Good morning, and welcome to the Lithia and Driveway Third Quarter 2021 Conference Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Jack Everett, Director of FP and A. Please begin.
Thank you, and welcome to the Lithia and Driveway Third Quarter 2021 Earnings Call. Presenting today are Brian DeVore, President and CEO, Chris Holshue, 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. Such statements are forward looking and subject to risks and uncertainties that could cause actual results to differ materially 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 and 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 on our website, lithiainvestorrelations.com highlighting our Q3 results.
With that, I would like to turn the call over to Brian DeBoer, President and CEO.
Thank you, Jack. Good morning and welcome everyone. 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 point $2,000,000,000 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 led our revenue growth up 40%, followed by a 22% increase in F and 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 omni channel 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 Q3, we generated $530,000,000 in Adjusted EBITDA greater than any full year in our history before 2019, providing us additional capital to deploy towards network expansion in driveway, while also accelerating our continued exploration into adjacencies. The robust customer demand we saw The 3rd quarter was driven by high levels of household savings, government subsidies, lower interest rates and increased equity and trade ins. Elevated demand and 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 consumers return to work and continue to travel using their vehicles.
As our industry transitions towards electrification and more convenient and empowered mobility solutions, Ladd will anticipate and adapt to execute and proactively lead this change. Our plan to reach $50,000,000,000 in revenue and exceed $50 in EPS by the year 2025, from here on referred to as our 2025 plan, with design with these and other consumer trends in mind. Lithian Driveway's full lifecycle offerings and adjacencies are evolving to respond to changing preferences. Beyond the lithium driveway channels, our 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 and 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 omni channel 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, Ladd established Driveway Has a unique independent brand with dedicated leadership, engineering and marketing teams, developing proprietary software and a complete life cycle 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 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 sites. For the Q3, these Lithia websites and associated online shopping experiences connected with 11 point 5,000,000 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 $5,900,000,000 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 percent 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 omni channel strategy, when our LAD total sales are compared to unique visitors from 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 $1,000,000,000 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 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, and investment grade credit rating to reduce borrowing costs and most importantly, further adjacencies with higher margins and structurally lower SG and A costs. The adjacency we're furthest 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 $530,000,000 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 earned 3 times the amount earned when we arrange financing with a 3rd party lender on a fully discounted basis.
We believe that Driveway Finance can penetrate 20% of our financed retail unit sales. This percentage is lower than used only Pierce 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 and 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 in engagement it's seeing 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 transactioned with Luthiera Driveway before. Monthly shop transactions increased 86% during 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 10th markets. Continued improvement in our existing markets improved our overall driveway golden ratio even with the early dilution from these 2 new markets.
We anticipate entering further new markets soon and remain On page to expand the nationwide marketing by the end of next year. To support consumer demand, we accelerated the opening of our 3rd driveway care center in Dallas, which occurred in September. In addition, we have ramped hiring at all 3 TimeZones 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 2022, we are forecasting 40,000 transactions with a 2.2:one 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 dealership's 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 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 U. S, placing us within 100 miles of all U. S.
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 $1,500,000,000 in annual revenue commitments as well as over $12,000,000,000 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 3x to 7x EBITDA.
This ensures we meet our after tax return threshold of 15% in a post pandemic profit environment. Lithium Driveway are known in the industry as the buyer of choice, obtaining manufacturer approval, timely and certain closing of transactions and retaining over 95% of the employees. During the quarter, we completed acquisitions that are to generate $1,700,000,000 in annualized revenues and year to date we have completed $6,200,000,000 Included in the total, we made our 1st 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 a leasing business, furthering our learnings of synergistic adjacencies. We also expanded our U. S. Footprint, particularly in the Southeast Region 6 entering the Atlanta, Georgia and Mobile Alabama markets. In closing, we are acutely focused on executing our omni channel strategy designed to continue our 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. With that, I'd like to turn the call over to Chris. Thank you, Brian.
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, Evolve on 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 Q3. 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 3rd quarter compared to 6,000 and $82 in the Q2 of 2021 $4,754 in the prior year.
