Q1 2024 Lithia Motors Inc Earnings Call
Speaker Change: [music].
Operator: Greetings and welcome to Lithia Motors' first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Amit Marwaha. Thank you. You may begin.
Greetings and welcome to Lithia Motors first quarter 2024 earnings conference call. At this time all participants are on a listen only mode. A 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.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host omit Marwat. Thank you you may begin.
Amit Marwaha: Thank you for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; Chuck Leitz, Senior Vice President of Driveway Finance; and finally, Adam Chamberlain, Chief Customer Officer.
Amit Marwaha: Thank you for joining us for our first quarter earnings call.
Marwat: With me today are Bryan Deboer, President and CEO, Chris Hoelscher, Executive Vice President and COO.
Marwat: Tina Miller senior Vice President and CFO.
Marwat: Chuck Lietz senior Vice President of driveway finance.
Marwat: And finally, Adam Chamberlain, Chief customer officer.
Amit Marwaha: 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 those 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.
Marwat: Today's discussion May include statements about future events financial projections and expectations about the company's products markets and growth.
Marwat: Such statements are forward looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made.
Marwat: We disclose those risks and uncertainties, we deem to be material in our filings with the Securities and Exchange Commission.
Marwat: We urge you to carefully consider these disclosures and not to place undue reliance on forward looking statements.
Amit Marwaha: 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 reconciliation of comparable gap measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.
Marwat: We undertake no duty to update any forward looking statements, which are made as of the date of this release.
Marwat: 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.
Marwat: We have also posted an updated investor presentation on our website investors dot Lithia driveway dot com highlighting our first quarter results.
Marwat: With that I would like to turn the call over to Bryan Deboer, President and CEO.
Bryan B. DeBoer: Thanks, Amit. Good morning, and welcome to our first quarter earnings call. Our Lithian driveway teams remain focused on driving results and continuing on our journey to building a unique and highly profitable customer ecosystem. For LADD, the windfall of elevated GPUs for the past four years provided the extra capital that allowed us to grow revenue and earnings by nearly three times and build, acquire, and fund all our crucial differentiating strategic adjacencies, such as the driveway, green cars, DFC, and Pendragon Vehicle Management or PVM.
Bryan B. DeBoer: So Matt good morning, and welcome to our first quarter earnings call.
Bryan B. DeBoer: Our lithium driveway teams remained focused on driving results and continuing on our journey to building a unique and highly profitable customer ecosystem.
Speaker Change: For Lad, the windfall of elevated Gpus for the past four years provided the extra capital that allowed us to grow revenue and earnings by nearly three times and build acquire and fund all our crucial differentiating strategic Adjacencies driveway Green cars.
Speaker Change: <unk>.
Speaker Change: And Pendragon vehicle management or PVM.
Bryan B. DeBoer: These important design and scale advantages have built a definitive pathway to a higher margin and lower cost business. While the extra capital helped us build out our advantages, we have been clear that elevated GPUs would return to some level of normality. We remain diligent and nimble throughout this normalization process, still seeing that combined vehicle GPUs, because of geographic and manufacturer mix improvements, along with our unrealized performance potential, will normalize between $4,300 and $4,500 per unit.
Speaker Change: These important design and scale advantages have built a definitive pathway to a higher margin and lower cost business.
While the extra capital helped us build out our advantages we have been clear that elevated Gpus would return to some level of normality.
Speaker Change: We remain diligent and nimble throughout this normalization process still seeing that combine vehicle gpus because of geographic and manufacturer mix improvements along with our unrealized performance potential will normalize between 4300 $4500 per unit.
Speaker Change: As strange as it may seem my team and I, welcome normalization and getting back to working for our profits through providing rich and irreplaceable experiences one customer at a time.
Bryan B. DeBoer: As strange as it may seem, my team and I welcome normalization and getting back to working for our profits through providing rich and irreplaceable experiences one customer at a time. Our current global footprint, core competency of acquisitions, growing high-margin adjacencies, and experienced operationally focused leadership at all levels of the organization combined to form our strategy. We are positioned to deliver strong growth through reinventing our industry's customer experiences and achieving a LADD profit equation of $2 of EPS for every $1 billion of revenue. Now, on to some highlights for the first quarter.
Our current global footprint core competency of acquisitions growing high margin Adjacencies and experienced operationally focused leadership at all levels of the organization combined to form our strategy.
Speaker Change: We are positioned to deliver strong growth through reinventing, our industry's customer experiences and achieving a lad profit equation of $2 of EPS for every $1 billion of revenue.
Speaker Change: Now on to some highlights for the first quarter.
Speaker Change: Lithium driveway grew revenues to $8 6 billion up 23% from Q1 of last year, helping out run some of the declines in Gpus.
Bryan B. DeBoer: Lithia and Driveway grew revenues to $8.6 billion, up 23% from Q1 of last year, helping outrun some of the declines in GPUs. However, vehicle operations experienced weaker performance in January and February with declining new vehicle GPUs and used vehicle GPUs at below normalized levels. March, however, did improve, exceeding our internal expectations, with good momentum in unit volumes and stronger used vehicle GPUs. Our investments and adjacencies are maturing as well as on the path to profitability. Financing operations produced strong results with a loss of less than $2 million in the quarter compared to a $21 million loss last year, and this was a over 90% improvement.
Speaker Change: Cooperations variance weaker performance in January and February with declining new vehicle Gpus and used vehicle gpus at below normalized levels.
Speaker Change: March however, did improve exceeding our internal expectations with good momentum in unit volumes and stronger used vehicle Gpus.
Speaker Change: Our investments in Adjacencies are maturing as well as the path to profitability.
Speaker Change: Financing operations produced strong results with a loss of less than $2 million in the quarter compared to $21 million loss last year and over 90% improvement.
Bryan B. DeBoer: Driveway and green car burn rates have also been cut in half compared to a year ago as we continue to refine our customer e-commerce strategies, improve our driveway care center and advertising effectiveness while continuing to convert new customers. As a result, and driven by macro market conditions, we generated adjusted diluted earnings per share of $6.11, a decrease of 28% from Q1 of last year. We continue to proactively manage our business with decisive actions aligned with local market and manufacturer partner trends, leaning into what we know best, execution. Let's move on to same-store sales results and vehicle operations. Total same-store sales revenues were down 2% driven by ASP declines, and gross profits declined 7%.
Speaker Change: The driveway and Green cars burn rates have also been cut in half compared to a year ago. As we continued to refine our customer e-commerce strategies.
Speaker Change: Improved driveway care center and advertising effectiveness, while continuing to convert new customers as a result, and driven by macro market conditions, we generated adjusted diluted earnings per share of $6 11.
Speaker Change: A decrease of 28% from Q1 of last year.
Speaker Change: We continue to proactively manage our business with decisive actions aligned with local market and manufacturer partner trends leaning into what we know best execution.
Speaker Change: Let's move on to same store sales results in vehicle operations.
Speaker Change: Total same store sales revenues were down 2% driven by ASP declines and gross profit declined 7% disc.
Bryan B. DeBoer: Despite continued affordability issues from ASPs and higher interest rates, we continue to see resilience in the automotive consumer, though a bit less willing to pay a premium. MUVs across all our digital channels increased 9%, quarter over quarter, reaching 12.3 million per month. Digital transactions, including driveway, grew to over 40,000 in the first quarter, up 32% compared to last year. Greencars, the leading sustainable vehicle education channel, continues to grow as the lead generation channel and contributed over 730,000 MUVs, up 71% over last year, doing so with very little expense.
Speaker Change: Despite continued affordability issues from Asps and higher interest rates, we continue to see resilience in the automotive consumer, though a bit less willing to pay a premium.
Speaker Change: <unk> across all our digital channels increased 9% quarter over quarter, reaching $12 3 million per month.
Speaker Change: Digital transactions, including driveway grew to over 40000 in the first quarter up 32% compared to last year.
Green cars, the leading sustainable vehicle education channel.
Speaker Change: Continues to grow as the lead generation channel and contributed over 730, <unk> up 71% over last year doing so with very little expense.
Bryan B. DeBoer: Our teams have made great strides towards profitability in driveway and green cars, and I want to commend Adam Chamberlain and Diana DePriest and their teams for the progress we have made in such a short time and their vision to achieve a profitable e-commerce channel someday soon. New vehicle revenues were up 2%, while gross profit declined 27% compared to the prior year. Unit volumes increased nearly 4% with ASPs declining 1%. New vehicle GPUs, including F&I, were $57.71 per unit, down $512 compared to Q4 and down $1640, or 22% year-over-year.
Our teams have made great strides towards profitability and drive away and green cars, and I want to commend, Adam Chamberlain and Diana <unk> and their teams on the progress we have made in such a short time and their vision to achieve a profitable ecommerce channel someday soon.
Speaker Change: New vehicle revenues were up 2%.
Speaker Change: While gross profit declined 27% compared to the prior year.
Speaker Change: <unk> volumes increased nearly 4% with asps declining 1% <unk>.
New vehicle Gpus, including F&I were $57 71 per unit down $512 compared to Q4 and down $640 or 22% year over year.
Bryan B. DeBoer: With the return of inventory supply, we have seen an accelerated pace of GPU normalization to nearly $150 per month. New vehicle inventory day supply was 60 days compared to 65 days at the end of Q4 and 51 days at the end of the first quarter of 2023. Moving on to used vehicles, revenue was down 5%, with units down only 2%, and ASPs declining 3%. Used vehicle pricing is moderating in line with the recovering supply of new vehicles, and we continue to see the impact of lost production from 2020 to 2023 moving through our certified and late-model vehicles. Used vehicle GPUs, including F&I, were $3901, up $150 per unit compared to Q4, and down $153 per unit compared to last year.
With the return of inventory supply, we have seen an accelerated pace of GPU normalization to nearly $150 per month.
Speaker Change: New vehicle inventory days supply was 60 days compared to 65 days at the end of Q4 and 51 days at the end of the first quarter 2023.
Speaker Change: Moving on to used vehicles revenue was down 5% with units down only 2% and asps declining 3%.
Speaker Change: Used vehicle pricing is moderating in line with the recovering supply of new vehicles, and we continue to see the impact of loss production from 2020 to 2023 moving through our certified and late model vehicles.
Speaker Change: Used vehicle Gpus, including F&I were 30 901.
