Q4 2023 Lithia Motors Inc Earnings Call
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Greetings and welcome to the Lithia Motors fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Ahmed Marwa director of Investor Relations. Thank you Amit you may begin.
Ahmed Marwa: Thank you for joining us for our fourth quarter and full year 2023 earnings call with me today are Bryan Deboer, President and CEO, Chris Holzschuh Executive Vice President and C O O P.
Tina Miller Senior Vice President and CFO, Chuck Lietz, Senior Vice President of driveway finance and finally.
Chamberlain Chief customer officer.
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 Securities and Exchange Commission.
We urge you to carefully consider these disclosures and not to place undue reliance on forward looking statements.
We undertake no duty to update any forward looking statements, which are made as of the date of this release.
Our results discussed today include references to non-GAAP financial measures.
Ahmed Marwa: Please refer to to date to the text of today's press release for the 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 fourth quarter results.
With that I would like to turn the call over to Bryan Deboer, President and CEO.
Bryan B. DeBoer: Thank you, Matt Good morning, and welcome to our fourth quarter and full year earnings call.
Bryan B. DeBoer: In Q4, it lithium driveway grew revenues to $7 7 billion up 11% from Q4 of last year and generated adjusted diluted earnings per share of $8.24.
Bryan B. DeBoer: 2023 was a record year for us as we reached just over $31 billion in total full year revenues.
Bryan B. DeBoer: Results in the quarter were driven by continued strength in new vehicle sales with same store units up 10% and after sales revenues up 3%. This was offset by lower new vehicle Gpus continuing to normalize.
Bryan B. DeBoer: Declining approximately $150 sequentially per month in line with our expectations for new vehicles.
Bryan B. DeBoer: Our manufacturer partners continue to replenish inventory at a steady pace with manufacturer incentives, both lower subsidize rates and cash rebates continue to support consumer demand across a variety of brands and models.
Bryan B. DeBoer: Use gpus came in near decade lows, while F&I Gpus were essentially unchanged.
Bryan B. DeBoer: With our unprecedented acquisition growth and yet expansion into Adjacencies with driveway.
Bryan B. DeBoer: Green cars driveway Finance Corp, Pendragon vehicle management, and a strategic partnership with Pine Wood technologies are key strategic design elements are all now in place.
Bryan B. DeBoer: This positions us perfectly for 'twenty, 'twenty, four and beyond to focus our attention on what we do best execution.
Bryan B. DeBoer: Our team remains acutely focused on delivering revenue growth and profitability across all business opportunities there.
Bryan B. DeBoer: The lab strategy is built on our vast store network made up of it the industry's most talented people highest demand inventory in a dense expansive physical network.
Bryan B. DeBoer: This foundation is driven by our culture that challenges our teams to operate with autonomy and respond nimbly to local market dynamics to achieve industry leading performance.
Bryan B. DeBoer: Expanding our store network and leveraging our many strategic adjacencies increases the touch points throughout the customers' lifecycle. We're also equipping our stores with the tools necessary to improve productivity loyalty and ultimate profitability.
Bryan B. DeBoer: The late ecosystem is designed to expand our total addressable market and market share through Omnichannel solutions and Adjacencies.
Bryan B. DeBoer: That are there for customers wherever whenever and however, they desire.
Bryan B. DeBoer: This will drive us from approximately 1.9% market share today towards our previously stated target of 5% and more importantly, our ratio of V. P. S to $1 billion of revenue of two to one.
Bryan B. DeBoer: Moving on to our financing operations driveway Finance Corporation, or Dfc posted another strong quarter with a smaller than expected loss of $2 1 million wireless receivables grew to $3 2 billion.
Bryan B. DeBoer: The <unk> team has demonstrated success in navigating through the fluid interest rate environment, while maturing its capital structure and liquidity position. We are excited to see this adjacency continued to mature as it looks to achieve breakeven later this year, while improving the liquidity as we manage the pace and.
Bryan B. DeBoer: Quality of originations.
Bryan B. DeBoer: Both Chris and check will be sharing further details on operational results are both vehicle and financing later in the call.
Bryan B. DeBoer: At the heart of our strategy is expanding customer solutions that are simple convenient and transparent our network is being designed to be within 100 miles of consumers to provide an easy and convenient delivery solutions for our customers.
Bryan B. DeBoer: Over time, the leveraging of this network with our omni channel solutions will generate more attractive and diverse impressions more memorable experiences better returns on capital and a unique ecosystem that provides differentiated and deep value for our customers.
Bryan B. DeBoer: We exercised patience and discipline during the fourth quarter, bringing us to $3 $8 billion in annualized revenues acquired in 2023.
Bryan B. DeBoer: 2024 has also started off strong with our successful completion of the Pendragon transaction at the beginning of this month.
Bryan B. DeBoer: This transaction forms a strategic partnership with Pinewood technologies adds a highly profitable fleet management business, both new Adjacencies and the U K motors business with 160 stores across the United Kingdom and over $4 billion in total revenue.
Bryan B. DeBoer: This is an exciting new chapter of diversification and growth as we round out our presence in the United Kingdom.
Bryan B. DeBoer: I'd like to personally welcome all our new Pendragon associates, and Pinewood partners to the Lithia family.
Bryan B. DeBoer: Acquisitions are a core competency of labs, and we remain disciplined and opportunistic as we look for accretive opportunities that can improve our business.
Bryan B. DeBoer: As a reminder, we target a minimum after tax return of 15% or greater and acquire for 15% to 30% of revenue or three to seven times normalized EBITDA.
Bryan B. DeBoer: Life to date, our acquisitions have yielded over a 95% SaaS right and after tax returns of over 25% as.
Bryan B. DeBoer: As Gpus normalize and liquidity tightened, we expect valuations to become more realistic as well.
Bryan B. DeBoer: Our robust acquisition strategy has opened up new markets and mobility verticals.
Bryan B. DeBoer: Creating considerably more opportunities for us in the future.
Bryan B. DeBoer: However for the foreseeable future we are fine tuning our targets to focus 90% of our M&A dollars to automotive in the United States.
