Good morning, and welcome to the Lithia & Driveway Second Quarter 2021 Conference Call. [Operator Instructions] I will now like to turn the call over to Jack Evert, Director of PF&A (sic) [ FP&A ]. Thank you, sir. Please begin.

Thank you, and welcome to the Lithia & Driveway Second Quarter 2021 Earnings Call. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO. Today's discussions may include statements about future events, financial projections and expectations about the company's products, markets and growth. 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 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 second 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 second quarter earnings in company history at $11.12 per share, a 199% increase over last year, including the impact of the 2 recent equity offerings. Record revenues of $6 billion were driven by robust consumer demand and an acceleration of acquisitions to produce strong operational performance across all business lines and channels. During the quarter, total revenue grew 87% over 2019 while total gross profit increased 125% compared to 2019. On a same-store basis compared to 2019, we recorded a 20% increase in new vehicle revenues, 49% increase in used vehicle revenues, 39% increase in F&I income and 3% increase in service, body and parts revenues. Comparisons to 2020 can be found in the financial performance tables of our press release. Our operational teams continue to excel in procuring used vehicles, delivering impressive gross margins and continuing to grow the business. Chris will be providing additional details on our same-store sales results, inventory levels and other operational results in a few moments. Reflecting back on the first year of our 5-year plan, we are considerably ahead of schedule and have the required capital to carry us to and beyond $50 in EPS and $50 billion in revenue. At $8 billion in added revenue since plan inception, we have acquired 40% of our targeted $20 billion in annualized revenues. In addition, both Driveway and our core business are contributing at higher-than-expected levels as we enter our second year of the plan. We remain disciplined in our execution and actively focused on adjacencies, cost management and leveraging our network to increase productivity and lower SG&A costs. Despite the cost of the acquisition integration and Driveway's development and expansion, our SG&A as a percentage of gross profit was…

Thank you, Bryan. As we live our mission of Growth Powered by People, we are once again humbled by our extraordinary team of almost 20,000 associates that in the second quarter more than doubled our previous earnings records. As we navigate the back half of 2021, we are confident that the demand from consumers remains strong for both in-home and in-network solutions and the acceleration of Driveway's incremental sales in key strategic markets will be well received. Each day, our leaders are rising to the challenge of achieving or exceeding our 50-50 plan, evolving their skills, growing their teams and navigating the unprecedented operating environment experienced in the first half of 2021. Our team remains humbled and never satisfied as they look to continued record performance levels and massive growth throughout the back half of 2021. Following is the discussion about quarterly results and as reported on a same-store basis. As Bryan mentioned earlier, we are providing comparisons against 2019 as 2020 results are not meaningful. For the 3 months ended June 30, 2021, total same-store sales increased 26% over 2019. These increases were driven by a 20% increase in new vehicle sales, a 49% increase in used vehicle sales, a 39% increase in F&I revenue and a 3% increase in service, body and parts revenues. For the quarter, our new vehicle average selling price increased 13% and unit sales increased 6% over 2019. Total gross profit per unit, including F&I, was $6,123, an increase of $2,462 per unit or 67%. Excluding F&I, we earned $4,266 of gross profit per unit, a 10.1% margin. Strong consumer demand as we exit the pandemic has accelerated inventory turns and increased new vehicle gross profit levels. For used vehicles, total gross profit per unit, including F&I, was $5,227, an increase of $1,658 or…