Speaker Change: $150 per unit compared to Q4 and down $153 per unit compared to last year.
Bryan B. DeBoer: As you may recall, Q1 and Q4 are traditionally the weakest quarters, and we are seeing more normalized seasonality trends in used cars. As new vehicle retailers, we are at the top of the procurement funnel, giving us significantly more access to inventory than used-only dealers. This provides us with a significant advantage as we continue to source over 70% of our used inventory directly from consumers. Our strategy of selling 1-to-20-year-old scarce vehicles also provides a vast opportunity for our new stores.
Speaker Change: As you May recall Q1, and Q4 are traditionally the weakest quarters, and we're seeing more normalized seasonality trends in used cars.
Speaker Change: As new vehicle retailers, we are top of the procurement final, giving us significantly more access to inventory then used only dealers.
Speaker Change: This provides us a significant advantage as we continue to source over 70% of our used inventory directly from consumers our strategy of selling 1% to 20 year old scarce vehicles also provides a vast opportunity to our new stores.
Bryan B. DeBoer: To put it in perspective, nearly two-thirds of our stores have been recently acquired, and this continues to be a massive opportunity for us to gain market share and increase profitability. Our Used Vehicle Inventory Day Supply was 58 days compared to 64 days last year and 53 days in the previous year. F&I per unit was $2,080 in the quarter, declining $123 compared to last year.
Speaker Change: To put it in perspective, nearly two thirds of our stores have been recently acquired and this continues to be a massive opportunity for us to gain market share and increased profitability.
Speaker Change: Our used vehicle inventory day supply was 58 days compared to 64 days last year and 53 days in the previous year.
Speaker Change: F&I per unit was 2080 in the quarter declining $123 compared to last year.
Bryan B. DeBoer: We continue to see consumers working to balance affordability due to higher ASPs, increasing negative equity, and high interest rates. This has created some affordability tension on monthly payments, impacting F&I product penetration rates positively on financing, up 150 basis points, and negatively on service contract penetration rates, which declined 270 basis points as compared to last year. Now on to after sales. For the quarter, revenues increased 3%, and gross profit increased 7%.
Speaker Change: We continue to see consumers working to balance affordability due to higher asps.
Speaker Change: Increasing negative equity and high interest rates.
Speaker Change: This has created some affordability tension on monthly payments impacting F&I product penetration rates positively on financing.
Speaker Change: 150 basis points and negatively on service contract penetration rates, which declined 270 basis points as compared to last year.
Speaker Change: Now on to after sales for the quarter revenues increased 3% and gross profit increased 7%.
Bryan B. DeBoer: Customer pay revenue, which accounts for 56% of the after-sales business, was up nearly 3%, while warranty sales, which make up 23% of the business, increased by 10%. Aftersales continues its steady performance of growth, despite our primary driver of one- to four-year-old vehicles in the car park being the smallest in over a decade. This speaks volumes to the strong upside created from the complexity of a growing number of different propulsion systems, resulting in longer warranty periods and a stickier customer attachment to new vehicle retailers.
Speaker Change: Customer pay revenue, which accounts for 56% of the after sales business was up nearly 3%, while warranty sales, which makes up 23% of the business increased by 10%.
Speaker Change: After sales continues its steady performance of growth. Despite our primary driver of one to four year old vehicles in the car park being the smallest in over a decade.
Speaker Change: This speaks volumes to strong upside created from the complexity of a growing number of different propulsion systems.
Speaker Change: <unk> and longer warranty periods, and a stickier customer attachment to new vehicle retailers.
Bryan B. DeBoer: Moving on to acquisitions and our long-term strategy, we completed the Pendragon acquisition at the end of January, establishing our partnership with Pinewood Technologies, adding a profitable fleet management business, and rounding out our footprint in the U.K. by adding a net 140 locations. In addition to Pendragon, we expanded our U.S. footprint in our least dense north-central region with the addition of the Carousel Group.
Speaker Change: Moving on to acquisitions, and our long term strategy.
Speaker Change: We completed the Pendragon acquisition at the end of January establishing our partnership with Pine with technologies, adding a profitable fleet management business and rounding out our footprint in the UK by adding a net 140 locations.
Speaker Change: In addition to Pendragon, we expanded our U S footprint and our lease dense north Central region with the addition of the Carousel group.
Bryan B. DeBoer: To date, in 2024, we have acquired $5.4 billion in annualized revenues, and I would like to personally welcome all our new associates to the Lithia and driveway family. Acquisitions are our core competency at LADD, and we remain disciplined as we look for accretive opportunities that can improve our network. As a reminder, we target after-tax returns of 15% or greater and acquire for 15-30% of revenue or 3-6 times normalized EBITDA. To date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%, demonstrating that LADD is not your typical high-risk roll-up strategy.
Speaker Change: To date in 2024, we have acquired 554 billion in annualized revenues and I would like to personally welcome all our new associates to the Lithia and driveway family.
Acquisitions are a core competency at ladder and we remain disciplined as we look for accretive opportunities that can improve our network.
Speaker Change: As a reminder, we target after tax return of 15% or greater and acquire from 15% to 30% of revenue or 3% to six times normalized EBITDA.
Speaker Change: Life to date, our acquisitions have yielded over 95% success rate and after tax returns of over 25% demonstrating that ladder is not your typical high risk rollout strategy.
Bryan B. DeBoer: Our scale allows us to find growth through acquisitions and adjacencies, through free cash flows, and reasonably leveraging our balance sheet. With elevated acquisition pricing, the current stock valuation, and placing M&A and share buybacks at parity, we have adjusted our capital allocations to target 50% to 60% towards acquisitions and 15% to 25% towards shareholder returns. We continue to monitor valuations on both acquisitions and share repurchases, being patient for strong assets priced within our acquisition hurdle rate. We still expect pricing to take some time to rationalize and reiterate our expectations that estimated future annual acquired revenues will be in the range of $2-4 billion a year.
Speaker Change: Our scale allows us to find our growth through acquisitions and adjacencies through free cash flows and reasonably leveraging our balance sheet.
Speaker Change: With elevated acquisition pricing current stock valuation and placing M&A and share buybacks at parity, we have adjusted our capital allocations to target, 50% to 60% towards acquisitions and 15% to 25% towards shareholder return.
Speaker Change: We continue to monitor valuations on both acquisitions and share repurchases being patient for strong assets price within our acquisition hurdle rates.
Speaker Change: We still expect pricing to take some time to rationalize and reiterate our expectations that estimated future annual acquired revenues will be in the range of $2 billion to $4 billion a year.
Speaker Change: The foundation of the lab strategy is our vast store network made up by the industry's most talented people highest demand inventory and dense expansive physical network.
Bryan B. DeBoer: The foundation of the Lab Strategy is our vast store network made up of the industry's most talented people, highest-demand inventory, and dense, expansive physical network. We have built, and will continue to build, the most extensive network in North America and the UK and added important foundational adjacencies and strategic partnerships to modernize the customer experience and diversify our profitability. Operating in one of the largest retail addressable markets in the world, we have built and solidified our ability to continuously grow in all aspects of our business.
Speaker Change: We have built and will continue to build the most extensive network in North America, and the U K and added important foundational adjacencies and strategic partnerships to modernize the customer experience and diversify our profitability.
Speaker Change: Operating in one of the largest retail addressable markets in the world, we have built and solidified our ability to continuously grow in all aspects of our business.
Bryan B. DeBoer: Expanding consumer solutions that are simple, convenient, and transparent is the heart of our strategy, allowing us to capture more of the consumer wallet's share and create a sticky and natural retention of consumers within our ecosystem. Magnetic brands like driveway and green cars provide a pathway to 50 times more customers than our core business. Solutions such as Pinewood Technology bring the ability to increase associate productivity and substantially improve our current customer experience.
Speaker Change: Expanding consumer solutions that are simple convenient and transparent is the heart of our strategy, allowing us to capture more of the consumer wallet share and create a sticky and natural retention of consumers within our ecosystem.
Speaker Change: Magnetic brands like drive lean <unk> Green cars provide a pathway to 50 times more customers than our core business offer.
Speaker Change: Solutions, such as Pinewood technology, bringing the ability to increase associate productivity and substantially improve our current customer experience.
Bryan B. DeBoer: Stitching together our robust ecosystem and placing it at our customers' fingertips. Combined with our mission growth powered by people, financial discipline, and regenerative free cash flows, we are able to respond quickly to local market dynamics while increasing the touch points throughout the customer life cycle through our adjacencies and equipping our stores with the tools necessary to improve market share, loyalty, and ultimately profitability. Weaving these elements together and assuming a normalized SAR and GPU environment, we continue to see a clear pathway to $1 billion in revenue, ultimately generating $2 in EPS.
Speaker Change: Stitching, together, a robust ecosystem and placing it at our customers' fingertips.
Speaker Change: Combined with our mission growth powered by people financial discipline and regenerative free cash flows we are able to respond quickly to local market dynamics, while increasing the touch points throughout the customer lifecycle through our adjacencies and equipping our stores with the tools necessary to improve mark.
Sure loyalty and ultimately profitability weaving.
Speaker Change: Leaving these elements together and assuming a normalized SAR in GPU environment, we continue to see a clear pathway to $1 billion in revenue ultimately generating $2 in EPS.
Bryan B. DeBoer: Key factors underlying our future steady state and now totally within our control are as follows. First, continuing to improve our operational performance by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer lifecycle interaction, leveraging our cost structure, personnel productivity gains, and growing each store's new and used and after-sales market share. In the long term, we look to achieve SG&A as a percentage of gross profit with adjacencies in the mid-50% range in a normalized GPU environment.
Speaker Change: Key factors underlying our future steady state and now totally within our control are as follows.
First continuing to improve our operational performance by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer lifecycle interaction leveraging our cost structure personnel productivity gains and growing each store's new and used.
Speaker Change: And after sales market share.
Speaker Change: And the long term, we look to achieve an SG&A as a percentage of gross profit with adjacencies in the mid 50% range and a normalized GPU environment.
Bryan B. DeBoer: Tina will be providing more color on the impact of our UK footprint on SG&A in a few moments. Second, continue focusing on acquiring larger automotive retail stores in the higher-profitability regions of the Southeast, South Central, and North Central United States. Combined with further growth in digital channels, we expect to reach a blended U.S. market share of 5%. Today, we are at a combined new and used vehicle market share of 1.2%
Dana will be providing more color on the impact of our UK footprint on SG&A in a few moments.
