Q3 2023 Lithia Motors Inc Earnings Call

Good morning, and welcome to the Lithia and driveway third quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session I would now like to turn the call call over to your host a meat Milwaukee director of.

Relations you may now begin.

Yeah.

Thank you for joining us for our third quarter earnings call for 2023 with me today are Bryan Deboer, President and CEO, Chris Hoelscher, Executive Vice President and C. O O Tina Miller, Senior Vice President and CFO, and Chuck Lietz Senior Vice President of drive way for that.

Today's discussion May include statements about future events financial projections and expectations about the company's products markets and growth.

Such statements are forward looking and subject to risks and uncertainties that could cause.

Actual results to materially differ from the statements made.

We disclose those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission.

We urge you to carefully considered 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 of comparable GAAP measures.

We have also posted an updated investor presentation on our website investors don't Lithia driveway dot com, highlighting our third quarter results.

With that I would like to turn the call over to Bryan Deboer, President and CEO.

Thanks, Amit good morning, and welcome to our third quarter earnings call. We appreciate everyone joining us today and the opportunity to update you on our business growth initiatives and progress towards our long term strategies.

In Q3, lithium driveway grew revenues to $8 3 billion up 13% from Q3 of 2022, resulting in adjusted diluted earnings per share of $9 25.

Overall same store sales momentum improved sequentially.

Led by new vehicle units up 5% and after sales revenues up over 4%.

Sequentially Gpus were in line with our expectations for both new and used vehicles, while F&I margins remained resilient.

Year to date Gpus for the new vehicles have come down approximately $100 per month.

We're down 19% from the end of 2022.

We are well supplied with new vehicles and parts to meet customer demand across the domestic brands throughout year end.

Our teams are driving both growth and profitability, while we focus on continued gains and efficiency across vehicle operations.

<unk> and our other adjacencies.

Our business model is flexible and diversified giving our store teams the tools and autonomy to adjust with local market dynamics and manufacturers.

Our goal is to provide customers with a wide variety of products and services and access to solutions that fit their needs throughout the vehicle ownership lifecycle. This allows us to create a culture that is responsive to varying needs and delivers the best possible experience for customers wherever whenever and however, they desire.

Moving on to our financing operations Driveway Finance Corporation or Dfc posted Q3 results in line with expectations as receivables grew to $3 1 billion.

The DFT team has been methodically and prudently navigating the shifting currents of increasing rates in the ABS and credit markets.

The team has managed loan loss provisions in line with expectations and steadily growing their loan portfolio.

Our plan remains on track to gradually expand margins move towards profitability late next year, while improving liquidity as we manage the pace and quality of originations.

Chris and Chuck will be sharing further details on results of both vehicle and financing operations later in the call.

At the heart of our strategy is expanding consumer solutions that are simple convenient and transparent.

Our network is being designed to be within 100 miles of consumers, which allows us to leverage our physical and virtual infrastructure.

Over time, we expect this will generate more convenient impressions more memorable experiences better returns on capital and an ecosystem that is unreplicable.

Acquisitions are a core competency to our design and organization, we remain disciplined and opportunistic as we look for accretive opportunities that can improve our business.

We target after tax returns of 15% or more 15% to 30% of revenues or three to seven times normalized EBITDA.

Life to date, our acquisitions have yielded over a 95% success rate and after tax returns of over 25%.

We're looking for acquisitions that are complementary to our network development strategy and meet our return thresholds and an unconsolidated industry.

During the third quarter, we completed two acquisitions in the United States combined they're expected to generate approximately $290 million in annualized revenues and year to date, we've acquired over $3 $8 billion in revenues.

In addition, I am pleased to announce the impending purchase of Pendragon UK motors the.

The Pendragon fleet management business, or PVM and strategic partnership with Pinewood technologies.

This transformative transaction is a crucial step towards executing on our long term design and brings with it a strong partnership with our highly profitable and innovative Dms CRM system expands our footprint further in depth management and finally grows our retail footprint in the United King.

Them.

We expect our annual revenue run rate to grow to approximately 38 billion and are excited with the addition of two fundamental pillars, Dms and fleet management company or FMC to our global business.

We'd like to welcome our new and future partners to our Lithia family as we expand our worldwide presence.

As a reminder, we target annual why annualized revenues acquired in the range of $3 to $5 billion per year.

Our primary focus remains on building out our U S network and complement our network strategies.

We are proud of our team's track record of executing and integrating multiple transactions as we make our way towards and beyond $50 billion in revenue.

Moving onto the overall execution of our long term strategy.

Since the launch of our plan, we added important foundational adjacencies and will have acquired over $22 billion in revenues once the pendragon transaction is completed.

In addition, driveway Finance Corporation, our captive Finance Division continues to make steady progress as our top finance partner and have line of sight to realizing the full potential and contributions to our profitability in the future.

As you May recall, the average loan we originated Dfc is three times more profitable over its lifetime relative to the fees. We received from third party commissions.

Shifting to our Omnichannel platforms, we're making steady progress growing online <unk> up 34% across our digital channels, while digital transactions grew to over 37000 units in the third quarter up 21% compared to last year.

Supported by the education provided by Green cars sustainable vehicle sales accounted for 16% of total new vehicle sales in the quarter up from 10% in Q3 of 'twenty two.

Ladd remains on track to become the preferred international Omnichannel provider of products and services meeting a diverse set of customers' needs throughout the ownership lifecycle and across multiple adjacencies our.

Our plans have positioned us to improve margins and lower SG&A through a combination of growth efficiency diversification and scale.

Combined these efforts will disconnect the ratio of $1 of EPS from every $1 billion in revenue and achieving $1 10 to $1 20 for every billion dollars of revenue by 2025.

This will be driven by a few key assumptions, namely <unk>.

Achieving through scale, a blended U S market share of two 5% through both acquisitions channel expansion market share gains and same store growth improved mix and a normalized Saar environment.

Second driving SG&A as a percentage of gross profit to below 60% through increased leverage of our cost structure and a normalized GPU environment and optimizing our network.

Third continued maturity and growth of our first adjacency dfc achieving profitability ability in the latter half of 2024.

Fourth continuing to expand revenue and consumer optionality with driveway by attracting 98% new customers through a seamless and transparent one price experience with seven day return privileges and shipping directly to your home.

Fifth green cars educating consumers on sustainable transportation and expanding our penetration levels of electric vehicles, and finally ongoing return of capital to shareholders through dividends and opportunistic share buybacks.

The above opportunities are now well underway combined with Dms and FMC design additions sets us up for further growth and profitability in the coming years.

In a normalized environment, we can now clearly see the path for significant change were $1 billion of revenue will ultimately generate $2 of EPS.

Key factors underlying our future steady state and now totally within our control are as follows.

Yes.

Optimizing our networking continuing to diversify our portfolio through focusing on acquiring larger stores located in higher profitability regions of the south central and South East U S.

Filling in the Midwest and integrating our international businesses, while growing our omnichannel platform and other mobility verticals.

Second.

Financing up to 20% of units with Dfc and maturing beyond the headwinds associated with seasonal reserves.

Third through size and scale, we will continue to drive down vendor pricing develop competencies internally to save costs and lower borrowing costs as a path towards an investment grade credit rating.

Fourth to increase our share of wallet through improving the customer lifecycle by leveraging our cost structure to reduce our SG&A as a percentage of gross profit to below 50%.

And finally maturing contributions from other horizontals, including fleet management software charging infrastructure and consumer captive insurance.

In closing lithium driveway provides a unique and unreplicable mobility platform and transportation solutions that deliver great customer experiences throughout the ownership life cycle at a global scale.

Our design is durable diversified fast and nimble to meet the needs of consumers with both online and in store solutions, coupled with financing solutions like Dfc.

The combination of our strategy and experienced teams gives us the confidence in our ability to eclipsed $50 billion in revenue and produce a ratio of $1 10 to $1 20 of EPS for every billion dollars of revenue in the mid term and ultimately over $2 long term.

With the completion of Pendragon transaction all elements of our original design are now securely in place, allowing us to do what we do best and are known for and Thats execute with that I'd like to turn the call over to Chris.

Thank you, Brian first off I'd like to provide an early welcome to the 6000 associates at Pendragon that will be unified.

With our Lithia and driveway UK operations team to build what will be one of the strongest dealership platforms in the United Kingdom with over 10% market share in the brands, we represent our strategic vision and commitment with Neil Williamson, Our UK regional President was to ensure that his team had the opportunity to bring our mission of growth powered by people across the Atlantic.

With this partnership we are well underway to solidifying that journey.

Since the inception of our plan, we have positioned the organization to ensure that whether in the United States, Canada or the United Kingdom, Our cultures would remain centered on entrepreneurial leadership at the local market level empowered to achieve our high performance.

Our seasoned and experienced regional operational leaders remain positioned to drive us towards the future. We remain committed to delivering a customer centric experience to be the retailer of choice wherever whenever and however, our customers desire focusing on our customer first will always ensure that we provide solutions that create sustainable growth and provide best in class returns.

To our shareholders now as it relates to the quarter.

Overall consumer demand remained strong for both vehicle sales and service despite a high interest rate environment and opportunities and OEM production. We believe we are at the late stages of a full production recovery that caused over 10 million units of product advantage from the North American pipeline because of COVID-19 supply constraints, while the average.

Tumor APR on finance vehicles is up over 200 basis points year over year. The average monthly payments remained stable as consumers continue to invest in personal transportation needs and all price levels and incentives continue to accelerate.

On a rebound of new vehicle production was impacted the related depressed production put pressure on used inventory availability. This trend is highlighted the benefits of having a diverse network and over 2000 used vehicle procurement specialists and our longstanding and disciplined approach to procuring vehicles for multiple channels lastly, with the age of the car.

Our park at record levels and the number of units in operation increasing the tailwind we have to deliver customer centric after sales to all levels of affordability remains strong for years to come.

Same store new vehicle revenues were up five 5% due to unit volumes, increasing 5% and Asps rising 5% new vehicle Gpus, including F&I were $6 678 per unit down from 7500 in Q1 of this year and 8165 in Q3 of 2022.