Bryan B. DeBoer: In addition, now that we have realized the scale necessary to find find and operate new Adjacencies, we will evaluate share repurchases with parity to acquisitions.
Bryan B. DeBoer: Past practices prioritize acquisitions is more beneficial strategically than buybacks, but at our current size and scale. We are now returning to a balanced deployment of free cash flows to drive the strongest possible returns.
Bryan B. DeBoer: We continued to monitor valuations of both being patient for strong assets price within our acquisition hurdle rates.
Bryan B. DeBoer: We expect pricing to take some time to normalize and now estimate annual acquired revenues, excluding the Pendragon acquisition in the range of $2 billion to $4 billion a year.
Bryan B. DeBoer: Our near term target of $50 billion in revenue remains within our sites and our team is confident in our ability to achieve this while doing so in the most prudent fashion possible.
Bryan B. DeBoer: Our team is experienced and executing and integrating acquisitions and we remain committed to achieving strong returns as we build out our network.
Bryan B. DeBoer: Moving on to the overall execution of our long term strategy.
Bryan B. DeBoer: Since the launch of our plan, we added important foundational adjacencies.
Bryan B. DeBoer: And have now acquired over $22 billion in revenue.
Bryan B. DeBoer: In addition, the strategic partnership with Pinewood technologies allows us to leverage technology to stitch together, our strategic adjacencies modernize the customer experience and someday realize considerable cost savings in our technology stack.
Bryan B. DeBoer: We are excited to begin the journey with the implementation of the Pinewood dealer management system, or Dms and our U K operations this year.
Bryan B. DeBoer: Beyond the U K and next year, we are excited to be part of the North American partnership with Pinewood technologies, continuing to grow our own driveway customer experiences and creating simple transparent and aligned customer and associate experiences.
Bryan B. DeBoer: Shifting to our Omnichannel platform are M movies across our digital channels were up 16%, reaching 13 million per month.
Bryan B. DeBoer: Digital transactions, including driveway grew to nearly 38000 in the fourth quarter up 27% compared to last year.
Bryan B. DeBoer: Green cars, the leading sustainability vehicle education channel continues to grow as a lead generation channel and contributed over 1 million M Uv's up from 102% over last year.
Bryan B. DeBoer: Sustainable vehicle sales now account for 16% of our new vehicles in Q4 up from 11% in the same period last year.
Bryan B. DeBoer: With our customers at the center of our design.
Bryan B. DeBoer: Joining me in welcoming Adam Chamberlain to the call and congratulating him on his expanded role as our chief customer officer.
Adam Chamberlain: His decades of experience and proven track record of driving results with Lilly will lead our continued transformation of the customer experience, combining our foundation <unk> elements to create deeper customer loyalty and increasing market share and profitability.
Adam Chamberlain: Now that all the foundation elements of our plan are in position our attention has turned to improving margins and lowering our SG&A through a combination of growth efficiency diversification and scale.
Adam Chamberlain: These elements are now well underway and when combined with our newest Adjacencies of fleet management and our strategic technology partnership we are well positioned for both further growth and realizing the profit potential of a more holistic lifecycle relationship with our customers.
Adam Chamberlain: Leaving these elements together and assuming a normalized SAR in GPU environment, we now conclude or at least see a pathway to $1 billion in revenue ultimately generating $2 in EPS.
Adam Chamberlain: Key factors underlying our future steady state and now totally within our control are as follows.
Adam Chamberlain: First.
Adam Chamberlain: Continuing to improve our network by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer lifecycle interactions.
Adam Chamberlain: Leveraging our cost structures.
Adam Chamberlain: Personnel productivity gains and growing each store's new used and after sales market share.
Adam Chamberlain: The result is to achieve and SG&A as a percentage of gross profit and store operations.
Adam Chamberlain: Below 55% and a normalized GPU environment.
Adam Chamberlain: Second.
Adam Chamberlain: Continue focusing on acquiring larger automotive stores and the higher profitability regions of the south central southeast and Midwestern United States.
Adam Chamberlain: Combined with further growth in our digital channels, we expect to reach a blended U S market share of 5%.
Adam Chamberlain: Third financing of up to 20% of units with Dfc and maturing beyond the headwinds associated with seasonal reserves.
Adam Chamberlain: As a reminder, our first adjacency DSC remains on track to achieve profitability during the latter half of this year.
Adam Chamberlain: Next maturing contributions from our Horizontals, including fleet management.
Adam Chamberlain: Ms software charging infrastructure and captive insurance.
Adam Chamberlain: Fifth through size and scale, we continue to drive down vendor pricing improved corporate efficiencies to save costs and lower borrowing costs as we path towards an investment grade rating.
Adam Chamberlain: Combining both store operational improvements with higher margin Adjacencies and the other design advantages discussed.
Adam Chamberlain: SG&A as a percentage of gross profit will fall below 50%.
Adam Chamberlain: And finally ongoing return on capital to shareholders through dividends and opportunistic share buybacks.
Adam Chamberlain: Please refer to the Lad investor presentation for further details and reconciliations.
Adam Chamberlain: As we approach the middle of the decade, we are well positioned to maximize our unique and unreplicable mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale.
Adam Chamberlain: Our strategy combined with our experienced and focused team.
Adam Chamberlain: We'll continue to expand market share leverage our size and scale and grow our complementary adjacencies to produce an ultimate long term profit to revenue ratio of $2 of EPS.
Adam Chamberlain: All elements of our original design are now securely in place and we look forward to focusing all of our attention on execution to establish new levels of performance for our industry with that I'd like to turn the call over to Chris.
Chris Holzschuh: Thank you Bryan I'd like to begin by congratulating, our 2023 class of lithium driveway partners group winners better known internally as LPG. These leaders and their teams achieved the highest performance levels among their peers in 2023 with outsized market share exceptional customer service strategic innovation and best in class execution.
Chris Holzschuh: Our LPG group is the North star for all of our retail locations to learn from and replicate as we continue to deliver operational excellence and attainment of profitability potential at each location. We now have 160, LPG partners, meaning over 40% of our eligible store leaders have attained this coveted status and we look forward to.
