supply, the demand outran the supply again, and we're sitting with ending inventory of 12,000 units on the ground ready to sell. You know, this situation is very fluid. The line of sight on it is very near term. I think, you know, we just have to take month to month and get every vehicle we can and sell every one that comes in with high turn and receive more allocation than some of our competitors.
Chris was just speaking about new as well. We ended at 50-day supply on used, and we're pretty active in being able to find vehicles, including the 0- to 2-year-old vehicles that we're able to get off of lease a lot easier than some of our peers.
Got it. That's really helpful. One for Tina or maybe actually for Chuck, but on Driveway Finance, you know, I appreciate the detailed long-term outlook in the slides. Can you talk about, you know, any changes you're seeing in credit performance in any areas of the credit spectrum? If you had to tighten your lending standards, how would that affect the long-term projections you provided today in the slide deck?
Yeah. Thanks, Daniel. This is Chuck. Great question. First part of your question was regarding our lending sort of credit policies and practices. As I had mentioned in my comments, we did actually in the first quarter limit for some of our lower credit spectrum LTVs or loans to value to a lower percentage, which should limit our risk and mitigate some of our exposure. To the second part of your question, relative to long-term performance. I think it's critical to note that we will continue to take advantage of Lithia's top-of-funnel position of having a tremendous amount of data that we can react on a real-time basis to make sure that we're not taking an undue risk-return ratio.
That's really the critical part, is we will change our credit policies and credit discipline to make sure that we maintain our fiscal risk-adjusted, fully burdened rate of returns and hurdle rates. That will be what will allow us to continue to hit our projections regardless of the economic cycle as we go forward versus our projections.
That's really helpful. If I could sneak one more in there. Just affordability and maybe used demand has been really topical. Bryan, could you address maybe how that progressed through the quarter and then any changes you've seen through March or maybe even into April tax refunds got paid? Thanks.
Sure, Daniel. We haven't seen any material changes in affordability as of yet. We're assuming that at some point, those funds that much of the population receives do begin to run out. But for the time being, it looks pretty good. I think in April, we're trending up about 9% in unit sales in used. It still looks strong and the balance between certified core and value is still looking similar.
That's great. Well, thanks so much for all the color, guys, and best of luck.
Thanks, Daniel.
Our next question is from Rajat Gupta with J.P. Morgan. Please proceed.
Great. Thanks for taking the question. You know, there have been a lot of emerging concerns that the economy might run into a mild recession or we might see a slowdown in the consumer. You know, could you give us a sense of like how you expect the business to perform if you do run into some sort of a mild recession here, maybe later this year or early next year? If you could help address investors' concerns around like what levers do you have in the business to offset pressures on the volume side of the business, and also like other parts of the business. Just what will be the puts and takes?
You know, maybe you can start there and have a couple follow-ups.
Sure, Raja. Good question. I think most importantly, consumer confidence currently is at its lowest level in almost 24 months. We're already seeing the impact of that. Fortunately, the supplies are balancing that out. Even though the consumer confidence numbers are pretty low, we still see a robust environment. We imagine that later this year and maybe even into next year, that may begin to soften a little bit. But more importantly, we built our model off of multiple verticals to create optionality with consumers. That is the most important part of the Lithia & Driveway strategy that we now have Lithia that's robust in growing its network.
We have Driveway that provides consumers with in-home transparent experiences in a one-priced environment, with considerable numbers of cars and now in both new and used vehicles, allowing us to reach deeper into the U.S. population. Whereas two years ago or a year and a half ago, we really only touched about 1% of the U.S. population. Today, we actively touch almost 28% of the population. Now with national advertising, we feel like national advertising in the different regions like on March Madness, we're now touching close to 100% of the country. Our ability to bring optionality to new consumers and conquest incremental customers into our business and keep them in that life cycle through sale, shop, and service is an important part of our design. Lastly, I would comment on this.
When we think about consumer demand changes or consumer shifts in behaviors, we are seeing a nice shift to sustainability. I mean, we were reaching almost 5% market share as a country in BEVs, which was quite special. We sold over 10,000 sustainable vehicles in the quarter. Okay, and it made up 7% of our volume. GreenCars is a commodity that is capturing affinity customers that are looking for sustainability, and GreenCars will become not only the current leading educational source, but it will become the leading marketplace for sustainable vehicles, not only nationally but internationally.