As of September 30, we had a 24 day supply of new vehicles on the ground, which excludes in transit. While the new vehicle day supply environment was challenging, Our 58 day supply of used vehicle inventory exiting June 2021 positioned us well for the Q3 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 day 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 Q3, we sourced 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 Q3, we earned $3,897 in gross profit on used vehicles sourced from customer channels, which turns in an average of 33 days. For used vehicles sourced from other channels, on the other And 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 omni channel strategy for Lithia and 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 with the largest number of both manufacturer certified pre owned vehicles and those priced under $10,000 or 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 The 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 With SG and 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 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 top line growth is aligned with further and improvements that result from our investment in the omni channel 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. With that, I'd like to turn the call over to Tina.
Thank you, Chris. For the quarter, we generated over $530,000,000 of adjusted EBITDA, a 104% increase over 2020 and $304,000,000 of 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. We ended the quarter with $1,700,000,000 in cash and available credit, which if deployed to support network growth could purchase up to $6,800,000,000 in annualized revenues. As of September 30, We have $3,800,000,000 outstanding in debt, of which $1,000,000,000 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 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. Earlier this morning, we announced a $0.35 per share dividend related to our Q3 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 $50,000,000 in SG and A and capital expenditures year to date.
The personnel costs for our over 500 associates to support the scaling and continued build out of Driveway and DFC, The marketing investment for Driveway and IT development costs are current period headwinds and most importantly, support the build out of 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 $50,000,000,000 of revenue and exceed $50 of earnings per share by the year 2025. This concludes our prepared remarks. We would now like to open up the call to questions. Operator?
Thank Our first question is from Rick Nelson with Stephens. Please proceed.
Thanks. Good morning. Congrats on a nice another nice quarter.
Thank you.
I wanted
to ask you about New car inventory 24 days supply at the end of the quarter, curious Where we go from here, do things get tighter or do we start to build inventory levels and Yes, you can hear confidence, I guess, in the Q4. Yes, that some of the trends we saw in Q3 can continue into the Q4.
Sure, Rick. I do believe that those trends should continue into the Q4. I think we're looking at a few more quarters of Strength, but I also know that a lot of this is going to be dependent upon what happens with the stimulus packages. Because if they renew those child credits, now all of a sudden we have More income in that middle income and lower income pockets, which could be a catalyst for continued demand for Maybe throughout 2022. Chris, do you have some specifics for us?
Yes, Rick. Good morning. I mean, I think part of this is the line of sight on inventories Still a bit murky and we're kind of day by day, manufacturer by manufacturer on kind of what's going on. But as you said, we had a 24 day supply, which was actually up one day from last quarter. However, our day supply uses a 30 day look back.
So When you're looking at that trend, we have declining sales volumes, which would indicate that a 24 day supply isn't apples to apples when you compare to last quarter. Obviously, more inventory in the pipeline is great. Now the flip side of that is we do have a 48 day supply of used vehicles. And I think the benefits of being a top of funnel Franchise dealer when it comes to used cars is really evident when you see the massive sales comps that we had up year over year at 18% in volume and 40% in revenue, are some of the benefits that we see that we can kind of outrun, outpace, some of the trends that we're feeling across the industry right now on new cars. Kind of
Thanks for that color. Also like to follow-up on the F and I. We've saw big Nice uptick. They are per unit despite a mix shift away from new toward used. And It's about Adam.
How will DFC, Driveway Finance, is impacting F and I pre unit or How do you expect it to impact in the future?
All right. Yes, Rick, this is Chris again. Good morning. So as far as F and I is concerned, I mean, this has been a focus that we've talked about for the last several years, obviously lagging some of our competitors as far as where those F and I trends came out and we continue to see the progress of focusing on people, process, products and obviously our comp plans around driving that performance up. We are seeing some benefits from obviously the economic indicators that Brian mentioned in his prepared remarks as well as valuations that are coming in used vehicles that give our customers a chance to invest in protection products That support their vehicle purchase.
As far as driveway is concerned, we're seeing a Probably about right now as they ramp up their business somewhere around a $50 per unit impact on the overall finance transaction. But As they continue to see record revenue, record deals coming into the driveway finance portfolio, we're confident that over time, The benefits of having a captive company, a captive finance company are definitely going to outweigh some of the headwinds that we're seeing right now today.
Great. Thanks very much and good luck as we push forward.
Thanks, Rick.
Our next question is from Ryan Sigdahl with Craig Hallum Capital Group. Please proceed.