We expect this trend and Gpus to continue resulting in further reduction in margins in line with our outlook. The new vehicle Saar will return to historical levels in the U S U K and Canada in the next 24 months.

New vehicle inventory day supply was 55 days compared to 47 days at year end and 39 days in Q3 of 2022.

High demand inventory that has been slow to reach our lot, particularly amongst the imports is improving despite the headlines related to the OEM strike in North America supply for <unk> vehicles across our network remains healthy at over 70 days on ground.

Shifting to used vehicle same store used vehicle revenues were down 8% with unit volumes, decreasing 2% and asps decreasing 6% each.

<unk> car price declines are driven by the availability of later model vehicles and a reduction in several years of new vehicle supply declines core product or vehicles three to seven years old make up 50% of our unit sales and trade ins for these vehicles as a primary procurement channel for value auto, which makes up 20% of our unit sales. While this has put significant pressure on.

The procurement of vehicles to meet demand and also reinforces that reinforces the competitive advantage, we have of being top of funnel new car dealers were over 75% of purchases are coming from consumer channels only available to franchise dealers. The competitive advantage enables us to provide the transportation needs to customers that fits their budgets.

Regardless of market economic conditions.

For used vehicles, including F&I Gpus were $3940 down 14% from last year overall low inventory supply is supporting overall asps.

But gpus are seeing variability due to procurement pressure and affordability for consumers when financing vehicles in this environment, we expect gpus to fluctuate as supply normalizes and interest rates settle shifting to used vehicle inventory levels vehicle inventory day supply was 58 days compared to 65 days this time last year.

Sure.

Our physical footprint will soon span over 500 locations worldwide, which combined with the ability to shop sell and service vehicles wherever whenever and however, our customers desire will create massive benefit as we leverage the size and scale of our network and give customers optionality and experiences they desire as Brian mentioned, we are dedicated to <unk>.

And international Omnichannel provider of products and services that meet a diverse set of consumer needs and we are still in the early innings of this unrealized opportunity.

In the third quarter lithium driveways online channels averaged $13 3 million unique visitors an increase of 34% from the same period last year with advertising spend down 10% total E. Commerce sales now represent 22% of retail transactions.

Unknown Executive: Good morning and welcome to the Lithia and Driveway 3rd Quarter 2023 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.

Amit Marwaha: I would now like to turn the call over to your host Amit Marwaha, Director of Investor Relations. You may now begin. Thank you for joining us for our 3rd quarter earnings call for 2023. With me today are Bryan DeBoer, President and CEO Chris Holzshu, Executive Vice President and COO, Tina Miller, Senior Vice President and CFO, and Chuck Leetz, Senior Vice President of Driveway Finance.

Driveway strategic growth and cost structure continued to be refined as we work towards the right sizing of that business.

Brand recognition remains on track as we work towards improving the consumer experience and our product offerings. The average distance to deliver a shop vehicle from our stores is now 800 miles and most customers have never shopped, our service with us before as our physical footprint grows each location provides the ability to do connect with 50 times.

More customers without the fixed investment as we expand the power and the reach of driveway.

Unknown Executive: Today's discussion may include statements about future events, financial projections, and expectations about the company's products, markets, and growth. Such statements are forward looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward looking statements. We undertake no duty to update any forward looking statements which are made as of the date of this release.

During the quarter service body and parts delivered strong same store sales rising 4% and overall gross profit margin increased 120 basis points customer pay which represented 60% of our after sales business was up 3%, while warranty sales were up 13%.

As the average age of the vehicles continues to trend higher and the complexity of new vehicles continues to increase our factory trained and certified technicians will continue to be a covenant asset that will only enhance our omnichannel solutions.

Excluding driver related costs adjusted SG&A as a percentage of gross profit was consistent with last quarter at close to 60% versus 62, 7% on a consolidated basis.

Unknown Executive: Our results discussed today include references to non-GAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable gap measures. We have also posted an updated investor presentation on our website, investors.lythiadriveway.com, highlighting our 3rd quarter results.

We.

<unk> focus on reducing overall, SG&A and our operating model where size and scale combined with technology improve productivity, reducing overall personnel costs, which will be the catalyst to drive down SG&A to 50% long term.

In closing our team is well positioned to build one of the most dynamic omnichannel growth engines to meet the needs of our consumers, while we have yet to fully capitalize on the unprecedented size and scale. We have created we will continue to stay focused on execution that resulted in exceeding our goal of delivering $2 in EPS for every $1 billion in revenue with that.

Bryan Deboer: With that, I would like to turn the call over to Brian DeBoer, President and CEO. Thanks, Amit. Good morning and welcome to our 3rd quarter earnings call. We appreciate everyone joining us today and the opportunity to update you on our business, growth initiatives, and progress towards our long-term strategies. In Q3, lithium driveway grew revenues to $8.3 billion, up 13% from Q3 of 2022, resulting in adjusted diluted earnings per share of $9.25.

To turn the call over to Chuck Thanks, Chris the financing operations segments had a disciplined quarter and narrowed our quarterly operating losses, we executed on our core competencies Dfc originated $502 million in loans in the quarter and the portfolio now exceeds $3 billion.

Bryan Deboer: Overall, same store sales momentum improves sequentially, led by new vehicle units up by percent and after sales revenues up over 4%. Sequentially, GPUs were in line with our expectations for both new and used vehicles while F&I margins remained resilient. Year-to-date GPUs for the new vehicles have come down approximately $100 per month or down 19% from the end of 2022. We are well supplied with new vehicles and parts to meet customer demand across the domestic grants throughout year end.

We had another milestone as our weighted average APR on loans originated in the quarter had 10% up 50 basis points from the prior quarter and 240 basis points over a year ago.

This was achieved without an impact to credit quality as weighted average FICO increased two points from the prior quarter to $7 32. In addition weighted average front end LTV decreased slightly from the prior quarter to 95, 6% for the quarter, we had a nine seven penetration rates declining from the SEC.

Bryan Deboer: Our teams are driving both growth and profitability while we focus on continuous gains in efficiency across vehicle operations, DFC and our other adjacencies. Our business model is flexible and diversified, giving our store teams the tools and autonomy to adjust with local market dynamics and manufacturers. Our goal is to provide customers with a wide variety of products and services and access to solutions that fit their needs throughout the vehicle ownership life cycle.

Quarter, primarily due to our focus on increasing yield rates and to move in line with our top tier competitors that we benchmark too.

Penetration was also impacted by increasing rates invention from OEM captive lenders, taking our new vehicle mix down to 24% in the quarter. We monitor the overall auto lending ecosystem and Dfc's underwriting standards are consistent with the rates and structures being offered by lenders and lithium driveways extensive network.

As such Dfc's lending practices have not impacted lab sales volumes.

Bryan Deboer: This allows us to create a culture that is responsive to varying needs and delivers the best possible experience for customers, wherever, whenever and however they desire. Moving on to our financing operations, Driveway Finance Corporation or DFC posted Q3 results in line with expectations as receivables grew to 3.1 billion. The DFC team has been methodically and prudently navigating the shifting currents of increasing rates in the ABS and credit markets. The team has managed loan-loss provisions in line with expectations and steadily growing their loan portfolio.

Third quarter net interest margin increased to $29 9 million as.

As our weighted average APR on originations moved higher cost of funds benefited from amendments to our warehouse facilities and the maturation of our capital structure. We now have 84% of our portfolio funded via ABS term issuances or our warehouse facilities as of the end of the quarter.

Net provision expense decreased from the prior quarter to $23 1 million and the allowance for loan losses as a percentage of loans receivable stayed flat at three 2% the increasing credit quality of recent originations along with the impact of decreased origination volumes have outweighed the volatile <unk>.

Bryan Deboer: Our plan remains on track to gradually expand margins, move towards profitability late next year, while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on results of both vehicle and financing operations later in the call. At the heart of our strategy is expanding consumer solutions that are simple, convenient and transparent. Our network is being designed to be within 100 miles of consumers, which allows us to leverage our physical and virtual infrastructure.

Current macroeconomic environment.

30 day delinquency rates were flat from the prior quarter at four 1% and down one 9% from a year ago.

Reflecting improved portfolio credit quality.

We expect that by early 2020 for the performance of more recent vintages will offset the negative headwinds, resulting from the 2021 in early 2022 vintages that are most exposed to the decline in used vehicle pricing.

Bryan Deboer: Over time we expect this will generate more convenient impressions, more memorable experiences, better returns on capital and an ecosystem that is unreplicable. Acquisitions are a core competency to our design and organization. We remain disciplined and opportunistic as we look for a creative opportunities that can improve our business. We target aftertacks returns of 15% or more, 15 to 30% of revenues, or 3 to 7 times normalized EBITDA. Life-to-date our acquisitions have yielded over a 95% success rate and aftertacks returns of over 25%.

Overall, the financing operation segment had an operating loss of $4 4 million for the quarter and losses sit at $43 8 million year to date, we are still in the startup phase we remain confident in our path to profitability and that we are tracking to breakeven towards the latter half of 2024 and will be profitable on.

Monthly basis exiting next year.

We are confident that Dfc will realized $650 million of earnings in the future state from a fully mature portfolio and a $50 billion lab revenue base with that I'd like to turn this call over to Tina. Thanks.

Thanks, Chuck and thank you everyone for joining us today in the third quarter, we reported adjusted EBITDA of $457 million and $1 8 billion for the trailing 12 months period. This result was driven by strength in new vehicle demand and surface in part offset by the impact of declining new vehicle gross profit with returning supply.

Bryan Deboer: We're looking for acquisitions that are complementary to our network development strategy and meet our return thresholds in an unconsolidated industry. During the third quarter we completed two acquisitions in the United States, combined they are expected to generate approximately 290 million in annualized revenues, and here to date we've acquired over 3.8 billion dollars in revenues. In addition, I'm pleased to announce the impending purchase of Pendragon UK Motors, the Pendragon Fleet Management Business, or PVM, and Strategic Partnership with Pinewood Technologies.

Higher floorplan interest costs and investments associated with our Adjacencies. We ended the quarter with net leverage excluding floorplan and debt related to DSC at two times up a little over a quarter of a turn from the second quarter.