Speaker Change: Second continue focusing on acquiring larger automotive retail stores and the higher profitability of regions of the South East South central and North Central United States.
Speaker Change: Bind with further growth in digital channels, we expect to reach a blended U S market share of 5%.
Speaker Change: Today, we are at a combined new and used vehicle market share of one 2%.
Bryan B. DeBoer: Third, financing up to 20% of our units with DFC and maturing beyond the headwinds associated with Cecil Reserve. As a reminder, this is our first adjacency, and it remains on track to achieve consistent profitability during the latter half of 2024. Next, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure, and captive insurance. Fifth, through size and scale, we will continue to drive down vendor pricing with solutions like Pinewood Technologies, which improve corporate efficiencies to save costs, and Laura Byron costs as we move towards an investment grade credit rating.
Speaker Change: Third financing up to 20% of our units with Dfc and maturing beyond the headwinds associated with seasonal reserves.
Speaker Change: As a reminder, this is our first adjacency and it remains on track to achieve consistent profitability during the latter half of 2024.
Speaker Change: Next maturing contributions from our Horizontals, including fleet management, Dms software charging infrastructure and captive insurance.
Speaker Change: Fifth through size and scale, we will continue to drive down vendor pricing with solutions like Pinewood technologies.
Speaker Change: Which improve corporate efficiencies to save costs and lower borrowing costs as we pathway towards an investment grade credit rating.
Bryan B. DeBoer: And finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. Please refer to slide 14 of the Ladd Investor Presentation for further details and reconciliation. As we approach the middle of the decade, we are well positioned to maximize our unique and powerful mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale. Our strategy, combined with our experienced and focused team, will continue to expand market share, leverage our size and scale, and grow our complementary adjacencies to produce an ultimate long-term EPS-to-revenue ratio of over 2 to 1.
Speaker Change: And finally ongoing return of capital to shareholders through dividends and opportunistic share buybacks. Please refer to slide 14 of the last investor presentation for further details and reconciliations.
Speaker Change: As we approach the middle of the decade, we are well positioned to maximize our unique and powerful mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership life cycle at global scale.
Speaker Change: Our strategy combined with our experienced and focused team will continue to expand market share leverage our size and scale and grow our complementary adjacencies to produce an ultimate long term EPS to revenue ratio of over two to one.
Bryan B. DeBoer: All elements of our original design are now securely in place, and we look forward to focusing all our attentions on execution to establish new levels of performance for our industry. With that, I'd like to turn the call over to Tina.
Speaker Change: All elements of our original design are now securely in place and we look forward to focusing all our attention on.
Speaker Change: Execution to establish new levels of performance for our industry with that I'd like to turn the call over to Tina.
Tina H. Miller: Thanks, Bryan, and thank you to everyone joining us today. Our financing operations segment, primarily driven by DSC, continues to grow, and we see clear line of sight on how this adjacency is now providing incremental profitability and diversifying our business model as it matures. As a reminder, a loan originated by DFC is expected to contribute up to three times more profitability compared to traditional indirect lending. The financing operations segment moved toward profitability with a first quarter operating loss of $2 million, down from $21 million last year in Q1, and a portfolio balance growing to over $3.5 billion. Within the United States, DSC's penetration rate was 11.7%, up from 10% last quarter.
Tina H. Miller: Thanks, Brian and thank you to everyone joining us today.
Tina H. Miller: Our financing operations segment, primarily driven by DSC continues to grow and we see clear line of sight and how this adjacency is now providing incremental profitability and diversifying our business model as it matures.
Tina H. Miller: As a reminder alone originated by DSC is expected to contribute up to three times more profitability compared to traditional indirect lending.
Tina H. Miller: The financing operations segment move toward profitability with our first quarter operating loss of $2 million down from $21 million last year in Q1, and a portfolio balance growing to over $3 5 billion within the United States Dft's penetration rate was 11, 7% up from 10% last quarter.
Tina H. Miller: We continue to strategically balance yield growth and risk through our underwriting and focus on high credit quality loans at market interest rates.
Tina H. Miller: We continue to strategically balance yields, growth, and risk through our underwriting and focus on high-credit quality loans at market interest rates. Origination volume was $493 million during the quarter, a 15% increase compared to Q14-23. The average APR on loans originated was 10.2%, essentially flat compared to the prior quarter, and up 124 basis points from a year ago, while originated at a consistent credit quality. Loans originated in the quarter had a rated average FICO score of 735 and a front-end OCD of 95%, consistent with the prior quarter.
Origination volume was $493 million during the quarter, a 15% increase compared to Q4 'twenty three.
Tina H. Miller: The weighted average APR on loans originated was 10, 2% essentially flat compared to the prior quarter and up 124 basis points from a year ago now.
Tina H. Miller: Originating at a consistent credit quality loans originated in the quarter had a weighted average FICO score of 735 and a front end.
Tina H. Miller: Of 95% consistent with the prior quarter.
Tina H. Miller: As a 100% captive auto loan portfolio, DFC can have first and last look at deals that fit our credit risk appetite, providing ample opportunity to grow while maintaining our underwriting standards, particularly in the used vehicle market. Net provision expense increased slightly from the prior quarter to $25 million, driven by the growing portfolio. However, the allowance for loan losses as a percentage of loan receivables stayed flat at 3.2%.
Tina H. Miller: As a 100% captive auto loan portfolio Dfc can have first and last look on deals that fit our credit risk appetite, providing ample opportunity to grow while maintaining our underwriting standards, particularly in the used vehicle market.
Tina H. Miller: Net provision expense increased slightly from the prior quarter to $25 million driven by the growing portfolio the allowance for loan losses as a percentage of loan receivable level stayed flat at three 2%.
Tina H. Miller: 30 day delinquency rates decreased 80 basis points from the prior quarter to 3.8%, consistent with seasonal expectations and were flat year over year, reflecting the maturing portfolio and continued execution from our loan servicing team. Our financing operations business continues to perform as expected, and we reiterate our expectation to break even in 2024. We remain confident in the financing operation's ability to deliver long-term earnings growth to LADD and achieve our end-state financial goals with a fully scaled and seasoned portfolio.
Tina H. Miller: 30 day delinquency rates decreased 80 basis points from the prior quarter to three 8% consistent with seasonal expectations and were flat year over year, reflecting the maturing portfolio and continued execution from our loan servicing team.
Tina H. Miller: Our financing operations business continues to perform as expected and we reiterate our expectation to breakeven in 2024, we remain confident in the financing operations ability to deliver long term earnings growth to lag and achieving our end state financial goals with a fully scaled and season portfolio simply.
Tina H. Miller: Simply put, the best is yet to come, as this first adjacency can take us a long way towards our two to one EPS to revenue target. Moving on to SG&A, adjusted SG&A as a percentage of gross profit was 69.4% during the quarter, mainly reflecting the higher expense profile of our UK business. On a same-store basis, which excludes the impact of the Pendragon stores and is more representative of our historical performance, our adjusted SG&A as a percentage of gross profit was 66.9 percent, a 180 basis point increase sequentially from the fourth quarter, mainly driven by declining new vehicle margins and below normalized levels used vehicle margins early in the quarter.
Tina H. Miller: Simply put the best is yet to come as this first adjacency can take us a long way towards our two to one EPS to revenue target.
Moving on to SG&A adjusted SG&A as a percentage of gross profit was 69, 4% during the quarter, mainly reflecting the higher expense profile of our U K business.
Tina H. Miller: On a same store basis, which excludes the impact of the Pendragon stores and is more representative of our historical performance. Our adjusted SG&A as a percentage of gross profit was 66, 9% a 180 basis point increase sequentially from the fourth quarter, mainly driven by declining new vehicle margins and below normalized levels.
Tina H. Miller: Used vehicle margins early in the quarter.
Tina H. Miller: With the completion of the Pendragon transaction, our UK business represents 18% of our revenue mix and 13% of our gross profit mix in the quarter. We thought it would be helpful to provide some early insights on the financial profile of our UK business, as it becomes a more meaningful part of our consolidated results going forward. Total vehicle gross profit per unit in the UK was $2,600 in the quarter, 45% lower than our North American vehicle operations. One of the main contributors of this difference is regulations around F&I in the UK, resulting in lower F&I per unit.
Tina H. Miller: With the completion of the Pendragon transaction, our UK business represents 18% of our revenue mix and 13% of our gross profit mix in the quarter. We thought it would be helpful to provide some early insights on the financial profile of our UK business as it becomes a more meaningful part of our consolidated results going forward.
Tina H. Miller: Total vehicle gross profit per unit in the U K was $2600 in the quarter, 45% lower than our North American vehicle operations. One of the main contributors of this difference is regulations around F&I in the UK, resulting in a lower F&I per unit gross.
Tina H. Miller: Gross profit mix from after sales is similar in the UK at just under 40%. Our UK footprint is comprised of smaller stores compared to our average North American location, with a revenue average of less than 50 million per store. While knowing this leading into the investment, the smaller store size, with SG&A being more fixed in nature, resulted in SG&A as a percentage of gross profit at 85% during the quarter for the UK.
Gross profit mix from after sales is similar in the UK at just under 40%.
Tina H. Miller: Our UK footprint is comprised of smaller stores compared to our average north American location, what the revenue average of less than $50 million per store, while knowing this leading into the investments the smaller store size with SG&A being more fixed in nature resulted in SG&A as a percentage of gross profit at 85% during the.
Tina H. Miller: <unk> for the U K.
Tina H. Miller: As a result, we see our consolidated SG&A as a percentage of gross profit increasing to the mid to high 60% range in the near term, with our long-term targets moving to be in the mid 50% range as GPUs normalize, and we continue to optimize our business and mature our adjacencies. We see opportunity to increase profitability over time in the UK as we fully integrate the teams into the Lithia and driveway culture, migrate our stores onto a single platform on the Pinewood DMS system, and drive higher levels of performance. As previously discussed, we are actively working on optimizing the UK network.
Tina H. Miller: As a result, we see our consolidated SG&A as a percentage of gross profit increasing to the mid to high 60% range in the near term with our long term targets moving to be in the mid 50% range as Gpus normalized and we continue to optimize our business and mature our adjacencies.