Good morning, guys. Congrats on another really strong quarter.
Hi, Ryan.
Curious on M and A. You guys talk confidently about A lot of opportunities still out there. And it seems like your peers have followed suit rather late, but a lot of Increased activity multiples going higher there. So does that change some of the negotiations you guys are having and the confidence in continuing The M and A at good valuations?
Yes. Ryan, this is Brian. I think most importantly, Keep our eye on the $20,000,000,000 that we set out to achieve in the fifty-fifty plan, okay, or now referred to as the 2025 plan, where we were really targeting to get to that 500 store locations to be able to deliver services and products Consumers within about a 2 hour or about a 100 mile reach. That's our ultimate goal. We're very fortunate that we were able to book Almost $10,000,000,000 worth of revenue over the last 15, 16 months at very attractive multiples in that middle of our 3 to 7 times EBITDA range.
And now we're looking at multiples in especially those 2 larger deals that were Close to probably double on a pre COVID or a post COVID multiple range as to what we paid for those assets. I think what you know about Lithium Driveway is that we're very disciplined, okay? We have enough in the funnel that we can still Find the gems in that in the opportunities of now around $12,000,000,000 and that's Assuming that the 2 major deals close with our 2 peer group and wish them the best on that.
And then on GPU, it seemed like Q2 was exceptionally Strong and things couldn't get better and then you trump new by well over $1,000 into Q3. So you mentioned strength And margins continuing for the next several quarters, lack of new inventory that's obvious out there. But do you think these Q3 levels are sustainable? Or is it kind of a blend between the 2, but any kind of directional help would be helpful?
Yes. I think as Chris mentioned, we did we believe that we've troughed in terms of inventory and Probably at least 50% of the manufacturers and the remaining 50%, they're troughing either now or in the next 30 days. So We really believe that once inventories start to return that we should be sitting at, I would say, more like Q2 levels And maybe at some point even Q1 and it's really hard to predict. I mean we could have never predicted another $1600,000 $1700 in margins and $7,400 new vehicle margins including F and I are Now pushing what 16.5 percent total margins on new, that's pretty massive when pre COVID we were Flirting with just below 10%. So it is somewhat supply based, but we would also Say and remind you that this is a demand based dilemma that's being caused more than anything and Day supply isn't really an indicative measure of what margins are going to do long term Because we have many manufacturers, we've run at these 20 day supply levels for decades and the margins aren't there.
So in the short term, Yes, there's a disconnect, but hopefully we can constructively have lower day supply, but it doesn't translate into Automatic substantial profit increases.
Nice job guys. I'll turn it over to the others. Thanks.
Thanks Ryan. Thanks Ryan.
Our next question is from John Murphy with Bank of America. Please proceed.
Hi, good morning everyone. This is T. G. Fletcher on for John Murphy. Sorry.
Thank you for taking the questions.
Hi. So I guess to start, you guys have kind of touched on this a little bit, but how much of the diverging performance on new and used same store comps Do you attribute to your increasing focus on the used vehicle market and your various initiatives like value auto versus typically new vehicle consumers shifting down into the used given the pervasive inventory shortage. So just trying to get a sense of what you think is more kind of a structural shift versus more transitory?
Sure. TG, this is Brian again. I think it's important to remember that in the lithium driveway procurement model, We specifically focus on channels of procurement that are a little different than most. We actually hit and I would say that is the major driver of our Those that can find the vehicles and recondition the vehicles are going to be the ones that are able to expand their same store sales at a greater rate. So we actually hit an all time high and procured 74% of our inventory directly from consumers and much differently than Maybe a used only retailer that we have 58% of our vehicles coming from trade in.
We had another 6% come off lease And another 10% come from private party. And probably the most important thing that we look at is we also had A low ever in auction procurement, which is only 13% of our mix. And Chris had mentioned that The importance of the consumer channels is that we don't have to transport cars and pay auction fees both directions. So we make about $1100 more in that channel on that 3 quarters of cars and you can relate that. Now in terms of What was Driveway's influence on the overall business?
Okay. Whether it was the shop or sale Functionality is important to keep in mind that the sale functionality or creating more inventory is another channel that we Haven't really explored until 9 months ago and that's quite attractive and we would attribute about 20 And of our volume in same store sale increases coming from that channel at the current time.
