Q2 2025 Lithia Motors Inc Earnings Call

Greetings, welcome to Lisieux and Driveways 2025 second quarter earnings call.

At this time, all participants are in listen-only mode.

Question and answer session, we'll follow the formal presentation.

If anyone today should require operator assistance during the conference, please press *0 from your telephone keypad.

please note that today's conference is being recorded.

I'll now turn the conference over to jardon how to Mio. Senior director of Finance. Thank you. You may begin.

Good morning, and thank you for joining us for our second quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Leits, Senior Vice President of Driveway Finance.

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

Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made.

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

We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements.

We undertake no duty to update any forward-looking statements, which are made as of the date of this release.

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 gaap measures. We've also posted an updated investor presentation on our website. Investors. Lithia driveway.com highlighting our second quarter results with that. I'd like to turn the call over to Brian door president and CEO.

Thank you. Jardon. Good morning and welcome to our second quarter earnings call.

The first half of 2025 reaffirms, the strength of our strategy, with the 29% increase in EPS on a year-over-year basis. Vastly outpacing the industry's profitability growth,

lithium driveway, strong earnings growth is enabled by an operational Focus, powered by our people, and the profitability of our ecosystem and adjacencies,

our integrated physical and digital Network Services customers, while scaling a platform designed to compound value, and earnings power with a diverse and resilient ecosystem,

In the second quarter, we delivered record revenue of 9.6 billion and 4% year-over-year, same store Revenue, increase reflecting our continued ability to grow share and enhance the profitability of our platform in addition diluted earnings per share for the quarter was $9.87 and $10.24 on an adjusted basis and increase of 25 and 30% year-over-year respectively.

We saw strength across the business with record profitability and financing operations, expanding after sales, margins and flat sgna despite pressures from lower gpus.

We're encouraged by our adjacencies that are now contributing meaningfully to both earnings and consumer engagement. These businesses are not just supporting core operations, they are expanding unit, economics, reinforcing, loyalty and widening. The Profit gap between Lithia and the marketplace.

As we look to the second half of 2025 and beyond our Focus remains on store performance scaling high margin adjacencies. Deepening customer relationships across the ecosystem and deploying capital in a way that is most valuable to our shareholders.

Our combination of local execution, integrated technology, and capital discipline positions us to grow profitably, take share, and advance to our long-term targets while continuing to lead the industry in innovation.

We're pleased to see increasing momentum in our high margin business lines, including financing operations and after sales which expands our unit economics and adds consistency to our earnings profile.

Our stores are adapting in real time to demand shifts, supported by their understanding of customer needs and OEM dynamics.

We continue to monitor and respond to the evolving tariff landscape and broader consumer trends.

We have diversified our earning stream, and as a reminder, over 60% of our net profit comes from the after-sales operations.

Customers across all segments and affordability levels while continuing to build upon the customer life cycle with high margin adjacencies to further improve the profit equation.

What differentiates us is how our components work together, a national footprint with local autonomy.

Integrated digital tools, high margin adjacencies that scale earnings across the ownership life cycle, while also being the preferred acquire of businesses in the industry.

In a fragmented sector. Our ability to acquire integrate and operate at scale remains a key focus in competitive advantage.

This quarter, we added stores and targeted High return markets. Continue to optimize our existing portfolio and embedded adjacencies more deeply into our daily operations.

Our Omni Channel platform is expanding both engagement and reach.

Tools like, the, my driveway portal or strengthening customer retention and digital brands, like driveway, and green cars as they continue attracting new customers into the ecosystem, all while improving the customer experience and driving margin.

In July, we completed a transaction to transfer our North American joint venture. Back to Pinewood AI Paving the way for pinewood's. Full roll out of the industry's Pinnacle.

Cloud-based solution across North America.

In addition to our high-margin adjacencies, we have a set of operational levers that tighten costs and lift throughput at the store level.

Today, my driveways customer portal reduces service costs and drives higher retention.

Soon, the Pinewood AI will allow us to replace multiple legacy and third-party solutions.

Allowing both customers and our team members to operate in the same environment.

This will improve the sales experience, streamline workflows and further. Reduce our cost structure.

Layer on to that scale, driven advantageous pricing as we unlock meaningful sgna leverage while freeing.

Store teams to focus on selling and servicing vehicles together. These abilities give Lithia a structural edge that supports sustained margin, consistency, and growth.

The strategy is producing results and creates a foundation of tremendous potential and more resilient and rewarding are earnings model. This enables us to grow through volatility.

Allocate Capital with confidence and advanced towards our long-term targets with clarity.

Strategic acquisitions remain a core pillar of our growth model and a proven differential of Lithia.

Our history of sustainable, high-return, and virtually risk-free growth has increased our revenue from $13 billion in 2019 to become the largest global auto retailer, quickly approaching $40 billion in revenue.

EPS has grown at a similar rate and we remain excited to operate and grow in 1 of the most unconsolidated sectors in the country. Our scaled diverse strategy and cash engine. Now have the flexibility to not only accelerate share BuyBacks

But also continue to grow both organically and through acquisitions.

With the disciplined approach, we continue to Target high-quality Assets in the US that strengthen our Network, especially in the Southeast, and South Central, where population growth and operational profits, are the highest.

We aim to acquire at 15 to 30% of Revenue or 3 to 6 times normalized, ebaa with a 15% minimum after tax hurdle rate, our track record reflects a 95% success rate of above Target returns.

Today, we are in a position of strength.