During the quarter, we generated free cash flows of $261 million and $870 million year to date, we continue to maintain strong cash flow generation and a disciplined balance sheet as we execute our growth plans, our capital allocation strategy target, 65% toward acquisitions, 25% directed to internal investments, including <unk>.

Bryan Deboer: This transformative transaction is a crucial step towards executing on our long-term design and brings with it a strong partnership with a highly profitable and innovative system, expands our footprint further into Fleet Management, and finally grows our retail footprint in the United Kingdom. We expect our annual revenue run rate to grow to approximately 38 billion and are excited with the addition of two fundamental pillars, DMS, and Fleet Management Company, or FMC, to our global business.

Capital expenditures and 10% for shareholder return in the form of dividends and share repurchases when they're appropriate and opportunistic.

Our acquisitions completed during the quarter were funded through using free cash flows from operations and through our working capital facilities.

We maintain our targets and financial discipline with leverage below three times, even with the purchase of Pendragon expected to occur in the fourth quarter, we're confident in our ability to achieve an investment grade rating over time. However in the near term, we are prioritizing growth and acquisitions to drive our long term strategy.

Bryan Deboer: We'd like to welcome our new and future partners to our Lithia family as we expand our worldwide presence. As a reminder, we target annualized revenues acquired in the range of $3 to $5 billion per year. Our primary focus remains on building out our US network and complement our network strategies. We are proud of our team's track record of executing and integrating multiple transactions as we make our way towards and beyond $50 billion in revenue.

Our goal is to fund the growth strategy and investment in Adjacencies as they mature while maintaining a strong disciplined balance sheet structure.

One of the unique elements of our strategy is the resilient annual cash flow generation, our existing business and our ability to ensure acquisitions are cash flow accretive on day one.

We see significant synergies and deploying our capital toward growth as we build out our network expand the markets, we operate in and invest in Adjacencies that provide consumer centric solutions for the full vehicle ownership lifecycle.

Bryan Deboer: Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and will have acquired over $22 billion in revenues once the Penn Dragon transaction is completed. In addition, Driveway Finance Corporation, our captive finance division, continues to make steady progress as our top finance partner and have line of sight to realizing the full potential and contributions to our profitability and the future. As you may recall, the average loan we originate at DFC is three times more profitable over its lifetime relative to the fees we receive from third-party commissions.

Team is headed towards achieving our revenue goals and margin expansion to have flat EPS to revenue ratio producing a $1 10 to $1 20 in earnings per share for every $1 billion in revenue and in the longer term generating $2 in earnings per share as demonstrated by our achievements over the past few years, our culture of growth and high performance.

Coupled with the talents of our team give us the necessary tools to achieve our plan and create value for our shareholders. This concludes our prepared remarks with that I'll turn the call over to the audience for questions operator.

Thank you at this time, we'll be conducting a question and answer session.

Bryan Deboer: Shifting to our Omni-channel platforms, we're making steady progress growing online MUVs up 34% across our digital channels while digital transactions grew to over 37,000 units in the third quarter of 21% compared to last year. Supported by the education provided by green cars, sustainable vehicle sales accounted for 16% of total no vehicle sales in the quarter, up from 10% in Q3 of 22. Lad remains on track to become the preferred international Omni-channel provider of products and services meeting a diverse set of customers needs throughout the ownership life cycle and across multiple adjacencies.

If you'd like to ask a question. Please press star one on your telephone keypad as a reminder, we ask that you. Please limit to one question.

A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Our first question comes from Daniel <unk> with Stephens. Please proceed with your question.

Yeah, Hey, good morning, everybody. Thanks for taking my question.

Hi, Daniel.

Hey, Brian I'll try to follow the rules and keep it to one question or at least one topic, but yeah wanted to maybe focus on pendragon a bit I guess you said in the slides you still expected to close in the fourth quarter can you maybe talk about the path forward to getting the deal closed what are the upcoming dates are important things to keep in mind.

Bryan Deboer: Our plans have positioned us to improve margins and lower our SGNA through a combination of growth efficiency, diversification, and scale. Combine these efforts will disconnect the ratio of $1 of EPS from every $1 billion in revenue and achieving $1.10 to $1.20 for every billion of revenue by 2025. This will be driven by a few key assumptions, namely achieving through scale a blended US market share of 2.5% through both acquisitions, channel expansion, market share gains, and same-store growth improvements in a normalized SAR environment.

And then stepping back from just the near term accretion and there's obviously a lot of pieces of the asset Theres. The Pinewood system, that's going to take LNG, There's fleet what.

<unk>, what do you see as the most near term opportunity for financial accretion and strategic rationale what are the longer term pieces can you just provide more detail on kind of strategically how you view all of the different assets of Pendragon.

Pendragon.

Absolutely well.

As you saw there was I think they call it a circular circular battle instead of a proxy battle and in the United Kingdom.

We actually got results of the final vote of shareholders.

Bryan Deboer: Second, driving SGNA is a percentage of growth profit to below 60% through increased leverage of our cost structure in a normalized GPU environment and optimizing our network. Third, continued maturity and growth of our first adjacency, DFC, achieving profitability in the latter half of 2024. Fourth, continuing to expand revenue and consumer optionality with driveway by attracting 98% new customers through a seamless and transparent one-price experience with seven-day return privileges and shipping directly to your home.

Five hours ago, which is wonderful there were 72% of the outstanding shares that were voted.

And it was approved at 99% approval rate, which is exceptional so I think everyone really sees that the future of that software as a service exclusively company is the right answer and ultimately approved our deal. So from this point forward. All that's left is really FCA approval and we expect a closing.

We would expect some time in <unk>.

Late part of Q4 worst case early part of Q1, but it's all dependent upon whats called the FCA that has to approve the overall.

Bryan Deboer: Fifth, green cars, educating consumers on sustainable transportation and expanding our penetration levels of electric vehicles. And finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. The above opportunities are now well underway, combined with DMS and FMC design additions sets us up for further growth and profitability in the coming years. In a normalized environment, we can now clearly see the path for significant change where a billion dollars of revenue will ultimately generate two dollars of EPS.

The overall transaction, but we have done our preliminary work should be clear sailing.

Now.

Once we get to that point, obviously, there is there is multiple components, but our big push is.

For the software as a service company Pinewood technologies.

Led by Bill Berman, he is going to be driving the marketing and growth and as you may have saw in some of the press releases.

That software company will grow and grow quite quickly globally outside of North America.

Three of the top 10 major groups in the United Kingdom that have verbally committed to join forces with us as well as one other that most likely will be will be will be joining as well plus will be growing the platform across western Europe.

Bryan Deboer: Key factors underlying our future steady state and now totally within our control are as follows. First, optimizing our networking continued to diversify our portfolio through focusing on acquiring larger stores, located in higher profitability regions of the South Central and Southeast US, filling in the Midwest and integrating our international businesses while growing our omnichannel platform and other mobility verticals. Second, financing up to 20% of units with DFC and maturing beyond the headwinds associated with Cecil reserves.

Bryan Deboer: Third, through size and scale, we will continue to drive down vendor pricing, develop competencies internally to save costs, and lower barring costs as a path towards an investment grade credit rating. Fourth, to increase our share of wallet through improving the customer life cycle by leveraging our cost structure to reduce our S-GNA as a percentage of gross profit to below 50%. And finally, maturing contributions from other horizontals, including fleet management, software, charging infrastructure, and consumer captive insurance.

That gets the phase one of the software company now in terms of the North American JV.

There is a development plan related to how we're going to approach that and to be fair, it's probably a year or two out before we get something live and before it ever is truly monetize its more of a pathway to be able to attach and attack our $110 million data stack, which is what our tech stack basically cost today.

Day and to curb some of those costs and most importantly glue together all of the fundamentals about our strategy that are a lot different than a lot of companies out there.

So when we look at why why Pendragon and why it's such an important transaction to our future. It really built two pillars for our future of the initial four or five that we had established obviously the software component allows us to get into a high profitability business as well.

As a pathway to leverage our own cost structures through that and then secondarily is the fleet management company, which is called <unk>.

<unk> drag and vehicle management, or PVM, which is again, a high profitability business massive synergies to automotive retail and service and vehicle procurement and vehicle divestiture and so on.

Bryan Deboer: In closing, Lithian driveway provides a unique and unreplicated mobility platform and transportation solutions that deliver great customer experiences throughout the ownership life cycle at a global scale. Our design is durable, diversified, vast, and nimble to meet the needs of consumers with both online and in-store solutions coupled with financing solutions like DFC. The combination of our strategy and experience teams gives us the confidence in our ability to equip $50 billion in revenue and produce a ratio of $1.10 to $1.20 of EPS for every billion dollars of revenue in the midterm and ultimately over $2 long-term. With the completion of Penn Dragon Transaction, all elements of our original design are now securely in place, allowing us to do what we do best and are known for. And that's executed.

That we think are the real two key parts of this now along with it came for $5 billion in revenues.

Thats built on a lot of nice high line.

Dealerships as well as some mainstream dealerships that really round out our United Kingdom presence with almost almost 10% market share within the highline brands that will have so our growth really now in the United Kingdom is limited to I would say, probably VW and Toyota in May.

Continuing to grow with BYD, which we.

We'll have about a third of the country in the lower part of the United Kingdom.

Pendragon already asked.

Outside of that our focus again is in North America, Okay to build out our network and reach that $60 billion to $70 billion, which we look at as our true optimized network in North America to really springboard, the adjacencies and build a platform for our customers that is holistic in lifecycle.

Chris Holzshu: With that, I'd like to turn the call over to Chris. Thank you, Brian.

Chris Holzshu: First off, I'd like to provide an early welcome to the 6,000 associates at Penn Dragon that will be unifying with our Lithia and driveway UK operations team to build what would be one of the strongest dealership platforms in the United Kingdom, with over 10% market share in the brands we represent. Our strategic vision and commitment with Neil Williamson, our UK regional president, was to ensure that his team had the opportunity to bring our mission of growth powered by people across the Atlantic.

I know that was long winded Daniel I.

Hopefully that covered what we're looking forward there and maybe you have a quick follow up.

It does.

