Good morning and welcome to the Lithia & Driveway Fourth Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the call over to Jack Evert, Director of FP&A. Please go ahead.

Thank you. Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO, and Chuck Lietz, Vice President of Driveway Finance Corporation. 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 were 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 fourth-quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Jack. And good morning and welcome everyone. Earlier today, we reported the highest adjusted fourth quarter EPS in company history at $11.39 per share, 109% increase over last year. Our full-year adjusted EPS was also a record coming in at $40.3, 120% increase over last year's $18.19 per share. Record annual revenues of $22.8 billion were driven by contributions from acquired businesses, our growing e-commerce platform and successful navigation of the supply and demand environment. SG&A as a percentage of gross profit decreased to 57.2%, 730 basis points better than last year, resulting in us generating over $1.8 billion in adjusted EBITDA for the year. Given the higher-than-expected EBITDA generated and our M&A cadence since the launch of the plan, we are excited to provide an updated 2025 plan and our vision of the future state for Lithia & Driveway. 18 months ago, we launched our plan to grow from just under $13 billion in revenue and $12 in EPS to $50 billion in revenue and $50 in EPS. The transformation of our company into a diversified omnichannel retailer leveraging our nationwide network and over 7 million annual customers is now well underway. Today we are eclipsing our initial plan and seeing early returns from leveraging our scale, adjacencies, data, and growing network. Through these efforts, we are delinking the historical relationship of each billion dollars of revenue producing only $1 of EPS as follows. We just completed a year where despite inventory constraints, we generated nearly $23 billion in revenue and earned $40 in EPS. Including a full year of performance from 2021 acquisitions, our annual run rate is well beyond $25 billion in revenue. Next, we have acquired businesses that will contribute $11.1 billion in annualized steady state revenues and entered the Canadian market. Our physical…

Thank you, Bryan. DFC's value proposition is to provide seamless financing options to consumers governed by an internal credit risk appetite designed to maximize our risk-adjusted cash flows while minimizing volatility during periods of economic stress. We are a full credit spectrum lender targeting near-prime portfolio, which we feel appropriately balanced credit risk with the financial spread we earned. In November of 2021, we completed our inaugural ABS offering and we're excited with the market's reaction and pricing of the deal. During 2021, DFC originated over 21,000 loans, penetrating approximately 4% of our retail units and in Q4 became LAD 's largest retail lender. We plan to become a programmatic ABS issuer going forward, allowing us to balance the growth of the portfolio with capital required and credit risk. Of the loans originated in 2021, the average loan amount was $33,000, the average interest rate was 8%, and the average FICO score was 670. We've adopted the CSO accounting standards where we record loan loss reserves upon origination and recognize the interest income over the life of the loan. As a result, individual loans generally are not accretive to earnings until the second year. Given our plan to ramp origination through 2025 and beyond, we will be growing loss reserves faster than profits. In our future state, however, DFC's contribution is clear. Assuming a 15% to 20% penetration rate on 1.5 million units sold, DFC could originate between 225,000 and 300,000 loans and contribute up to $650 million of pre -tax earnings annually. We believe DFC's targeted penetration rate will not impact our relationship with our lending partners. Looking at the future state and DFC's contributions. DFC alone has the potential to significantly grow EPS faster than revenue. The amount of incremental capital generated by DFC will enable us to further grow and transform LAD in a cost-effective manner. Next, I would like to turn the call over to Chris.

Thank you, Chuck. We appreciate the job you and your team have done to scale and integrate this adjacency within LAD powerful network. This will be a huge complement to our core business and a massive profit engine for Lithia and Driveway. Looking back on the -- one of the most challenging years ever in automotive retail, I'd like to acknowledge and thank the achievements of our 22,000 team members. Despite the impacts of the pandemic and inventory shortages, the Lithia channel achieved record levels of profitability and continued to evolve the business to ensure that all customers can buy, sell, or service their vehicles wherever, whenever, or however they desire. This also enabled the company to significantly outperform our 2021 annual operating plans and set us up for another year of high performance in 2022. I also want to congratulate our LAD partners group, our LPG winners for their exceptional performance in 2021. Recognition of an LPG member is a highly coveted award and represents the pinnacle of our mission of growth powered by people. Though high-performance resides throughout LAD, these locations demonstrate a relentless and elevated focus on culture, customer experience, and continuous improvement to create the highest level of execution and automotive retail. Looking forward to 2022 and beyond, our leaders continue to evolve our business practices to address changing consumer preferences, what we call retail readiness. That means upping our game on how we present vehicles in-store or online, how we price and recondition vehicles, and how we use technology to elevate transparency in convenience in the sales and service experience. These actions will drive higher volumes in store and nationwide on Driveway, increased customer satisfaction and decreased SG&A as a percentage of gross profit. New vehicle sales volumes continued to be impacted in the fourth…