Got it. Great. Thanks for that color. Maybe on parts and services, you know, strong growth here in the first quarter. Can you maybe give us a sense of how you expect this to progress through the rest of the year? You know, maybe across the different buckets, you know, what you're seeing currently and going forward as well. Like which buckets do you expect to recover faster or slower, you know, across customer pay, warranty, you know, collision, et cetera. I have one more follow-up. Thanks.
Yeah, Raja, this is Chris. You know, obviously miles driven is up, you know, given kind of going post-pandemic and seeing people actually out on the road again, definitely creates an environment where, you know, the service opportunities come more front of mind on vehicles maybe that have had some deferred maintenance based on, you know, periods of lockdown. In addition, you know, we have 270 million of UIO in our car park, and because of where we're at on the new vehicle supply chain, the aging of those vehicles continues to run past the 13-year mark that we've had for history.
I think the results of those things, those items led to what you saw in the quarter, where, you know, CP was up 15%, warranty was down slightly, which again, if you see two years now of reduced SAR, you're gonna expect to see some warranty decreases over the coming months. Wholesale parts was up dramatically, which tells you there's a lot of, you know, one-off shops that are doing work, you know, lower down the chain, for consumers that also have repair needs. Then lastly, our collision centers, where we get more vehicles on the road, they tend to bump into each other from time to time. I think as far as looking forward into 2022 and beyond, I think we have a good run rate in this countercyclical fixed ops business that we have.
We expect to see more of the same through the back half of the year.
Got it. Great. Just lastly on capital allocation, you know, obviously the balance sheet continues to delever here. You know, what are you seeing today in the M&A environment? You know, is this still like a favorable time, or are you still getting like favorable multiples, you know, for the deals you're looking at? You know, also like given where we are, you know, just from the economy perspective, you know, what would be a more near-term preference, you know, in terms of M&A versus buyback? You know, given where the shares are trading today versus, you know, what you're seeing in the M&A market out there. Thanks.
Sure, Raja. This is Bryan again. On the M&A market, we're definitely seeing balances in pricing. We now have either closed or have under contract $3 billion so far year to date. That's a big number. It's a little higher than what we expected. Most importantly, we do not adjust our disciplines, okay? We're finding partners that are excited about joining us at multiples that we look at on a normalized basis to be able to do that. We do also balance our stock price, okay? Look at the volatility in our space, which is obviously quite high to allow us to utilize capital in the best possible way, okay? When we're buying back, it doesn't mean that you know that we think that that's the right stock price.
It just means that we've measured the volatility and hit it at a opportune time to be able to do that. Now, even with the $3 billion through the first half of the year run rate, which should put us somewhere between $5 billion and $6 billion coming out of the year, and buying shares back at a similar cadence of the 4% that we've bought back of our float over the last 4 to 5 months, we still have plenty of capital that's being generated, so it's important to remember. We generated almost $500 million in free cash flows in a quarter, okay? So when you do look at this isn't the same as a startup that's losing money. When we spend our money on capital, we get network, okay? When we spend it on acquisitions, I mean, we get network.
That network persists forever and allows us to get closer to the customer, okay? Others that lose money, the money's gone, okay? We kind of look at the fact that we make $2 billion in free cash flows and then apply that to our network or apply it to less share count to be able to get there. Whereas there's a lot of dilution in startups of how they think about their business relative to where we both end up in the long run, which ultimately will reflect in what the consumers are going to expect in terms of pricing, in terms of the major cost advantages that we sit here with in our design that we're executing now on quite well.
Got it. Very helpful. Thank you, and good luck.
Thanks, Rajat.
Our next question is from Chris Bottiglieri with Exane BNP Paribas. Please proceed.
Hey, guys. Thanks for taking the question. Just wanted to ask about the impact of rising rates. I guess, like to date, on average, have you seen lenders begin to pass through some of the funding costs to customers yet? If so, how much on average? Historically in rising rate environments, what impacts have you seen on your business when rates have risen? Has there been any impact to your F&I profit per unit or through your ability to mark up loans? Has there been any changes to insurance product attach rates? Any historical perspectives appreciated.