Our growing Capital engine and consistent free cash flow gives us the flexibility to allocate or returns our most attractive.

While waiting for Market valuations on Acquisitions to reset the relative value of our own shares supports a more aggressive buyback strategy, which Tena will be discussing further.

In the first half of the year, we repurchased, 3% of our outstanding shares over the long term we continue to Target acquiring 2 to 4 billion dollars in Revenue annually and will continue to deploy Capital where it compounds value most effectively.

We have clear line of sight to our long-term revenue of eps growth targets, powered by 5 strategic levers.

Improving store level performance. Expanding our footprint and digital reach to grow US market. Share from 1 Point 1% to 5% financing up, the 20% of units, through scaling DFC reducing costs through scale, efficiencies and sgna discipline and capital structure. And finally capturing growing contributions from Mommy Channel adjacencies like e-commerce Fleet software and insurance.

Let's turn to our key operating results and how the performance is being driven at the store and departmental level.

Another meaningful step forward in the consistency of our performance. We delivered year-over-year growth, particularly in after sales and continued to see sequential improvements and used autos, especially in the value auto segment.

While the June 2024 outage contributed to softer comps in the prior year, this quarter's results reflect operational progress, yielding organic revenue growth through each month of the quarter, supported by disciplined SG&A control and strong execution across our stores.

As we move through the rest of 2025, our focus remains on the fundamentals: expanding market share, improving throughput, and maintaining cost efficiency to reach our potential.

Turning to same store, sales performance total revenues and gross profit. Both increase by just over its 4% due to sequential strength across all business lines that are partially offset by declining gpus.

Total vehicle gross profit of 4318 was down 128 compared to the same period last year.

New vehicle units increased 2% year-over-year, with front-end GPUs at 3,175, slightly up sequentially.

Used vehicle units, increased 4% year-over-year, our Value Auto Sales continued to Trend impressively with 50% same store sales Improvement versus last year.

Front and gpus for used vehicles were flat. Year-over-year at 1900.

We saw a slight increase in new vehicle inventory, with a day supply of 63 at quarter end. This compares to an unusually strong sales month in March, with absolute inventory increasing by only 5% sequentially.

Use vehicle DSO, increase slightly to 48 days from 45 days in Q1.

Flooring, interest savings were significant this quarter with a 28% decline year-over-year.

And I delivered 4.5% year-over-year growth in same store, sales growth profit and 1841 on a per unit basis. A 25 year-over-year increase reflecting the continued steady growth of this High profitability area.

After sales was once again a key earnings driver. Same-store after-sales growth profit grew 8.5% year-over-year, helped by solid momentum in both customer pay and warranty. Work gross profit expanded even faster at 11.9%, as the segment's gross profit margin widened to 57.8%, an 180 basis points increase from last year, reflecting a stronger mix and operating efficiency.

Warranty remains a standout with gross profit of 21.9% on elevated OEM service activity and higher technician productivity. With aftersales now contributing more than 60% of the net income of our company, we see continued headroom to compound growth and earning stability in 2025 and beyond.

With the foundation of our strategy. Now in place lithium driveway, differentiated model is delivering results.

Leveraging, our national physical Network throughout the customer life, cycle, with inventory and network scale advantages, Industries industry-leading, Digital customer Solutions, and deepening. Customer AC economics through captive, finance and expanding after sales, all underscore the consistency, resiliency flexibility and potential of our model.

Our leaders are executing across the network by driving towards store, potential integrating adjacencies and creating memorable customer engagements across the ownership Journey.

Our integrated ecosystem is delivering tangible results and we are confident in our ability to lead the industry and consistency, profitability, and long-term value creation.

Before turning things over to Tina, I would like to thank and congratulate Gary glandon our chief people officer on his upcoming retirement.

His leadership is leveraging lad's greatest strengths our people.

...and is a perfect exclamation point on an illustrious 25-year career as head of people functions and his 5 years here at Ladd.

We look forward to seeing our people and culture teams that Gary has built led by Katie Macadamia continue to flourish and drive our mission of growth powered by people with that. I'll turn the call over to Tina. Thank you, Brian.

Of 1.5% of shares in the quarter these results underscore how ongoing cost control actions, a maturing captive, Finance platform and balance Capital deployment, are accelerating value creation.

Adjusted SG&A as a percentage of gross profit was 67.7%, down from 67.9% a year ago on the same-store basis SG&A. It ticked up to 67.4% from 66.4%, reflecting cost pressures as we navigate declining front-end GPUs.

We're pushing levers to reclaim operating margin by increasing productivity through performance management and technology optimization. Our tech stack and retiring duplicate systems, renegotiating national vendor contracts, and automating back-office workflows are all part of this effort. These actions, combined with ongoing UK network rationalization, are designed to bend the SG&A curve lower again, while giving store teams more time with customers.

We expect the benefits to build each quarter controlling sgna even if front and gpus continue to normalize.

DFC continues to scale, profitably demonstrating the differentiation of our model, financing up income more than doubled year-over-year from $7 million to $20 million, supported by a 50 basis point expansion in net interest margin to 4.6%. Disciplined underwriting remains the cornerstone, with second quarter originations of $731 million, carrying an average FICO score of 747.

was achieved while increasing U.S. penetration to 15%, up 240 basis points versus last year. The optimization of risk and reward in recent vintages is driving improved performance, passing more of that spread through to earnings.

Our market position at the top of the consumer funnel and high-quality originations keep credit risk low and preserve balance sheet capacity for continued growth.