Thank you, Chris. For the quarter, we generated over $492 million of adjusted EBITDA, an increase of 284% compared to 2019 and $282 million of free cash flow, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash: interest, income taxes, dividends and capital expenditures. As a result, we ended the quarter with $2.6 billion in cash and available credit. In addition, our unfinanced real estate could provide additional liquidity of approximately $655 million for a combined nearly $3.3 billion of liquidity. As of June 30, we had $4.3 billion outstanding in debt, of which $1.3 billion was floor plan, used vehicle and service loaner financing. The remaining portion of our debt is primarily related to senior notes and finance real estate as we own over 85% of our physical network. The current environment offers attractive returns on lending and to expand our reach, last month, we increased the financing available on our ABS warehouse line from $150 million to $300 million with the ability to expand the line to $400 million. We expect to enter the ABS term market late this year. That, along with the efficiencies that would be realized upon attaining an investment-grade credit rating, will further increase our returns on the Driveway Finance portfolio. A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt. This financing is integral to our operations and collateralized by these assets. The industry treats the associated interest expense as an operating expense and EBITDA and excludes this debt from balance sheet leverage calculations. Unadjusted, our total debt-to-EBITDA is overstated at 3.37x. Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.25x. As a reminder, our disciplined approach is to maintain leverage between 2 and 3x as we continue to progress toward another sizable, competitive cost advantage of achieving an investment-grade credit rating. Our capital allocation priorities for deployment of our annual free cash flows generated remains unchanged. We target 65% investment in acquisitions, 25% internal investment, including capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases. Earlier this morning, we announced the $0.35 per share dividend related to our Q2 performance. With the capital raise completed, we are well positioned for accelerated disciplined growth. We continue to make strong progress in modernizing an omnichannel consumer experience, both in-store and through Driveway. Combined with a robust balance sheet, we are well positioned to be the leader in consolidating this massive industry, all while progressing toward our 5-year plan of achieving $50 billion in revenue and exceeding $50 in earnings per share. This concludes our prepared remarks. We would now like to open the call to questions. Operator?

[Operator Instructions] Our first question today is coming from Rick Nelson of Stephens.

Congrats on another great quarter. Curious as you march toward this $50 billion target, are you running into any challenges at all with the OEMs in terms of approvals?

Rick, this is Bryan. We are not running into any challenges. I think the pathway has been paved with them over the last couple of decades of really buying underperforming stores and really showing that we can put the right people in place to be able to improve the performance at substantial levels. And that's really helped with those relationships, plus myself and Chris and our group leaders are actively involved with the relationship with those manufacturers and don't foresee that as an inhibition to achieving the 50-50 plan.

Okay, got you. And I just had a follow-up, the pricing environment on acquisition. Some of your peers are saying it's really frothy, the data you've provided this morning. 3 to 7x EBITDA sounds more rational than that. But any commentary about pricing, I think, would be helpful.

Sure. I think that there is some frothiness, there's no question, Rick. But I think when you have a $15-plus billion pipeline, there's enough stuff to choose that's appropriately priced and most of that is all within that 3 to 7x range. It's surprising that with capital gains increases looming, that the number of acquisitions out there just continues to grow, and we're really sitting there at about 120-day window that deals have to be completed for them to occur during this calendar year. So that's helping maintain pricing at some level of reasonableness. And I think as we think about our growth strategies, it's really about the network and ensuring that the density of the network, like the Mississippi deal and a few others that we've got working in the Southeast are filled in and allows us the ability to be able to service our customers throughout the entire life cycle of their ownership experience.

Our next question is coming from Rajat Gupta of JPMorgan.

Congrats on a pretty strong quarter. I wanted to start with a question on the SG&A. Could you give us a sense of the number of employees at the company today based on like just the recent acquisitions?

Yes, this is Chris. So currently, we're running around 20,000 employees in the network and -- yes.

But Raj, let me also add that we had permanently reduced headcounts by 20% back last March and April. And those -- that -- I think it was about 2,800 people at that time are still permanent, okay, which is about a 300-point reduction in overall SG&A costs, okay? Most of the increases are just coming from buying the new businesses. We have acquired $8 billion in revenue over the last 12 months or so, which is really where those -- that overall increase has happened. But the discipline in terms of cost management and headcount is still quite high and the productivities continues to grow.

Got it, yes. The reason I was asking the number is, I mean, it looks like versus 2Q '19 levels, I believe you were at around 14,000 employees. So it looks like your employee headcount is up roughly 30%, 35%, and your combined units have grown 65% since 2Q '19. So is that kind of productivity level sustainable going forward? Do you think you need more people at a store just from a customer experience standpoint? Just curious as to like how we should think about sustainability of this kind of productivity.