Thank you, Chris. For the quarter we generated $538 million of adjusted EBITDA, a 118% increase over 2020, and $304 million 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 $1.5 billion in cash and available credit, which if deployed today with support network growth of up to $6 billion in annualized revenues. We target maintaining leverage between 2 and 3 times and remain committed to obtaining an investment grade credit ratings which would be another sizable competitive cost advantage. As of quarter-end, our ratio of net debt to adjusted EBITDA was 1.35 times. Our targets for the deployment of our free cash flows remain unchanged at 65% toward acquisitions, 25% toward internal investment in Driveway and DFC along with capital expenditures, modernization, and diversification, and 10% towards shareholder returns in the form of dividends and share repurchases. With recent market volatility, we believed it was proven to opportunistically repurchase shares. In the fourth quarter and to date in 2022, we have repurchased approximately 912,000 shares, representing 3% of our outstanding shares at an average price of $284. In November, we obtained an additional $750 million repurchase authorization from the board and as of today, have a remaining availability of $679 million. Deployment of capital for acquisitions and internal investment is always preferred as they reinvest and grow our business. However, we had excess cash generated from our 2021 performance and saw an opportunity where the returns generated from repurchasing our stock, which has no integration risk, exceeded the return hurdle rate ranges for acquisitions. Opportunistic share repurchases allow us to efficiently provide immediate shareholder return. Additionally, earlier this morning, we announced our $0.35 per share dividend related to our Q4 performance. We remain well-positioned for accelerated disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and $55 to $60 of EPS by 2025 with even more significant upside into the future. This concludes our prepared remarks. We would now like to open the call to questions. Operator.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Rick Nelson with Stephens Inc. Please proceed with your question.

Thanks. Good morning. Congrats on a great quarter and the record 2021 and thanks for the detail long term outlook and [Indiscernible] I’d like to just follow up on DFC, significant pre-tax income targets. If you could review that math that goes into that long-term target, I think you said $650 million pre-tax.

Thanks for joining us today, Rick, this is Bryan. I'm going to actually let Chuck handle the DFC questions since he's an expert at this.

Yeah. Thank you, Bryan. Chuck Lietz. So relative to the $650 million, that's really predicated upon achieving a penetration rate across the Lithia network of between 15% and 20%. That really would equate to a significant amount of loans that we would contribute to our pretax income, and originating somewhere in the neighborhood of $3.5 billion to $4 billion a year in overall origination. The other big part of that would just be leveraging the economies of scale as we continue to grow our portfolio, and that would hopefully generate a significant amount of pretax earnings.

Thanks for that. Also, with those long-term outlooks, Bryan there's new horizontals, verticals that's referred to in the slide deck. If you could give us some ideas what you're thinking along those lines?

Sure, Rick. Most importantly, our horizontals because that's really what we're focusing on for the next three to four years with obviously the first being DFC and probably the largest contributor to the disconnect between the billion dollars and a dollar of EPS generation from that. And then followed by that, we obviously have fleet and leasing companies, almost [a quarter] (ph) billion dollars in our portfolio at this stage and we intend to grow that out as well. And that maybe could be as big as a horizontal, but that's yet to be determined. And then obviously, consumer insurance is another horizontal that we are in pilot stages in a few of our stores, as well as possibly charging networks to really utilize the infrastructure that we built in our 300 locations and the density that we had to make sure that we're moving forward in a sustainable manner as well. Now, in terms of the verticals and we refer to adjacencies as both. The verticals are more mobility verticals, and we've talked about those in the past, which would be like power sports or construction equipment or farming equipment or long-haul trucking or any of those type of verticals, and those are really things that we're really looking at beyond the 2025 plan and we started the layering in this future state idea. Because obviously if you think about the horizontals or you think about the strengths of Lithia & Driveway, it's pretty easy to be able to leverage those into a business that has the same four business lines of new, used, Service and Parts.