Adam Chamberlain: All of our teams achieving LPG status in the future.
Adam Chamberlain: Executing on our vision to build out a vast automotive ecosystem across three of the largest English speaking countries in the world is well underway, we remain committed to our mission of growth powered by people and a high performance culture led by entrepreneurial leadership at the local market level, which has been a differentiator in our strategy for over a decade empowering our teams to <unk>.
Adam Chamberlain: Serve their customers and deliver best in class services wherever whenever and however, they desire continues to be keys to our success.
Adam Chamberlain: Moving onto the fourth quarter results, we continue to see resilience in the auto retail consumer as they pivot their buying needs in new and used vehicles and lockstep with OEM incentives the recovery of new vehicle inventory.
Adam Chamberlain: Credit availability scarcity of later model used vehicles and the demand for after sales is the vehicle car bar continues to age.
Adam Chamberlain: On a same store basis, new vehicle revenues were up 10%. This was driven by unit volumes, increasing 10% and nominal changes in asps.
Adam Chamberlain: New vehicle Gpus, including F&I were 6215 per unit down $1510 or 20% year over year as we expected this and discussed throughout 2023, we anticipate the downward trend in Gpus to continue through 2024, eventually resulting in total gpus, including F&I at.
Adam Chamberlain: $4500, which is near our historic levels.
Adam Chamberlain: Main driver behind the GPU trend is driven by new vehicle Saar continuing to normalize which is expected to end 2024 near 16 million units in the U S. Same store volumes are positively highlighted by large improvements in important domestic brands, which were up 12% while domestic volumes improved just over 4%.
Adam Chamberlain: I also constructive on Saar normalizing in the United Kingdom, and Canada, eventually getting back to 2019 levels, which leaves, 20% and 15% and expected recovery respectively.
Adam Chamberlain: New vehicle inventory days supplies rose to 65 days compared to 55 days at the end of Q3 and 47 days at the end of Q4 2022.
Adam Chamberlain: Moving on to used vehicles revenue was down 11% and units were down 6%.
Adam Chamberlain: Asps has continued to decline down 5% to $28000 versus $29400 in the prior year used vehicle pricing continues to moderate in line with the recovering supply of new vehicles sales of certified vehicles were up nearly 2%, while our core vehicle segment, which accounts for more than half of our used vehicle sales was down 10%.
Adam Chamberlain: As the impact of Covid production constraints is working through the supply chain as a reminder, around 10 million vehicles were locked in production in 2020 to 2023 due to Covid impacted factory shutdowns and supply chain issues.
Adam Chamberlain: Value autos, what's your higher mileage vehicles and generally over nine years old were down 3% our top of funnel OEM new car status gives us significantly more access to inventory then used only dealers, which coupled with driveway and our omnichannel selling arm will continue to be a significant advantage for years to come used vehicle gpus, including <unk>.
Adam Chamberlain: <unk> $3789 down 7% from last year, and well below our historic average our teams are reacting to a volatile used car marketplace in response to the massive rebound in new car inventory that continues to add new vehicle supply as.
Adam Chamberlain: As the average APR on used vehicle alone and I'll leave used vehicle alone is almost 11, 7% the outlook for lower consumer borrowing rates will eventually serve as a tailwind for consumers and relief in their monthly payments.
Adam Chamberlain: Used vehicle inventory day supply rose to 64 days compared to 58 days last quarter and 58 days in the prior year.
Adam Chamberlain: Our after sales business, which makes up 42% of our gross profit rose by 3% and gross margins were 55% customer pay which accounts for 60% of the after sales business was up 3%, while warranty sales, which made up 30% of the business rose by 6%.
Adam Chamberlain: The average age and size of the vehicle car Park is at record levels and with the advancement in technology and product offerings for our consumers. We can expect greater complexity and higher cost for repairs. We continue to meet this high margin demand by finding innovative ways to attract and grow talent, while offering state of the art facilities for our technicians to come from they call their professional home.
Adam Chamberlain: Finally, adjusted SG&A as a percentage of gross profit excluding driveways cost was 62, 8% versus 65, 1% on a consolidated basis, which was similar to the prior year.
Adam Chamberlain: Over the past 10 years, we have managed to extract nearly 500 basis points from our total SG&A as we look to the future and work to find ways to gain additional leverage and benefits from our 460 plus locations across the globe. We are confident on our ability to create a high performance Omnichannel network that is truly best in class in operating leverage.
Adam Chamberlain: As we started our LPG group has set the bar for our organization of what is expected and in simple terms moving our non LPG to LPG performance levels has a massive impact on profitability, specifically moving non LPG stores up one segment of performance will add 500 to 800 basis points of incremental leverage in the model.
Adam Chamberlain: This would equate to approximately $250 million to $400 million in additional profitability or 7% to $10 in EPS on today's performance and is a key to unlocking the $2 in EPS for every $1 billion in revenue that Brian has discussed.
Adam Chamberlain: In summary, our plan is well underway to build an international ecosystem and personal transportation that provides a variety of products and services that meet our broad set of consumers mobility needs wherever whenever and however, they desire our tenured and experienced team is set up to achieve high performing results and a lean operating model, while continuing to execute our plan.
Adam Chamberlain: That will deliver best in class returns to our shareholders with that I'd like to turn the call over to Chuck.
Chuck Lietz: Thanks, Chris the financing operations segment continued to move towards profitability narrowing our quarterly operating loss to $2 1 million down from $4 4 million last quarter, while our portfolio ended the year at just over $3 2 billion.
Chuck Lietz: As we prioritize increasing yields and managing risk through our underwriting we a saw a sequential decline in origination volume to $429 million shifting.
Chuck Lietz: Shifting to our operating metrics the weighted average APR on loans originated increased to 10, 3% up 30 basis points from the prior quarter and 210 basis points from a year ago as a captive lenders sitting at the top of the funnel, we were able to achieve this without impacting credit quality.
Chuck Lietz: Average FICO score of 734 on loans originated in the quarter was two points higher than the prior quarter, while front end LTV was essentially flat at 95% Dfc.