Tina H. Miller: We see opportunity to increase profitability over time in the UK as we fully integrate the teams into the Lithia and drive a culture migrate our stores into a single platform on the Pinewood DNS system and drive higher levels of performance as previously discussed we are actively working on optimizing the UK network.
Moving onto our balance sheet and cash flow performance during.
Tina H. Miller: During the quarter, we completed an amendment to our main credit facility used to fund our vehicle Floorplan and working capital increasing the capacity for $4 6 billion to 6 billion and extending the maturity to 2029. This solidifies our capital structure to take us beyond $50 billion in revenue I want to take a moment and thank all.
Tina H. Miller: Moving on to our balance sheet and cash flow performance, during the quarter, we completed an amendment to our main credit facility used to fund our vehicle floor plan and working capital, increasing the capacity from $4.6 billion to $6 billion and extending the maturity to 2029. This solidifies our capital structure to take us beyond $50 billion in revenue. I want to take a moment and thank all of our banking partners for their support and continued confidence in our business.
Tina H. Miller: Our banking partners for their support and continued confidence in our business.
Tina H. Miller: We reported adjusted EBITDA of $362 million in the first quarter 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.
Tina H. Miller: Unique to our industry is the financing of vehicle inventory with floor plan debt. This finance is integral to our operations and collateralized by these assets.
Tina H. Miller: We reported adjusted EBITDA of $362 million in the first quarter, driven by continued strength in new vehicle sales and after sales, offset by lower new vehicle GPUs with returning supply and higher floor plan interest expense. Unique to our industry is the financing of vehicle inventory with floor plan debt. This finance is integral to our operations and collateralized by these assets. The industry treats the associated interest as an operating expense in EBITDA and excludes the debt from the balance sheet leverage calculations.
The industry treats the associated interest as an operating expense in EBITDA and excludes the debt from the balance sheet leverage calculation.
Tina H. Miller: Similarly, as we have ABS warehouse line and ABS issuances to capitalize Dfc we.
Tina H. Miller: We exceed those from our leverage calculation.
Tina H. Miller: Adjusting for these items, we ended the quarter with net leverage of approximately two five times comfortably below our target of three times and our banking covenant requirement of five seven times, we continue to maintain our financial discipline, even with planned growth and target leverage below three times.
Tina H. Miller: Similarly, as we have ABS warehouse lines and ABS issuances to capitalize DFC, we exceed those from our leverage calculation. Adjusting for these items, we ended the quarter with net leverage of approximately 2.25 times, comfortably below our target of three times and our banking covenant requirement of 5.7 times. We continue to maintain our financial discipline even with planned growth and target leverage below three times. During the quarter, we generated free cash flows of $218 million.
Tina H. Miller: During the quarter, we generated free cash flows of $218 million, we define free cash flow as EBITDA, adding back stock based compensation less the following items paid in cash interest income taxes, capex and dividends free.
Tina H. Miller: Free cash flows were impacted by the declining EBITDA and an increase in capital expenditures compared to prior year, mainly related to construction at recently acquired locations to meet manufacturer requirements. The benefits of our capital allocation strategy is the regenerative cash flows generated from our business, allowing us to preserve the quality of our balance sheet both.
Tina H. Miller: We defined free cash flows as EBITDA, adding back stock-based compensation plus the following items paid in cash, interest, income taxes, capex, and dividends. Free cash flows were impacted by the declining EBITDA and an increase in capital expenditures compared to the prior year, mainly related to construction at recently acquired locations to meet manufacturer requirements.
Supporting our growth initiatives and navigating various crosscurrents in today's environment.
Tina H. Miller: Being responsive to valuation trends, we evaluate M&A opportunities in the near term on parity with being opportunistic in our share repurchases. We have adjusted our capital allocation strategy to target, 50% to 60% toward acquisitions, 25% toward internal investments, which includes capital expenditures and the balance of 15% to 20.
Tina H. Miller: The benefits of our capital allocation strategy are the regenerative cash flows generated from our business, allowing us to preserve the quality of our balance sheet while supporting our growth initiatives and navigating various cross-currents in today's environment. Being responsive to valuation trends, we evaluate M&A opportunities in the near term on parity with being opportunistic in our share repurchases. We have adjusted our capital allocation strategy to target 50 to 60 percent toward acquisitions, 25 percent toward internal investments, which includes capital expenditures, and the balance of 15 to 25 percent toward shareholder return.
Tina H. Miller: 5% towards shareholder return since the end of the quarter and as of the end of last week.
Tina H. Miller: We repurchased approximately 58000 shares at a weighted average price of $264 approximately $452 million remains available under our share repurchase authorization.
Tina H. Miller: 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 our ability to deliver an accretive acquisition. The team has the necessary infrastructure and tools to drive revenues and margins toward our long term.
Tina H. Miller: <unk> of achieving $2 in EPS per $1 billion in revenues and are focused on execution, our culture and business is designed to grow and deliver consistent strong performance and our diverse and talented members of our team give us the necessary foundation to achieve our plan and to continue driving value for our shareholders.
Tina H. Miller: Since the end of the quarter and as of the end of last week, we have repurchased approximately 58,000 shares at a weighted average price of $264. Approximately $452 million remains available under our share repurchase authorization. Our vision and ability to deliver on synergies through acquisitive growth remain unchanged, and our strategy is flexible with the consistent cash flow generation of our vehicle operations business, coupled with our ability to deliver on accretive acquisition
Speaker Change: This concludes our prepared remarks with that I'll turn the call over to the audience for questions operator.
Speaker Change: 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.
Speaker Change: We ask that you please limit to one question and one follow up.
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Tina H. Miller: The team has the necessary infrastructure and tools to drive revenues and margins toward our long-term target of achieving $2 in EPS per billion dollars in revenues, and they are focused on execution. Our culture and business are designed to grow and deliver consistent, strong performance, and our diverse and talented members of our team give us the necessary foundation to achieve our plan and to continue driving 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.
Speaker Change: 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 comes from Ryan <unk> with Craig Hallum. Please proceed with your question.
Ryan: Hey, good morning, Brian Tina.
Ryan: Wanted to start on new Gpus, they declined a little bit more sequentially I think and you guys Handoffs expected, but curious what you've seen in April and then any expectation kind of for the next several quarters through the rest of this year.
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 1 on your telephone keypad. We ask that you please limit your question to one and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 start button. One moment, please, while we poll for questions. Our first question comes from Ryan Sigdahl with Craig Hallam. Please proceed with your question.
Speaker Change: Sure Ryan Thanks for thanks for joining us today.
Speaker Change: We did see a slight acceleration to around $150 a unit in the quarter.
Speaker Change: We also imports were up which which up about 9% in revenues and units.
Speaker Change: Which which carried some of that which is typically a little bit lower cost cars doesn't have quite as many trucks. So that could have been some of the some of the influence there. The other thing I would say is we.
Speaker Change: We're still we're still at about $1000 higher including F&I of where we believe normalization.
Speaker Change: Finally fall into line, Okay, and there is still some work to go we also have a small about amount of regional differences, but all in all I mean, that's that's where that's where it started was it really that top level, where gpus fell a little bit more than what we really expected at $100 a month.
Ryan Ronald Sigdahl: Hey, good morning Bryan, Tina. Want to start on the new GPUs, they declined a little bit more sequentially than you guys and us expected, but curious what you've seen in April and then any expectation kind of for the next several quarters through the rest of this year. Sure.
Speaker Change: Yes.
Speaker Change: Great and if I could just ask one longer term question. If I'm looking at slide 14 kind of the bridge to that $100 billion of sales dollars 75, $2 of EPS, if I look back to the previous expectations operating margins were expected to be 7% plus now 5% plus.
Bryan B. DeBoer: Sure, Ryan. Thanks for joining us today.
Bryan B. DeBoer: We did see a slight acceleration to around $150 a unit in the quarter. We also saw imports up, which up about 9% in revenues and units, which carried some of that, which is typically a little bit lower cost cars, doesn't have quite as many trucks. So that could have been some of the influence there. The other thing I would say is We're still at about $1,000 higher, including F&I, of where we believe normalization will finally fall into line, okay, and there's still some work to go.
Speaker Change: What's.
Speaker Change: The offset there.
Speaker Change: Assuming lower operating margin, but similar EPS flow through share about half of that is the bringing on of pendragon. So the dilution of lower margins from the United Kingdom affected to some degree and I think the rest is more conservative that we that other things.
Speaker Change: That are below operating margins, such as interest costs or possibly buybacks can influence things a little bit more as well.
Speaker Change: Thanks, Brian very good thanks, Brian and good luck guys.
Speaker Change: Our next question comes from Bret Jordan with Jefferies. Please proceed with your question Hey, Good morning, guys.
Bryan B. DeBoer: We also have a small amount of regional differences, but all in all, I mean, that's where it started with really the top level where GPUs fell a little bit more than what we really expected at $100 a month.
Bret David Jordan: Could you talk a little bit more about F&I I mean, obviously, it's hard to attach extended warranties to customers that can barely afford the right side of the equation, but do you see much downside in F&I or are we sort of stable at both at the run rate in the first quarter.
Bryan B. DeBoer: And if I could just ask one longer-term question, if I'm looking at slide 14, kind of the bridge to that $100 billion of sales, $1.75, and $2 VPS. If I look back at the previous expectations, operating margins were expected to be 7% plus, now 5% plus, I guess, what's the offset there, assuming lower operating margins but similar EPS flow through?
Speaker Change: We were down.
Speaker Change: $124 a unit.
Speaker Change: New was down a little bit more at 180, so we're seeing a lot.
Speaker Change: Better incentives when it comes to fleet and finance, which takes away some of our profitability because of flat fees. So that has a little bit to do with it and then obviously as we continue to penetrate with Dfc that influences a little bit as well we were up to what about 11 <unk>.
Bryan B. DeBoer: Sure, about half of that is the bringing on of Pendragon, so the dilution of lower margins from the United Kingdom affected it to some degree. And I think the rest is more conservative, that other things that are below operating margins, such as interest costs or possibly buybacks, can influence things a little bit more as well.
Speaker Change: Seven 5% penetration rate.
Which is quite nice, but it does influence thats in finance ops offering obviously, whereas.
Speaker Change: When we don't get the reserve from our third party lenders it does lower Gpus, a little bit we believe a normalized state bread is is probably in the 1900 dollar range. Okay. Because there is some impact that will come from Asps, which is a.