Great. Thanks for that color. And if I could ask a near term question as well. On demand, are you seeing any hesitation at all among consumers to the elevated prices, is the lower-end consumer constrained at all along those lines?

Hey, good morning, Rick. This is Chris. I think the easy answer is absolutely not. As fast as we are replenishing our new car inventory, which started off January probably in the best position that we've seen since last summer, we are able to retail out of those units at the consistent margins that we've seen really in the back half of the year. So, demand is very high right now and we're taking advantage as much as possible in both new and used in that capacity.

Good to hear it. Thanks, and good luck.

Thanks, Rick.

Thank you. Our next question comes from the line of Rajat Gupta with JP Morgan. Please proceed with your question.

Great. Thanks for taking the questions. Just a couple. First on Driveway. The platform is still in the early innings here, but how do we get comfortable around scaling it from roughly $1 billion in revenue this year to the $9 billion by 2025. Can you give us any color on how the store culture is evolving, alignment with the store personnel in the centralized locations, any updates, changes to the advertising strategy, you mentioned nationwide branding, and maybe any -- any further updates coming to the platform, integration, etc. And I have a follow up. Thanks.

Sure, Rajat. Great question too. And it's probably the part of the plan that we're starting to get more comfortable with, but it's still probably the most cloudy because it is a startup. And like you said, we're into our 13th month live with our consumers and we're quite excited of what we're initially seeing in our thesis. Related to - about 50% of the market is looking for something that's an out of dealership experience and more of an in-home type of environment. So, we do believe that there are three basic drivers, and we can talk about the store a little bit as well in the network and how it supports it. But fundamentally, when we built Driveway our belief in growth revolved around incremental consumers and the ability to find incremental inventory. So, if you think about the Driveway model versus any of the used car peer competitive group, our big model difference is that we have 1,200 people on the ground buying cars out on the street and not going to auctions. Now we're also able to procure a lot larger portion of cars directly for consumers. So, our ability to scale that depends on our ability to source cars as close to the customer as possible. Obviously, starting with the customer then moving to customer trade-ins that are across the street at a competitive dealer and then working through your different channels of fleet and leasing, and then lastly, auction type of vehicle. So, in terms of scaling, that's critical. Okay. Now, let's move up funnel real quickly and let's talk about what we're seeing in MEVs, because I think if you think about how do we get to a couple of 100 thousand units instead of a couple of thousand units I really believe…

Great. That's really helpful color. And maybe just a question on capital allocation. Slide 18 mentioned that you're targeting $2 to $4 billion in revenue, but you are acquired driving this year. Probably similar run rate over the next two, three years as well to get to the $20 billion. However, it seems like we're going to be in this elevated level of new Waco gross margins for a while, which means -- it seems like 2021 could be another record year, which would mean excess free cash flow once again. So, you did not change your capital allocation framework in your slide deck. But as Tina mentioned, could we expect to continue larger focus on the buyback here in the near-term before you shift back to your traditional plan? Just as curious how to think about that cadence there going forward, particularly in the context of like $55, $100 EPS targets than you have. Thanks.

Thanks, Rajat. This is Tina. Great question. I think we have our capital allocation that we've been steadily doing for a long time, 65% toward acquisitions, and then the 25% towards internal investment. As I mentioned in the remarks, that is our best way to use our capitals are really reinvest in that capital engine as acquisitions are accretive and generate even more free cash flow. I think similar to our history and what we've demonstrated with share repurchases, when there's a disconnect in the price, when the math makes sense, right? You will see us still opportunistically buy back shares, and it's something that we'll watch with the price. And you can see in Q4 as well as beginning of this year, we've done some active share repurchases, I think repurchasing about 3% of our outstanding float to date. So, I think we'll continue to watch that. I think we stay really disciplined and have a good structure around driving those returns for our shareholders, and balancing that with that excess free cash flow just gives us a lot of freedom to make a choice in terms of where we're investing.

Got it. And is that return math driven more by the near-term EPS expectations, like next 12 months versus what the M&A returns we're generating? Just curious, like what kind of valuation levels we should be watching for that buyback program?