Chuck Lietz: <unk> penetration rate during the quarter was 9% primarily due to the negative impact on labs growth in retail units overseas. If we consider only retail units sold in the U S. The only market DSC currently operates in our penetration rate increases to 10%.
Chuck Lietz: Now that our yield is aligned with the market. We expect penetration will increase in 2024 and beyond as we look to scale, our future growth has endless possibilities, including launching a new vehicle leasing products as well as exploring supporting labs expansion into other geographies and mobility verticals in.
Chuck Lietz: In the fourth quarter net interest margin increased to $33 $2 million, driven by increasing portfolio APR and relatively flat funding costs.
Adam Chamberlain: In Q4, we closed our sixth ABS offerings, and we now have 86% of our portfolio funded through ABS term issuance and warehouse facilities and later today, we are closing a very successful seven ABS term offering.
Adam Chamberlain: Net provision expense increased slightly from the prior quarter to $23 8 million as we saw seasonally higher charge offs in the fourth quarter the allowance for loan losses as a percentage of loans receivables stay flat at three 2% 30 day delinquency rate increased 50 basis points from the prior quarter.
Adam Chamberlain: Four 6% consistent with seasonal expectations and down 80 basis points year over year. This reflects strong performance from our servicing team as well as increasing our overall portfolio credit quality.
Adam Chamberlain: As we prepare to transition from the startup period I am very proud of all <unk> accomplished since we launched this initiative in May of 2020, DSC will quickly start to prove the financial benefits of this adjacency as well as show a clear path to realizing the full scope of Dsv's contribution so with the driveway.
Adam Chamberlain: <unk> Standalone profitability, we can see how our matured DSC support labs long term objectives to re imagine the vehicle sales ownership experience and make meaningful connections with the consumer throughout their entire vehicle ownership lifecycle.
Adam Chamberlain: <unk> has been built to be successful in the full range of market conditions, regardless of short term volatility we remain confident in <unk> ability to deliver long term earnings growth.
Adam Chamberlain: And achieving our end state financial goals with a fully scaled and seasoned portfolio with that I'd like to turn the call over to Tina.
Tina Miller: Thanks, Chuck and thank you for all those joining us today.
Tina Miller: In the fourth quarter, we reported adjusted EBITDA of $400 million and nearly $1 8 billion for the full year 2023.
Tina Miller: Results in the quarter were driven by continued strength in new vehicle sales and after sales offset by lower new vehicle Gpus with returning supply and higher Floorplan interest expense are focused on maturing our adjacencies resulted in improved profitability at driveway and PSC. Although early we are well positioned to see.
Adam Chamberlain: Positive contributions this year.
Adam Chamberlain: We ended the quarter with net leverage excluding floorplan and that type of Dfc of approximately one eight time relatively flat from the prior quarter. We continue to maintain our financial discipline, even with planned growth and target leverage below three times.
Adam Chamberlain: During the quarter, we generated free cash flows of $242 million, an increase of 10% compared to the previous year, we define free cash flow as EBITDA, adding back stock based compensation less the following items paid in cash interest income taxes, capex and dividend.
Adam Chamberlain: Managed to generate another year of strong cash flow and balance with consistent capital allocation. We can preserve the quality of our balance sheet, while supporting our growth initiatives and navigating various crosscurrents in today's environment.
Adam Chamberlain: Our capital allocation strategy at 65% toward acquisition, 25% towards internal investments, which includes capital expenditures and the balance of 10% to our shareholder return remains relatively unchanged. However, with nearly $22 billion of acquisitions completed since 2020, we're making some tactical shifts appears.
Adam Chamberlain: Sponsors to the market environment as Brian outlined earlier, we will continue to assess valuation trends and balance our M&A expectations in the near term, but being opportunistic in our share repurchases.
Adam Chamberlain: In the fourth quarter, we repurchased nearly 143000 shares for a weighted average price of $241 per share we have approximately $457 million available under our current authorization, we remain nimble and we'll look to deploy capital in ways that drive strong returns.
Adam Chamberlain: Our vision and ability to deliver on synergies through acquisitive growth remains unchanged and our strategy is flexible with the consistent cash flow generation of our vehicle operations business, coupled with measured investments in adjacencies to.
Adam Chamberlain: The team has the necessary infrastructure and tools to drive revenues and margin toward our long term target of achieving $2 in EPS per $1 billion in revenue and our focus on execution and digesting the acquisitions. We've completed over the past few years, our culture and business is designed to grow and deliver consistent strong performance coupled with the.
Adam Chamberlain: A diverse and talented members of our team. This gives us the necessary foundation to achieve our plan and to continue driving value for our shareholders. This concludes our prepared remarks.
Speaker Change: With that I'll turn the call over to the audience for questions operator.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'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.
Speaker Change: Our first question is from John Murphy with Bank of America. Please proceed with your question.
John Murphy: Good morning, everybody.
John Murphy: Brian just want to ask a first question on Pinewood.
John Murphy: We're hearing a lot of folks transitioning to <unk>.
John Murphy: Youre talking about Pinewood it seems like we're finally getting this evolution or maybe revolution in Dms.
John Murphy: Across the industry as you think about the implementation of Pinewood throughout your entire platform is this more sort of a cost and efficiency focus.
John Murphy: Change or is this.
John Murphy: The kind of system that is going to help you leverage and get into these lifetime revenue streams and adjacencies.
John Murphy: In addition to these cost cutting I'm, just trying understand where this is going.
John Murphy: Hi, John This is Bryan thanks for the question today I'd.
Bryan B. DeBoer: I'd start with the Pinewood system is what we would consider the top of the heap in global Dms systems.
Bryan B. DeBoer: That its functionality is far and above what we see here in the United States. I think it's also imperative to point out that pine Wood's user base is the same size as <unk> today.
Bryan Deboer: Okay, and Thats before they begin to.
Bryan Deboer: To develop additional uses and move into the largest market in the kind of in the world, which is North America. So we look at as as as three key elements, Okay first and foremost.
Bryan Deboer: We're just a partner in the parent so keep that in mind. This is pine Wood's business, it's a savvy business, that's ready and prime to grow so we look at their ability to grow.