Ryan Ronald Sigdahl: Thanks, Ryan. Very good. Thanks, Bryan.
Bret David Jordan: Our next question comes from Bret Jordan with Jeffries. Please proceed with your question.
Speaker Change: Given the throughput of a lower cost amount means a lower finance.
Bret David Jordan: Hey, good morning guys. Could you talk a little bit more about F&I? I mean, obviously, it's hard to attach extended warranties to customers that can barely afford the rate side of the equation. But do you see much downside in F&I, or are we sort of stable at the run rate in the first quarter?
Speaker Change: Income.
Speaker Change: But outside of that I think we're we're seeing a nice trend there towards that normalized state.
Okay, and then you talked about the trend in the quarter of January February saying, some below normalized levels at March improving could you talk about the UK trended in the quarter.
Speaker Change: Chris you want to ask about the U K, Yes, you bet yeah. Good morning, Brett.
Christopher S. Holzshu: U K is kind of has that as an anomaly every quarter and the anomaly in the first quarter. It tends to be a massive march with a lot of deliveries with a plate change over that you have so you have a kind of a very modest January a very modest February and then a monster margin.
Bryan B. DeBoer: We were down $124 a unit, and new was down a little bit more at $180, so we're seeing a lot of better incentives when it comes to fleet and finance, which takes away some of our profitability because of flat fees.
Christopher S. Holzshu: That came through to fruition like we expected.
Bryan B. DeBoer: So that has a little bit to do with it. And then, obviously, as we continue to penetrate with DFC, that influences it a little bit as well. We were up to, what about 11, 11.5% penetration rate, which is quite nice, but it does influence things. That's in finance. Obviously, whereas when we don't get the reserve from our third-party lenders, it does lower GPUs a little bit. We believe a normalized state, Bret, is probably in the $1,900 range because there is some impact that will come from ASPs, which just is a given throughput of a lower cost amount means a lower finance income. But outside of that, I think we're seeing a nice trend there towards that normalized state. Okay.
Christopher S. Holzshu: <unk> focused our longer term, obviously as continue to figure out how to get kind of more consistency in the business in each of the quarters and try to match a little bit more relatively to some of the performance that we see in the U S outside of the F&I performance, which is much more regulated in the U K than it is in the U S.
Christopher S. Holzshu: Okay.
Sure Brian.
Brian: My question is leasing going to be a headwind to F&I because theres just less attachment as leasing comes back or is that not material for you.
Speaker Change: It is and that was one of the things that I had mentioned that with some vented leasing and that's where a lot of the incentive dollars are still going we're basically at a normalized state of incentive dollars in leasing, which obviously has been flat fees. So it does impact our F&I I think it's important to also point out that financing.
Speaker Change: Centers are still off somewhat so they are about half of where they normally are which means that those finance customers still aren't getting quite the the benefits of of.
Bret David Jordan: Okay, and then you talked about the trend in the quarter of January-February seeing some below-normalized levels, and March improving. Could you talk about the UK trend in the quarter?
Speaker Change: <unk> incentives are lower more affordable pricing and then most importantly for cash buyers, it's still down like 80%, meaning that the incentives that are coming on the hood for cash directly to the consumer is still down considerably and.
Christopher S. Holzshu: Chris, you want to talk about the UK? Yeah, you bet. Yeah, good morning, Bret.
Christopher S. Holzshu: So, the UK kind of has an anomaly every quarter, and the anomaly in the first quarter tends to be a massive March with a lot of deliveries and a plate changeover that you have. So, you have a kind of a very modest January, a very modest February, and then a monster March. And, you know, that came through to fruition like we expected. The focus, though, longer term, obviously, is to continue to figure out how to get kind of more consistency in the business, you know, in each of the quarters and try to match a little bit more relatively to some of the performance that we see in the US outside of the F&I performance, which is much more regulated in the UK than it is in the US.
Speaker Change: And I think that you know that obviously can be good tailwind in the future as that begins to come back.
Speaker Change: Thanks, Brett.
Speaker Change: Our next question is from John Murphy with Bank of America. Please proceed with your question.
John Joseph Murphy: Good morning, everybody.
John Joseph Murphy: Just wanted to follow up on <unk>.
John Joseph Murphy: Comment you made about sort of some pressure on the used business early in.
John Joseph Murphy: In the quarter and it just seems like there is.
John Joseph Murphy: Pressure on used vehicle pricing, which has been a reasonably as expected, but it also seems like there's a bit of volatility in that business. I was just wondering if you could kind of expand on that and if there is anything that is unusual in the first quarter that might normalize going forward.
Bret David Jordan: Okay. Oh, and Bryan, on the F&I question, is leasing going to be a headwind for F&I because there's just less attachment as leasing comes back, or is that not material? I-I-It is.
John Joseph Murphy: It sounds like things are a little bit more volatile there than usual.
John Joseph Murphy: Yeah, Hey, John it's Chris I'm going to jump in on this.
Christopher S. Holzshu: Maybe just talk about the trend that we talked about in Q4, which was I think the term I used was we were in a bit of a firefight trying to procure used cars back in Q4, which put a lot of pressure on margins.
Bryan B. DeBoer: It is, and that was one of the things that I had mentioned that subvented leasing and that's where a lot of the incentive dollars are still going. We're basically at a normalized state of incentive dollars in leasing, which obviously is in flat fees. So it does impact our F&I.
Christopher S. Holzshu: And really the back half of 2023 and into the first couple of months in 2024.
Christopher S. Holzshu: I think as our teams have kind of adjusted to ensuring that every every vehicle that we can take in on trade generates about $800 more than a vehicle that we buy an auction overall gross profit dollars.
Bryan B. DeBoer: I think it's important to also point out that finance incentives are still off somewhat. So they're about half of where they normally are, which means that those finance customers still aren't getting quite the benefits of manufacturer incentives or lower, more affordable pricing. And then, most importantly, for cash buyers, it's still down like 80%, meaning that the incentives that are coming on the hood for cash directly to the consumer are still down considerably. And I think that obviously can be good tailwinds in the future as that begins to come back. Thanks, Bret.
Christopher S. Holzshu: I think theres, a big focus and we saw that trend continue to recover throughout Q1.
Christopher S. Holzshu: Bolton and Gpus, where I think we had the strongest GPU in March that we had in the last 12 months and also on a same store comp basis. It was the first time in February that we saw a positive comp and same store used cars in like 15 months or something like that so I.
Christopher S. Holzshu: I think we've kind of got our arms around this it is very volatile it is really finicky by being a top of funnel used car dealer, obviously, our new car dealer, where we get first access to most trades as a huge benefit that we need to continue to capitalize on.
John Joseph Murphy: Our next question is from John Murphy with Bank of America. Please proceed with your question.
Christopher S. Holzshu: And then just wouldn't follow up on on parts and services plus three 2% is nothing to sneeze at but as I was a little bit lower than we're expecting do you do you foresee the ability to get a little bit deeper in the age spectrum.
John Joseph Murphy: Good morning, everybody. I just wanted to follow up on the comment you made, Tina, about sort of some pressure on the used business early in the quarter, and it just seems like there's pressure on used vehicle pricing, which is, you know, reasonably as expected, but it also seems like there's a bit of volatility in that business. I was just wondering if you could kind of expand on that and if there's anything that, you know, that is unusual in the first quarter that might normalize going forward, and it just sounds like things are a little bit more volatile there than usual.
Christopher S. Holzshu: Sort of broaden retention a bit to get that up into the mid.
Christopher S. Holzshu: Single digits or do you think is we're seeing.
Brian as you mentioned the shrinkage or this very no zero to four car population, it's going be challenged for the next couple of years.
John This is Bryan I think we're really positive about what's happening in after sales.
Christopher S. Holzshu: Yeah, hey, John, it's Chris. I'm going to jump in on this and maybe just talk about the trend that we talked about in Q4, which was, I think the term I used was we were in a bit of a firefight trying to procure used cars back in Q4, which, you know, put a lot of pressure on margins, you know, in really the back half of 2023 and into the first couple months of 2024.
Christopher S. Holzshu: Most importantly at $3 two when the car park is so much smaller as our main driver of the business, which is 1% to four year old vehicles. If you think about the $10 million less units that are available for us to be up in same store sales as big which means we're digging in to older model vehicles I think at all.
Christopher S. Holzshu: Also speaks volumes to the fact and I think 3% is probably a low point of the next coming few years.
Christopher S. Holzshu: But when we think about after sales growth the complexity of vehicles is getting crazy.
Christopher S. Holzshu: I think as our teams have kind of adjusted to ensuring that, you know, every vehicle that we can take in on trade generates about $1,800 more than a vehicle that we buy in auction, overall gross profit dollars. You know, I think there's a big focus. And we saw that that trend continue to recover throughout Q1, both in GPUs, where I think we had the strongest GPUs in March that we had in the last 12 months.
Let alone the fact that it's not just the <unk> now we got be Evs and most manufacturers we got plug in hybrids. We got hybrids, we got ice engines and all of the products or new meaning that there is a higher breakage rate. When there is new products. Okay. I mean, we've got we've got the major advantage of longer one.
Christopher S. Holzshu: Warranty periods now which is massive okay. We've got the factory trained technicians and most importantly, the specialty tools that others can't do so the stickiness to new car dealers. We think is a heck of a lot higher than what it was in the past and should bode well for us in the future regarding attach.
Attachment and same store sales growth.
Christopher S. Holzshu: And also on a same store comp basis. It was the first time in February that we saw a positive comp in same store used cars for like 15 months or something like that. So I think we've kind of got our arms around this. It is very volatile, It is really finicky. But being a top of the funnel used car dealer, obviously, or new car dealer where we get first access to most trades is a huge benefit that we need to continue to capitalize on.
Speaker Change: That'd be helpful. Thank you.
Speaker Change: Thanks, John.
Speaker Change: Our next question comes from Rajat Gupta with Jpmorgan. Please proceed with your question.
Rajat Gupta: Great. Thanks for taking the question.
I had a question.
Rajat Gupta: On the UK business.
Rajat Gupta: We saw that the wholesale losses, you know were once again very high in the first quarter, you know like $21 million.