With managed receivables now above $4 billion, our mature portfolio can continue to deliver outside profitability relative to indirect lending, reinforcing our earnings growth trajectory.

Strong origination flow is improving margins. And Runway, to increase retail penetration, demonstrates a clear path to our long-term profitability targets for DFC.

Now, moving on to our cash flow and balance sheet health, we reported adjusted EBITDA of $489 million for the second quarter, a 20% increase year-over-year driven by increased earnings.

During the quarter we generated free cash. Flows of 269 million. Our business continues to convert operating momentum into healthy free cash flow. Giving us the flexibility to pursue a balanced strategy of buying back shares funding at creative store, Acquisitions and investing in the customer experience. All while preserving a strong balance sheet profile, the steady self-funded cash engine, lets us stay Nimble and challenging markets, and deploy Capital where it will compound shareholder value fastes.

This quarter, we continued our balanced approach to capital allocation. We deployed approximately one-third of cash flows to share buybacks at an average price of $306, representing 1.5% of outstanding shares. One-third was allocated to acquisitions of high-quality stores and targeted geographic regions, with the remaining capital invested in store capex to enhance the customer experience and opportunities to improve operating efficiency.

Our Capital allocation philosophy is to act opportunistically and with leverage comfortably be lower Target and ample liquidity we are accelerating our share repurchases to Target up to 50% of free, cash flows and capitalize on what we view as a meaningful disconnect between our stock price, and intrinsic, value this stepped. Up buyback, Pace allows us to compound returns for shareholders while still per serving capacity for high returns strategic acquisitions.

The last strategy remains anchored in consistent, differentiated profitable growth powered by an omni Channel platform that now delivers tangible earnings at every step of the ownership Journey. Our passionate teams differentiated digital and financial capabilities and found balance sheet, provide the foundation to scale, both core operations and high margin adjacencies. Unlocking, the next chapter of value Creation in 2025 and Beyond. As we continue our progress to creating 2 dollars of eps per billion in Revenue.

This concludes our prepared remarks with that. I'll turn the call over to the operator for questions, operator.

Thank you. We'll now be conducting a question-and-answer session.

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You, in our first question, is from the line of Ryan Seal. With Craig Helen, please receive their questions.

Hey, good morning, guys.

Morning.

Morning Ryan. Uh want to want to start with uh sgna gross profit. So certainly making good progress on the adjacencies on the operating. Efficiencies I hear you from an operational standpoint, but when I look at the numbers, I guess a little bit worse than we were expecting, uh, from an sgna to gross profit, leverage, despite better gpus. So I guess can you talk through kind of the operational improvements and then kind of the financial implications and maybe with some guard rails as to help the street and and myself kind of, think about how this layers into

Um the income statement of the model, as it relates to the second half of this year and then 2026.

Sure. Ryan, this is Tina. I'll start with that question. I mean, I think when we think about SG&A, as we've talked about before, a lot of it is driven by volume on the top line and making sure we're really driving that growth or, you know, in terms of units and where that's happening in our stores. That continues to be the focus as we look at, you know, our leaders that we have in our stores or department managers and making sure they're really driving, you know, to get that market share and that growth that's available in their market. Um, and then looking at productivity and cost controls, you know, on that line as we look at SG&A. So, I think as a combined effort in both, we continue to pay a lot of attention to it, you know, and drive discipline through it and making sure we have the right leaders who are able to look at that. As we look at the rest of the year, you know, we did increase the outlook slightly as we think about SG&A.

Just sort of balancing what's already occurred in the first half, um, with continued discipline in the second half. And as we've talked about, you know, that continued pace that we see, it needs to be that, you know, glide path down to getting toward that long-term target of 55% SG&A as a percentage of gross profit. But it's a diligence on it that we need to do, you know, every quarter.

Uh, very good. Uh

I don't believe you commented on the UK specifically. So, I'll ask it here. There are very challenging conditions from an industry standpoint, with changing EV mandates, etc. How do you feel about the UK overall from an industry perspective, and where does your business stand in terms of costs or operational standpoint?

Thanks for the question, Ryan. Uh, I, I, I think the, the UK for us has been performing, uh, as expected. We were actually up profitability Wise by about 3% year-over-year, which was a nice number, uh, relative to what's happening in the marketplace.

Um, Neil and his teams uh, there, I understand that Top Line is, is most critical and they're obviously growing their businesses and doing a nice job at at Cost management and and so on. So we're pretty pleased with with, with where we sit today and I think it, it took a year to get the network fairly well, cleaned up and they sit with a nice, uh, clean portfolio with a lot of really great people that understand.

The consumers understand the competition and should continue to flourish in the future.

Great. I'll turn it over to the others. Thanks. Brian Tina.

Thanks Ryan. Thanks.

Next questions are from the line of Michael Ward, with Citi Research. Please just use your questions.

Thanks very much. Good morning, Brian. Good morning, Tina. Um, maybe just following up on the SG&A side, uh, with the addition of Pendragon, it kind of distorts some of the comps in Q2 in particular. How does the U.S. alone look on SG&A?

Are you? This is Tina. I mean are you us business continues to be strong on the SG side? And as you know, the, the sgna footprint in the UK is just higher. And so you know, when we look at our Blended number, I think both of the both of the teams on both sides, I would say continue to focus on sgna. Um you know and it's an area that you know we we see long-term continued opportunity to drive that down over time, um but our us business continues to do well on the sgna front.