Bryan B. DeBoer: User base outside of North America, as as priority number one and they obviously look at that the same.
Bryan B. DeBoer: Secondarily, we do look at that the idea of it coming into United States opens up additional user base for them as well, but for us it.
Bryan B. DeBoer: There is two big advantages one is it allows us the ability to glu R. Multiple adjacencies together.
Adam Chamberlain: The way that we see fit okay, and as as that ecosystem begins to develop okay. So that's pretty crucial knowing that the two major players in the United States are truly.
Adam Chamberlain: More of behind the scenes type of functionality, where we're really really were looking for an environment, where customers and associates coexist and work to reduce productivity with our associates because the consumers typically want to do that that that stuff themselves. So yes.
Adam Chamberlain: Yes on trying to glue together the ecosystem and then lastly.
Adam Chamberlain: If we assume a 25%.
Adam Chamberlain: Inflation in the cost per user that Pinewood currently charges and apply it to our data stack today, we save about 50% on our tech stack, Okay about 50%. So it is a large cost savings, while still already adding greater functionality to the system. So.
Adam Chamberlain: It is priority number one of why the Pendragon acquisition.
Adam Chamberlain: So meaningful and so strategically targeted by us.
Speaker Change: And then if I could just sneak in a second question.
Speaker Change: And this is giving you a little bit of a hard time, even though SG&A performance has been good.
Speaker Change: In the quarter SG&A was up about little over $83 million and gross profit was up just shy of 52 billion. So SG&A growth is outstripping the growth in gross profit it was kind of a similar dynamic for the year.
Adam Chamberlain: As we think about incremental gross or over time.
Adam Chamberlain: How should we think about sort of the flow through of SG&A to gross incrementally.
Adam Chamberlain: It seems like it's growing faster than grosses.
Adam Chamberlain: That's something we'd want it slowdown obviously overtime.
Adam Chamberlain: The biggest impact that we have right now that we're dealing with as used cars used car grosses right now.
Adam Chamberlain: Significantly below historic levels and right now trying to get at really procure and get the core product that we need which is kind of those three to seven year old vehicles, it's a firefight the benefit.
Adam Chamberlain: Benefit we have is being a top of funnel new car dealer is 70% of our trades are coming in from consumers, but we still have to fill our pipeline being used car operators with vehicles that are outside.
Adam Chamberlain: <unk> of our customer channel, which creates pressure on gross and we compensate our teams are selling a lot of vehicles right. Now that just are lower on gross profit contribution. So I think when things normalize and you go back to the overall structure that we have and we have a slide that kind of represents kind of what our top tier is able to.
Adam Chamberlain: Right now in that SG&A closer to 50% we've got to do the work now with our operations team and move kind of the lower bucket of stores that arent getting that kind of leverage up and Thats, where we really believe we can continue to maintain an outlook of getting to 55%.
Adam Chamberlain: <unk> gross <unk>.
Adam Chamberlain: Somewhere near term mid term, but that's an execution opportunity for us.
Adam Chamberlain: Thank you. Our next question is from Daniel <unk> with Stephens Inc. Please proceed with your question.
Adam Chamberlain: Hey, guys. This is Joe enderlin on for Daniel Thanks for taking the questions.
Adam Chamberlain: Hi.
Joe Enderlin: The slides it looks like you moved the timeframe from your 'twenty five targets.
Joe Enderlin: How should we be thinking about the timeframe here now and what changed in your thinking.
Speaker Change: I would I would start with it obviously, we're less than a year out from the start of 2005. So we would be inferring specific guidance and it's not something it's not typical practices of our company to provide guidance.
Speaker Change: But maybe more importantly than that the goals that we've established for ourselves or to build an ecosystem that is unreplicable in that foundation is now solidly built okay. So the idea of trying to achieve $50 billion in revenue isn't really the target the target.
Speaker Change: Has now moved to be more about what can that eco system produce in terms of customer experiences and ultimate touch points throughout the lifecycle with the consumer to create $2 of EPS for every billion dollars of revenue. So the $50 billion is obviously when our sites in our sites.
Speaker Change: Unfortunately, with where the market is pricing acquisitions today, and where we're trading the acquisitions are more costly than we can buy our own stock back. So if you. If you heard in the prepared remarks, we're looking at buybacks versus M&A at parity and in today's environment. What we're seeing is.
Speaker Change: That these one in these single point stores and even the smaller groups are bringing massive multiples like.
Speaker Change: Selling for as much as 10 to 20 times normalized earnings when they look back is a three year look back that's just not something that we're going to chase, okay, and I think as such we are revising what our M&A targets are postponed dragon at $2 billion to $4 billion annually, which will get you into the <unk>.
Speaker Change: The end of the mid $40 million $1 billion in revenue range in 'twenty five.
Speaker Change: We can probably get there in 25, assuming that the marketplace.
Speaker Change: Softens up a little bit and looks past the three years of elevated earnings from Gpus.
Speaker Change: Got it that's super helpful. Thank you.
Speaker Change: Okay as a follow up and you guys have pushed further into the UK market with the acquisition and Pendragon.
Speaker Change: Could you maybe provide some current thoughts on the U K market share results have come in softer than our previous expectations.
Speaker Change: Are you seeing any headwinds there in the used market or how is that market trended in recent quarters.
Speaker Change: Yes, Joe It's Chris Yes, I mean, I think typically kind of the issues that we are contemplating in the U S are also impacting the U K.
Chris Holzschuh: The used car market has been adjusting pretty rapidly with the new car inventory recovery and I think fourth quarter was was difficult I think for used cars. Just because you are chasing a number that's coming down.
Chris Holzschuh: But I think there's also a lot of synergies that the UK stores are seeing and what we do in the U S and the way that we think about the different segments of vehicles and going after kind of value auto product and figuring out how to get synergies across the brand and I think with the size of the network that we built there.
Chris Holzschuh: Of opportunity and the last thing is in my prepared remarks, I mentioned that there is a larger recovery than what youre going to see in the U S getting back to a normalized SAR in the U K.