Yes. So we actually -- we added some things to Slide 16, which is our network costs, which includes those people, okay? We really believe that technology as well as the consumers spending more time on working through their transactions on their own is going to be able to continue to increase productivity levels. On a finite basis pre-COVID, we were at about 15,000 employees, and we dropped to around 9,000, if you remember, of which half of that, 6,000 dropped was furloughs, okay? And those are all back now. The other 3,000 is what's permanent. So on a -- if you're using a 14,000 base, okay, that would be probably relative to about 11,500 is the net employee count on a same-store basis at that level. So when we think about our ability to constructively drive down SG&A, we don't know how low is low. I mean, what we know is that the top quartile of our stores perform at a sub-55% level in a pre-COVID environment and they're operating about 1,000 basis points below that, so let's say, a mid-40 percentile range. What we know is our network is quite optimized and it has a lot of good businesses that all should be able to perform at that. And we really haven't started to really constructively change the economics in terms of how do we manage the ultimate business. But we believe and we're up for the challenge to be able to drive down SG&A in a massive amount and really delink that idea of $1 billion in revenue produces $1 of EPS. We hope it can produce $1.20 or more and Driveway's a lot of that ability to gain that leverage because we've never really sat here with a national brand and had the advantages of scale and leveraging that inventory and that infrastructure that we've built.

Got it, got it. That's helpful. Just a question on Driveway as well. Can you give us a sense of based on the regions that you have launched that platform, how many of the stores are opting in onto Driveway? And then relatedly, how are the in-person store sales force incentivized to list on Driveway? Is it based on procurement or turnover, et cetera? Just curious if you can share any thoughts on that.

Sure. So we have 95% of the traditional Lithia network that's participating in Driveway. We also -- when we think about what the store's participation is, it is a noncustomer-facing role other than the last-mile delivery that's completed by a non-negotiating valet, which makes up about 2/3 of our employee base. But it's typically that the store is doing some level of paperwork, they're doing reconditioning, they're procuring inventory and really, they're doing behind-the-scenes VCE stuff for purchasing a vehicle. So we keep it pretty straightforward that the stores continue to sell cars under their traditional model. We do share best practices. And hopefully, over time, they're able to take some of the cost out of their traditional model. But ultimately, today, we're asking them to continue to sell and service cars the way that they traditionally do. Now they're also beginning to behaviorally shift into in-home service, and we have a little over half of our stores that are performing in-home service for their traditional customers. But remember, at Lithia & Driveway, most -- all of our service experiences are one price, so those are very transferable into the Driveway experience as well, whereas our sales experiences have some level of negotiation. And obviously, in today's hyperinflated demand environment, there's probably a little less negotiation than normally occurs in the network.

Our next question is coming from Ryan Sigdahl of Craig-Hallum.

Congrats on another quarter of great results and progress. Curious, a couple of questions on Driveway. So you mentioned 550 transactions in June. Curious how that compares to April and May, first.

So those volumes increased month-over-month by about 15%.

Got you. And then you mentioned 5% of dealers not participating at this time on Driveway. I guess, is your expectation that eventually, they will? And then what is stopping those dealers from coming on?

It's a small amount. And the main reason that's stopping them is the ability to break down price into a rebate and an accessory level. So it's more about legalities in certain states as to why they don't participate. There is a little bit of a propensity for people to be a little territorial on inventory right now when we sit at a 23-day supply on new with -- we do have another 20 days in-transit, so for a total of about 43 days on new. We are sitting at 58-day supply on used, which is quite nice. But still, there is some stores that have tendencies to want to service their local consumers and not at the current time because of that tighter inventory supply participate in Driveway. But it's a small amount of about, what, maybe about 10, 15 stores today.

And then on the auto approval for financing, it was down from 20% to 15% quarter-over-quarter. Is that just normal variability [ and basically ] low numbers? Or have you recalibrated the algorithms to effectively auto approve less?

No. The algorithms are working the same. We also have the diagnostic AI now that's helping guide consumers. It's really just the makeup of a consumer doesn't allow them to get auto approved. And that's where the care centers are having to be built at faster levels than we expected because it does take constructive time to guide consumers through the process and help them understand their cash requirements, their equity situations and their credit needs.

Our next question is coming from John Murphy of Bank of America.