My experience, I I think it I think it's also important it's easy to get caught up in 1 number or another but there's a lot of factors that go into how you think about your business and how you grow your business. I it's easy to get caught up of what's Happening quarter over quarter or year over year or so on. But Lithia and driveway has built an organization that is

Focused on multiple assets of the customer life cycle.

3-fold in earnings and have all of the levers and the dry powder in our adjacencies, to continue to do the same thing, let alone in our m&a, strategies of how we attack the marketplace, we don't have blips in terms of how we how we buy and how we operate because we didn't pay based off coid level earnings. We don't have right offs as 2 of our peers, just had. But for some reason everyone keeps discounting. Those type of things and you know, lithium driveway as it continues to plot along as the largest now out of retailer in the country and continuing to separate ourselves in terms of scale and size.

That we get into these microscopic views of SGNA was a half a point higher than it should have been.

Same-source sales might have been a little worse when our same-store sales revenue growth and used cars were the best in the sector so far. Okay, last quarter and the quarter before it wasn't. So, the gaps that we're realizing because of the ecosystem are quite there.

You know, it's Tina, and the teams are working diligently on SG&A, and we're going to be able to deliver the performance. In this quarter, we felt that we picked up some of the gaps in where we stand. There's no question that we have a greater portion of our business that's sitting in blue states, where population growth is not as exorbitant or robust as what it is.

In the Southeast and South Central, we've been very fortunate to be able to change our mix to be able to.

Expand where we sit and as such, we're more excited than ever about what we've built and the potential of what we have. So Mike, thanks for letting me get on my soap box for a few minutes, but no, that's fine. Sure. Frustrating as a management team that you build something, and all you do is get the penalties of it. And then when there's 1 number out of out of 17, that seems to jump out people forget of what we've accomplished as a management team and more importantly, what the foundational elements of what we built have the capacity to do in the future.

Well, you know, my point was that it was better than it looks because the UK kind of distorts it. So the performance was actually better than it was in Q2. To that end, it looks like Driveway Finance has turned the corner. You know, Tina is at $20 to $30 million, the new run rate per quarter. Is that what we're looking at? So, $100 million plus contribution like 26?

Hey Mike, this is Chuck. Um, you know DFC is on a very specific growth trajectory, and yes, we feel, as you've said, DFC has definitely gotten out of the startup phase and continues to execute our strategy of being top of funnel and getting preferential loan selection. We see just that continued growth rate trend continuing for the next foreseeable quarters going forward. So,

Yes, definitely. Uh expect to see that level of run rate going forward, checks being very humble because I I think the 20,00 that we did was 3 times what we did in the previous year the spreads are there our delinquency rates continue to strengthen, okay? And become better which is great and I think it's

It's easy. It's easy to forget that that we made 20 million in the quarter and I think we're targeting 60 or something, maybe 70 for the year. Ultimately, at the current Revenue base, where we financed Vehicles, which is in the US we're about 32 billion dollars in Revenue which is about 320 million in profitability at scale at just that Revenue base. And we've continued to say that at a $50 billion domestic Revenue base. We're going to make half a billion dollars, okay? That's real money that our competitors at this stage don't have okay. And it's important to clarify that we're not getting valued on that, okay? And, you know, and fact for the, last 2 years, we've been penalized for it. Okay. And I think there's a lot of confusion out there that it takes a lot of capital, and a lot of courage and bold planning to be able to execute on the things that we're executing on to be able to bring you. What is now a company that has the ability,

Ability to compete in acquisitions in consolidation and then the bottom-line profitability in ways others can't.

Yeah, it's a marathon, not a sprint.

Thank you, Brian. We are still cheering for you. Thank you.

All right. Bye bye.

The next question is from the line of Raat Gupta with JP Morgan. Pleased to see if there are questions.

Uh, great. Uh, thanks for taking the questions. Uh, and I'm sorry I have to, uh, apologize in advance. I want to follow up on my...

I mean, it looks like, I mean, uh, if Bryan, like, you obviously done a lot of acquisitions since the pandemic. Um, you have grown your company three-fold, as you've said, but I think it's been a couple of years, uh, since you've had those under the hood.

Um, and I think it's linked, 10 quarters now.

Since the same-store metrics have an impact on the performance of your peer group.

uh,

I don't know. It's like, uh, a year and a half is enough time, or do we need to see more time before that starts to recover? So, could you give us some visibility on when we should see your organic performance? I understand the agencies. I think DFC is great, but just the store performance metrics—when should we see that recoupling or doing better than peers? Uh, and I have a quick follow-up. Thanks.

Raja, I think if you look back three quarters, our performance has bridged a lot of that gap. Like I said, in used cars, we were number one in revenue growth. Okay? Number one.

So and in service we were in the middle of the pack, okay? And remember that service is based off of smaller units and operation growth than what others are. We believe it's somewhere between 3 and 3 and a half percent difference, just from units. In operation, we were about 1 and a half to 2% below, what the peer group was okay, when it comes to new car sales,

You know what? Stellantis is still struggling a little bit and we still got a fairly large portion of that like Auto Nation does. And the rest is is is yet to be seen. So if if you want to view the world as that go ahead, it's 1 part of who we are. Okay? As an organization and the ecosystem is beginning to perform, okay? And the same store sales growth is starting to bridge. The gaps that are there, okay I can't change overnight where our footprint is okay. If you remember we were 80% West Coast base before our acquisition of DCH okay? At the same time we were almost 75% domestic. Uh manufacturers. Okay. Today we sit at less than 30% of our mix being domestic. We sit with over 40% of our mixed being in the Southeast and South Central that automatically yields over double the operating margins of what the Western 2 regions perform at. Okay.