Yeah, Chris, great question. This is Chuck. I'm gonna handle the lender part of your question first. As I mentioned in my prepared comments, we did selectively increase,
In our rate card for DFC about 25-50 basis points, particularly where we felt like the market had responded in a similar fashion. I think that's really sort of what I would say is that most lenders are being proactive in terms of raising rates selectively. We don't see a lot of across-the-board increases. I would say particularly in the prime and the near-prime segments of the market, most lenders are staying very competitive and holding the line. If there are future rate increases, we do expect that to change as we go forward, and DFC will continue to react accordingly. Bryan, you wanna cover the business part?
I'll let Chris run through the business part.
Yeah. I think what I would add to it is, you know, if you look over the last 12 years, we saw a really modest increase in what customers were willing to accept as far as monthly payments. You know, 12 years ago, I think on the used side, we ran somewhere around a $300 payment per month on average. Coming right now into 2022, it really accelerated right in the middle of the pandemic, you know, that average payment in a high-demand environment went to $456. I wouldn't say that, you know, that was no interest rate impact.
I think the big question that we've been kinda talking back and forth between, you know, our finance teams and our operations teams is that $456 going here to stay, or is that something that rising interest rates are going to cause the actual payment to change? When you go back in time and the last time that we had to talk about rising interest rate environments, in a recessionary period, what we saw customers do is they didn't decide to not buy a car or buy a car. If you want a vehicle, you're gonna get a vehicle. You may just drop down and de-content that vehicle or drop down in a model class, to make sure that you get a vehicle.
I think with the technology advancements that you're seeing in vehicles today, a three-year-old newer car that may be stepped down one level may be more advanced and more technology ahead of where your vehicle was that you bought three years ago, even if it was, you know, one up on a class. So I think this is something that's fluid for us to watch right now, but we are definitely seeing payment levels for consumers, you know, at some of the highest that we've ever seen. The question then is, in a higher interest rate environment, are customers going to drop their payment or just drop the valuation of the vehicle they purchase? We're anticipating watching that throughout the rest of the year.
Thanks. One quick follow-up. You've kinda hit on this a little bit already, but when you look at, like, your mix, are you seeing any? And I'm not sure how close you monitor this, but are you seeing any material deviations by income? Like, are you seeing the high-end consumer with materially stronger patterns than your call it low-income consumer? Any way to stratify that, for us?
No, Chris. It's very similar to how it's been over the last few years.
Gotcha. That's helpful. Thanks. Thanks, guys.
Our next question is from John Murphy with Bank of America. Please proceed.
Good morning, guys. I just had one question on the used vehicle side. I think in the revenue mix, wholesale went up from 3.1% to about 5.8%, based on what you guys were disclosing, and I know it's on revenue, not units. I'm just curious why that would increase as a % of the revenue base if, you know, you're trying to retail everything you possibly can and just, you know, it's hard to get these vehicles. I mean, why would you wholesale more vehicles?
John, this is Bryan. I would say that it's because, I mean, we did purchase about 2,300 vehicles last month, and it's not targeted purchasing. When we purchase off of Driveway, we buy everything. Okay? Whereas before, our stores always just bought things that they were looking for or took things on trade that they were more aggressive on for things that they wanted, whereas in Driveway, we're aggressive on everything, okay, because we have an exit strategy, whether it's wholesale or whether it's a retail channel to be able to do that. I'm thinking that probably had a, you know, maybe a 100 basis point impact to that number.
Okay. also on used, I mean, the percentage margin went down, but GPUs are up. you know, if we saw some normalization or fade in used vehicle pricing, it's probably not coming down too much anytime soon just 'cause we're so short of vehicles. if you saw that price fade to some degree, you know, how well do you think you could hold the dollar GPU and the percent margin would go up? I mean, the dollar GPU is obviously much more important.
Yeah. I think it's important to remember that we buy our inventory monthly and that we run at a 50-day supply. Any changes in market conditions can be offset quickly by new incoming inventory. In terms of holding margin, it's truly a function of the demand market. I would say that it depends on what happens. If it's a slow economic impact, it's one thing. If it's something more extreme like Russia moving into, you know, western Ukraine or possibly into eastern Poland or something, now you're starting to talk about massive impacts that could happen quite quickly. You now have these major emotional disconnects in consumers. I don't know that we can give you an exact indication.