Okay, got it. That makes a lot of sense. And then just a last housekeeping question. Is it fair to assume that the non cash unrealized loss on investment in the quarter was shift? Was there any realized or cash loss on investment?
And kind of how do you think about the nature of that investment over time, whether it be core or non core to the let the air driveway business model.
So, there was a large adjustment that was based off The value of Shift of what they traded at as well as we had a possibility to get other shares of Shift, but the stock the performance of the company didn't reach the level. So we We basically just adjusted that balance. Tina, anything to add on that?
No, that's correct. It's related to valuation of shift tied to the stock price. And then as Brian We have some shares that were held in escrow that didn't meet the performance metrics.
Okay. I understand. Thank you. That's all for me. Thanks,
The next question is from Chris Bottiglieri with BNP Paribas. Please proceed.
Hey, everyone. Thanks for taking the call. Hey, Chris. Steve, I wanted to ask about the used business. So you're 13 point 5% using a growth in 2 year CAGR 9% share like the market season.
Can you give us a sense for how that fared monthly throughout the quarter and into October? Is it relatively consistent? Is it volatile? And then just related, Your inventory levels are still pretty strong, but not as strong as they were in Q2. Do you feel good about
I feel good. We saw consistency throughout the quarter, Chris. So And exiting the quarter, even though we're at 10 day lower supply, if you take the increase even quarter over quarter, our used car sales were up considerably. So that actually 30 day look back when you take that into account, our actual static inventory numbers were about the same as they were exiting Q2, which we like and we're continuing to buy more. Also October is looking pretty good.
So and I would remind everyone that our Quarter over quarter look back versus 2020, that was a good quarter, okay? So it's not we stopped talking about 2019, which was really for that 1 quarter of Q2 when we had half a quarter where we were basically shut because of regulatory closures.
Got you. That's really impressive.
So then my next question is, so you seem
to be scaling driveway making a lot of incremental investments On the $50,000,000 can you give us a sense for like what the split is on SG and A and CapEx? And then separately, if I heard you correctly, It sounds like you're becoming more confident on the level of structural cost takeout. It seems like at least 300 basis point of improvement versus pre COVID. Just Want to make sure I heard that correctly. And then 2, kind of maybe just speak to what's making you more confident?
What do you see in the business that's making you think like some of this is structural? And that when if inventory ever normalizes, you've got to retain at least the $300,000,000
Yes. I think most importantly, Chris, this is an investment in our Future in a channel that's growing. So of the $50,000,000 about 1 third or $15,000,000 of it was actual CapEx. The remainder is those 500 associates that are that we're building into our future for. And we think it's the right investments, including The expansion into Phoenix, Arizona and Las Vegas, Nevada, which is now our 9th 10th markets because we did see 2 of our markets, our initial two markets, Portland and Pittsburgh have one has actually reached the 0.15 golden ratio, which was our Next level of scaling.
The other one's trajectory looks imminent in the next month or 2. So we felt it was an appropriate time to expand that. And We are somewhat fortunate that we are in a hyperinflated gross profit environment, which allows us the flexibility to expand that business at a probably a little more rapid rate than we initially expected 15 months ago.
Got you. Okay. Thank you for the time. Appreciate it.
Thanks, Chris.
Our next question is from Raja Gupta with JPMorgan. Please proceed.
Great. Thanks for taking the questions. Just had a question on the M and A environment and just capital allocation in general. You raised $1,500,000,000 or so in May. So you still have like a lot more Acquisitions to do just to finish that capital, Denuaries.
And given like what you're seeing In the LOI and what you've closed so far, how quickly do you think you need or how urgent do you think Need to deploy all of that capital that you raised or if you're not finding the right deals at the right multiples, would there be other sources That capital or would that capital go into some other uses? And I had a follow-up. Thanks.
Understood, Rajat. This is Brian again. Obviously, We spend about 2 thirds of our capital on the network strategy and the growth of M and A. We had 107 Or what, dollars 1,700,000,000 remaining of the approximately $4,000,000,000 that you mentioned off of the 2 capital raises plus Internal cash flows, which were way more than expected. We do have about $1,500,000,000 contracted, Okay.