So, if you want to just compare apples to apples, then you need to do deeper dives into what the marketplace is doing, where population growth is, and how operational profits and dock fees impact the operation. Those operating profits...

Understood. Um, and I mean, if, if you are, if you do have a line of sight and you know, a lot of these gaps narrowing, uh, and getting better over the next few years.

Um, could we see a more aggressive pivot to, and also, given the fact that you're at a significant discount to your peer group?

Um, could we see a more aggressive pivot to stock buybacks in the efficient market, the entire time, before the market can give you credit?

Sure, Raja. I mean, good insight. I think when we're trading at a 20% to 30% discount to the peer group and we've got somewhere between 20% and 40% upside just from our adjacencies that are not fully realizing their potential, and the trajectory is there, absolutely. I mean, as Tina mentioned, we're now allocating 50% of our capital to buybacks.

Okay, I'm imagining we're in the market today buying, and we're going to continue to buy back until the world understands that what we built is something special. The performance on each of these side metrics is important, I get that, but you still have to look at the totality of what is being accomplished and not lose sight of that. This is about TSR, okay? It's about shareholder return and the ability to grow a company, both top and bottom line. We'll be rewarded for it; we're confident of that. But as a management team,

It's easy to get frustrated that the, that the boldness that we took and the steps that we took to reinvent, basically the industry and our sector. We've been pretty much penalized for for the last 2 and a half years. And, you know, this is a hell of a buying opportunity because at those kind of discounts, we're going to back up the truck and continue to buy shares back.

Understood, thanks for the answers. Uh, and good luck. Thanks. Roger.

Thank you. Next question, from the line of Daniela.

Hannigan, with Morgan Stanley. Please see with your question.

Um, you cited 70% self-sufficiency, which is really strong in this fragmented used car market. How do you view competition from the likes of the online pure play retailers? And is there greater opportunity to grow and consolidate here?

Great. Great question, Danielle and and I think as we think about our mix, what we're seeing and part of the reason for the outperformance in used vehicles on same store is because we're growing our over 9 year old, uh, bucket quite nicely. It was up 50% year-over-year, okay. That obviously means that the other buckets didn't grow quite as fast, but that's because the supply in those buckets really aren't. There we are purchasing over 2/3 of our vehicles directly from consumers. Those are yielding almost a 1700 price difference between those Vehicles purchased uh, uh, from options or on the street. Okay? And that's a massive competitive advantage over used only retailers that are not a funnel. Quite, as much, uh, 1 of the other notes that I think is important to, to to, to understand is that in our ecosystem, uh, driveway actually purchased over double the amount of vehicles uh, through our AI valuation.

And our, and those, uh, purchasing metrics. So quite a difference year-over-year and that's starting to impact our ability, to find the vehicles to be able to meet our consumers, demand at the right affordability levels.

Got it. Thank you. And then can you just comment on the M&A environment? Um, I know you have the target for $2 billion to $4 billion in annual revenue per year. Does the policy uncertainty change that, um, more or less dealers to the table this year, next year, etc.? Any comments around that?

Sure, uh, we've done just over a half a billion dollars so far this year, we have a considerable amount under contract. But again, I would State this, we don't flex on pricing. Okay, we watch the market come to us. We act when there's opportunities that make a good Roi sense. And I, I said in my prepared remarks that were 95% successful on Acquisitions, we're actually 99% successful now that we've purged some of the smaller stores that were in groups which created that extra 4%. So this is, this is a pretty easy roll-up strategy and we believe the market will come back to us as profits begin to normalize which they've, they've done nicely. But we need that to happen for a couple of years, because that's what determines pricing. Okay. So we are, there is an advantage to having a discounted stock price.

In the event that m&a is is a little pricier than we can buy our shares back. So I think Danielle uh to summarize, we should be able to achieve the low end of that uh 2 to 4 billion dollar range by year end and have a fair amount of stuff that if have come into play over the last few months.

Thanks Brian.

You bet.

The next questions are from the line of Mark Jordan with Goldman Sachs, please just use their questions.

Hey, thanks for taking my question. Um, for the after-sales segment, how much of the stronger same-store sales growth can you attribute to lapping last year's CDK issues? And, um, is there any additional call you can provide regarding how the different channels performed?

Uh, good, really, really, really, uh, good question. I would say that the lapsing, the performance in the same-store sales was driven, uh, by a little better than 50% by the easy lapse of comp, okay? I don't know what the other peers had communicated that with the rest coming from outperformance, where a lot of it is being driven by customer pay and some buy warranty.

Okay. Perfect. And then uh did you benefit and after sales from any um tariff related, inflation pass through during the quarter and is that factored into your full year outlook for Mid single digit comp for the segment.

uh, so Mark, we don't

We, I would say that there's slight impacts from terrorists, but most manufacturers have controlled their pricing on Parts as well. Okay, now going forward, there may be implications there, but we didn't see uh impact uh from terrorists at any scale, okay? And you can see that we were up what 1 and a half percent in margin in after sales, which usually is indicative that there was a higher mix of Labor, which is a 60 65% margin business, rather than the 30 to 35% margin business, which is parts.

Excellent, thank you very much.

Thanks for your question.