Did cover it yes, and then if I could just a quick just a quick follow up maybe just on the U S business with the ongoing strike you guys have decent domestic exposure what have you seen here maybe progressing into October we've heard anecdotes of parts availability issues and discounting slowing as inventory works down just how are you guys planning for that here in the fourth.

Chris Holzshu: With this partnership, we're a well underway to solidify in that journey. Since the exception of our plan, we have positioned the organization to ensure that, whether in the United States, Canada, or the United Kingdom, our cultures would remain centered on entrepreneurial leadership at the local market level, empowered to achieve our high performance. Our season and experience regional operational leaders remain positioned to drive us towards the future. We remain committed to delivering a customer-centric experience to be the retailer of choice, wherever, whenever, or however, our customers desire.

Quarter, what are the puts and takes as you look at the rest of the year from the ongoing strike.

Great Great. Daniel This is Bryan again, I think most importantly believe it or not our D. Three inventory sits it's still above 70 days supply on the ground, Okay and in transit we're still sitting at the same amount we were six weeks ago before the strike both of those numbers are consistent so we look pretty strong.

Chris Holzshu: Focusing on our customer first will always ensure that we provide solutions that create sustainable growth and provide best-in-class returns to our shareholders, now as it relates to the quarter. Overall, consumer demand remains strong for both vehicle sales and service despite a high-interest rate environment and opportunities in OEM production. We believe we are at the late stages of a full production recovery that caused over 10 million units of product to vanish from the North American pipeline because of COVID-19 supply constraints.

Going into the end of the year.

We'd encourage that that we try to find a middle ground so in the future.

In Q1, we've got some inventory sitting out there I will say this if you remember and go back with you at one time was three quarters domestic unit sales today Lithia only sits at 23, 9% domestic unit sales. Okay. So we've we flipped it on its head and now with the international expansion as well.

Chris Holzshu: While the average consumer APR and finance vehicles is up over 200 basis points year over year, the average will monthly payments remain stable as consumers continue to invest in personal transportation needs at all price levels and incentives continue to accelerate. While we rebound a new vehicle production was impacted, the related depressed production put pressure on used inventory availability. This trend is highlighted the benefits of having a diverse network and over 2,000 used vehicle procurement specialists and a longstanding and disciplined approach to procuring vehicles from multiple channels.

The luxury and import expansion domestically, we don't have as much exposure as we used to.

And again, we sit pretty nicely right now with units on the ground and let's hope for some type of.

A reconciliation over the next four to five weeks.

And on the parts side has there been any change in parts availability for the service surface to our furnace you have insights on parts, yes, Daniel Good morning, It's Chris Yeah. So we have the highest level of parts inventory that we've seen in the last six months. So what the production ramp up has done is given us parts on the ground I think preparing for.

Chris Holzshu: Lastly, with the age of the car park at record levels and the number of units in operation increasing, the tailwind we have to deliver customer-centric after sales to all levels of affordability will remain strong for years to come. Same store a new vehicle revenues are up 5.5 percent due to unit volumes increasing 5 percent and ASP is rising 0.5 percent. New vehicle GPUs, including F&I, were 6,678 per unit down from 7,500 in Q1 of this year and 8,165 in Q3 of 2022.

The expected decline in overall parts in the coming quarters not no line of sight on what that's going to look like and I understand that there's a lot of training going on right now to kind of make sure that we can keep as many of those parts coming into our stores as possible I think the pressure that we have right now is more on special parts kind of fast moving parts special warranty.

Kind of related parts that are.

Suppliers being strained.

But too early really to judge the impact on that when Youre seeing overall warranty up 13%. Thanks Danielle.

Chris Holzshu: We expect this trend and GPUs to continue resulting in further reduction in margins in line with our outlook, the new vehicle star will return to historical levels in the US, UK, and Canada in the next 24 months. New vehicle inventory day supply was 55 days compared to 47 days a year and 39 days in Q3 of 2022. High demand inventory that has been slower to reach our loss, particularly amongst the imports, is improving. Despite the headlines related to the OEM strike in North America, supply for D3 vehicles across our network remains healthy at over 70 days on ground.

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

Good morning, guys I just wanted to.

Follow up on that inventory question.

Outside of the <unk>.

How is your inventory stands and how many sales do you think you're kind of losing or not fulfilling because of that tight inventory in the U S.

Yes, good morning, John So I think when it really comes down to a demand is high demand is high for news demand is high for us when it really kind of is happening right now is really around affordability and so.

Chris Holzshu: Shifting to used vehicles, same store used vehicle revenues were down 8 percent with unit volumes decreasing 2 percent and ASP is decreasing 6 percent. Use car price declines are driven by the availability of later model vehicles and the reduction in several years of new vehicles supply declines. Core product, or vehicles 3 to 7 years old, make up 50 percent of our unit sales and trade-ins for these vehicles is the primary procurement channel for value auto, which makes up 20 percent of our unit sales.

When you think about interest rates going up.

We still have the majority of our consumers have a FICO score of less than 720, what we're managing is really price point because payments overall average payment is staying flat and so.

As production continues to kind of dropped down in AOSP level trim packages, the same product, but maybe the content at a little bit I think youre going to continue to see the push up on new vehicles getting back to kind of the $16 517 million Saar that we saw for five straight years.

Chris Holzshu: Well, this has put significant pressure on procurement of vehicles to meet demand. It also reinforces the competitive advantage we have of being top of funnel new car dealers, where over 75 percent of purchases are coming from consumer channels only available to franchise dealers. The competitive advantage enables us to provide the transportation needs to customers that fits their budgets regardless of market economic conditions. For used vehicles including F9, GPUs were $3,940, down 14% from last year.

<unk> kind of Covid pandemic, but the other side of that is that you have a lot of customers that manage their overall payment by going into the used market.

And the dynamic that we're dealing with as I mentioned on the prepared remarks is we lost 10 million units in production, which is putting a strain on those late model vehicles that are now coming through the pipeline and so we really believe that being a top of funnel new car dealer, where 70% of our vehicles come in on trade is a massive advantage because it allows us to be at least.

Chris Holzshu: Overall, low inventory supply is supporting overall ASPs, but GPUs are seeing variability due to procurement pressure and affordability for consumers when financing vehicles in this environment. We expect GPUs to fluctuate as supply normalizes in interest rate settle. Shifting to use vehicle inventory levels, vehicle inventory days supply was 58 days compared to 65 days this time last year.

Not buying those vehicles from auctions, where the higher prices are being paid to fill spots, but not fill gross and so some of the pressure that you saw this quarter on used car gross and it'll probably continue just because as we have to fill holes and move volume, which does benefit us on the recon side of benefits on F&I is going to continue to just kind of.

Chris Holzshu: Our physical footprint will soon span over 500 locations worldwide, which combined with the ability to shop, sell and service vehicles wherever, whenever and however, customers desire will create massive benefit as we leverage the science and scale of our network and give customers optionality and experiences that they desire. As Brian mentioned, we are dedicated to creating an international omnipotent provider of products and services that meet a diverse set of consumer needs, and we are still in the early innings of this unrealized opportunity.

Balance out between where those prices are and whether consumers go.

New car purchases are used cars.

And if I could sneak one follow up on SG&A attach rate to GPU. So as Gpus come down there is some natural attach rate on SG&A our sales comp.

Without taking any specific actions to lower SG&A or or execute incredibly well can you kind of remind us how you think about that SG&A attach rate as gpus on new slowly fade here.

Chris Holzshu: In the third quarter, Lithian Driveways online channels averaged 13.3 million unique visitors, an increase of 34% from the same period last year with advertising spent down 10%. Total e-commerce sales now represent 22% of retail transactions. Driveways, strategic growth and cost rupture continue to be refined as we work towards the right sizing of that business. Brand recognition remains on track as we work towards improving the consumer experience and our product offerings. The average distance to deliver a shop vehicle from our stores is now 800 miles and most customers have never shop or service with us before.

Yes, John it's Chris again, our big focus there is really on this whole idea of throughput and we expect in good times when grosses.

Is going up that we expect 50% throughput.

Fall to the bottom line now the same thing should apply when we are going to a declining market I think we lost $100 million in gross year over year in.

In the quarter and our overall very variable expenses were down about $47 million. So about 50% the opportunity that you run into is when you put a lot of pressure on GPU, specifically I've used we still pay sales associates to move inventory thats, aged maybe not as profitable profitable as we like.

Chris Holzshu: As our physical footprint grows each location provides the ability to connect, could do connect with 50 times more customers, without the fixed investment as we expand the power and the reach of Driveways. During the quarter service body and parts delivered strong steam store sales, rising 4% in overall growth profit margin increased 120 basis points. Customer pay, which represents 60% of our after sales business, was up 3% while warranty sales were up 13%.

And so it does provide a short term disconnect sometimes on certain products that were moving in so.

Something that we're focused on using technology to drive productivity to continue.

Continue to pay higher above average paying above average performance is what we're focused on and we have some opportunities there that we're going to continue to push through in Q4 and into next year.

Chris Holzshu: As the average age of the vehicle continues to trend higher and the complexity of new vehicles continues to increase. Our factory train and certified technicians will continue to be a coveted asset that will only enhance our omnichannel solutions. Excluding driveway related costs, adjusted SNA as a percentage of growth profit was consistent with last quarter at close to 60% versus 62.7% on a consolidated basis. We remain focused on reducing overall SNA in our operating model, where size and scale combined with technology, improved productivity, reducing overall personnel costs, which will be the catalyst to drive down SNA to 50% long term.

Thanks, John next question.

Our next question comes from Rajat Gupta with Jpmorgan. Please proceed with your question.

Great. Thanks for taking the question.

Just had a question on <unk>.

Driveway.

Performance in the quarter, you mentioned prepared remarks that the SG&A to gross excluding <unk>.

<unk> stayed flat sequentially.

Previously we had assumed that the driver losses were coming down you know, maybe 15 million monthly into more like $5 million to $10 million I'm curious how that progress through the quarter wasn't an incremental headwind.

Any color on that.

Chris Holzshu: In closing, our team is well positioned to build one of the most dynamic omnichannel growth engines to meet the needs of our consumers. While we have yet to fully capitalize on the unprecedented size and scale we have created, we will continue to stay focused on execution that results in exceeding our goal of delivering $2 in EPS for every $1 million in revenue.