Under commitments, which is about a third or a quarter of the amount that we would need if we deployed 100% of the 1.7 Because as Tina mentioned, it's about $6,000,000,000 that we could buy with the $1,700,000,000 based off what we've been paying traditionally. I would also say this, Raja, we're pretty disciplined at what we do, okay? And the network strategy and what we pay is hyper important to how we value things. And if we look at those maybe those 2 larger deals that we were active on, but maybe not as aggressive because we didn't believe That the network strategy was as good for us as maybe it was for one of our peers and we wish them all the best in that as well. So I think that our ability to deploy the remaining, what, let's say, about $1,200,000,000 Probably takes us 2 to 4 more quarters and the environment may change a little bit, but also remember that transactions Aren't just about how much you pay, it's about what you do post signing and what you provide The teams that are exist there and what those dealer those sellers are really looking for, for their culture and for their succession To achieve the things.
Remember, Lithium Driveway is an experienced M and A company for the last 2 decades. It is a core value of our company, okay. And that $12,000,000,000 that's in the pipeline, there's a good chance that there's plenty of volume there to at least achieve that $6,000,000,000 over the coming quarters years or the remaining $10,000,000,000 that we have In the fifty-fifty plan.
Got it. Got it. So it looks like M and A is still like the number one priority in terms of the use of that capital. So I had a question on the 36,600 e commerce units. Could you just baseline us on like How do you define that transaction?
Is it a few parts of the transaction being done online or like One part online, just curious on just to make it comparable maybe versus some of your peers. Thanks.
So Raja, and I I apologize to everyone. This is something that we just assumed was part of our business. And when we did the design 6 years ago, We were at about a 5% to 6% of our total volume at that time and it's since grown through our own proprietary solutions or Partners like Roadster and Motor that provide end to end solutions. But the way that we're looking at this is that's digital funnel engagement that Created a sale. Okay.
Much like what we do in Driveway or much like, any of our e commerce retail competitors do, We just had discounted it and said, all right, it's just part of our business when it's really not. It is a digital e commerce channel. It's just not aggregated under one umbrella like it is under Driveway. So it's all e commerce business In the 300 local and regional brands as well as the Lithia Direct brand.
Got it. But the consumer is not necessarily doing the full transaction online there. It's just more just getting
to the sale of the car? Yes, Rajat, let's remember this, okay? The consumers at our competitors that are e commerce retailers Are not either or they wouldn't need 13,000 employees to be able to sell those cars. So remember the funnel efficacy, We're seeing 7% of our consumers in Driveway that are HappyPath. Remember that stay within the technology the whole way through And that's a 100% savvy e commerce solution.
Okay. So keep that in mind. Remember this also that because of disequity, A lot of transactions are require human involvement, whether it's through chat or whether it's through email or phone calls To be able to do that and I can sure share if anyone would like some of the driveway numbers as a comparison to our traditional Lithia
Channels. Got it. Just one last one, on the 15% approvability for financing, It seems a little below versus what you've heard from other peers. And maybe it's not like for like, What's the customer credit mix that you're seeing there? Is that something that's coming in the way also?
And can Driveway Finance Help you to reduce that friction or just help increase that approvability rate?
Sure. So Rajat, there's a difference between 15% approval rate and 7% actually by rate, okay? Meaning that consumers actually carry forward with the approval that was given them. Okay. So keep that in mind.
I don't want to confuse anyone there. In terms of our funnel efficacy in Driveway, we are seeing that the average consumer and I would also I'll comment a little bit on Driveway's financials influence in just a second. But the Driveway consumer is averaging exactly 50 points lower on their FICO scores. So there are 671 versus a 721 in Lithia. But I would accredit that Primarily to new car customers.
Okay. That is a difference that most consumers believe or have the financial wherewithal to be able to buy new, Okay. Which will have a higher credit spectrum. Okay. We also we did finance a higher percentage of customers in driveway at 75% and only finance 67% of Lithia customers.
So there is a little bit of a difference there. Now In terms of what we would call our golden ratio that we talk about all the time, what we do notice is there is a difference. And when we get to the ABS market in the next few months, it could allow us to portfolio lend, Okay. And that basically means that you're lending at not a one to one lending, meaning you have standards that you lend on and that individual customer has to meet that standard or not. And if they're not above it, they don't get approved.