The next question is from the line of Ron Joe with Goldman's Charities. Please proceed with your questions.

Yeah, good morning team, and uh, thanks for taking my questions.

Hey Brian. I wanted to start with kind of the DFC growth this quarter and then, especially after another strong quarter for DFC, I guess the back half does imply a pretty meaningful step down versus.

versus what you did this quarter uh trying to understand what's informing that cuz cuz Nims and credit performance both still look strong. So I don't know if this is just a lean towards conservatism it looks like you still want to grow the book pretty aggressively but it's tough for us to bridge too.

Certainly, the low end of the range at least.

Yep. Around this is Chuck. Great question. Um, first I think you actually hit on some of it, and that, you know, again, one of the great things about DSC is we've grown our penetration rates. We're getting very close to hitting that consistently at a 15% penetration rate, and then hopefully we can build on that to 20. And as you know, as we continue to ramp up those originations, that can have a drag on some of our near-term profitability when we have to take that settle reserve up front. And then secondarily, there is some seasonality in our numbers. Um, you know, the summer months generally are those months that consumers don't necessarily pay their auto loans. So if you look at some of the published reports, you are seeing delinquency rates pick up, but when...

You kind of get past uh, past the summer months. We hope that those start to tick down a little bit and don't start, you know, weighing us down with actual charge off. So um, some of it is uh, due to the growth rates. The other part would be seasonality, our 3.1% loss ratio includes and assumes that seasonality, but it does change the profit equation. So if you look at the at the first quarter you can't just take a times 4 and see exactly, right?

Okay, no that that's super helpful caller. And then Brian might have a chance for you to get back on your soapbox here. But on, uh, on on on sgna, you laid out a bunch of buckets, you're targeting to start taking costs out and improve efficiencies. Um, I guess any way to think about the cost savings potential, for some of the things you laid out Performance Management, Tech Stacks, vendor contracts automating, workflows. And, and then the UK, I know it's a lot but just kind of how you think about.

I think most importantly, when you think about sgna costs, we're obviously trying to grow our Top Line. Most importantly, because that's what, that's what generates the the net profit as an organization. Because if I grow Top Line in new and used vehicle sales, I get the 62% of my net profit, that's generated from after sales. Okay? So massive point to remember and obviously, to be able to grow the after sales, you got to spend money to do it. Our sgna is made up primarily off Personnel expenses in the sales department. Okay. So anything that occurs there is going to pay later in

After sales. So important to remember that, as we think about driving down our cost structures in sales and in the service um uh advisor pay, which makes up these small portion of sgna personnel costs. Okay, those are productivity jobs. Okay. And what we're pretty excited about is the Pinewood AI that we have a partnership and now I I think in a couple weeks or whatever, we'll we'll have about a third ownership in that in that company, that AI technology is going to put our customers and our sales associates in both the service and sales departments into the same environment which helps us to drive down Personnel costs. So a lot of the, the the 700 basis points that we're looking at achieving is coming from AI improvements, and then skinning up how we look at Staffing. Uh, those departments. So, uh, a big part of that the remaining couple hundred basis points is coming from vendor and scale.

And other other types of things. So, but we're really looking at gaining productivity in both sales and service in those productive jobs. Uh, and hopefully at some point which some of the AI is helping us today. But ultimately, that's the stuff that's embedded in the Pinewood system that we're helping co-develop, uh, with them.

Yeah, that's super helpful. I appreciate the detail on the AI sourcing of vehicles as well. It's interesting anecdotes, thanks for sharing. It's interesting, Ron, because when you think about AI...

I think when we started on this journey 10 years ago, we thought technology was there to bring customers in and to be able to touch customers throughout their life cycle. Today, when we look at what technology and engineers, and these partnerships with great companies like Pinewood can do, it's incremental.

Of simple things like scheduling appointments, okay. If we can have ai schedule appointments, which is, is simple as what we now have in our, my driveway portal that allows consumers in all of our stores, other than 3, to be able to schedule appointments. Well, that takes off the load of the bdcs and the service advisors, what we have to do, a better job of is looking at productivity metrics and then driving those costs reductions into the store. Okay? Now the 60-day plan and the everyday plan started on that Venture, but it's easy to get sloppy. And it's easy to think the Top Line growth is going to also fix your sgna costs. When ultimately, you still have to force the cost savings and we're encouraging our store leaders and our department leaders to do such and they get it. Okay. And it's it's important that we lead the pack in all these categories and we'll continue to be able to drive those costs down

it's a great color and

Thanks.

The next question is from the line of Jeff Flick with Stevens. Please receive three questions.

Uh, good morning, everybody. Congrats on a nice quarter.

Um, Brian. I was wondering just if we could talk a little bit, you know, tapping into your, you know, historic expertise and experience here. You know, when we talked, if we assume that a 15% tariff,

Probably going to be where we end up just across the board. Um, you know, on a high cost of goods.

Unit, like a car is, you know, 85% 7%, whatever cost of goods sold, you know, the the price increase required. Um, you know, at the at the invoice level, the only invoice level is is pretty substantial. So,

At some point, someone, you know, on the units that are tariff, you know, there’s going to have to be conversations. I’m just curious. How do you see those playing out? What would be the mechanism? I mean, at some point, like, the OEMs have to go to the dealers and say, look, you know, you’ve got to share the pain. I’m just kind of curious how you see that playing out.