The SG&A performance would be helpful sure sure Rajat.

This is Brian.

I think most importantly, we continue to make progress in driveway. The burn rate is similar primarily because the gross profit levels on used cars came down a little bit we have been able to curb our expenses and drive way by about 20, a little over 20%, which is a big move ultimately I mean.

Chuck Lietz: With that, I'd like to turn the call over to Chuck. Thanks, Chris. The financing operation segment had a disciplined quarter and narrowed our quarterly operating losses we executed on our core competencies. DFC originated $502 million in the quarter and the portfolio now exceeds $3 billion. We had another milestone as our weighted average APR on loans originated in the quarter had 10% up 50 basis points from the prior quarter and 240 basis points over a year ago.

We intend to drive way to become a portal for consumers, okay, and really be able to create greater touch points and that's going to change our equation a ton we are getting probably more traffic than we can actually handle we are achieving over 3 million unique visitors a month through that site.

Which is which is its almost unruly the amount of traffic that we're getting through there and today, it's really a finance ability source and it needs to become more of an experienced source that people are buying cars on driveway, not because we're able to finance them, but because they like the convenience of simplicity in the empowerment that they.

Chuck Lietz: This was achieved without an impact to credit quality as weighted average FICO increased two points from the prior quarter to $7.32. In addition, weighted average front and LTV decreased slightly from the prior quarter to 95.6%. For the quarter, we had a 9.7% for the penetration rate declining from the second quarter, primarily due to our focus on increasing yield rates and to move in line with our top tier competitors that we benchmarked to.

<unk> achieved for that so we've got some work to do there, but it's neat to see what's happening on driveway one other little side note is this other little incubator called Green cars Dot Com is doing some pretty special things, we only spend about 150 to $200000 a month and marketing on that and it's producing now over 700.

Chuck Lietz: Penetration was also impacted by increasing rates of intervention from OEM captive lenders taking our new vehicle mixed down to 24% in the quarter. We monitored the overall auto lending ecosystem and DFC's underwriting standards are consistent with the rates and structures being offered by lenders in lithium driveways extensive network. As such, DFC's lending practices have not impacted lab sales volumes. Third quarter net interest margin increased to 29.9 million dollars as our weighted average APR on originations moved higher cost of funds benefited from amendments to our warehouse facilities and the maturation of our capital structure.

Unique visitors.

And those unique visitors are shopping on and learning and educating themselves on green cars and they are buying cars at lithia at a rate of about 1200, a month, okay, theres very little attribution between green cars and our stores, if we extrapolate those numbers and you can be.

Extreme and say Lithia <unk>, 2% of all the new cars and used cars in the country. So let's just take 50 times whatever that 1200 as you get to a 75000 units a month that green cars could have attributions to sell okay. So we're working also on the green car side to be able to.

Chuck Lietz: We now have 84% of our portfolio funded via ABS term issuances for our warehouse facilities as of the end of the quarter net provision expense decreased from the prior quarter to 23.1 million. And the allowance for loan losses percentage of loans receivable stayed flat at 3.2%. The increasing credit quality of recent originations along with the impact of decreased origination volumes have outweighed the volatile current macro economic environment. 30-day delinquency rates were flat from the prior quarter at 4.1% and down 1.9% from a year ago reflecting improved portfolio credit quality.

Ties to some extent that educational process as more and more consumers begin to move to some level of sustainable transportation.

Got it that's helpful and then just on Dfc.

We've seen some widening.

The ABS market.

Benchmark rates have also gone up.

Does that in any way change your thinking around DFT.

So in the near term.

Or perhaps another way to ask is.

How much flexibility do you have to.

Chuck Lietz: We expect that by early 2024 the performance of more recent vindages will offset the negative headwinds resulting from the 2021 and early 2022 vindages that are most exposed to the decline in use vehicle pricing. Overall, the financing operations segment had an operating loss of 4.4 million for the quarter and losses sit at 43.8 million year today. We are still in the startup phase. We remain confident in our path to profitability and that we are attracting to break even towards the latter half of 2024 and will be profitable on a monthly basis exiting next year.

Manage to your full year guidance, our fourth quarter guidance.

The 2024 guidance for Dfc.

Without without hurting financing availability for your customer base.

Hey, Roger This is Jack Great question.

So first as we've been.

And also in my prepared remarks, our penetration rate did come down to nine 7% this quarter and for many of the reasons. You cited we're really focused on increasing our yields making sure that we maintain our discipline in terms of our credit underwriting standards, and then supporting our stores and we feel like our.

Chuck Lietz: We are confident that DFC will realize 650 million of earnings in the LAD future state from a fully mature portfolio and a $50 billion lab revenue base.

Value proposition to both our customers into our stores for right now in terms of just letting our portfolio season, making sure that we focus on maintaining our discipline is more important than say achieving a specific penetration rate relative to your second part of your question I don't see any real material impact.

Tina Miller: With that, I'd like to turn this call over to Tina. Thanks, Chuck. And thank you everyone for joining us today. In the third quarter, we reported adjusted EBITDA of 457 million and 1.8 billion for the 12-month period. This result was driven by strengths in new vehicle demand and service and parts offset by the impact of declining new vehicle growth profits with returning supply, higher floor plan interest costs and investments associated with our adjacent- We ended the quarter with net leverage, ex-gloating floor plan and debt related to DFC at two times, up a little over a quarter of a turn from the second quarter. During the quarter we generated free cash flows of 261 million and 870 million year to date. We continue to maintain strong cash flow generation and a discipline balance sheet as we execute our growth plans.

We are maintaining our guidance between now and the end of the year. Obviously, that's subject to change. If there is other sort of macroeconomic factors that come up in the fourth quarter, but I think we can be fairly comfortable that in the next 65 to 80 days, we should be able to continue the path forward.

Our next question is from Ryan <unk> with Craig Hallum Capital Group. Please proceed with your question.

Good morning, guys.

Specific question Randy look at.

Slide 18, and the mix of CTO versus core versus value.

Tina Miller: Our capital allocation strategy targets 65% toward acquisitions, 25% directed to internal investments including capital expenditures, and 10% for shareholder return in the form of dividends and sharey purchases when they're appropriate and opportunistic. Our acquisitions completed during the quarter were funded through using free cash flows from operations and through our working capital facilities. We maintain our targets and financial discipline with leverage below three times even with the purchase of Pendragon expected to occur in the fourth quarter.

Looking at those ROI expectations from a year ago feedback to this one.

As you would expect the Rois are down four GPO and core its actually up for value autos. So I guess my question is are you seeing improved GPU on value autos, despite the more competitive.

<unk> narrative around the used market overall.

Hey, Ryan This is Brian I think what Youre seeing mostly on that chart is that the turn rates going up so as that supply continues to be pressured youre going to see the same thing happened in Korea on the 10 million units that Chris was talking about when that bubble moves in or that lack of bubble moves into core we're going to see the same thing that our turn rate.

Tina Miller: We're confident in our ability to achieve an investment-grade rating over time however in the near term we are prioritizing growth and acquisitions to drive our long-term strategy. Our goal is to fund the growth strategy and investment in adjacent fees as they mature while maintaining a strong discipline balance sheet structure. One of the unique elements of our strategy is the resilient annual cash flow generation our existing business and our ability to ensure acquisitions are cash flow creative on day one.

It's going to go up we're going to have to be more efficient and as you know I mean, we do procure almost three quarters of our vehicles directly from consumers, whether it's through off lease whether it's through purchasing directly from consumers or whether it's through trading.

Tina Miller: We see significant synergies in deploying our capital toward growth as we build out our network expand the markets we operate in and invest in adjacent fees that provide consumer centric solutions for the full vehicle ownership life cycle. Our team is headed towards achieving our revenue goals and margin expansion to have labs EPS to revenue ratio producing a dollar 10 to a dollar 20 and earnings per share for every billion in revenue and in the longer term generating two dollars in earnings per share.

Great and then my follow up question, just as you think about the 2025 targets.

Reiterating them in the slide deck here, but curious how much of an impact we know kind of the puts takes between driveway dfc in the core business and M&A et cetera, but one that is probably a bigger focus now with the rising interest rates I guess, how much does that impact.

Net income and profitability and what are the assumptions if rates keep going higher on your ability to achieve that 2025 EPS target. Thanks.

Tina Miller: As demonstrated by our achievements over the past two years our culture of growth and high performance coupled with the talents of our team give us the necessary tools to achieve our plan and create value for our shareholders.

Brian This is Brian again, I may let Tina follow up with it on the interest cost I think I think most importantly, we have now all of the foundation that we originally designed into our plan back in 2017, so our ability to achieve the 2025 targets.

Unknown Executive: This concludes our prepared remarks.

Unknown Executive: With that I'll turn the call over to the audience for questions operator. Thank you. At this time we'll be conducting a question and answer session. If you'd like to ask a question please press star one on your telephone keypad. As a reminder we ask that you please limit to one question. A confirmation tone will indicate your line is in the question queue. You may press star two if you like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment please let we poll for questions.

We are producing over $1 billion 2 billion foreign capital.

The interest cost do impact things and do change the calculus on whether to buy shares back or whether to buy businesses or whether to expand on the adjacency in the design, but today, we have everything in place that we need ultimately to achieve the $2.

EPS for every $1 billion in revenue now that's a steady state basis. If you remember in the prepared remarks, we talked a lot about the driving forces behind that but in terms of where the market looks the biggest driver of achieving that 25 is really the ability to get the acquisitions and then execute today now.

Daniel Imbro: I first question comes from Daniel Embro with Steven's please proceed with your question. Yep. Hey good morning everybody. Thanks for taking our question. Hi Daniel. Hey Brian. I'll try to follow the rules and keep it to one question or at least one topic. But yeah I wonder maybe focus on pen dragon a bit. I guess you said in the slides you still expected to close in the fourth quarter. Can you talk about the past forward to get into the old clothes?

Also remember that we're assuming that's a 17 million Saar and it's a normalized environment, Okay, and we've always we've always been very clear about that.