Okay? So what some of our competitors do is what's called portfolio lending, meaning that if they got 3 customers in a row that were above the standard, And this is just an example of 4 customers. And one that was below that standard, that one other customer gets approved, Okay. And that's called portfolio lending where you're a broad based lender. We don't technically do that today at Driveway Financial, but we're building the API and the software.
It's one of our 2 major road map initiatives on the technology that will require some back end funneling to specific lenders or if we choose to keep that loan directly in the Driveway Financial, We'll have the ability to do that. But it is something that does allow the funnel efficacy from finance approvability to be improved at a pretty dramatic pace. Now remember Raja, you have 30 lenders that are API'd, but remember it's a one to one lending. So you still have that dilemma, okay. I will also say this, there's a different way that people seem to count, Okay.
And what you're getting is pretty raw numbers from us as to how we would look at it in an equitable way from a traditional retailer standpoint like we do at the Lithia business That your typical traditionally used to.
I understood. Great. Thanks for all the color and good luck.
You bet. Thanks, Rajat.
Our next question is from Nick Jones with Citigroup. Please proceed.
Great. Thanks for taking the questions. I guess maybe I'll I think like a bigger picture view here, a
bigger picture
question. You've talked about wanting to be around 100 miles from all U. S. Shoppers. Once you kind of build out that footprint, how should we think about consolidation from there?
I mean, how are you thinking about the strategy of consolidating The environment which you kind of touched on earlier that like top 10 maybe have 10% share. So once you have the footprint, is there capacity across To kind of across your footprint to increase volume and continue to take share? And I guess more broadly, do you think this can consolidate Like maybe like auto insurance were top 10 or closer to 70% or 80%. Thanks.
Sure, Nick. This is Brian again. So I would say that the 100 miles is important to us Because of the life cycle of the interactions with your consumers, let's remember that. When we think about the 500 locations in the country. That gets us to about 3.5% to 4% new car market share.
But we believe that with wonderful customer offerings that are providing solutions where, when and how consumers choose That that could be expanded. Now I would also make this comment that our ability to get much past, I would say 10% of U. S. Market share on new is a little bit restricted by our manufacturer partnerships, which many have A 5% to 7% of their national footprint. And then if you assume that you could get 2 times the throughput through that through those existing stores, then you can get somewhere a little bit north of 10%.
Remember that in all both new and used, Okay. Vehicles and new are they're allocated, okay? So they do manufacturers do control. It's not like You're greenfielding like an insurance business where the top 10 could get to 80% of the country. Now if each one of them got 10% in theory, yes.
But I don't believe that the marketplace is that unified that could ever really do that, Okay. Remember also on the used car side, it's all about inventory procurement. And those that are further up funnel and have lower cost reconditioning are going to be the ones that are able to capture more used car market. Those kind of go hand in hand To some extent, so I could see a day where the top 10 own 20% to 30%. But remember, that ability to get there with the manufacturers is all dependent upon performance and relationship with those manufacturers.
And it's probably fair to say that there's 2 or 3 of our peer group That actually are looking at that relationship as long term, okay, and is collaborative by what they buy and yield performance levels that Are in step and stride with those manufacturer partners.
Got it. And I guess maybe a follow-up is, so as you kind of get Towards that objective of being around 100 miles from every consumer then kind of M and A slows and presumably there's a lot investment in driveway and kind of the D2C approach, is that the right way to think about what will happen or is that kind of naturally?
Yes. Nick, let me share that obviously the adjacencies domestically can take some of the capital. But part of the strategy On Canada was to start planting seeds that you could now move internationally to be able to deploy capital as well. More importantly than that, we believe that there is opportunities to overlay our digital e commerce strategies as well as our Underlying network strategy into 2 wheel mobility and tractor trailer mobility and into farming mobility. So As we begin to grow domestically, that's where you would have the same type of disciplines that are in automotive retail, which is the most proactive in terms of Customer desirability, okay, could be overlaid into those 3 other industries at some point as well.
And I think you'll see us start to plant seeds in those areas domestically because they are based off the same four business strategy, which is new vehicles disposing of the used vehicle through your network, okay, and then having the service body and parts operations much like what we have in new vehicle sales.
Great. Thanks for taking the questions.
You bet, Nick. Thanks.