I have about 50 questions but I'm going to put it into 1 bucket. So I'll try to be efficient, I apologize. So on the transformation of the company here, there were a couple of things that just seemed a little interesting. I just wonder if you'd clarify and comment on them. First, you mentioned that you could do equity for a transformative acquisition and also mentioned that you're considering English-speaking countries. So I mean, both of those can mean a lot. So I just wonder if you could maybe give us a little bit of clarity on that. Also on the captive FinCo, you're up to $370 million on the books right now. I'm just curious as you build Driveway Financial and go out to the ABS market, what size deals we should be thinking of and when that will come. And then also on the 500 transactions that were done on Driveway, it sounds like that's ramping quickly. So I mean, it's a small number now but that will get much bigger over time. But just curious, the interaction other than full transactions getting executed on Driveway. If you have any other metrics on how much consumers are working down the purchase funnel and then maybe coming into the showroom or interacting with an associate to actually get the deal done. So those 3 transformative comments or data points you gave us on the call, can you clarify?

Great questions, John. Hopefully, I can remember all 4, okay? First and foremost, the equity that we raised in the last 2 offerings takes us up substantially to about $1.5 billion in total cash flows as a company. That $1.5 billion, once the capital is deployed over the next 2 to 4 quarters, gives us the ability to really grow at about a $7 billion to $8 billion annual clip without adding leverage to the balance sheet. So that can get us somewhere in the 20%, 25% level, which should cover everything other than a transformative acquisition that would require us to maintain leverage of below 3x, okay? And I think that's why we kind of note that even though the likelihood of that is obviously still low. The English-speaking countries comment, I mean, really, we're talking about, and this is the order of priority. Canada is our #1 target. We've spent the last 5 years getting to know the dealer body there and have pretty good relationships with most of the large groups and believe that something is imminent in that country. If it comes to the U.K. or Australia, those are a little less relevant at today's date. Those are probably 2 to 5 years out, kind of where Canada was a few years ago. So nothing urgent. We really look at Canada as an extension of the United States. It has similar economic background. It has similar governmental regulation and so on, so we feel very comfortable in that. Chris, do you want to quickly talk about the captive and what our time frame looks like on ABS at the scale of that?

Yes. You bet, Bryan. So as far as our Driveway Finance team, we're really proud of the job that they're doing, being up over 400% year-over-year and originations at [ 4,400 ] in the quarter. And ultimately, when we started this strategy, the goal was to get 20% of our Finance business. And as we continue to ramp up our acquisitions and our partnerships with new teams, obviously, that pool of business continues to grow. As far as the ABS market is concerned, I think a lot of it's going to be dependent on the capital that we generate and the capital we deploy and other means, but we're anticipating something around Q4 of this year that we would do our first ABS launch.

John, one other quick thing on that would be that we expect it to be in the $400 million range, okay, as the first tranche. It's quite good credit. It's a little higher than what we expected. So stay tuned on that, but that should grow momentum. One other quick comment is our base case on the 50-50 plan. We only assumed a $12 billion base of business that's being generated and contributing to the 50-50 plan, when the 50-50 plan ultimately is about 4x larger than that. So again, that's a way to constructively separate that EPS from revenue and be able to bring more money to the bottom line. The last thing that you had asked about was the ramp-up of the Driveway business and the 550 units. I think it's important to remember that, that level of volume is nearly 2 to 3x what our e-commerce used-only competitors were at in their 6 months of business. So we are trending at a much better rate. It is ramping up at an accelerated pace. And as Chris mentioned, a lot of this now is really behind the scenes. Its care center involvement, we're now -- we just opened in South Amboy, South Jersey (sic) [ New Jersey ], our second care center. Even though it would seem like you'd only need 1 or 2, we believe that the care centers need to compete because it's young for us and it's new to us that we want those care centers competing. And then eventually, we'll be opening a mega care center in Texas, which is a good -- is a Central Time zone and has lots of staffing ability and should be able to take us upwards of those targets that Chris had outlined for year-end and in 12 months following that. It's an exciting time in Driveway. And I think our early learnings are that consumers are willing to transact without viewing the vehicle, okay, which is quite nice. We are selling a lot more used cars so our used-to-new ratio is around 5.5:1, whereas at Lithia is 1:1 approximately and that was expected. But we believe that as our technology by year-end becomes better at the auto approval process, meaning that consumers are able to take it even another step further where we're actually approving the actual credit and there's not a predictive indicator where it's actually doing it all for them, which is we'll be the first in the industry to be able to crack that code. So hopefully, that gives you enough color on a few questions, John. Any follow-ups on that?