Speaker Change: Hey, Joe wanted one incremental piece of information, Chris and I were out there for a week.
Speaker Change: What 10 12 days ago, now and we spent time with Neil our operational leader, both Pendragon and <unk> as well as his key generals, it's surprising that the Pendragon group, especially.
Speaker Change: Evans Hall Shaw that Gary the leader of that they have a good grasp of the used vehicle market.
Speaker Change: And I think it's very clear that our ability to grow within that market is out there.
Speaker Change: And as a side note we ended up walking through each and every store within the 160 locations and have a pretty good strategy on how to optimize their network as well as well as retain and motivate those people to be able to reach higher in the United Kingdom Lastly, I would say that our growth in the United Kingdom is.
Speaker Change: Pretty well accomplished okay. So we're nicely positioned in the United Kingdom with.
Speaker Change: Close to.
Speaker Change: 88% market share or something with most of it being a luxury.
Speaker Change: Is quite nice.
Speaker Change: And obviously our attention now turn turned back to the United States with automotive and 90% of our mergers and acquisition dollars will be going to that.
Speaker Change: Yes.
Speaker Change: Got it. Thank you guys Thats all for us.
Speaker Change: Our next question is from Rajat Gupta with Jpmorgan. Please proceed with your question.
Rajat Gupta: Great. Thanks for taking the question.
Rajat Gupta: I had a couple.
Rajat Gupta: First of all on the buyback.
Rajat Gupta: Our strategy shift.
Speaker Change: Yes.
Speaker Change: In the event.
Speaker Change: They are doing more buybacks versus M&A or similar amounts over the next.
Speaker Change: A couple of years.
Speaker Change: How much should we think.
Speaker Change: You could take leverage too on the balance sheet, which is one eight times adjusted you are at today.
Speaker Change: That are different.
Speaker Change: A benchmark that you would be looking at relative to when you were doing M&A, just curious thoughts there and I'll have a follow up thanks.
Speaker Change: Sure Rajat. This is Bryan again, I think it's important to define that just because we put M&A and buybacks at parity doesn't mean, we believe that we'll be able to do buybacks or M&A. The market will dictate both of those and we believe and we know definitively that M&A is a core competency.
Speaker Change: Of Lithia Motors and drive away and that we always are able to find acquisitions as such even though we have the pendragon acquisition. We have other deals in the hopper that are going to make the year round out quite nicely that our domestic deals in the United States with highly attractive franchises in the areas that we've targeted our growth.
Speaker Change: That will be there now.
Speaker Change: We think about.
Speaker Change: Buybacks ultimately.
Speaker Change: Is still the last thing that we want to do with their money because the only reason we would be buying back is because we believe that our share price is more valuable.
Speaker Change: Than what it's trading at so that balancing act, we'll try to give you color as to where we sit today, but today. If you noticed we bought back $40 million or so of shares in the quarter, primarily because when acquisitions are at 10 times.
Speaker Change: And we can buy our shares back at seven times, we're going to buy our shares back okay. So the market will ultimately dictate it so for our ideas are.
Speaker Change: How to diagnose I think we're going to we're going to stick with probably $2 billion to $4 billion in domestic U S. Automotive growth is key okay and that should get us to about 50% to 70% allocation of our capital to M&A. Okay. And then you can balance out that that too.
Speaker Change: 20% is probably the difference that falls into the buyback pool.
Speaker Change: Got it and then on the leverage.
Speaker Change: Why do you think you can take the leverage on the balance sheet Zhou from one age.
Speaker Change: I have three Diana.
Speaker Change: Yes, Rob this is Tina I mean, we target being below three times Levered, which is the financial discipline that we've always had I think that will continue to hold true. It gives us space to do some constructive work, whether it's M&A or buyback, but we want to keep that discipline balance sheet.
Speaker Change: Thanks, Roger Our next question is from Ryan signal with Craig Hallum Capital Group. Please proceed with your question.
Ryan Signal: Hey, good morning, guys.
Ryan Signal: Good morning, Brian.
Ryan Signal: Two on driveway so.
Ryan Signal: So first in past quarters, you've given the impact of quantified it whether it be SG&A to gross profit ratio of say 300 bps or the dollars, but curious if you are willing to do that in Q4, and then secondly, how do you think about the investment in driveway and digital in 2024, and what primary kpis, you're watching either pulled.
Speaker Change: Back or lean into marketing and customer acquisition spend there.
Speaker Change: Sure Ryan if you noticed in the script that we ended up blending it together with vehicle operations because that is just truly another channel.
Speaker Change: That is important for us.
Speaker Change: We are it is important to us that the burn rate becomes something thats manageable, our burn rate year over year is down about 30%, 35% with another 30% to 35% expected by the end of the year, but it does create an ecosystem that we believe is the center of the Lithia and driveway.
Speaker Change: Universe now today, we sit with about 13 different functions that are there in the driveway customer portal and we intend to build that out with 118 different touch points throughout the lifecycle with our consumers.
Speaker Change: They can exist and coexist in both driveway as well as our traditional store base as the ecosystem to be able to put things at People's fingertips that they need during their ownership lifecycle, okay and that is deep about a quarter of those are monetize a bowl touch.
Speaker Change: Okay. The other 75% is truly it's just value adds and that's when we talk about the deep value ads, we're looking at it from the customer perspective, so driveway youll see and its separate selling.
Speaker Change: Selling channel.
Speaker Change: Thats, one price and as home delivery, and it's convenient and transparent and so on but you're also going to see the functionality within that website add those additional 100 ourselves functions to be able to provide that to all users within the lithia and driveway ecosystem to be able to access that in.
Speaker Change: Subscribe to different things and schedule their service and pay.
Speaker Change: Pay their payments and their finance company or vice versa or know what the valuations of their trade ins are and I think as we think about the longer term term vision, it's really drive way as a customer facing solution that someday will integrate with the Pinewood solutions and help us build an ecosystem that customers are.
Speaker Change: We used to and believe is infectious and wants to be there a couple of times a week rather than once every three to five years.
Speaker Change: That's great Thanks, Brian and good luck guys.
Speaker Change: Brian.