I would just look at magnitude and speed of where the demand comes from. Because remember, we've been talking about for the last two years that this is a 75% demand cost and 25% inventory cost. Now, it's definitely now a maybe 50/50 inventory because inventory has prolonged its shortages for a much longer period of time.
Hey, John, this is a reminder as well. As a top of funnel, you know, new car dealer that gets used vehicles coming in on trade, you know, we're making about $1,900 more on vehicles that come in from consumers than that we buy at auctions or from other dealers, and we turn them much faster.
You know, it's a huge advantage that we have, one, to react to the issues that Bryan talked about, but just to, you know, continue to make sure that we have a very profitable and a pipeline of inventory coming in quickly on the used car side.
I'm sorry, just one more on the used side. I mean, what do you guys think of the Carvana acquisition of the ADESA Physical Auctions? Does that impact your sourcing, your costs at all, or I mean, do you just kinda make a left turn away from those auctions and go to Manheim and do more consumer direct, you know, consumer sourcing? I mean, what's the kinda fallout? That's a big one transaction in the industry.
Yeah. I mean, we're kinda benign to it. I mean, we haven't given specific instructions like I believe there's now seven manufacturers that have pulled cars from ADESA. Important to remember, and I believe the rest are planning to do it soon, which, you know, is part of that profit stream. I would also remember that, you know, ADESA lost money pre-COVID, and they lost tons of money during COVID. So to us, it was more of an infrastructure play, you know. Now, I believe Carvana goes from, what, 22 reconditioning centers to about 70. So even sitting there, they still have about a $500 logistical disadvantage over our network that sits within 200 miles, 240 miles from the average customer in the country. They still sit at about $550 with 70 locations.
you know, I guess that's how we kinda look at it, is what are the cost advantages that we can, you know, transpose into our consumers' pockets, and a little bit different way of maybe what you thought about it. you know, that's another drag I would think on their earnings at some point, especially knowing that most of the inventory is getting pulled.
That's incredibly helpful. Then just one last one. I mean, as you look at the last two years and then this year, given the supply constraints, new vehicle demand is gonna be at recessionary levels for three years running. I know there's a lot of talk about, you know, a potential recession, which, without a lot of data to back it up, to be perfectly honest. You know, if we look at autos, even if we went into a recession, isn't there a good chance that new vehicle volume in the next couple of years could still even be up in the face of that? Isn't this the industry that kinda leads the economy out of the trough? I mean, what do you, how do you think about all this?
It just seems like, particularly for autos, is a little bit overblown.
We would agree with you that when we've been running at 13-14 million SARs, there's massive pent-up demand. Obviously, the average car in the car park is now almost a year older. You know, and despite the fact that maybe we're overearning on GPUs a little bit, if you can add 20% to the volume, which has a trickle-down effect into the used vehicles and the service body and parts, we believe there's massive tailwinds coming and, you know, and we're excited of whatever environment possibly is there, even if it's recessionary. Because I believe it's going to allow more consumers to get into the market, that today aren't willing to buy at MSRP, okay? 'Cause that's something that's quite important to remember, okay?
That obviously has its own implications on the 15% or 20% of consumers that have bought over the last 18 months, that may have a little bit more disequity in the coming years. Ultimately, we think that there's a lot of tailwinds coming in whatever environment, whether it's continued strength or in demand or whether there's a little bit of softening, which will allow more consumers to come into the market.
Okay. It's helpful. Thank you very much, guys.
Thanks, John.
Our next question is from Bret Jordan with Jefferies. Please proceed.
Hey, good morning, guys.
Hi, Bret.
On the topic of negative equity that you just mentioned, I guess, if there's gonna be a move to maybe a lower loan-to-value in conjunction with maybe some negative equity showing up, do you see that having any real impact on sort of a national SAR level, or is it small enough it really doesn't count?