Just as far as the interaction, though. I mean it just seems like there's a lot more going on than just the 500 -- I mean, the 550 that you mentioned. I mean, are there any other metrics of 90% of your consumers are starting on Driveway and then you fulfill them via your omnichannel or physical stores or associates? I'm just trying to understand how many of your customers are starting in Driveway and then ultimately fall into your lap in other [indiscernible] fully transacting.

Yes, John, there's 0 intermissions or intermittence between channels. There is no relationship at all. So there is no mechanisms in the care center to send it back to the store. It stays within Driveway the entire life of that customer, okay? We're very fortunate that in our first 6 months, our Q2 data, we were -- 97.5% of customers in Driveway were entirely new to Lithia & Driveway. So it's an important part of the design and an important delineation between any of the competition that there is no overlap between the channels. It's an entirely independent experience for the consumers, that's negotiation-free. And that is the cost of our ability to get to a 4.98 Yahoo! and Google rating, which that experience has to be pure and it makes it much easier to be able to do that. We are delivering cars at a lot further radius. So if you remember, last quarter, we were at 740 miles or so. We're at 930 miles. So I think with scarcity of vehicles, there's definitely consumers that are more apt to turn to the Internet to find inventory just because there's just a massive shortage, and that increased the average logistics cost of the consumer from about $440 to a little over $550 for their actual out-of-pocket on that.

Our next question is coming from Adam Jonas of Morgan Stanley.

Really great information. Very, very exciting times for you. So Bryan, a lot of investors are asking us daily when would Driveway be at a condition where it could be spun off, separated financially for valuation and appraisal by the capital markets. And I realize that's an insanely premature question, given you did 550 vehicles. But how do you respond to that kind of question? Because it is -- there may be some merit to this at a time and a place or not, but I just would love to hear how you think about it, what your message would be on that level of financial independence and what it needs to happen between now and then if we get there. And then I have a follow-up.

Sure, Adam. This is Bryan again. I think at 550 transactions per month, we are about the size of what 2 of the 3 publics were when they went public, so there is the ability to do that. And I think that's important to keep in mind. But I would also reiterate that the model was built in a way that the 2 channels highly support each other. And though many believe that the 3 e-commerce retailers do not have infrastructure, it's important to note on Page 16 that their infrastructure costs today are about the same as what Lithia & Driveway's are. So the idea of bifurcating that, I believe that it could be done but I don't believe that it's a necessary thing. I think Lithia Motors and Driveway has proven that it has the ability to execute, that it's developed a plan that's much different and is very difficult to replicate for anyone else coming into the space. It's important to remember that the competitive advantages of being a new car dealer are hyper-important to the overall model of things. And that I think over time, the world will see that infrastructure is important and that the traditional business has the ability to recondition closer to consumers. Our new cars generate trade-ins that other independent used car dealers will never be able to get, giving us a massive cost advantage. And there's other benefits that I think over time, I think the 2 organizations behave best together. Now we have built everything so it could be bifurcated in the event that we're not able to see separation in values or stock value. And we'll take that as time dictates and as our valuations really end up.

Appreciate that answer, Bryan. Just a quick follow-up. When you mentioned transformative acquisition, and I think you said low probability and that's totally fair, are we thinking horizontal like another dealer group, which I think is how people interpreted your comments when you said something similar a quarter or 2 ago? Or could a transformative acquisition be something non-horizontal, non-dealer group but filling in an important technological or infrastructure capability?