Rajat, this is, this is Bryan again, I think most importantly, when we think about share buybacks, we balance it with acquisitions, okay, and right now we are seeing decent pricing still on acquisition, even on a steady-state or earnings basis it's still looks pretty good and obviously, with 13 billion in the pipeline, we can pick and choose acquisitions to achieve our $2 billion to $4 billion a year that are remaining over the final couple of years of the 2025 plan. Okay. So, it really boils back down to once you run those calculations, can we get a higher return on buying our own stock back? Absolutely right now. And it shouldn't be that way. But if the world doesn't see what our company's dry powder is and what the potential is in Driveway or DFC or further adjacencies, then we obviously will lean towards the buybacks to be able to do that. We actually apply about a 25% premium over what we buy shares back of the company saying that basically buying shares back isn't as important to us as getting to the 2, 1/2% to 5% market share in the future. So, we want to be able to buy them back more constructively than what acquisitions are. So that's kind of a simple way to look at it in terms of acquisition and obviously, I think we all believe that the stock is vastly undervalued.

Great. That's good. Thanks for all the color and good luck.

Thanks, Rajat.

Thank you. Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question.

Good morning. Congrats on the results.

Good morning, Ryan. Thank you.

Starting on GreenCars, I guess looking out to your 2025 targets, you show incremental revenue for the GreenCars initiative, but it doesn't appear to be detracting from the traditional core of Lithia business. Just can you talk through the puts, takes, and how you think about potential cannibalization there.

Sure. I think first and foremost, GreenCars is in educational site to be able to be a catalyst to the conversion to sustainable transportation. Okay. So that's first and foremost. So anytime I'm talking about what's our lead conversion ratios are those type of things on GreenCars. Know that the educational components are almost 5X. That number of customer base. So, it's primarily there to educate consumers, outside of that, we really look at GreenCars as a lead generation source for Driveway, and later in the next few months, we'll be upgrading the GreenCars website with all the Driveway proprietary technology, both new and used as well as the functionalities of shops sell and service. But it's actually effectuated and the logistics and everything are done exactly the same as what we're doing in Driveway. So, there is no network changes that need to happen or there's no structural changes in terms of logistics or customer guarantees, it's all the same as Driveway. So, keep that in mind. Now, we are finding that the GreenCars Marketplace, the leads that are coming through that, while still getting the educational lift that we get from the site, are costing about half the price of what they're costing in our e-commerce channels of Driveway. So, we like the fact that it's an affinity brand that we do get these benefits. So, what we're really saying is, our budget -- our marketing budget for Driveway that we can divert some of that marketing budget into the affinity brand GreenCars, and get more effective funnel utilization throughout the entire model.

Great. Then switching over to the potential for an agency model and OEMS going more direct relationships on Slide 18, you note that that's potentially 2035 for certain manufacturers. Any idea on which ones or how much of the market could potentially go that direction? Secondly, why is that 15 years old versus the next five years? And then lastly, can you talk through the economic differences of the dealer versus agency model and the puts it takes you guys?

Sure. I think most importantly, we have to remember that franchise laws are state-by-state, and that's how they change. We haven't had franchise law changes and about five years. In 2017, when the one state in the country allows both legacy manufacturers and new startups to be able to direct sale to consumers. And we've seen no attrition by any of the traditional OEMs to move to a direct sale in that state. So, keep that in mind as you're thinking about this. So, we believe this is very slow. If you look into Eastern and Western Europe, there is acceleration of the agency model and they're working out those agreements now, and many of the European manufacturers primarily are talking about moving to an agency model, and we'll get to see a little bit more about what those margins and stuff look like as they move into 23 and 24, which is really their time horizons that they're looking at. Now in Eastern Europe and in other parts of the world where there are light agency models, primarily only with the European manufactures. Okay, it looks like that the margins are somewhere between 6% and 10% on the front-end margin of the business. Okay. So, remember that the F&I -- some of the F&I is also being reduced in the agency model. So, I think if I was going to extrapolate something out, what we know is that one of the German manufacturers is fairly aggressive here, but they just recommitted to the U.S. while also saying that they know franchise laws doesn't allow them to move to an agency model, they basically committed to margins being stable for the next five years. Okay. And then beyond that, they made the comment that agency model isn't really in the…

As always, very helpful, Bryan. Thanks. Good luck.