Brett, you're right. It's small enough. I mean, that's why I made the comment. It's 15%-20% of the consumer base that have transacted. Remember also that when you're calculating that this equity, it's not just this equity on the car they're buying. They're offsetting about half of that on overvaluations of the trade-in that they're dealing with. You're only taking about half of that problem and carrying it forward on about 15%-20% of the consumers. We don't think it will have a material impact, even if margins continue for another couple years.
Okay. A question on the, this wholesale parts business. I mean, obviously pretty significant growth there. Is there anything driving that, I guess, from a mix standpoint? I mean, some of the collision guys had talked about supply chain problems. Are your wholesale parts growth more mechanical or in the collision space or, you know, what's driving that strength?
Well, we did have body shop that was finally up, but I really believe that it's what Chris spoke to, which is really that we got do-it-yourselfers that still are working from home and, you know, they figure out how to manage their time better. As such, they're buying parts directly, and we're not putting them on the cars for them, or we're selling them to the shops that maybe are a little bit more cost-effective than the normal dealer. Now, we do sell non-OEM parts to consumers as well, and we've done that for now almost three decades, okay. Post-warranty period, we're pretty price competitive. In our markets, there's not a lot of aftermarket, you know, business left over after, you know, after we take it post-warranty period.
Okay, great. I appreciate it. Thank you.
Thanks, Bret.
Our next question is from Kate McShane with Goldman Sachs. Please proceed.
Hi. Good morning. Thanks for taking our question. Most of our questions have been answered, but just in the sense of just the impact of higher gas prices, I know you've mentioned overall it's had no effect on demand, but has there been any change in mix, in terms of demand for larger vehicles and SUVs? Has that changed at all given the change in gas prices?
The only mix shift, and thanks for your question, Kate, is we were up 58% in sustainable vehicle sales. You know, that's a pretty big unit shift, okay? That could have some impact from gas prices. Obviously there's affordability issues that come with sustainability. I think with people having a little bit more money in their pockets, it does create that transition that we're all hoping for a little bit quicker. Outside of our traditional vehicle sales or a mix from more conventional or bigger vehicles, we're not seeing massive shifts away from large SUVs or trucks like we did see what was it about 10 years ago when we went through the gas crunch a decade or so ago.
Today it looks pretty stable. I would expect that as things subside and people are running out of their funds that they receive from the government, I would expect that we'll see some subsidized or some a mellowing of growth rates in our sustainable vehicles. Now, hopefully, we can continue to take more market share and exceed what the national levels are to be able to conquest market share.
Thank you.
Thanks, Kate.
Our next question is from David Whiston with Morningstar. Please proceed.
Thanks. Good morning. On DFC, you mentioned on the call earlier that you give customers a tailored presentation to them. I was just curious, how do you present that value opportunity for the customer to choose DFC over one of the many other lending partners out there like a Chase, Capital One, Ally, et cetera? Is it purely? I suspect that you're not just purely undercutting them in interest rates, but if you could just give a little more detail, it'd be great.
Thank you, David. This is Chuck. First, you know, within our environment, we have the direct and indirect lending model. It's actually our F&I specialists within our dealerships who actually are placing the paper with the lender of best fit. They really are looking at each individual consumer's needs in terms of how they want to structure the deal in terms of potentially down payment, interest rate, term, and other factors to make sure that they have the optimal mix of, you know, meeting their needs and their individual financial situation, and then matching that to a lender like DFC.
I think one of the big advantages for DFC is that we can communicate with our fellow employees on a real-time basis to make sure that when we have optimized what's best for the consumer, we can respond with an offer that fits those needs, and that's one of our big competitive advantages.
Okay. Shifting gears over to the continued growth of Tesla with their direct-to-consumer model, I'm just curious if your either your premium brands or any of your brand stores are getting hurt at all by Tesla's growth. If not, would they be if there was no chip shortage impacting production?
We are not seeing it, okay? Though Tesla's market share continues to grow, we were up in the quarter. BMW was up 31% in unit sales, and Mercedes-Benz was down just a touch, okay? You know, the two big competitors are looking pretty good. The super high lines, I mean, I'm not sure those are that relevant. Genesis was up almost double over last year. There's some real keys. The rest of it's all premium lux, probably not that relevant even though some of them were up over 100%. You know, we think that the DTC model is how we mirrored Driveway and GreenCars' experiences, and I think that's important to remember.