Great question, Adam. I believe that it would be something within the current realm, which would be another new car dealer, where you're adding physical network and the ability to service the entire customer's life cycle. I would also say that Lithia Motors and Driveway is a fairly conservative company that had the stretch to be able to think about its Driveway strategies 3 to 5 years ago and redesigned how we approach that. And it's important to remember that those 300 associates are of additional SG&A costs today, and we've built that to be able to scale to nearly 300,000 units over the remaining 4 years of our 5-year plan. So we have plenty of what I would call headroom to be able to grow, and most importantly, leverage the infrastructure to be able to constructively drive down SG&A, so any type of transformative acquisition would most likely be in our wheelhouse. We think that we've built what we need to build to constructively and meaningfully aggregate this unconsolidated space. And as such, the -- we like where we really sit and don't believe that there's anything that needs to be added materially to be able to execute on the 50-50 plan or beyond.

Our next question is coming from Nick Jones of Citi.

Two for me. I guess first, you're pacing ahead of -- or you're pacing nicely against the 5-year plan at year-end. I guess how are you thinking about maybe updating the plan, either shortening it or increasing the numbers of what the targets are? I don't know if it's still too early, but given kind of the progress, just curious on how you're thinking about that. The second question is, nationwide advertising back half of next year, how should we think about that in terms of the impact on margins? Do we expect to tick up? And then, I guess, what kind of population coverage are you expecting when you launch that? Is it 55%? Are you expecting maybe something closer to 70% or higher? Just how should we think about that nationwide launch?

Sure. And Nick, you're correct. We are ahead of the 5-year plan. What we tried to do on this call was to help you understand that we've always said at $1 of EPS is generated from $1 billion of revenue. And we laid out those 6 items that constructively disconnect that formula or that ratio to be able to do that. So I would say that our next update will be about how do we turn $50 billion of revenue into something greater than $50 in EPS. And I know when we first designed the strategy a few years ago, it was really easy to have that 1:1 ratio. And today, now that we see the synergies and adjacencies that are occurring and the ability to leverage a national brand in Driveway, that's going to be pretty easy to be able to adjust that. I think that's an easier part of the formula than saying that the network should grow bigger than $50 billion even though it's very likely we'll need to or can, especially when you start to look at areas internationally to be able to do that. Now in terms of part 2 of the question, which is the nationwide advertising, what you will see is that Lithia Motors and Driveway will constructively manage marketing budgets according to the golden ratio and according to what our lead costs are to do what's best for the long-term health of the organization, while still building an e-commerce presence that is competitive and is well aware of any of the competitors that may be out there. So I would say that when we move to national marketing, that should look like a different metric at inception, which is basically seasoning those markets to be able to improve the golden ratio. Whereas…

Our next question is coming from Chris Bottiglieri of Exane BNP Paribas.

So yes, so first off, I agree with you that like I would never break these 2 businesses up, Lithia and Driveway, just given the sourcing and infrastructure advantages. But I guess my question to you would be why not to the opposite and bring them closer together? It seems like e-commerce businesses are more about scale, network effects and customer acquisition. The Lithia business is one of the largest dealership networks in the country. Why not leverage that scale? And just basically early learnings from Driveway today, like have you begun to think about this longer term and any benefits of bringing the 2 together?

Chris, that's a great insight. And I think when we think about the idea of the channels becoming similar, I think when we began the behavioral transformation of the organization a couple of years ago and began to talk about incentivizing the existing network for those that procure the inventory get the profit, I think that was instrumental in gaining the buy-in from them. And I believe over time that best practices will be shared by the different channels and that stores may make the decision to be able to transition. I think constructively, to be able to drive down SG&A, it may have to be done in a way that you're motivating the stores to do it, much like we do with the profitabilities from Driveway. But I also know that the existing model is highly profitable. It has massive advantages in terms of financeability, in terms of face-to-face presence with the consumer that keep those channels independent, because we always say that we're going to provide solutions to consumers when, where and how they choose. And there is a large portion of the consuming public that, today, like the ideas of negotiation. They like the ideas of face-to-face test drives and the idea and they need help with financeability. So I think we'll know if there's a right time and place. But I think today, there is no constructive plan to bring those together, even though the constructive plan is provide multiple solutions to consumers and drive down SG&A costs as low as we can possibly get to. And I think some of that idea of combination of the channels will occur over time. We also most likely will modify some of the new car network with Driveway brand names over the coming quarters and years, okay? And that may be an easier way to gain the scale and leverage the national brand across new car franchises as well with those manufacturers that allow the branding of Driveway, which is about 75% of the manufacturers.