Daniel Imbro: What are the upcoming dates or important things to keep in mind? And then stepping back from just the near term accretion there's obviously a lot of pieces of the asset. There's the Pinewood system that's growing the technology. There's fleet. What excite you most? What do you see as the most near term opportunity for financial accretion and strategic rationale? What are the longer term pieces? Can you provide more detail on kind of strategically how you view all the different assets of pen dragon?

But ultimately that's really a short to midterm part of the game today, our design isn't really focused on 25 any longer it's focus on $2 of EPS for every billion dollars of revenue and will let your mind wander on what that can do and we've got that now earmarked between the Dms The fleet management.

<unk> area and driveway Finance Corporation.

Daniel Imbro: Absolutely well as you saw there was I think they call it circular circular battle instead of a proxy battle in the United Kingdom. We actually got results of the final vote of shareholders about five hours ago which is wonderful. There were 72% of the outstanding shares that that were voted and it was approved at 99% approval rate which is exceptional. So I think everyone really sees that the future of software as a service exclusively company is the right answer and ultimately approved our deal.

Plus so many other things that when you have an ecosystem as large as ours now it's about figuring out how to connect the dots on the ecosystem to make to make sure that we maximize that performance to get below the 50% SG&A as a percentage of growth anything on interest rates and Ryan This is Tina.

Just to add to that when we think about our return metrics and we're looking at deployment of capital we are factoring in.

Thanks, <unk> and our hurdle rates have to remain similar so if you think about the acquisitions that we're looking at in that capital and profit accretion that we're looking at that is factoring where rates are today and the higher for longer sort of tone out there. So thats baked into how we think about our approach to capital deployment as well.

Daniel Imbro: So from this point forward all that's left is really FCA approval and we expect a closing we would expect some time in a late part of Q4 worst case early part of Q1 but it's all dependent upon what's called the FCA that has to approve the overall transaction but we've done our preliminary work should be clear sailing. Now once we get to that point obviously there's there's multiple components but our big push is for the software as a service company Pinewood technologies led by Bill Berman.

Thanks Ryan.

Our next question is from Ron Josey with Citi. Please proceed with your question.

Great. Thanks for taking the question I wanted to ask maybe a few follow ups on driveways, specifically I think I heard on the prepared remarks that awareness for driveway.

Our brand recognition is on track can you just talk to us a little bit more about awareness and brand recognition and then to that and Brian I think you just mentioned probably off the cuff that driveways getting more traffic than we can handle or expected just provide a little more detail. There in terms of maybe upside downside and how you think about just servicing that traffic. Thank you.

Daniel Imbro: He's going to be driving the marketing and growth and as you may have saw in some of the press releases that software company will grow and grow quite quickly globally outside of North America. We have three of the top ten major groups in the United Kingdom that have verbally committed to join forces with us as well as one other that most likely will be will be joining as well plus we'll be growing the platform across Western Europe.

Sure.

In terms of awareness the experiences on driveway or quite accepted.

Higher consumers and again, we these are new consumers of lithia over 98% of the consumers haven't done business with us in the last decade and a half.

So their awareness is is growing relative to what our typical store network looks like.

Daniel Imbro: That gets the phase one of the software company now in terms of the North American JV there's there's a development plan related to how we're going to approach that and to be fair it's probably a year or two out before we get something live and before it ever is truly monetized. It's more of a pathway to be able to attach and attack our $110 million data stack which is what our tech stack basically costs today and to curb some of those costs and most importantly glue together all the fundamentals about our strategy that are a lot different than a lot of companies out there.

The issue still is is that we're not really getting repeat and referral business yet even though we're now pushing almost three years and in activity.

That's because we have an acute focus on shop in cell and need to expand it into the lifecycle and ownership experience post sale and we've done a lot of the Geo fencing, we built a lot of the after sales models, we just need to activate them within driveway and within the network to create greater attachment.

Two the brand in.

In terms of the traffic I think as a as a young.

Daniel Imbro: So when we look at why why Penn Dragon and why it's such an important transaction to our future it really built two pillars for our future of the initial four or five that we had established. Obviously the software component allows us to get into a high profitability business as well as a pathway to leverage our own cost structures through that. And then secondarily is the fleet management company which is called Penn Dragon Vehicle Management or PVM which is again a high profitability business massive synergies to automotive retail and service in vehicle procurement and vehicle divestiture and so on that we think are the real two key parts of this.

Digital retailer.

Does take time to build your sales centers to focus on the customers' needs and I think it's imperative that we as traditional retailers as well don't let that pollute our processes and keep it peer with our consumers our consumer acceptance rates are quite high I think we're a $4.

For on an.

Google scores, which is which is up from where we were about a year ago for two I believe there could be four eight or four nine if we can just create this ecosystem and drive way like we have in the store that's more physical where it's actually playing in the stores or in the <unk>.

Daniel Imbro: Now along with it came 4.5 billion dollars in revenues that's built on a lot of nice high line dealerships as well as some mainstream dealerships that really rounds out our United Kingdom presence with almost almost 10% market share within the high line brands it will have. So our growth really now in the United Kingdom is limited to I would say probably VW Toyota and maybe continue to grow with BYD which we will have about a third of the country in the lower part of the United Kingdom that Penn Dragon Audi has.

And in the consumer's house in the same way that we do in the stores.

That's going to take a little bit more coding and a little bit more repeat and referral business, but ultimately the traffic is overly strong in our care centers are still learning, which customers are the best to be able to focus on when there is there is that much traffic there Chris was there anything else that I missed no. Brian I think you nailed that you have shopping.

Cell and then you have service parts.

Youre <unk> your driveway finance products, and then eventually even making the connection with RV and kind of the motorcycle business is that we have I think that the sky's the limit, but we just have to stay focused on kind of one tactical execution at a time and as Brian said, we have some opportunities there to continue to improve that experience.

Daniel Imbro: Outside of that, our focus, again, is in North America, okay, to build out our network and reach that 60-70 billion dollars which we look at as our true optimized network in North America to really springboard the adjacencies and build a platform for our customers that's holistic in life cycle. I know that was long-winded, Daniel. Hopefully that covered what we're looking for there, and maybe have a quick follow-up. It did cover it.

Super helpful guys. Thank you. Thanks.

Thanks, Ron.

Our next question comes from Colin Langan with Wells Fargo. Please proceed with your question.

Oh, great. Thanks for taking my questions just a follow up on Pendragon can you dive into the Dms opportunity because I think you mentioned, you're spending $110 million on Gms.

Daniel Imbro: Yeah, I mean, if I have a quick follow-up, maybe just on the U.S, business, you know, with the ongoing strike, you guys have decent domestic exposure. What have you seen here, maybe progressing into October? We've heard anecdotes of part availability issues and discounting, slowing as them into where it works down, just how are you guys planning for that here in the fourth quarter? What are the puts and takes as you look at the rest of the year from the ongoing strike?

Get reduced or do you since you'd be probably sourcing through pinewood you'd be getting sort of equity stake in the front.

From that and how does the U S. Joint venture work do you actually have sort of a stronger interest in that when that growth sure.

Sure Collin. This is Brian again, so we have a $110 million tech stack of which about 60% of it is Dms system today, and then you add on your CRM and your service systems and your used car systems and stuff like that.

Daniel Imbro: Great, Daniel. This is Brian again. I think most importantly, believe it or not, our D3 inventory sits still above 70-day supply on the ground. Okay, and in transit, we're still sitting at the same amount we were six weeks ago before the strike. Both of those numbers are consistent, so we look pretty strong going into the end of the year and, you know, we'd encourage that we try to find a middle ground, so in the future, you know, in Q1, we've got some inventory sitting out there.

In terms of how we think about the progression so we're going to own somewhere between 17% and 20% of the parent company Pinewood.

And then we own 51% of the North American JV, which eventually if you extrapolate out the 17% to 20 and then added on to the 51, we're about 60% ownership of the North American JV, that's not where our focus is okay, because we intend to monetize it.

Daniel Imbro: I will say this, if you remember and go back, Lithia at one time was three-quarters domestic unit sales. Today, Lithia only sits at 23.9% domestic unit sales. Okay, so we've flipped it on its head and now with the international expansion as well as the luxury and import expansion, and domestically, we don't have as much exposure as we used to. And again, we sit pretty nicely right now with units on the ground, and let's hope for some type of reconciliation over the next four to five weeks.

With other partners as well, we're not really looking at controlling that we're looking at it that it's a pathway to develop a longer term solution of how to attach our customers to lithium driveway ecosystem in a better way than what we do today. So when you think about the tech stack I would.

Say, that's a three to five year venture we've run some base numbers that if and to be fair Pinewood isn't ready to be put into North America. It needs Apis to manufacturers and it needs. The API is to each of the state agencies and tax codes in DMV codes to be able to move to America, just like when pine.

Daniel Imbro: And on the part side, hasn't been any change in part availability for the service department. Chris, you have insights on parts? Yeah, Daniel, good morning. It's Chris. Yeah, so we have the highest level of parts inventory that we've seen in the last six months. So, you know, what the production ramp up is done is given us parts on the ground. I think preparing for, you know, the expected kind of decline in overall parts in the coming kind of quarters, not no line aside on what that's going to look like.

Would move us into a different country and that will take a couple of years to get there, but if we were to basically extrapolate what pinewood charge was at their full profitability. Okay onto Lithia is tech stack today, it's about a $30 million savings. Okay don't put that in your estimates because we're not ready to do that.

Daniel Imbro: And I understand that, you know, there's a lot of training going on right now to kind of make sure that we can keep as many of those parts coming into our stores as possible. I think the pressure that we have right now is more on special parts, kind of fast moving parts, special warranty, kind of related parts that are, you know, our supplies being strained. But too early to really judge the impact on that when you're seeing overall warranty up 13%. Thanks, Daniel.

Yet okay. That's that's a longer term vision of where we get to <unk>.

Think most importantly, what you have in Pinewood.

<unk> is a cloud based system that is quite adaptable that we believe is one of the top three functional systems in the world.

And as such it's our pathway to be able to someday glue or different adjacencies together, but more mid term is to create a software as a service company and deemphasize our influence within that company to bring in other partners to ultimately.