We also, I would imagine, are one of the largest resellers of Tesla vehicles in the country, knowing that we sold 10,000. You know, to be fair, it's setting a high bar for our manufacturers to aspire and to compete with. Today, they're doing a pretty good job at it because 70% of those sustainable vehicles we sold in the quarter were from our traditional manufacturers and were new. Okay. We got every manufacturer pretty much now that has a full BEV. They also have plug-in hybrids, which are almost 30% lower in cost.
In fact, I think I'm buying a BMW X5 hybrid that goes 32 miles on a charge, which means I pretty much never have to put gas in my car, and nets out at $60,000, fully loaded X5 with the federal funds. We think that they're nicely positioned, and most of the mainstream manufacturers have quite a bit of cars coming through as well. I think maybe even more important in terms of the DTC. We're very well aligned with our manufacturer partners from a tier one and a tier three level in marketing and from consumer experience from factory to Driveway that is the right answer for the consumers that will ultimately drive market share for their growth in the sustainability sector as well.
Let's hop just real quick finally, do you guys still own your stake in Shift? If you do, what are the long-term plans for that?
We do. We still. I don't even know what our percentage. I'm gonna guess 15%-16% of Shift. It's still a wonderful source to be able to share information and ideas and still like to have that as a resource knowing that they're 300 miles away and their views on the new world of e-commerce is important to how we think about things. I hope they feel the same about us.
Okay. Thanks, everyone.
Thanks, David.
Now our final question is from Glenn Chin with Seaport Research Partners. Please proceed.
Hi. Good morning, folks.
Hi, Glenn.
Hi, Bryan. Industry chatter has it that Lithia sold several stores in the quarter. Can you talk to us about why the stores were sold, the annualized revenue-
Sure
they contributed, and if you can, the multiples that you're getting on those stores?
Sure. I think most importantly, we always optimize our network to make sure that it's clean. We bought stores over the years that were in groups, typically that weren't right for Lithia, and it's a matter of divesting those. I believe it was an annual run rate of about $90 million. Is that right, Chuck? $90 million? About $90 million were sold in the quarter, okay? A number of those were assets that we just don't believe are assets that, you know, were to some extent sellable, okay? In this environment, everything is kinda sellable. We took advantage of that and divested those stores. You'll see, you'll probably see more of that in the next few quarters.
We probably have a half a dozen stores that are typically smaller stores, maybe located in an area where it's not helping our network at all. Meaning it's a duplicate store or a secondary store, or it's in too small a market where you're utilizing a general manager talent and you can reposition them in a better and bigger store.
I think likewise, Bryan, you sold several stores also from the Carbone Auto Group in the fourth quarter. Is annualized revenue contribution from that set of stores also not material just to the disposed portion?
Yeah. I mean, the stuff that was sold in the Carbone Group was a small Chevy and GMC store, a small Hyundai store, and what? The little Nissan store? Is that right?
Yeah.
It's immaterial.
It's a BMW store.
Yeah. If you know Utica, it's about a 300,000-person market, registers about 12,000, 13,000 vehicles. You're talking about new car franchises that's selling the 200-300 units a year, okay? What we ended up with in the marketplace is a very strong Dodge store, and Jeep store, a very strong Ford store, a very strong Honda store, and a very strong Subaru store. That's what our footprint will look like going forward in Utica.
Yeah. Okay. Then just one more. On the flip side, any movement on the multiples that you're seeing in the marketplace that sort of the asks?
You know, I would say that the overall marketplace probably has moved, but with $15 billion in the pipeline, we haven't, okay? Even though we believe that we're the best buyer for most businesses, we're very discerning. So when we assemble that $15 billion, that's assets that fit our network strategy model and the six regional strategy. So we don't typically have to flex on price, and most of our sellers are not just looking to sell their business, they're looking to provide opportunities for their team and the people that they built for years and be part of, you know, the next evolution of automotive retail, of whether that's in network or whether that's in-home.
Okay. Very good. Thanks very much.
Thanks, Glenn.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
Thanks, Sherry. Thanks everyone for joining us today. We look forward to updating you on Lithia & Driveway second quarter results in July again. Bye-bye.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.