Got you, okay. Then just a quick follow-up. Obviously, one of the plans is to make the store dealership network more efficient. It seems like the Driveway website's getting a lot better. You have a lot more technology that's leading to read efficiency. How challenging of an exercise would it be to take that Driveway infrastructure from the website and kind of create a homogenized, like standardized website for your local dealerships? I know they keep the same brand that we have today, but is there even technology that could be feasible to create like a common architecture that creates more of the process online for the local dealerships? Or how do you think about that over time?

That's accurate, Chris. I mean, we designed it so it's transferable. I think when you think about the proprietary technology of Driveway, it does wrap around 2 things: one is a transparent buying process that is negotiation-free, and then secondarily is the in-home convenience of having that delivery model. But we do have, on the road map, the ability to apply the proprietary technology to the local brands, but that will start with the stores that have similar buying practices, which today, we have probably a half a dozen stores. Is that about right, Chris?

Yes, that's exactly right.

That are really a 1-price or low haggle type of model and do a lot of their business in home. And then also on the road map is really powering up green cars, okay, which is another affinity brand that now makes up about, I think it was about 5.8% of our total volume, is made up of a sustainable vehicle as a company. So in the west, green cars are quite important, and our states out here are a little bit more electrified and that's a big part of it as well. So that is all road mapped into the design, and as stores' processes become more similar to Driveway if they choose to do that, then the technology can be ramped up and obviously replicated in those environments. We can replicate the process even in a negotiated type of environment where a consumer can actually complete end to end to end transaction. It just means that the data sets have to allow for some input. When price isn't typically determined by the consumer, it's a little tricky to do it. But in a consultative environment where consumers are coming into the stores, it's easy for an associate to be able to work through with a consumer a negotiated price and input that variation in pricing.

Our next question is coming from Bret Jordan of Jefferies.

As you look at the inventory and you say you've got 20 days in-transit, could you talk about the cadence of the in-transit? Are you seeing supply coming back at all? And maybe if you could give us a feeling for when you see the low watermark in new vehicle inventory?

Yes, Bret, it's Chris. The clarity and all of that is not perfect because every OEM has a different allocation method for giving you kind of what that in-transit number looks like. But generally speaking, we expect inventories to continue to normalize throughout the back half of 2021 and in the first part of 2022. As far as the low watermark is concerned, I mean, by indications of what we're getting and what we're seeing in allocations, I think July and August should be the low watermark, and we should see improvement after that, just based on the increasing allocations that we're seeing in certain OEMs already. As far as like specifics are concerned, the leanest inventory that we're running right now is with Toyota, Subaru and General Motors. But all indications from them seem to see -- make us believe that we're going to see improvement in those allocations over the next couple of months.

Okay. And I guess the recent move of OEs or a few OEs to restrict lease returns to franchised same-brand dealerships, is that a real positive or were not a lot of vehicles going back to, say, used-only or outside brand dealerships?

Yes. I think that the idea around it makes sense, and I think there is going to be some lift if you have a lease return at a typical OEM. But typically, the home OEMs or the home brand or the home store is the one that's actually taking first shot at those vehicles anyway. So while there might be some incremental lift and it should support some off-lease vehicles going to our existing stores, I don't think it's going to be that meaningful for us to really comment on today.

Okay. And then one last question on supply. I guess as you've seen a lot of M&A activity or in your pipeline, you must have some visibility as to broader days sales and inventory out there. Do you -- would you say the smaller dealerships are materially different inventory levels than some of the public dealer groups we see numbers on?

Bret, this is Bryan. When we look at the businesses that we're buying, we're not seeing major differences in inventories. I would say, if anything, it may be more geographically dispersed because you still have to remember that the pandemic is still about 60 days out of the box in the western states that were a little slower to reopen, so their inventories probably look a little better than the Texases and Floridas that went hog wild 4 to 6 months ago. So I would say that's probably more of the dissimilarities. And we do sit at that 23-day supply, which is quite nice and have that in-transit that should all look good. And obviously, with 58 days supply on used, we sit quite nicely going into Q3 and into Q4. And I will say this that this is as much a demand-driven environment that it is a supply or chip-driven shortage, okay? And obviously, now with the child credits that are -- that just started and are going to carry through the end of the year, we see no reason why demand shouldn't be strong. And obviously, the manufacturers are scrambling from other parts of the world that have higher COVID numbers and are able to pull some units. But like Chris said, I think we've seen the worst of things and should be able to offset any differentiation in new cars with used car sales.