Thanks, Ryan.

Thank you. Our next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed with your question.

Hey, guys, thanks for taking the question.

Hey, Chris.

Hey, just want to run through some numbers. So, it sounds like the financing business, you're saying that you'll sell 1.5 million units, so why don't we kind of focus on that number a little bit? Like how do you get there? I think you're running like 550,000 units today, roughly speaking, using the Q4 and annualizing that. Like how do you get that incremental roughly million units from now to '25 year-end? Like how much of that's Driveway, how much of that's same-store, how much is acquisition? Can you help bridge that for us?

Sure. Let's start with Lithia. Obviously, we have a same-store sales growth rate built in. We're utilizing basically a normalized environment in all of our assumptions as well, assuming that the current situation in short supply and new vehicles will return. So, we look at that. Lithia ends up -- Tina, do I have that right here? Hold on, I got to get this. Okay. So, the Lithia core business, which includes all businesses prior to July of 2020 is around 1/2 million units, so about a third of the business. The network development, which was originally estimated at around $20 to $22 billion, which was all the acquisitions post that July 2020 makes up for around 600 and some thousand and the remainder is Driveway. And those Driveway units are really the exponential hits that will come through the e-commerce and conquesting market share outside of the network growth in the core business that sits there. Okay and then obviously in terms of the financeability of that, when we start to extrapolate the 15% to 20% penetration rates, you can start to get to those numbers. We do use a little bit higher penetration rate on our used vehicle business. So, when we get to that state, we're almost 1.5 used to new ratio. So, it's a little bit different than what you would look at today when we're sitting at 1.1 to one used to new ratio.

Got you. There is another question I had that, you mean the penetration seems a little conservative, I'd take your used ratio. Typically, 75% [Indiscernible] of customers take financing. I would think your CPO penetration is roughly 30%. So roughly there's like 45% of customers that get financing elsewhere. So, it seems like you're still using like a pretty conservative share of that last 40 or 45. Of that 40, 45 that you're not financing, where is the gap? Is it there's certain ends of the credit spectrum that you don't want to finance? Is it you just expect to have a competitive platform [Indiscernible] partners? Maybe just help us to think through like why that can't be higher.

Yes. So let me start by saying it could be higher. We use 15% as our penetration rate in the 2025 and used an upside of 20% when we talk about future state or steady state. And obviously that [Indiscernible] reserve has a big drag on things until you ever get to steady-state and maybe you really never do. I think most importantly, when we start to think about the penetration rates, our manufacturer partners take the lead on all new cars and we currently penetrated about 27% of our product is leased. I don't see that changing materially, that's how we retain our customers and keep them in that brand for a longer period of time. Beyond that, there's a large portion that's financed and then there's that 15% of consumers on new that truly pay cash. So, we think that we probably are really sitting at a 10% to 15% penetration rate best case, in terms of new. On the used car side, it is a lot deeper penetration. We're actually only selling about 24%, 25% of our cars and certified and the certified penetration levels of captives is pretty low still, it's not the same penetration rates. So, in theory, if it grows, yes, you're right. We may be able to do 40%, 50% penetration in used vehicles. But again, we want to illustrate what is the most likely case, knowing that we're now talking out three to four years or even up to 10 years when we start to think a little longer. Chuck, do you have anything to add on that?

Just, again, that we want to continue also to maintain our banking relationships with our existing lending partners. And so, they provide a lot of other services to us and that's another reason why our penetration rates are a little on the conservative side.

Makes perfect sense. Thanks, guys.

Thanks, Chris.

Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.

Good morning, guys. This is an overarching question. You went through this over the previous question, but just as you look what the automakers are doing and trying to capture more revenue beyond point of sale. You call it agency models, whatever you want to call it, I mean this is a question of semantics here. But it looks like they're trying to, with your help, replicate the direct-to-consumer model in some form or fashion which you are already doing yourselves, in some ways, sort of the online efforts, the rep -- that look similar to that. Just curious. Do you view them as partners in this or foes? It seems like they want to leverage you and your expertise more as partners and leverage your networks by giving you may maybe greater share of revenue over time. In the backend and maybe take a little bit in the front end. But the net of it would be a positive for you. How do you see this developing? Because I mean, there's a lot of demand thinks of how what you call and all this stuff, but it seems like this is going to play to your strengths as a large network in the country, in the U.S.?