Bryan B. DeBoer: And then just wouldn't follow up on parking service. And plus 3.2% is nothing to sneeze at, but it was a little bit lower than we were expecting. Do you foresee the ability to get a little bit deeper in the age spectrum and sort of broaden retention a bit to get that up into the mid-single digits? Or do you think, as we're seeing, Bryan, as you mentioned, that the shrinkage or this very low zero to four car population is going to be challenged for the next couple of years? John, this is Bryan. I think so.
Rajat Gupta: Gross profit loss I'm curious was that all related to.
Rajat Gupta: UK related inventory liquidation or was there something else going on.
Rajat Gupta: Curious what happened there and then how should we think about.
The inventory situation into the second quarter.
Rajat Gupta: Hi, Rob a quick follow up thanks, Yeah Rajat this is Bryan.
Most of our problems in the UK remember, we're only giardina and it happened in Q4, we worked through most of that in the United Kingdom. So most of those losses are relative to what's happening in the United States.
Bryan B. DeBoer: So it's a what drove the sharp wholesale launched in the first quarter I mean, we didn't notice that of other companies are just curious.
Bryan B. DeBoer: John, this is Bryan. I think we're really positive about what's happening in after-sales. Most importantly, at 3.2, when the car park is so much smaller as our main driver of the business, which is one- to four-year-old vehicles, if you think about the 10 million fewer units that are available for us to be up in the same store, sales are big, which means we're digging into older model vehicles. I think it also speaks volumes to the fact, and I think 3% is probably a low point for the next few years, but when we think about after-sales growth, the complexity of vehicles is getting crazy, okay, let alone the fact that it's not just a BEV.
Bryan B. DeBoer: Or is it just like excess inventory.
Bryan B. DeBoer: And southern regions or what.
Bryan B. DeBoer: What drove the material change there.
Bryan B. DeBoer: This past quarter, Yes, I think the big thing was in January we really tried to clean up inventory. So we could go buy fresh inventory and I think thats, what we saw and Chris mentioned that we got the benefits of that coming out of of those divestitures, so cleaning up inventory truly.
Bryan B. DeBoer: In the months was at the first part of the quarter.
Bryan B. DeBoer: The real disconnect.
Bryan B. DeBoer: And now we're starting to see some of those tail wins come in March and hopefully again in April.
Speaker Change: Got it that's helpful. And then we've also grown press reports around you know head count cuts.
Bryan B. DeBoer: Now we have BEVs from most manufacturers. We have plug-in hybrids. We got hybrids. We got ICE engines, and all the products are new, meaning that there's a higher breakage rate when there are new products, okay? I mean, we've got the major advantage of longer warranty periods now, which is massive, okay? We've got factory-trained technicians, and most importantly, the specialty tools that others can't do, so the stickiness to new car dealers, we think, is a heck of a lot higher than what it was in the past and should bode well for us in the future regarding attachment and same-store sales growth.
Speaker Change: The U K.
Speaker Change: Was that a political planned reduction.
Speaker Change: Announcement of Dragon or was there something incremental given what's going on in the region right now.
Speaker Change: Yeah, Rajeev, let me let me jump in on that this is Bryan again.
Bryan B. DeBoer: We obviously have.
Bryan B. DeBoer: Structured head count reductions in the United Kingdom I think.
Bryan B. DeBoer: Everything is still pretty new and in flux. There. So I think it's premature to be able to figure out exactly what that's going to look like I think more importantly, where we're a sizable company today, where as a company if we cut SG&A by 1%, it's $50 million or $1 40 in EPS.
Rajat Gupta: Our next question comes from Rajat Gupta with JP Morgan. Please proceed with your question.
Bryan B. DeBoer: I think where Chris Adam and our operational teams are really focused today is how do they how do we push that into the 3% to 5% range and save a $150 million to $250 million after coming off some cuts over the last few years as well and I think when we think about the lithia and driveway model it's above.
Rajat Gupta: Great. Thanks for taking the question. I just had a question on the UK business. You know, we saw that the wholesale losses were once again very high in the first quarter, like $21 million.
Bryan B. DeBoer: Finding productivity increases that can come through technology and can come through just heavy lifting enrolling rolling up our sleeves. So that's where we're focusing the bulk of our efforts and obviously the U K will have their own efforts, but we really believe that there is a good 3% to 5% of fat that's still in there.
Bryan B. DeBoer: Rajat, this is Bryan. Most of our problems in the UK, remember, were only Jardine, and they happened in Q4. We worked through most of that in the United Kingdom, so most of those losses are relative to what's happening in the United States.
Bryan B. DeBoer: Store and would encourage each of our stores to continue to look for those opportunities.
Rajat Gupta: So what drove the sharp wholesale loss in the first quarter? I mean, we didn't notice that at other companies. So I'm just curious, was it just like excess inventory in certain regions, or what drove the material change there versus the last quarter?
Speaker Change: Got it.
Speaker Change: Helpful. Thanks for the color.
Speaker Change: You bet Roger.
Speaker Change: Our next question comes from Douglas <unk> with Evercore ISI. Please proceed with your question.
Douglas: Hey, good morning team.
Douglas: So I have a question on the dry with finance book now at about $3 $3 billion is there a level that this book has to be at to achieve that profitability target at the end of the year is at $3 $74 billion is more or less just curious there.
Bryan B. DeBoer: Yeah, I think the big thing was in January we really tried to clean up inventory so we could go buy fresh inventory, and I think that's what we saw, and Chris mentioned that we got the benefits of that coming out of those divestitures. So cleaning up inventory truly in the months was the real disconnect, you know, and now we're starting to see some of those tailwinds come in March and hopefully again in April.
Douglas: Thanks, Doug This is Chuck.
Speaker Change: Relative to the size of our book, we feel very comfortable that we can achieve the profitability at that $3 3 billion.
Rajat Gupta: Got it. That's helpful. And then we thought of press reports around, you know, headcount cuts in the UK. Was that a part of a planned reduction, you know, when you announced Spindragon, or was there something incremental given what's going on in the region right now?
Charles Lietz: As a credit business.
Charles Lietz: Most of our revenue streams are fixed and we've already subsequently fixed our cost of funds. So this is a business is very predictable. It is very consistent and we feel very confident even at sort of about $3 5 billion level that we can achieve our path to profitability in this year, which we're very excited about.
Bryan B. DeBoer: Yeah, Rajat, let me jump in on that. This is Bryan again. We obviously have structured headcount reductions in the United Kingdom. Everything is still pretty new and in flux there, so I think it's premature to be able to figure out exactly what that's going to look like. But, more importantly, we're a sizable company today where, as a company, if we cut SG&A by 1%, it's $50 million or $1.40 in EPS.
<unk> checks very humble I'm going to give them. Some some some big kudos here, it's been a four year journey to get to profitability and I think from this point forward. We are looking like we can achieve profitability on a month basis with with without any outlying changes which is great.
Charles Lietz: As a side note in March we did make over $2 million in the month. Okay. There was a little bit of anomaly that still showed what it showed profitability.
Bryan B. DeBoer: I think where Chris Adam and our operational teams are really focused today is how do we push that into the three to five percent range and save $150 to $250 million after coming off some cuts over the last few years as well. And I think when we think about the Lithia and driveway model, it's about finding productivity increases that can come through technology and can come through just heavy lifting and rolling up our sleeves.
Charles Lietz: But things look good delinquencies are down.
Charles Lietz: The pains that we took in the times of elevated Gpus were the right time, because those are massive barriers to entry to anyone getting into this business is you have to establish seasonal reserves. Okay. So now we're finally to the point, where our net interest margins are out running the cease of reserves and now we can play.
Charles Lietz: Around with penetration rates truly capture that additional $500 or so on every car deal that we put into DSD over the life of that loan is $500 more than what we make on sending it to a third party.
Bryan B. DeBoer: So that's where we're focusing the bulk of our efforts, and obviously, the U.K. will have their own efforts, but we really believe that there's a good three to five percent of fat that's still in the store and would encourage each of our stores to continue to look for those opportunities.
Speaker Change: Excellent. Thanks team and then just one more from me here as we get toward the year end and less vehicles are coming off lease from the past two to three years, how should we think about used vehicles sales and GPS reacting to this lack of supply you mentioned the firefight analogy earlier is it going to continue to be a firefight like that where profitability is shrimp and do you see.
Rajat Gupta: Got it. That's helpful. Thanks for the cover. You bet, Rajat.
Douglas Dutton: Our next question comes from Douglas Dutton with Evercore ISI. Please proceed with your question.
Douglas Dutton: Good morning teams. So I have a question on the driveway finance book, which is now at about 3.3 billion dollars. Is there a level that this book has to be at to achieve that profitability target by the end of the year? Is that 3.7, 4 billion? Is it more or less? Just curious.
Speaker Change: The offsets to that and presumably better new vehicle volumes. Thanks Dean.
Charles Lietz: Thanks, Doug. This is Chuck.
Charles Lietz: You know, relative to the size of our book, we feel very comfortable that we can achieve profitability at that $3.3 billion. You know, as a credit business, most of our revenue streams are fixed, and we've already subsequently fixed our cost of funds. So, this is a business that's very predictable, it's very consistent, and we feel very confident, even at sort of about a $3.5 billion level, that we can achieve our path to profitability this year, which we're very excited about. Chuck's very humble. I'm going to give him some big kudos here.
Speaker Change: Thanks, Doug for your questions too this is Bryan again.
Bryan B. DeBoer: I think I think most importantly inventory supply I believe boils back down to people.
Bryan B. DeBoer: It's our belief and it's it's the ability to find vehicles and whether theres less awfully as lease vehicles are not it's not what's most important we can find vehicles with good people that are mining for cars deeper through this.
Bryan B. DeBoer: 2% to six channels that we typically mind vehicles, there is $10 million less units available out there, which is a given but remember this.
Bryan B. DeBoer: It's been a four-year journey to get to profitability, and I think from this point forward, we're looking like we can achieve profitability on a month basis without any outlying changes, which is great. As a side note, in March, we did make over $2 million in the month, okay? There was a little bit of an anomaly that still would have shown profitability, but things look good. Delinquencies
Bryan B. DeBoer: We're in the plus nine nine year old vehicles, which is really important to remember of the 37 million units that are available that are being sold out there a year today, which has depressed still by about 10%.
Bryan B. DeBoer: 63% of the vehicles of the 37 million vehicles are over nine years old Okay, That's where we focus our money those units turn at four times the speed of a certified vehicle. They turn at two times the speed of a core vehicle and we make about the same amount of money on it.