Our next question is from Bret Jordan with Jefferies. Please proceed.
Hey, good morning guys.
Hi, Brett. Have you
seen any manufacturer pushback at all on the consolidation? So you've done a lot. Some of your peers are ramping it up. Is there any conversation as far as or any more complicated conversations involved in the Transfer of franchises?
No, there really hasn't been a change. I think that because Most of our relationships with our manufacturers are contractual when what's called a framework agreement that as long as you achieve their performance Standards, you have the ability to grow to a certain level. So I don't really see that as an impediment. And to us or to others, if they're able to get their performance to a level that's broad enough to be able to buy multiple brands, Okay. Which is usually the hang up when you're buying large groups.
Okay.
And then I guess a question on the structural Profitability change and you talked about historic new GPUs a little under 10. I guess from From a labor model, is there anything that sort of when you think about going forward in a normal sort of post-twenty 21 environment, Is the new GPU a couple of 100, few 100 basis points higher forever? Or do we in a cyclical slowdown go back to the old profit levels?
So I want to define that in the 2025 plan, it's very clearly that it goes back to old profit But we will be updating that in the coming quarter, okay, in February to April, okay. And I can give you a little color in some of the areas. There may be margin expansion. We probably won't predict margin expansion even though today the negotiation free or fixed price models are generating approximately $600 higher sale prices than post negotiated prices of negotiated dealers, which makes up 98% of the transactions. Okay.
So there is a case that could be made, but I believe And I think our team believes that as the world becomes more transparent and more businesses transacted through e commerce, Okay. The pricing becomes more transparent with that, which ultimately that gap will most likely go away. Now, If we're able to compete and buy cars at a lower price and recondition those logistically closer to our customers, Then there are ways to be able to expand margins and we'll be able to give you more color on that, but hopefully that gives you A tidbit of information. Chris, did you have something to add to that? Yes.
Just I mean, as a call out maybe to our own team is that historically prior to these margin Our top 25% of our dealers are running at SG and A levels at where we're seeing things today on average. So I think that Our expectation is that as we continue to see margins return to normalized levels, our focus on personnel marketing and leveraging our facilities To maintain this level of profitability is something that we've called out 65% as kind of our midterm goal, but obviously we'd like to see it better than that longer term.
Great. And just a data point, I think in past calls we've talked about the geographic reach of Driveway, how far customers are buying. Do you have that number for the Q3?
I do. In fact, it's 1 mile further than it was last quarter. It's 931 miles was the average Distance, the average shipping fee was actually a little bit higher. It was $5.76 versus $5.61 last year. And I would say that that continues To grow so long as there's shortages in new and used inventory.
Okay. Because and it's something that we're really thinking about is there As inventory start to build back, does that reach start to shrink a little bit again? One other piece of information that we do provide Is that incrementally new customers to Lithia and Driveway? It did drop 1 percentage Point down to 96 from the 97.8 last quarter and the quarter before that was actually 95. So it's back to where Q1 was, which we're really pleased and I think that's an important notation between Our Lithia e Commerce business that has a good portion of repeat business.
Our driveway was specifically designed to get incrementally new customers And that's holding strong even as we spread our wings and start to overlap with consumers that we've already touched once before. So It truly is a new customer that is either needing financial assistance, okay, in getting the vehicle the correct vehicle for them or consumer that's looking for more of a tech type of experience that's they're empowered, it's transparent and The convenience of the in home delivery.
Great. Thank you.
You bet, Brett. Thanks for the questions.
Our next question is from Ali Farag with Guggenheim. Please proceed.
Good morning. It's Ali Fager from Guggenheim. Thanks for squeezing me in.
Hi, Ali.
So I just want to confirm I got all the M and A numbers correct. So you have $1,500,000,000 in M and A under contract that will likely close imminently. It sounds like $6,000,000,000 you think you can acquire sometime maybe over the next 2 to 4 quarters And then a total pipeline about $12,000,000,000 Do I have all those numbers correct?