John, we believe so too. And I think that the dealers and the manufacturers, they trust each other. They understand what the fundamentals are and they're trying to find simpler ways and more transparent ways to meet their customers. And I think the ideas of trying to replicate a Driveway, like what GM maybe doing right, is something that I think helps educate them that the customer-facing part of the entire formula is something that is involved with one-on-one relationships and communities and so many more things that dealers bring to the equation. When you think about the total profit equation, I think we all get to this idea that the dealers are going to be dis-intermediate. I don't think most manufacturers think that way. I think that they are exploring the ways of how can they make the experience more transparent from start to finish, and I think we're -- we as dealers feel the exact same thing and want to achieve the exact same things. Now, if you think about it from maybe other perspectives where they're going, okay, this is the start of DTC or this is the start of a total new channel, I don't believe that that's where it's at. I think manufacturers have large challenges to be able to build sustainable vehicles and compete with some of the new entrants in this space like Tesla, that they have plenty to do rather than worry about what happens post-sale. And I think when we think and dissect the profit margins of what a manufacturer is making and then the normalized amount that a dealer makes in this equation is less than 20% of what the dealer makes. So, let's keep this all relative that this isn't a big thing and I think there is a…

And just a follow-up then two specific things with the [Indiscernible] and CarBravo, it seems like they've -- they're launching these and they're constructing them as they're being implemented. I think the end game is not set yet as to where they want to go with these things. In CarBravo my understanding is that they want to go to 10- to 15-year-old vehicles potentially which really is getting to the second or third -- are really getting to the third owner, the vehicle -- the third term in the life of the vehicle. Do you think -- what does that -- how does that impact your business? Maybe just CarBravo, specifically, because it seems like it's -- it's somewhat of a tool by which the GM vehicles are then recaptured in network and you still maintain the large portion of the economics and it might help drive your used volumes up. I'm just trying to understand how you perceive that because it's pretty opaque at the moment. And it seems like it's going to be a positive for the GM dealers, but what is your take?

I think it does build a marketplace to have visibility, but I would also go back to -- I wouldn't be fearful as a dealer about it because ultimately, who controls the inventory? The dealers are the ones that have the inventory. So, we really looked at it initially as, okay, it's probably a way for them to learn about beginning to end type of process again, even though many manufacturers have done this in the past and haven't been hyper successful in that type of venue. What they're going to find is that I believe they sit there much like a Cars.com or CarGurus that if you don't have the inventory, what part of the profit equation can you ultimately demand? And if it's really this 10- to 15-year-old vehicles, I do know that they control their pipeline of off lease cars in the event that we don't take them in on trade and early terminate those leases. But in the 10- to 15-year-old model, they need us and we need them. And I would say more so the small dealer rather than the Lithia & Driveway which we're building our own brand impression and I would imagine even when we look back two to five years from now, Driveway will have a larger inventory of selection of that 10- to 15-year-old vehicle than even the aggregated GM dealers will have.

Okay and just one more follow-up on that. Do you believe that just means that your network is that much more powerful communities otherwise and the smaller dealers as this organization occurs, whether be it for you or the automakers, then further disenfranchised or put it at a disadvantage if you will -- I mean, or does this actually helps them? I'm just trying to understand what is really means for the full landscape.

It may give a venue for smaller dealers to at least compete with the Driveway, but most importantly, remember that the entire design thesis is around inventory procurement. The logistics of that procurement to the reconditioning site, and then that vehicle going back to the consumer and I think that's something that has to be done somewhere. So, when you think about how the model works and where the profit equation ends up being, know that the dealers of the ones that have the technicians, the expertise, and the distributed networks to be able to keep those cars closest to the consumer and do it at an affordable price to be highly competitive with maybe new entrants into the end of the used vehicle space. You have a down --

Okay. Great.

You're welcome. thanks.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey. Good morning, guys.

Hi, Bret.

Hey. In the prepared remarks, you talked about the '25 model having a 2.5% market share and I think that you said GPUs at pre -pandemic levels. Do you think it's realistic to think that they'll go all the way back to pre -pandemic GPUs? And I think, could you talk about the cadence, how you see the step-down from the current record levels?