John Murphy: Hi, next question comes from John Murphy with Bank of America. Please proceed with your question. And we guys, I just wanted to follow up on that, that inventory question, you know, outside of the D3, you know, how is your inventory staying and how many sales do you think you're, you're kind of losing or not fulfilling because of that, that kind of inventory in the US?

Be able to grow from.

Colin do you have a follow up question on that.

John Murphy: Yeah, good morning, John. So I think, you know, when it really comes down to it, demand is high, demand is high for news, demand is high for use. What it really kind of is happening right now is really around affordability. And so, you know, when you think about interest rates going up, you know, we still have the majority of our consumers have a FICO score less than 720. What we're managing is really price point because payments, you know, overall average payment is staying flat.

Well not related to that just a quick follow up overall your same store unit sales were up 5% I think retail Saar was up 11%.

Why the underperformance versus the market to start a geographical mix issue or any color there. Thanks.

Our same store new was up a little over 5%, but youre actually youre, absolutely right and Chris can give you some of the numbers a region or a state by state, but we do have a little bit different footprint and it's still a little bit more depressed than some of the areas that we have footprint, yes, just to follow up on that then.

John Murphy: And so, you know, as as production continues to kind of drop down in ASP level trim packages, same product, but maybe decontented a little bit. I think you're going to continue to see to push up on new vehicles, getting back to kind of the 16 and a half 17 million, sorry that we saw, you know, for five straight years, pre kind of COVID pandemic. But the other side of that is that you have a lot of customers that manage the overall payment by going into the use market.

Like we've talked about the last several quarters I think the worst is seeing kind of different growth rates that we're seeing kind of in in the southwest for example.

The northwest region and southwest regions were both up about Oh, what do you think about that.

Were both about flat and then more in the southwest regions in the northeast regions, we were up.

John Murphy: And the dynamic that we're dealing with, as I mentioned on the prepared remarks, as we lost 10 million units in production, which is putting a strain on those late model vehicles that are now coming through the pipeline. And so, you know, we really believe that being a top of funnel new car dealer, where 70% of our vehicles come in on trade is a massive advantage because it allows us to be at least, you know, not buying those vehicles from auctions where the higher prices are being paid to fill spots, but not fill gross.

Double digits kind of above even the Saar number that you said so a lot of it is kind of what our mix is and what our franchises are as Brian mentioned earlier, 23% domestic those units are down 11%.

Whereas you're important luxuries are up about 12%. So mix has a lot to do with that geography has a lot to do with that but I think our point is to have a diverse network in all regions.

Depending on what's happening in the economy and each of those markets will kind of ride that tide.

John Murphy: And so some of the pressure that you saw this quarter run use car gross, it'll probably continue just because, you know, as we have to fill holes and move volume, which does benefit us on the recon side of benefits on F and I is going to continue to just kind of, you know, balance out between where those prices are and whether consumers go, you know, into new car purchases or use cars, and if I can sneak one follow up on SGNA Attach Rate to GPU. So as GPUs come down, there's some natural attach rate on SGNA or sales comp, without you taking any specific actions to lower SGNA or execute incredibly well. Can you kind of remind us how you think about that SGNA Attach Rate as GPUs on New Stolely Fade here?

Thanks Colin.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.

Okay.

Our next question comes from David Whiston with Morningstar. Please proceed with your question.

Thanks, Good morning wanted to go back to the discussion we're just having on the Pinewood Dms JV in North America when it eventually comes.

Comes here.

As you know.

Reynolds and CDK are very big too when are you just basically hoping you can win share in North America because of your system is superior or is it going to be more of a pricing discussion just how do you convince dealers to make that switch.

John Murphy: Yeah, John, it's Chris again. Our big focus there is really on this whole idea of throughput and we expect in good times when gross is going up that we expect 50% throughput to fall to the bottom line. Now, the same thing should apply when we are going to a declining market. I think we lost 100 million in gross year over year in the quarter and our overall variable expenses were down about 47 million.

Well David This is Bryan again, I think most importantly.

If you've ever been into a dealership and if you think about the experience that CDK and Reynolds and Reynolds provide it's more of a transactional database its not really a relationship generator. So when you think about the Pinewood system. It's all built around the customer experience both in a digital and the physical presence.

And I think with our experience we can help embellish that process as well I know that we've been one of the largest partners the CDK and still intend to for a fair amount of time.

John Murphy: So about 50%. The opportunity that you run into is when you put a lot of pressure on GPU specifically unused, we still pay sales associates to move inventory that's aged, maybe not as, you know, profitable the profitable as we like. And so it does provide a short-term disconnect sometimes on certain products that we're moving. And so, you know, it's something that we're focused on. I mean, using technology to drive productivity to, you know, continue to pay higher above average pay, above average performance is what we're focused on. And, you know, we have some opportunities there that we're going to continue to push through in Q4 and in the next year. Thanks, John.

That they are intense or are always good but they're starting from a foundation of technology. That's just not conducive to our associates or for that matter our consumers that they don't really interact with the CDK systems are the rentals and rental systems at all.

In a in our ecosystem as we envision it with Pinewood the consumers are interacting with our Dms system, just like our associates would interact with it. So we believe that there is an opportunity at some point to be able to conquest market share and as you know.

Rajat Gupta: Next question. Our next question comes from Rajat Gupta with JP Morgan. Please proceed with your question. Great. Thanks for taking the question. This had a question on, you know, driveway performance in the quarter. You mentioned for benchmarks that the SG need to gross, excluding driveway state flat sequentially. You know, previously we had assumed that the driver losses were coming down, you know, maybe like 15 million monthly to more like, you know, five to 10 million.

CDK went private which means it's private equity money and there may be an.

And opening to some extent to be able to bring in new technology and I think I think our ultimate goal would be to join forces with with multiple other retailers, possibly even manufacturers or possibly even CDK or other technology companies to really provide a world class consumer experience that.

Rajat Gupta: I mean, curious how that progress to the quarter was it an incremental headwind, you know, any color of that to dissect the SG and its performance would be helpful. Sure. Roger. This is Brian. I think most importantly, you continue to make progress in driveway. The burn rate is similar primarily because the gross profit levels on used cars came down a little bit. We have been able to curb our expenses in driveway by about 20, a little over 20%, which is a big move.

Really isn't out there in one form today, we all add on multiple other systems that are just clunky for associates and consumers.

Okay. That's helpful. Thank you.

Yes.

Thanks, David.

We have reached the end of the question and answer session I would now like to turn the call back over to Amit Mahua for closing remarks.

Thank you everyone for joining us today, we'll look forward to speaking to you over the next couple of weeks.

Rajat Gupta: Ultimately, I mean, we intend driveway to become a portal for consumers. Okay. And really be able to create greater touch points. And that's going to change our equation a ton. We are getting probably more traffic than we can actually handle. We're achieving over 3 million unique visitors a month through that site, which is, which is, it's almost unruly the amount of traffic that we're getting through there. And today, it's really a finance ability source and it needs to become more of an experience source that people are buying cars on driveway, not because we're able to finance them, but because they like the convenience, the simplicity and the empowerment that they achieve for that.

Good to see you next quarter. Thank you bye all.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

Rajat Gupta: So we've got some work to do there, but it's neat to see what's happening on driveway. One other little side note is this other little incubator called green cars dot com is doing some pretty special things. We only spend about $152,000 a month in marketing on that and it's producing now over 700,000 unique visitors and those unique visitors are shopping on and learning and educating themselves on green cars and they're buying cars at Lithia at a rate of about 1,200 a month.

Rajat Gupta: Okay, there's very little attribution between green cars and our stores. If we extrapolate those numbers and you can be extreme and say, Lithia sells 2% of all the new cars and use cars in the country. So it just takes 50 times whatever that 12 hundred is you get to a 75,000 units a month that green cars could have attributions to sell. Okay, so we're working also on the green car side to be able to monetize to some extent that educational process as more and more consumers begin to move to some level of sustainable transportation.

Rajat Gupta: God, that's helpful. And then just on DFC, you know, we've seen the widening in spread in the ABS market, you know, benchmark rates have also gone up. Does that in any way change your thinking around, you know, DFC penetration in the near term? Or perhaps another way to ask is, you know, how much flexibility do you have to manage to your foliar guidance or the fourth quarter guidance, as well as the 2024 guidance for DFC without hurting financing availability for your customer base?

Today's conference call has ended please.

Connect your lines at this time thank you.

Rajat Gupta: Thanks. Hey, Rajat, this is Chuck. Great question. So first, as we've been saying, and also in my prepared remarks, our penetration rate did come down to 9.7 this quarter. And, you know, for many of the reasons you cited, you know, we're really focused on increasing our yields, making sure that we maintain our discipline in terms of our, you know, credit underwriting standards. And then, you know, supporting our stores. And we feel like our value proposition to both our customers and to our stores for right now in terms of just letting our portfolio season, making sure that, you know, we focus on maintaining our discipline is more important than, say, achieving a specific penetration rate relative to your second part of your question.

Rajat Gupta: You know, I don't see any real, you know, material impact to maintaining our guidance between now and the end of the year. Obviously, that's subject to change. If there is, you know, other, you know, sort of macroeconomic factors that come up in the fourth quarter, but I think we can, you know, be fairly comfortable that in the next 65 to 80 days, we should be able to continue the path forward.

Ryan Sigdal: Our next question is from Ryan Sigdal with Craig Hallum Capital Group. Please proceed with your question. Good morning, guys.

Ryan Sigdal: This is a question that I look at, slide 18 in the mix of CPO versus co-or versus value. Looking at those ROI expectations, from a year ago, five back to this one, as you'd expect the ROI's are down for CPO and core. It's actually up for value autos. So I guess my question is, are you seeing improved GPU on value autos despite the more competitive, kind of broader narrative around the use market overall?

Ryan Sigdal: Hey, Ryan, this is Brian. I think what you're seeing mostly on that chart is at the turn rates going up. So as that supply continues to be pressured, and you're going to see the same thing happen in core on the 10 million units that Chris was talking about, when that bubble moves in or that lack of bubble moves into core, we're going to see the same thing that our turn rate is going to go up.