Sure, Jeff, and I think let me answer the first, your direct question, and then let me embellish a little bit on how we think about it as a mitigation strategy. The most important thing is our manufacturers are all competing to sell cars. So it's important to keep that in play, and only about half of the vehicles...

That we sell on a new car basis are being impacted by terrorists. Okay, the rest are not. So, when we think about the remaining half, what happens? I, I believe that manufacturers have already begun to either decontent cars or not charge for other upgrades. I believe that consumers can save other other dollars. So, when you think about a 15% increase, uh, they're, they're thinking about they're thinking about, you know, that I don't have to, I don't have to pay for as much gas because we now have what 36% of our vehicle sales are sustainable vehicles that get better gas mileage.

Uh, I think Chuck would sit here and argue that the DFC has the ability to help with financing, and manufacturers can subsidize, uh, in the financing capacities. We've now got, uh, our government that's allowing us to write off, you know, certain interest costs on auto loans, and there's a lot of other moving parts. So, a finite 15% increase, when we think about the tariff on 50% of our inventory, that influences things, is just another thing in our daily lives. And each of our stores will respond to that. Now, in terms of who is Lithia Motors and Driveway and how do we respond to it? I think if you look at our profit equation today, okay, and compare it to that of our peer group, we're already diversifying that portfolio with 60...

5% of our net profits are being directly attributed to aftersales. Okay? With less than 20% of our net profit currently being attributed to new vehicle sales, including F&I. Okay?

It's pretty exhilarating, okay? Our ability to deal with these situations means we've got all the levers to pull. As the world moves on and as these things start to change the industry...

those with more cash and more ability to code, so solutions for customers that make it easier, are those that are going to be able to grow market share and, uh, be less impacted by whatever changes do come from tariffs, or our model, or franchise laws or whatever, might might else be there.

Well in 1 follow up while I guess in this kind of big picture uh mode here. Uh you know for the first time we heard as it relates to the UK, the notion that Chinese oems which, you know, none of the Publix have. Uh,

You know, any Chinese OEM franchises in the UK that those are starting to maybe represent some formidable competitive pressures. And maybe it's much things up for the other uh, oems or or other brands, I'm just curious your take on the, you know, the Chinese oems and if you wanted to go 1 step further and say, you know, when do they

What implications do they eventually wash up on our shores? Um, yeah. Sure. I'm happy to hear that one too. Sure.

Well, I mean, we'll have to see what happens in tariffs, and I think,

Us consumer sediment may be different than what the UK is. I think it's also important to remember that uh, that our presence in the in the United Kingdom does include, uh, byd and mg uh, with uh, 5 total stores. So, we are getting to see what's occurring there. It's still, it's pretty bumpy. Okay, if you remember, we started out pretty strong with byd, but it came to a dull Roar in about a quarter and a half, you know, and now there's another surge out there and it's starting to impact the, the, the, the the marketplace. But again, in the in the UK, it's pretty easy to adapt. Okay. And it's still not a material amount of our profitability equation as to how we think about it. And I'd still go back to it. 110% terrorists today with the Chinese and a by D price competitive wide.

In the United Kingdom, it isn't much less than what a BMW or a Mercedes is for the same type of equipment and the same type of propulsion. So, you know, we'll continue to be diversified and we'll continue to keep our pulse on what occurs in the United States, and look to whether or not those models are including dealers or if they do even come to the United States. But there's been.

Now, three failed attempts by large Chinese manufacturers coming into the U.S. have not really yielded their results, the same as in a lot of other places in the world.

Awesome. Well, thanks for taking the questions.

Thanks Jeff. Appreciate your insights.

Our next questions are from the line of Feder, Rico Mendy with Bank of America. Please assist us with your questions.

Uh, good morning, everybody. Um, earlier you mentioned that the 55% SG&A target loan term and...

I appreciate the commentary on the actions to reduce the.

Sgna. But

It seems to me that an important part of the equation is also the footprint. That's your size.

And I was wondering how much larger Lithia has become.

Uh, to enable that target reach.

Puerto Rico. Congratulations to on, on on taking over the research and and welcome to the, welcome to the space.

I think when we think about our trajectory and our timing of SG&A, we're looking out half a decade to be able to accomplish it because it's easy for us to say that we can reduce our personnel expenses, which makes up the most of the SG&A costs.

But ultimately, if we're not competitive in terms of salaries and compensation with what the industry is...

You ultimately can lose your people. Now, if we can provide solutions,

Out for bdcs.

Twenty years ago, we didn't have BDCs, and you know, they're great in certain locations where you have massive amounts of volume. The department leaders have figured out ways to get productivity out of both. However, in many situations, we added Business Development Centers for service and sales.

That are basically doing the same job that our advisors and our sales associates are doing. So, you know, lots of opportunities to be able to attack that. The remaining portion of that is coming from scale and is coming from the adjacencies of what they provide with lower marketing costs, more efficient inventory, and so on.

Thank you, Brian. And um,

my last question would be on the

Omnichannel initiatives. Could you give us an update and also how you fare compared to your competitors?

Um sure, I'm I'm not.