Great question, Bret and I think -- let me start by saying Lithia & Driveway has made their history on focusing on what things we can control, okay? So that's not to sidestep the question. We believe that the margins and ultimate inventories, and Chris spoke to that a little bit that we are seeing glimpses of improvement, but ultimately the demand is out, still outpacing the supply. So in the 2025 model, there's no benefit for us to show a big the margins, maintaining that in the event that they do And every day it does seem like the window for increased elevated margins are probably there for longer than we all would like or our consumers would like, but it may be that they don't return to some normalized level, Bret and in that event we have some extra capital to do different things of whether it's the adjacencies or whether it's the network growth or whether it's the next thing that we can leverage our 7 million paying customers annually to find new ways to service them and build brand recognition and lower cost marketing budgets and so on. So, you may be right, but I think what we try to do is outline what our best most likely cases rather than maybe what best case is, as we think about our 2025 model, or now, even the discussions about future state or more of a steady-state type of model.

Okay, great. And then on the service side of the business, you hit double-digit in customer pay, could you talked about the cadence of customer pay. Obviously, you've seen that summary opening in the fourth quarter. And then the parts growth obviously being north of 20, is that something that is a new normal or is that related to supply chain issues where more of the independent service market is buying dealer parts because they can't get in the after-market?

This is Chris. I think what we're really seeing is the impact that you're seeing on the new vehicle side is also translating over to what's happening on -- even on the wholesale part side where non - OEM parts are in high demand, where you saw our warranty business was down year-over-year, which is really a function of the allocation of OEM parts, specifically electronic parts that are going into production rather than sitting up for warranty. And so, I think on the wholesale part side, I think having that good, better, best the best being the OEM products, is offerings, which we do have in our stores, both for retail and for wholesale, is setting us up nicely for the recovery where as customers are coming back on the road, miles driven is increasing, the age of vehicles is at record levels. I think it sets us up nicely for a good tailwind for 2022 and beyond.

Good, Chris. Hey, Bret, one other -- a couple other key points. We're still basically flat from where we were in 2019. There was a lot of wind -- or sale that needed to be filled with that tailwind. Also keep this in mind, and it's a small incremental amount, we were one less day in the quarter than we were in the previous year, so that affects that same-store sales number by about 1.5%, 2%. So, it's probably more around 10 than 12, but those are all the things -- similar to what Chris said.

Okay, great. Thank you.

Thanks, Bret.

Thank you. Our final question this morning comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.

Great. Thanks for taking my questions. You just recently -- one of the automakers made a comment that 20% of dealers are charging above MSRP and they're tracking these dealers and that there might be future payback on allocations. One, are you selling above MSRP? The 20 actually sounded a little low, do you think that's where the industry is, and are you concerned about maybe margins coming down as other dealers maybe pull in pricing based on those kinds of concerns?

Sure Colin, really good question. I think one of Lithia & Driveway's big claim to fame is that our stores make those decisions in the field. And they do that based off their supply and what their competitors are doing. So yes, we do have some stores that are charging over MSRP. We don't have specific numbers because we don't specifically track it because we allow our network to make the decisions close as to what their customer base is and what the supply and demand is in that local market.

You mentioned in your commentary, increased advertising, and then some of the losses for upfront booking of losses on the Driveway Financial. Is that a material impact that we should be thinking in SG&A this year, or is that all immaterial in the scope of the entire company? And also, where exactly is the Driveway Financial book? Is that recorded in the -- broken out in the segments, or it's a new or used, or is it -- where

I'm going let Tina run through that for you okay.

Yes. I mean, on the DFC business, we do net the income statement impact with DFC within SG&A at this point in time. The amount is not material and so we're not required to break it out. And so any of those headwinds from the [Indiscernible] reserve, as well as the building of that is actually impacting our SG&A and increasing that costs [Indiscernible]. And so it's really an investment, it's how we think about it. Similar to the advertising spend for Driveway as well as our stores. That's also all within SG&A so you can see those trends over time as we continue to build those brands and built these businesses that augment what we're doing.

All right. Thanks for taking my questions.

Thanks, Colin.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. DeBoer for any final comments.

Thank you, Melissa. And thank you for joining us today and we look forward to updating you on Lithia & Driveway for the first quarter in just a few months. Bye-bye all.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.