Our next question is coming from Bob Winston (sic) [ Dave Whiston ] of Morningstar.

On Slide 15, you're talking about the average FICO score for Driveway customer being lower than the typical Lithia customer. And I'm just curious how much of that FICO difference is because Driveway's much more heavily used vehicles versus just drivers getting a totally different customer. I don't know if it's possible to slice at that because...

Sure, David. This is Bryan. We are -- our average Driveway FICO score is 670 score and at Lithia, it's 717 so it is a little bit different. I actually -- what our original findings are, and this was part of the original thesis is we believe that one of the major groups of consumers in e-commerce is people looking for financeability. So I think there's been a lot of pain felt by consumers over the last number of decades on their financeability. And I think that it's easier for a consumer to turn to a transparent online experience and not have to deal with the battering from traditional dealers in terms of their credit, which I think drives that more than anything. Because remember, the online inventory is about matched for Lithia and Driveway. There is no material difference, okay? So it's something more about who the consumer is rather than what the inventory is, okay? We do said we are selling a lot more used cars than new cars even though the new car inventory is online, okay? But that's really a function of the financeability of the consumer that I think is really out there. Lithia's financing, about 66% of it's sales, whereas Driveway's at about 73%. So I think that lower credit is more of a behavior of people don't want to have to uncover difficult circumstances that they may have had that caused the credit impairment, okay? And this is an easier way to deal with it. And I think our care centers are highly acutely aware of that and spend that time consulting and helping people feel comfortable in the Driveway environment.

That's helpful. And then on the auto world after the chip shortage, I'd just like to get your opinion on where should inventory go in terms of that old benchmark of 60 days. As you know, GM and Ford have committed to being a lot less -- doing a lot less inventory once this is resolved. And then somewhat related to that is, do you want to see the American industry go back to a much more build-to-order model like it was a long time ago or do you like the current setup?

I think that if the industry could move to a build-to-order much like Western Europe, which has higher real estate costs, then it would be very beneficial to the overall model. I find it difficult to believe that competitive manufacturers, though, are going to build the correct number of cars and have always traditionally overproduced, even though we'll hope that they're able to do that. I find it hard to believe that, that will occur, and I believe that new car inventories of 60-, 70-day supply is probably pretty typical. And those manufacturers that are pretty savvy on inventory and always have been like most of the Japanese imports probably will continue to be in the 30- to 45-day supply like we normally realize in more of a build-to-order model or a little bit less complex buildable orders than what the domestic manufacturers that really have a broader product array with many more options when it comes to the pickups and SUVs.

So related to that though, what's your opinion on the American consumer? Can they be patient enough to do a build-to-order? Or are they going to want to have that vehicle on a lot when they go to the store or the website?

Well, I think that there's a big way between a 60-, 70-day supply and a 0-day supply. I mean even a 23-day supply, consumers are willing -- are able to get immediate gratification. And I think that will be for the consumers to decide, am I looking for an exclusive built car that's specifically me or am I where I'm willing to wait, or am I going to take something that's on the lot? And I think that's to each their own to make that decision. But I do believe you're right, David, that there is an immediate gratification in this idea that you're going to have 100 cars to choose from that are all quite similar that Americans seem to like, but we'll have to balance that. And I think the consumers will ultimately determine that by not buying cars on the lot that are run-of-the-mill and rather get that additional individuality that maybe they're looking for, which may be some consumers but I think it's difficult to speak to that in generalities.

Thank you. This brings us to the end of our question-and-answer session. I would like to turn the floor back over to Mr. DeBoer for closing comments.

Thanks, Donna. Thanks, everyone, for joining us today and look forward to updating you on our Lithia & Driveway third quarter results in October. Bye-bye.

Ladies and gentlemen, thank you for your participation and interest in Lithia. This does conclude today's event. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.