Speaker Change: Our next question is from Colin Langan with Wells Fargo. Please proceed with your question.
Colin Langan: Thanks for taking my questions.
Colin Langan: If it looks sequentially was a bigger step down in new GPU, how should we think about that trending as we go through this year. I think you noticed you think your comments that youre kind of eventually expect to get to sort of pre crisis levels.
Colin Langan: Should that be over the next.
Colin Langan: A couple of quarters or any thoughts on that piece of it.
Colin Langan: Hi, Collin this is Brian So I think the easiest way to think about it let's let's talk about what we believe is steady state and normalized we think that that total deal average is around 4500 about 2500 on the front end and Thats blended new and used okay and just under.
Brian: $2000 on the back end today, we sit at almost $200 above.
Colin Langan: That on new and we sit about $500 below that unused okay.
Speaker Change: So that that balancing act will come back in.
Colin Langan: We achieved.
Brian: About we dropped about $150 a month over the last quarter, which is a little bit accelerated rate from where we were originally we're looking at throughout the last year.
Brian: We assumed that by now we would be back to normalized state now the other thing to keep in mind is that Q4, and Q1 are typically seasonally a little bit tougher quarters.
Brian: In fact Q4 is usually the weakest in terms of GPU. So we do have some seasonality on our side. So I would say that over the next quarter or two we should see about $100 drop per month, but I would say that once we get into the second half of the year whatever is left will normalize by year.
Brian: And.
Brian: Okay, because I think if we go through another seasonally slow period, which will be in fall of next year. It should be back to some type of normalized level and I think as Chris mentioned, it would sure be nice to be able to be at that level. So we could truly.
Brian: Be able to see whats what.
Brian: Effectively happening within different franchises in different areas of the country to be able to truly manage performance, whereas it's been a little tricky managing performance over the past couple of years, just because GPU has been behaving so differently by manufacturing by region.
Speaker Change: Got it that's very clear very helpful.
Speaker Change: On the <unk> side, you did mentioned those are sort of lows.
Brian: How should we think about that does that sort of bounce back as you get sort of the inventory realigned or is that going to drag on through the rest of this year.
Brian: Is that a short term or long term sort of issue.
Brian: You know Collin, it's interesting because you'd think with the shortage in supply that margins would be quite stable, but I think everyone is is.
Brian: Is chasing inventory, which is driving the ultimate price costs up more which is affecting margins in there. When you go through the typical seasonality of the winter months.
Brian: It.
Speaker Change: I don't know if Chris or Adam has any additional color on that Noel said, Brian Okay.
Speaker Change: Thanks Colin.
Speaker Change: In the interest of time, we ask that participants limit themselves to one question.
Speaker Change: Our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Speaker Change: Good morning, This is mark Jordan on for Kate Mcshane.
Bret Jordan: In your slide deck. It notes that you expect same store sales growth in the low to mid single digit range in the near term can you break that out for us and how we should think about pricing in units for both new and used.
Bret Jordan: I think in terms of like new vehicles, we're seeing good tailwind Athena by the way in terms of growth with that with the imports coming back in terms of volume we saw strong growth in that as we hit the fourth quarter and I think that will continue somewhat as supply continue.
Speaker Change: To normalize across the different brands that we have.
Speaker Change: From a used vehicle perspective, as we've mentioned in last couple of quarters, that's been a tougher market and from an ASP perspective, they have been relatively high and so sequentially, we seem to be pretty flat.
Speaker Change: As youre thinking about modeling those out Brian did you have some additional commentary I think I think short term, we're looking at new in the mid to high single digit range.
Brian: On us we're looking to be flat, okay year over year. Okay. Now, we're a little bit were a little bit below that right now at the minus six but we think what's coming selling season, we should be able to recover as we lap those comps.
Brian: Thank you. Our next question is from Chris, particularly Aerie with BNP Paribas. Please proceed with your question.
Brian: Yes.
Chris Holzschuh: Hey, everybody thanks, taking the question.
Chris Holzschuh: One quick clinical question and a bigger picture question for that but the first one is just following up on the changing the slide deck. It looks like you kept the reiterated the 50 to $55 in the near term plan.
Chris Holzschuh: But then cut the estimated gross the operating and cut operating margins.
Chris Holzschuh: At least at the midpoint, so trying to understand if you're just targeting the higher end still can you just giving a range or why the EPS didn't change mathematically.
Chris Holzschuh: Chris So so I think what Chris is referencing is slide 14, it's an important new slide of the slide deck, because it reconciliation styles, how we get to $2 of EPS.
Brian: For every billion dollars of revenue.
Brian: We're we're looking short term, while we take that offline. We can help you with your model.
Brian: And be able to achieve that I would like to go back through of what our crosswalk is to get to the two $2 of EPS. It's important to know this and everything that happens until we normalize in Gpus.
Brian: Yes, we're going to always be rolling up our sleeves and driving to execute and achieve the highest results, but our focus is on how to achieve and weave together the ecosystem to achieve.
Brian: Okay. So our stores today, the $22 billion that we purchased over the last four years, three and a half four years.
Brian: We believe between those and the existing store base should be able to produce another 30 to 40.
Brian: For every billion dollars of revenue and Thats coming from being in better markets being in less regulated markets like the southeast and the south central.
Brian: And improving the performance in the stores, meaning grow the people, okay, and incentivize them to be able to grow market share and reduce costs. Okay. Alongside that is dfc well on its way to profitability later this year, Okay, and most importantly through the pains of.
Brian: Most of the seasonal as well as the seasoning of the portfolio, which is quite beneficial that's another 20 to 25.
Brian: <unk> per share at normalized steady state position at a 20% penetration rate okay.
Brian: So keep that in mind, we also just added.
Brian: Our fleet management company, even though we have one in Canada and a little one in Detroit. This is a real fleet management company with 30 to 40000 units under under contract that Theyre, managing their selling and they're bringing back into their organization. We believe that fleet management can be another 10 to 15 cents of lift.