You do other than the $6,000,000,000 I don't know that That's we said that we have $1,700,000,000 in capital. That could acquire $6,000,000,000 So We're not giving the forward looking as much anymore other than we believe that we need to add $20,000,000,000 to $22,000,000,000 in aggregate since the start of July last year, okay, to be able to achieve that network coverage of 100. Now I would give you confidence that the 6,000,000,000 It's probably fairly reticent like in the $12,000,000,000 there's enough deals. And if you add the 2 large deals from our peers To the $12,000,000,000 it's more than the $15,000,000,000 So we added almost $3,000,000,000 in the quarter to that pipeline To get to the $12,000,000,000 which means the market is hyperactive. There's good deals that are priced out there that either have opportunities or their earnings are Similar to COVID levels in many of the parts of the country, if they've had personnel problems or those type of things.
And I think we're always kind of looking for that diamond in the rough to Able to maintain that 15% after tax return that we've so eloquently accomplished over the last couple of decades.
Great. That makes a lot of sense. And then just as a follow-up here on Driveway, you talked about 40,000 shop and sell units Next year. Is the right way to think about that as the majority of that is incremental to your used car business? Because I think it implies roughly a 10% to your used car volumes next year.
So just trying to make sure kind of how you think about those 40,000 transactions.
Sure. I think you can assume that The sell to shop ratio is about 2.2:one that we're assuming, okay? And of the shop portion, Those units will be about, I'd assume 90% to 95% new incremental customers. Okay. Chris, did you have something to add on that?
Okay. Thanks, Ali.
Our next question is from David Whiston with Morningstar. Please proceed.
Thanks. Good morning. Looking at the GPU between new and used, New was up 81% on a same store basis and 7% for used, obviously, at the time of grade imbalance. But Was there also maybe a conscious decision on your part on used pricing or is it used just far more competitive? Just trying to Understand the gap there.
Yes. Good morning, David. This is Chris. I mean, going back to our operating model where we Engage and expect each of our stores to make independent market decisions. It's kind of hard to generically just answer That we did something specifically from corporate on pricing.
I mean each of our stores is reacting to the local market conditions that they're seeing. And I think across the country, we're seeing obviously good margins in new and used and obviously a scarcity of new car Volume kind of driven more by domestics than luxury, but overall those decisions are made at the local level and we expect that to continue.
Okay. And on, I guess a 2 part question on inventory procurement. You talked about 74% of your inventory coming from consumers. And is there some extra advertising push that you're doing to get that high of Joe, on driveway specifically, how do you ensure that driveway doesn't get left with the mostly undesirable inventory that the stores don't want?
So two things. Let's remember that driveway inventory is the store's inventory that they leverage each other. So They would never get left with inventory that they do not want. In terms of our ability to procure cars through the 3 customer channels, That primarily comes from our ability to buy cars and the valuations that we provide. So we don't specifically market In our traditional channel, we do specifically market in our driveway channel.
In fact, mid quarter, we had actually curtailed The valuations that we were giving on trades and it affected our sell to shop ratio lightly, okay? And we've now, I think caught up with everyone else assuming that the last quarter of the year and early into the Q1, There is price drops that typically happen this time seasonally and we're obviously being sensitive to the supply as well-to-be able to do that. So We did adjust those pricing algorithms or valuation algorithms on our sale and driveway, which does give some guidance into the field as well. Okay.
And finally, compared to say a few months ago or earlier this year, When consumers are coming in now, especially if they want a new vehicle, are they more willing to go use They were a few months ago or they more perhaps the other way more stubborn saying I'm just going to wait for the strip shortage to end and they walk out?
So we're very fortunate that we do have visibility into our pipeline, especially with the domestic manufacturers where Those cars are spoken for up to 90 to 120 days in advance. So that pipeline is full. In terms of The transition from a new vehicle to a used vehicle or a used vehicle to a new vehicle, again, as Chris said, that's an decision by individual consumer. When we look at it in driveway, we do have those discussions with consumers because Obviously, a new vehicle has more margin in it typically, which you can see from our GPUs. That does help you deal with financeability on a Consumer and ultimately as Driveway reaches national scale by end of next year and that type of framework, We will be converting consumers from used to new.
But at the current time, our technology isn't able to do that, but should be able to by end of year, Early next year as we've disclosed in the past.
Okay. Thank you.
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.
Thank you, Sherry. I would make this comment. Hold on, we're just getting started. And again, thank you for joining us today, and we look forward to updating you on Lithium Driveway's 4th quarter results in February and also a little update on the fifty-fifty plan. Thanks all.
Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.