Bryan B. DeBoer: truly capture that additional $1,500 or so on every car deal that we put into DSC over the life of that loan; it's $1,500 more than what we make by sending it to a third party.
Bryan B. DeBoer: Half the investment meaning that the vehicles average selling price is about half obviously, if you combine those together the return on a on a value auto vehicles can be as much as five to eight times over what it is on a certified vehicle. So when it comes to lithium driveway thats, our real focus and we get those vehicles as off.
Douglas Dutton: Excellent. Thanks, team. And then just one more from me here.
Douglas Dutton: As we get toward the year end, and fewer vehicles are coming off lease from the past two to three years, how should we think about used vehicle sales and how are garages reacting to this lack of supply? You know, you mentioned the firefight analogy earlier. Is it going to continue to be a firefight like that where profitability is paramount, and do you see offsets to that on presumably better new vehicle volumes? Thanks, team. Yeah, thanks, Doug, for your questions, too. This is a good example
Trade ins off of our core vehicle products, so a little bit of a waterfall effect hopefully that gives you some color on that.
Speaker Change: I appreciate it thanks, Steve.
Speaker Change: You bet.
Speaker Change: Our next question comes from Chris <unk> with BNP. Please proceed with your question.
Chris: Hi, Thanks for taking the questions.
Bryan B. DeBoer: Yeah, thanks Doug for your questions too. This is Bryan again.
Chris: One follow up question and one bigger picture question.
Chris: Thanks for the help on the color on Pendragon and can you give us a sense for the restructuring like you closed the used car store Theres a head count number you defined can you give us a sense like what the impact on SG&A rose will be used like how many units you would be giving up by close to these businesses just looking how to model the business that seems pretty disruptive that'd be helpful color you could provide any.
Bryan B. DeBoer: I think most importantly, inventory supply, I believe, boils back down to people. Okay? It's a belief, and it's the ability to find vehicles, and whether there are fewer off-lease vehicles or not, it's not what's most important. We can find vehicles with good people that are mining for cars deeper through the five to six channels that we typically mine for vehicles. There are 10 million fewer units available out there, which is a given, but remember this.
Chris: Yes. Good morning. This is Chris again, I think right now we're right in the middle of that restructuring and really getting our arms around the business and really trying to focus the teams on evaluating with performance in each one of the locations it looks like and so yeah I'd like some of the things that you alluded to.
Bryan B. DeBoer: We're in the plus nine-year-old vehicles, which is really important to remember of the 37 million units that are available that are being sold out there a year today, which is still depressed by about 10 percent. Okay, 63 percent of the vehicles of the 37 million vehicles are over nine years old. Okay, that's where we focus our money.
Chris: Are happening we're right in the middle of those like the car store shutdown and actually submit potentially selling some of those assets out.
Chris: But we're going to continue to work through that in Q2 and have a solid plan that we're really focused on getting to kind of more of a steady state business would look like in the second half of 2024 here.
Bryan B. DeBoer: Those units turn at four times the speed of a certified vehicle. They turn at two times the speed of a core vehicle, and we make about the same amount of money on about half the investment, meaning that the vehicle's average selling price is about half. Obviously, if you combine those together, the return on a value-added vehicle can be as much as five to eight times over what it is on the certified vehicle.
Speaker Change: Okay. Thank you then I have a.
Speaker Change: Bigger picture question. So you guys are the best class operator.
Speaker Change: And your estimated gross is only 300 basis points below pre COVID-19. Despite some mixed benefit from larger stores and our Gpus have default. So my question is it would seem that most of the dealers pre COVID-19 in aggregate were barely profitable.
Bryan B. DeBoer: So when it comes to Lithia and driveway, that's our real focus, and we get those vehicles as trade-ins off of our core vehicle product. So a little bit of a waterfall effect. Hopefully, that gives you some color on that.
Speaker Change: Hard to tell if it's understated.
Speaker Change: All businesses the private business.
If profitability goes back to pre COVID-19 or lower for these private dealers. What do you think happens to the industry like what are some of the puts and takes how does this benefit in that scenario.
Christopher James Bottiglieri: Our next question comes from Chris Bottiglieri with BNP. Please proceed with your question.
Christopher James Bottiglieri: All right, let's take a question. One follow-up question and one bigger picture question. Make sure to help with the color on Pendragon.
Speaker Change: Well, Chris you are being you are being awfully generous. There. This is Bryan I think for US if you if you've been around Lithia and driveway long enough, we keep our heads down and most important we stay pretty humble. So I don't know if we're best in class operators I do know that our design is quite special.
Christopher James Bottiglieri: Can you give us a sense of the restructuring, like you closed the used car store; there's a headcount number you defined. Can you give us a sense of what the impact on SG&A Gross will be in used, like how many units you'd be giving up by closing these businesses? Just so we can kind of model the business. That seems pretty disruptive. That'd be helpful, Colin, if you could provide some.
Bryan B. DeBoer: And as different than what the independent operators or our fellow peers are doing most importantly, I think today looking at our results I would challenge our teams to continue to dig deeper in terms of market share in terms of cost cutting in terms of keeping margins and really expanding the customer.
Christopher S. Holzshu: Yeah, good morning. This is Chris again.
Bryan B. DeBoer: <unk> experience too.
Christopher S. Holzshu: I think, you know, right now we're right in the middle of that restructuring and really getting our arms around the business and really trying to focus the teams on evaluating wood performance in each one of the locations. And so, yeah, some of the things that you alluded to are happening. We're right in the middle of those, like the car store shutting down and actually potentially selling some of those assets out.
Bryan B. DeBoer: To be able to grow and loyalty. So we have a lot of opportunity, Chris we're not going to sit here and Pat ourselves on the back when we're sitting here.
Bryan B. DeBoer: With her.
Bryan B. DeBoer: Hurrying to try to figure out how to respond to the declining Gpus, we obviously had planned well for those things, but we're not done.
Bryan B. DeBoer: The achievement of a $2 of EPS for every billion dollars of revenue is not something that my team and I take lightly.
Bryan B. DeBoer: That is 100% our focus it is about EPS and the results and bringing that back to shareholders and we do that through great customer experiences that create more loyalty higher market share and better profitability. So I would say relative to where our independent competitors.
Christopher S. Holzshu: But, you know, we're going to continue to work through that in Q2 and have a solid plan that we're really focused on getting to kind of what more of a steady state business would look like in the second half of 2020.
Bryan B. DeBoer: We love the industry, we're not here to try to disrupt what they're doing we're here to conquest market share in our own way and we obviously have driveway green cars and other assets within our design that allows us to conquest market share outside of the Lithia footprint in all of our focuses are really that we do have.
Christopher James Bottiglieri: Thank you. I will take your picture.
Christopher James Bottiglieri: So you guys are the best class operators, and your opportunity to grow this is only 300 basis points below pre COVID despite some mixed benefit from larger stores, and your GPUs have more room to fall. So my question is, it would seem that most of the dealers pre COVID, in aggregate, were barely profitable. You know, hard to tell if it's understated, you know, small businesses and private, but like, if profitability goes back to pre-COVID or even lower for these private dealers, what do you think will happen in the industry? Like, what are some of the puts and takes?
Bryan B. DeBoer: Some hangover from the western markets still and I think that does dilute some of our results and what our performance looks like but again, we're not here to make excuses, we're here to take action.
Speaker Change: Got you. Thank you Sir.
Speaker Change: Our next question comes from Ron Josey with Citi. Please proceed with your question.
Ronald Victor Josey: Great. Thanks for taking the question here.
Ronald Victor Josey: I wanted to focus a little bit more on newer sales channels, Brian and ask about Internet, specifically with <unk> sales up 8% sequentially to 41000 units traffic, reaching $12 3 million across all of the properties can you talk just about the overall platform for online awareness strategy here I think there was comments a few quarters ago, just about a lot.
Christopher James Bottiglieri: How does this benefit Lithia in that scenario? Well, Chris, you're being you're being awfully generous.
Bryan B. DeBoer: Well, Chris, you're being awfully generous there; this is Bryan, I think... For us, if you've been around Lithia and Driveway long enough, we keep our heads down, and, most important, we stay pretty humble. So I don't know if we're the best in class operators. I do know that our design is quite special and is different from what the independent operators or our fellow peers are doing. Most importantly, I think today, looking at our results, I would challenge our teams to continue to dig deeper in terms of market share, in terms of cost cutting, in terms of keeping margins, and really expanding the customer experience to be able to grow loyalty.
Ronald Victor Josey: More traffic than you knew what the deal. So we would love to hear an update there and then lastly, I think you mentioned in the call burn rates were cut in half.
Ronald Victor Josey: As you refine your ecommerce strategy if any insights on these improvements would be very helpful. Thank you.
Speaker Change: You bet, Ron I mean, I may touch on it briefly and let Adam chime in a little bit as well since he is he and Diana are the ones driving the successful results and driving in regards.
Speaker Change: I think when we think about top of funnel.
Speaker Change: We are doing is adapting to the Omnichannel and I think it's taken some of the stores a little bit longer to get into that rhythm that customers truly should have the optionality to do things in their home or in the dealership.
Speaker Change: I think Thats, a result of a 32% increase in total transactions that were done online year over year, that's big input with only about a 9% top of funnel improvement. So good improvements there when it comes to drive way. We are we did reduce our burn by 50%, which.
Bryan B. DeBoer: So we have a lot of opportunity, Chris, and we're not going to sit here and pat ourselves on the back when we're sitting here, you know, with, you know, her hurrying to try to figure out how to respond to declining GPUs. We obviously had planned well for those things, but we're not done, okay?
Ronald Victor Josey: The achievement of $2 of EPS for every billion dollars of revenue is not something that my team and I take lightly. It's something that is 100% our focus. It is about EPS and the results and bringing that back to shareholders, and we do that through great customer experiences that create more loyalty, higher market share, and better profitability. So I would say, relative to our independent competitors... We love the industry.
Speaker Change: Is good I'll, let Adam talk a little bit about where do we go from there, but we're sure hoping that we can reduce it by another 50% over the coming periods and I think from my standpoint, the work that Adam and Diana and the teams and drive we have done over the last 90 to 180 days is constructive they have there.
Adam Chamberlain: Our pulse of multiple different levers to pull and I can see a pathway again to get to breakeven and even profitability in the mid to near future.