Brian: In the long term, okay. It's a highly profitable business the pinewood vehicle management or PVM is highly profitable just like Pinewood technologies is highly profitable. Okay. So we're not looking for additional burn rates of any kind. Okay. We're looking at how to get rid of those burn rates and we're well on.
Brian: Our pathway to do that other adjacencies and you can see what those are listed as in the slide deck add another 5% to 10% and we believe there may be more upside in those adjacencies, we just havent been able.
Brian: To put our fingers on all that but we will in the coming quarters and years lastly, the remaining 10% or so comes from scale advantages I E cost savings on Pinewood, if we're able to move to that system someday, okay cost of capital, Okay, moving to IAG rating and saving.
Brian: 50 to 75 basis points in our overall interest cost okay. Those type of things as well as the possibility of buybacks, even though we don't believe that needs to be the driver to get to the $2.
Brian: So keep that in mind, Chris as we think about it but I think that's where the executive team is focused while the operational teams are really focusing on how do they get to the $50 to $55 or $50 $60 as soon as they possibly can.
Brian: Yes.
Brian: Our next question is from Bret Jordan with Jefferies. Please proceed with your question.
Bret Jordan: Hey, guys.
Bret Jordan: Can we talk a bit more about the credit business, maybe what youre seeing year over year and loss reserves I think your FICO scores have improved in your delinquencies may be down, but obviously, a bigger loan portfolio and then maybe I guess really what youre seeing in the underlying consumer health and then also on the recovery side from repos.
Bret Jordan: What youre seeing in repo volumes and how those are up.
Bret Jordan: Are winding up as you sell it out.
Bret Jordan: Yes, Brad Great question. This is Chuck.
Chuck Lietz: So first and just sort of a general market.
Chuck Lietz: Overview, we see the same things that everybody else is which is that consumers are under some degree of stress and that delinquency rates of either got right to or slightly above sort of pre pandemic levels for 30 day delinquency, but I think that really goes back to sort of dfc strategy and real power of being.
Chuck Lietz: Top of funnel captive finance business and then back in 2022 first quarter, we were able to dramatically increase our credit quality over 50 points of weighted average FICO from two years ago, and that's really standing us in good stead.
Chuck Lietz: Relative to withstanding sort of some of the impacts of some of this negative noise that we're seeing in the economy. So our portfolio is performing very well we had a recent avs.
Chuck Lietz: Issuance in the market this quarter that should go off very well and was very well received by the marketplace.
Chuck Lietz: And we feel that Thats, a big contributor to how we are managing our portfolio.
Chuck Lietz: To answer the second part of your question, which is the repos or recovery rates were stressed probably the last 12 months to 15 months with some of the industry experience or a lack of repo agents.
Chuck Lietz: Our repo and recovery being limited by the distance of which they would go to recover vehicles, we've overcome that and our recovery rates are either at or slightly above the market rate. It's still something we watch very closely and keep an eye on but we feel very comfortable that our recovery rates are in line with the market. Thanks for your question.
Chuck Lietz: Okay.
Chuck Lietz: Our next question is from Michael Ward with Freedom Capital. Please proceed with your question.
Michael Montani: Thanks, very much good morning, everyone.
Michael Montani: I think you mentioned in your comments Hey, Brian I think you mentioned in your comments that you saw SG&A expense as a percentage of gross going down below 50%.
Michael Montani: Thank you guys already talked about used vehicle grosses normalizing moving higher.
Michael Montani: What are the other components of that does that assume that you get a higher profitability from DCF is that folded in there I assume there were some SG&A costs in there for the ramp up of Tcf what are we looking at there.
Speaker Change: It does so we get to 55% operationally within our core businesses, which is vehicle operation. So that includes driveway green cars and all the Lithia core stores.
Speaker Change: And you have to.
Speaker Change: So at that level and you have stores at that level today correct.
Speaker Change: We have store lots of stores at that level and normalized times lots.
Speaker Change: Okay, and remember, we purged almost 50 stores over the last what.
Chuck Lietz: Six seven years that were stores that typically we're having where it had SG&A of above 80, 590%.
Chuck Lietz: So about a quarter of our stores today operate in the mid 50% range of normalized times. Okay. We believe that the network has been built with such good quality stores that we believe that's the normal.
Chuck Lietz: And that's where our ability to execute and utilize our world class performance management systems like what we call our Sps, which is our core our guiding document for performance management.
Chuck Lietz: In that that's how we really drive the results and it's built on the back of both market share loyalty as well as profitability to achieve high.
Chuck Lietz: Higher performance and that is really the secret sauce of what Lithia has always been able to do and will do once again to achieve that 55%. The rest of the 5% plus is coming from higher margin businesses like fleet management, Okay, and Dfc as well as a few of the other adjacencies.
Chuck Lietz: And then obviously some scale advantages in cost.
Chuck Lietz: We expect to be able to realize in the coming years.
Chuck Lietz: Our next question is from David Whiston with Morningstar. Please proceed with your question.
David Whiston: Thanks, Good morning could you just.
David Whiston: Give your opinion on when you think leasing penetration will move back towards close to 30%.
Chuck Lietz: Yeah.
Chuck Lietz: Yeah, Hey, David its Chris I mean, I think it.
Chris Holzschuh: It's hard to highlight when that is because we don't control the incentive base that the manufacturers support us with but it's obvious that with the buildup of inventory.
Chris Holzschuh: Specially.
Chuck Lietz: In the domestic ranks that.
Chris Holzschuh: Contributions, whether it's in leasing our finance participation or even cash incentives are going to be the driving factor in that and I think.
Chuck Lietz: Throughout the back half of the year.
Chuck Lietz: We expect that to continue and I think the other side of it is getting a clear line of sight on the residuals that they provide.
Chuck Lietz: Which in this dynamic market that we've been dealing with the last couple of years with Covid and pricing and everything else I think is on everybody's mind, but.
Chuck Lietz: A little outside of our control, David but we'll continue to execute in the in the environment that we're in.
Speaker Change: Thank you there are no further questions at this time I would like to hand, the floor back over to Amit <unk> for any closing comments.
Amit: I want to thank everybody for joining us today, we look forward to speaking in the coming days and weeks have a good day take care.
Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.