Ryan Sigdal: We're going to have to be more efficient and as you know, I mean, we do procure almost three quarters of our vehicles directly from consumers, whether it's through off lease, whether it's through purchasing directly from consumers, or whether it's through trade in.

Ryan Sigdal: Great. The next follow-up question. Just as you think about 2025 targets, you're iterating them in the slide deck here. But curious how much of an impact, we know kind of the puts takes between driveway and DFC and core business and M&A, etc. But one that is probably a bigger focus now is the rising interest rates. I guess how much is that impact net income and profitability? And what are the assumptions if rates keep going higher on your ability to achieve that 2025 EPS target?

Ryan Sigdal: Thanks. Ryan, again, I mean, Tina follow up with it on the interest cost. I think most importantly, we have now all the foundations that we originally designed into our plan back in 2017. So our ability to achieve the 2025 targets. When we're producing over a billion, two billion, four in capital, the interest cost do impact things and do change the calculus on whether to buy shares back or whether to buy businesses or whether to expand on the adjacency in the design.

Ryan Sigdal: But today, we have everything in place that we need ultimately to achieve the two dollars in EPS for every billion dollars in revenue. Now, that's a steady state basis. If you remember in the prepared remarks, we talked a lot about the driving forces behind that. But in terms of where the market looks, the biggest driver of achieving that 25 is really the ability to get the acquisitions and then execute today. Now, also remember that we're assuming that's a 17 million star and it's a normalized environment.

Ryan Sigdal: Okay, we've always we've always been very clear about that. But ultimately, that's really a short to midterm part of the game today. Our design isn't really focused on 25 any longer. It's focused on two dollars of EPS for every billion dollars of revenue and we'll let your minds wander on that. On what that can do and we've got that now earmarked between the DMS, the fleet management, Chuck's area in and driveway finance corporation.

Ryan Sigdal: Plus so many other things that when you have an ecosystem is large as ours now, it's about figuring out how to connect the dots on the ecosystem to make to make sure that we maximize that performance to get below the 50% S genius percentage of growth anything on interest. And Ryan, this is Tina, just to add to that, when we think about our return metrics when we're looking at deployment of capital, we are factoring that the interest rates are and our hurdle rates have to remain similar.

Ryan Sigdal: So if you think about the acquisitions that we're looking at and the capital and the profit of creation that we're looking at, that is factoring where rates are today and the higher for longer sort of tone out there. So that's based into how we think about our approach for capital deployment as well. Thanks, Ryan.

Ronald Josey: Our next question is from Ron Josie with the city. Please proceed with your question. Thanks for taking the question. I wanted to ask maybe if you follow up on driveway specifically. I think I heard on the prepared remarks that awareness for driveway is a brand recognition is on track. Can you just talk to us a little bit more about awareness and brand recognition and then to that and Brian, I think you just mentioned probably off the cuff that driveway is getting more traffic than we can handle or expected. Just provide a little more detail there in terms of maybe upside down side and how you think about just servicing that traffic. Thank you.

Bryan Deboer: Sure. I think in terms of awareness, the experiences on driveway are quite accepted by our consumers. And again, these are new consumers of Lithio over 98% of the consumers haven't done business with us in the last decade and a half. So their awareness is growing relative to what our typical store network looks like. The issue still is we're not really getting repeat and referral business yet even though we're now pushing almost three years in activity.

Bryan Deboer: That's because we have an acute focus on shop and sell and need to expand it into the life cycle and ownership experience, post sale and we've done a lot of the geofence and we built a lot of the after sales models. We just need to activate them within driveway and within the network to create greater attachment to the brand. In terms of the traffic, I think as a young digital retailer, it does take time to build your sales centers to focus on the customer's needs and I think it's imperative that we as traditional retailers as well.

Bryan Deboer: Don't let that pollute our processes and keep it here with our consumers. Our consumer acceptance rates are quite high. I think we're a 4.4 on Google scores which is up from where we were about a year ago at 4.2. I believe that it could be 4.8 or 4.9 if we can just create this ecosystem in driveway like we have in the store that's more physical where it's actually playing in the stores or in the consumers house in the same way that we do in the stores.

Bryan Deboer: And that's going to take a little bit more coding and a little bit more repeat and referral business. But ultimately, the traffic is overly strong and our care centers are still learning which customers are the best to be able to focus on when there's that much traffic there. Chris, was there anything else that I missed? No, Brian. I just think you know you nailed it that you have shop and sell and then you have service parts, you know, your DF, your driveway finance products.

Bryan Deboer: And then eventually even making the connection with RV and kind of the motorcycle businesses that we have. I think that the sky is the limit but we just have to stay focused on kind of one tactical execution at a time. And as Brian said, we have some opportunities there to continue to improve that experience. Thank you very awful guys, thank you. Thanks, Ron.

Colin Langan: Our next question comes from Colin Langan with Wells Fargo. Please proceed with your question. Oh, great, thanks for taking my questions. Just to follow up on Penn Dragon. Can you dive into a bit the DMS opportunity? Because I think you mentioned you're spending 110 million on DMS. Does that get reduced or do you, since you'd be probably sourcing it through Pinewood? Would you be getting sort of equity stake in the from that?

Colin Langan: And how does the US Joint Venture work? Do you actually have sort of a stronger interest in that when that grows? Sure, Colin. This is Bryan again. So we have 110 million dollar tech stack of which about 60% of it is DMS system today. And then you add on your CRMs and your service systems and your use car systems and stuff like that. In terms of how we think about the progression.

Colin Langan: So we're going to own somewhere between 17 and 20% of the parent company Pinewood. And then we own 51% of the North American JV, which eventually if you extrapolate out the 17 to 20 and then add it on to the to the 51 were about 60% ownership of the North American JV. That's not where our focus is. Okay, because we intend to monetize it with other partners as well. We're not really looking at controlling that.

Colin Langan: We're looking at it that it's a pathway to develop the develop a longer term solution of how to attach our customers to lithium drive way ecosystem in a better way than what we do today. So when you think about the tech stack, I would say that's a three to five year venture. We've run some base numbers that if and to be fair, Pinewood isn't ready to be put into North America. It needs APIs to manufacturers and it needs the APIs to each of the state agencies and tax codes and DMV codes to be able to move to America, just like when Pinewood moves into a different country.

Colin Langan: And that will take a couple years to get there. But if we were to basically extrapolate what a Pinewood charge was at their full profitability. On to Lithia's tech stack today, it's about a $30 million savings. Okay, don't put that in your estimates because we're not ready to do that yet. Okay, that's a longer term vision of where we get to. I think most importantly what you have in Pinewood is a cloud-based system that is quite adaptable that we believe is one of the top three functional systems in the world.

Colin Langan: Okay, and as such, it's our pathway to be able to someday glue our different adjacencies together. But more midterm is to create a software as a service company and deemphasize our influence within that company to bring in other partners to ultimately be able to grow from. Colin, do you have a follow-up question on that? Well, not related to that, just a quick follow-up. Overall, your same store unit sales are up 5%.

Colin Langan: I think retail saw it was up 11%. Why the underperformance versus the market is that a geographical mix issue or any any color? Yeah, our same store knew was a little over 5%, but you're absolutely right, and Chris can give you some of the numbers region or state by state, but we do have a little bit different footprint and it's still a little bit more depressed in some of the areas that we have footprint.

Colin Langan: Yeah, just to follow up on that then, you know, like we've talked about the last several quarters, I think the West is seeing kind of different growth rates that we're seeing kind of in the Southwest, for example, Northwest region and Southwest region. We're both, you know, up about, oh, what do you think about that? They were both about flat and then more in the Southwest regions and the Northeast regions, we were up, you know, double digits kind of above even the start number that you said.

Colin Langan: So a lot of it is kind of whatever mix is and what our franchises are as Bryan mentioned earlier, you know, 23% domestic, those units are down 11% whereas you're important luxuries are up about 12%. So mix has a lot to do with that geography has a lot to do with that. But. I think our point is have a diverse network and all regions and, you know, depending on what's happening in the economy and each of those markets will kind of ride that tide. Thanks Colin. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad one moment while we pull for questions.

David Whiston: Our next question comes from David Wiston with Morningstar.

David Whiston: Please proceed with your question. Thanks. Good morning. I wanted to go back to the discussion we were just having on the Pinewood DMS JV in North America when it eventually comes, comes here. As you know, Reynolds and CDK are very big too and are you just basically hoping you could win Sherry in North America because your system is superior, or is it going to be more pricing discussion? Just how do you convince dealers to make that switch?

Bryan Deboer: David, this is Brian again. I think most importantly, if you've ever been into a dealership and if you think about the experience that CDK and Reynolds and Reynolds provide, it's more of a transactional database. It's not really a relationship generator. So when you think about the Pinewood system, it's all built around the customer experience, both in a digital and a physical presence. And I think with our experience, we can help envelop that process as well.

Bryan Deboer: I know that we've been one of the largest partners of CDK and still intend to for a fair amount of time, that their intentions are always good. But they're starting from a foundation of technology that's just not conducive to our associates, or for that matter, our consumers, that they don't really interact with the CDK systems or the Reynolds and Reynolds systems at all. In our ecosystem, as we envision it with Pinewood, the consumers are interacting with our DMS system, just like our associates would interact with it.

Bryan Deboer: So we believe that there is an opportunity at some point to be able to conquest market share, and as you know, CDK went private, which means it's private equity money, and there may be an opening to some extent to be able to bring in new technology. And I think our ultimate goal would be to join forces with multiple other retailers, possibly even manufacturers, or possibly even CDK or other technology companies to really provide a world-class consumer experience that really isn't out there in one form today. We all add on multiple other systems that are just clunky for associates and consumers.

David Whiston: Okay, that's helpful. Thank you. Thanks David.

Unknown Executive: We have reached the end of the question and answer session.

Amit Marwaha: I would now like to turn the call back over to Amit Marwaha for closing remarks. Thank you everyone for joining us today. We'll look forward to speaking to you over the next couple weeks before seeing you next quarter. Thank you. Bye all.

Unknown Executive: This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation. As ended, please disconnect your lines at this time. Thank you.