Adam Chamberlain: Adam any additional thoughts hey, good morning. This is Adam yes, just to pick up where you left off we've managed to drive down the burn rate as you said by about 50%.
Ronald Victor Josey: We're not here to try to disrupt what they're doing. We're here to conquer market share in our own way, and we obviously have driveway green cars and other assets within our design that allow us to conquer market share outside of the Lithia footprint, and all of our focuses are really that. We do have some hangover from the Western market still, and I think that does dilute some of our results and what our performance looks like. But again, we're not here to make excuses. We're here to take action.
Adam Chamberlain: Year on year, and we see further enhance was possible.
Adam Chamberlain: <unk> hundred two levels, we become much more efficient in our marketing spend marketing spend is down about 40% year on year.
Speaker Change: And we become much more efficient in our transaction processing through things like automated salesforce process.
Speaker Change: And things like that so yes, we are working hard and see further improvements possible Brian that's.
Speaker Change: That's great.
Brian: Thanks, Ron.
Speaker Change: Thank you.
Speaker Change: Our next question excuse me. Our next question comes from Colin Langan with Wells Fargo. Please proceed with your question.
Ronald Victor Josey: Our next question comes from Ron Josey with Citi. Please proceed with your question.
Ronald Victor Josey: Great, thanks for taking the question here. I wanted to focus a little bit more on newer sales channels, Bryan, and ask about the internet specifically, with I think sales of 8% sequentially to 41,000 units, and traffic reaching 12.3 million across all of the properties. Let's just talk about the overall platform for online awareness strategy here. I think there were comments a few quarters ago about a lot more traffic than you knew what to do with.
Colin M. Langan: Oh, great. Thanks for taking my questions I just wanted to follow up you mentioned, new Gpus down a 115 months.
Colin M. Langan: Monthly basis, if I look at same store I think its actually closer to like 100 and 716.
Colin M. Langan: Is it some of that space, that's going to be reflected in pendragon, some pack to zero it sounds like about 100.
Speaker Change: You nailed it Colin.
Speaker Change: Yes, you nailed it this is Brian I mean, the difference between same store and.
Ronald Victor Josey: So we'd love to hear an update on that. And then lastly, I think you mentioned something called burn rates were cut in half as you were applying your e-commerce strategy. Just any insights on these improvements would be very helpful. Thank you. You bet, Ron. I may touch on it briefly and let Adam chime in a little bit as well, since he and Diana are the ones driving the successful results in front of the green cars. I think when we think about the top of the funnel, what we're doing is adapting to the omni-channel, and I think it's taken some of the stores.
Speaker Change: And total is basically about $40.
Brian: And it's about I think it's about three or $400 in aggregate and.
Brian: And it's coming from the U K.
Brian: Dilution from lower Gpus in the United Kingdom.
Brian: Okay. So I'm more thinking about the U S. New GPU decline it actually is kind of the same pace as it was.
Brian: And the last year or actually has that gotten worse too.
Brian: I think it's it's somewhat similar I mean, it's I think it's a little bit worse.
Bryan B. DeBoer: You bet, Ron. I may touch on it briefly and let Adam chime in a little bit as well, since he and Diana are the ones driving the successful results in front-wing green cars. I think when we think about the top of the funnel, what we're doing is adapting to the omni-channel, and I think it's taken some of the stores a little bit longer to get into that rhythm, that customers truly should have the option to do things in their home or in the dealership.
Brian: But again I think the reason we displayed as it was as it was tough in January and February and then we saw a little bit of recovery again in March in both new and used.
Speaker Change: Got it and then.
Speaker Change: You mentioned the target for SG&A as it sounds like it's still mid 50% even with the Pendragon addition, because coming on or at 85% in the UK. So what are the so do you think you could get that U K business to be the same profit level or is it just there's more room to go on the U S business.
Bryan B. DeBoer: And I think that's a result of a 32% increase in total transactions that were done online year-over-year. That's a big input, with only about a 9% top of funnel improvement. So good improvements there. When it comes to the driveway, we did reduce our burn by 50%, which is good. I'll let Adam talk a little bit about where we go from here, but we're sure hoping that we can reduce it by another 50% over the coming years.
Speaker Change: That could kind of keep you on that target.
Speaker Change: So remember that the mid 50% is including the Adjacencies, so and in terms of the UK I don't think we see a world where SG&A is similar to what the United States or have they just don't have the leverage of throughput. They do have some big advantages. There average personnel cost is quite is quite a bit different than.
Bryan B. DeBoer: And I think from my standpoint, the work that Adam and Diana and the teams at driveway have done over the last 90 to 180 days is constructive. They have the pulse of multiple different levers to pull, and I can see a pathway, again, to get to break-even and even profitability in the medium term.
Speaker Change: In the United States.
But I wouldn't see that U K could get to those normalization most of it is coming in the United States from network improvements, meaning reaching potential within the stores by growing market share and cutting costs, okay as well as the adjacencies that I spoke to at the beginning of the answer.
Operator: Our next question, excuse me, comes from Colin Langan with Wells Fargo. Please proceed with your...
Speaker Change: Got it alright, thank for taking my questions.
Speaker Change: Our next question comes from David Whiston with Morningstar. Please proceed with your question.
Colin M. Langan: Oh, great. Thanks for taking my questions. I just wanted to follow up.
David Whiston: Thanks, Good morning.
David Whiston: Just curious with all the.
Colin M. Langan: You mentioned new GPUs down by 100, you know, on a monthly basis. If I look at the same store, I think it's actually closer to like... Isn't some of that pace going to be reflected in Pendragon's impact? Isn't there like about a... You nailed it, Colin. Yeah, you nailed it. This is Bryan.
David Whiston: Waiting for a fed interest rate cut even if we do get.
David Whiston: Even just one this year do you think that's going to matter much to your customers or do they need to get multiple cuts to really bring a lot of people back.
Bryan B. DeBoer: I mean, the difference between same store and total is basically about $40, okay? And it's about, I think it's about $300 or $400 in aggregate, and it's coming from the UK, a dilution from lower GPUs in the United Kingdom. Okay, so when we're thinking about the U.S. new GPU decline, it actually is kind of the same pace as it was last year, or actually has that.
David Whiston: Our customers are surprisingly resilient I mean, we've been we've been quite shocked with their ability to adapt I mean, we now have an average rate of DSC about 10, 2% our average rate as an organization is about 10%.
David Whiston: We're at 7% on on on new vehicles, and about 12% on used vehicles.
Colin M. Langan: I think it's somewhat similar. I mean, I think it's a little bit worse. But again, I think the reason we displayed it as it was is that it was tough in January and February and then we saw a little bit of recovery again in March, both new and used.
I don't know that I don't know that a quarter or a half is going to make much difference I think it's more general economic factors at this stage that they feel comfortable with their jobs they feel comfortable with their.
Bryan B. DeBoer: And then, you mentioned that the target for SG&A is, it sounds like it's still mid-50% even with the Pendragon addition because it's coming on at 85% in the U.K. Correct. So what are the, do you think you could get that U.K. business to be the same profit level, or is it just that there's more room to go on the U.S. business that could kind of keep you on that
David Whiston: And their family and their affordability levels.
David Whiston: Okay and on the balance sheet.
David Whiston: Giving you will do continue to do some acquisitions do you want to pay down the revolver balance at all or are you just going to let that sit there for a while and keep growing.
Colin M. Langan: So, remember, the mid-50% is including the adjacencies, and in terms of the UK, I don't think we see a world where SG&A is similar to what the United States is. They just don't have the leverage of throughput. They do have some big advantages. Their average personnel cost is quite a bit different from the United States, but I wouldn't think that the UK could get to those normalizations. Most of it is coming in the United States from network improvements, meaning reaching potential within the stores by growing market share and cutting costs, okay, as well as the adjacencies that I spoke to.
Speaker Change: Well you did probably noticed David I mean, we are carrying some pretty big cost from you know from M&A.
Speaker Change: Most recently, our leverage is still quite nice sitting at a little over two X, which is good and if you remember our covenants allow US go all the way to 575, so we sit quite nicely to be able to constructively do M&A or balance that depending on stock price with share buybacks you will find that.
Speaker Change: We will be more constructive than we probably are in the past because we have put those two things at parity, but in terms of debt pay down if thats. The best use of capital then we would also use it to pay down debt.
David Whiston: Got it. All right, thanks for taking my questions. Our next question comes from David Whiston with Morningstar. Please proceed with your question.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: We have reached the end of the question and answer session I would now like to turn the call back over to Bryan Deboer for closing comments.
David Whiston: Thanks. Good morning.
David Whiston: I'm just curious with all the waiting for a Fed interest rate.
Bryan B. DeBoer: Thank you everyone for joining us today, and we look forward to updating you on lithium driveway second quarter results in July Bye bye everyone.
Bryan B. DeBoer: Our customers are surprisingly resilient. I mean, we've been quite shocked at their ability to adapt.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Bryan B. DeBoer: I mean, we now have an average rate at DSC of about 10.2%. Our average rate as an organization is about 10%. You know, we're at 7% on new vehicles and about 12% on used vehicles. I don't know that a quarter or a half is going to make much difference. General economic factors at this stage that they feel comfortable with their jobs, they feel comfortable with, you know, their family, and their affordability levels.
Speaker Change: Today's conference call has ended please disconnect your lines at this time. Thank you.
David Whiston: Okay. And on the balance sheet, given you will continue to do some acquisitions, do you want to pay down the revolver balance at all? Or are you just going to let that sit there for a while and keep growing?
Bryan B. DeBoer: Well, you probably noticed, David, we are carrying some pretty big costs from M&A most recently. Our leverage is still quite nice, sitting at a little over 2x, which is good. If you remember, our covenants allow us to go all the way to 5.75. So we sit quite nicely to be able to constructively do M&A or balance that, depending on the stock price, with share buybacks. You will find that we will be more constructive than we probably have been in the past because we have put those two things at parity. But in terms of debt pay-down, if that's the best use of capital, then we would also use it to pay down debt.
Bryan B. DeBoer: We've reached the end of the question and answer session. I'd now like to turn the call back over to Bryan DeBoer for closing comments.
Bryan B. DeBoer: Thank you everyone for joining us today, and we look forward to updating you on Lithium Driveway's second quarter results in July. Bye-bye, everyone. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Today's conference call has ended. Please disconnect your lines at this time. Thank you.