Sure that everyone counts the same but the some of the facts that I do know it at least in terms of us. So I'll try to avoid any direct comparisons. We sold, uh, over 25 and a half percent of our vehicles, uh, through Omni channels sources with Digital support or 45,000 vehicles in the quarter. That's up to considerably from where we've been in the past, okay? Uh, our driveway, uh, Channel continues to be

Over 97% new customers uh to the ecosystem which is quite effective. And we continue to drive uh that channel and I believe more importantly, than ever having an omni Channel solution within our stores. There's a lot of the reasons that a BDC was developed is because sales people weren't as equipped to be able to deal with internet leads 15 20 years ago. And today they're equipped to be able to do it. Our IT solutions are able to use AI to be able to sort leads, to be able to do a lot of the communications and work for us to be able to catalyze the change to be able to drive those costs down. So in terms of digital Solutions, it kind of goes hand in hand with our scna Solutions. We're pretty excited at where we've been able to grow and build driveway. And we sit here today with a my driveway portal that has

I'm not 100% sure on this, but I believe it was 137,000 users. Remember, that went live in December of last year. So we're about 7 or 8 months in and that's growing, and consumers are now doing more of the stuff themselves in a simple, transparent, and empowered way.

Thank you, guys, and I look forward to working with you.

Thanks Frederico.

Our next questions are from the line of Chris Paglieri with BMP Paribas. Please receive your questions.

Hey guys, thanks take care of the question. Um, hi, Chris the first 1. Hey, hey. Um, first 1, I want to follow up was on you raised. The GPU guy by about $200, a year, at the midpoint of, there's been some strength kind of year to date, but how do you think about tariffs impacting that Outlook? What do you expect the industry to do from inventory levels? Like brand mix and incentive levels as I was trying to to have 2525 and 26, do you have any view in kind of the drivers of those?

Sure. Chris, I I think, I think, when we think about the impacts of terrorists, we got to go back to affordability, because I think we still have the ability to order cars. We still have the ability to guide and support manufacturers on DC contenting cars and to be able to keep afford affordability front and center. I, I it's easy to get lost in that, that these increases are going to create this higher price level. We make 5 to 7% on the new vehicles that we sell and have carrying costs and so on and so on. So there's structural support within the industry and across competitions, that we're not here to to kill each other. And there's only so much margin in cars. In 5 to 7% is pretty small.

The car 4 to 5 years from now. So we think we're pretty insulated from the impacts of tariffs, and it's easy for us to get, you know, confused with what manufacturers have to do versus what a retailer has to do. We're quite diversified, and you can see as we think about our model just moving downstream, whether it's decontented new cars or whether it's more mainstream new cars or whether it's selling more value auto cars, retailers are pretty adaptable.

Got you, that's really helpful. And then the credit side, I mean your Own Credit Force has been pretty spectacular, but you've run the portfolio a lot. I'm just curious what you're seeing. If you peel the onion back, are you noticing...

Any differences between the 21-22 inches and the 23-24s? Do you notice any differences between bars that have student debt and those that don't? It just seems like the broader credit environment is a little bit choppier, but yours looks really great. I'd like to see what we can learn from you.

Yeah, Chris this is Chuck um great question. Yeah that 2021 vintage both for us as well as the markets um really was uh 1 that's not performing as well as we all I think would hope in the industry and the and the segments but that that really LED for us to take that major shift for us to move up market and really try to de-risk our portfolio. And as you said, we're really starting to see that start to flow through in our 23 24 and, and even into our 25 vintage we really feel strongly that we are starting to see Separation on preference.

Differential selection from some of the key metrics like delinquency and, and, um, you know, some of the default rates. So, uh, we expect that preferential selection to continue as we go forward and hopefully see the results of that as we go forward in the market and our financial, I love, I love how Jack is so humble on things. I, I think it's important to note that when you think about the different, um, uh uh, vintages of our portfolio.

Remember this? Okay at 15% penetration rate that was our mid and long-term goal, okay? And we accomplished that by lowering our LTV by 1% to 90 to less than 95%. Okay. Our original targets were 100 to 105% ltvs, okay. More importantly than that, our average FICO score on our incoming business. This quarter was 746. Okay, that's 36 points higher than what our original forecast had established at 7:10. Okay, we were also 15% uh 15 points higher FICO this year over last year. Okay? So when we think about our loss ratios, we're able to skin better and better paper from our stores and they're doing an excellent job at giving us first look. And we're going to continue to pathway towards the 20%, Which is our super long-term goal. So we're pretty excited.

Excited by what we see, we're bucking the trends we observed two years ago. We bucked the trend last year, and we're bucking the trend this year. We're not seeing any softness across our portfolio, and it's continuing to add value to our ecosystem and to our customer relationships.

Great. Thanks guys.

Thanks Chris.

The next question is from the line of Doug Dutton with Evercore ISI. Please proceed with your questions.

Yep. Just a quick one for me, team. I'm curious about something that was contradictory here. We have in the Q2 DAC for Driveway DFC $50 to $60 million of finance operations income targeted for 2025, as the estimate, and then something that was spoken to earlier, was that?

$20 million in the second quarter and $33 million year to date is going to continue to grow. So those things are sort of that odds, and I was just curious if you could clarify which one of these is correct.

Yeah, this is Chuck. Um, you know our financing income is actually our segments. We do have a couple of other businesses that are included in that. Notably we do have a finance company in Canada as well as a Fleet Management Company, um, in the UK that also does financing that does get Consolidated into that. So I think if you were to peel back sometimes, we do refer just to the DFC which is the US portion of our business, for some of our numbers, but the 2000 and the 7 million dollars, that Brian referenced was for our financing income segments.

So hopefully that clears up that question. And remember, Chuck talked about the seasonality, and when we talk about improvements, it's a year where you're improvements. I mean, we made $10 million last year in DFC as a whole, and we're going to make $60 to $70 million this year.

Okay. Okay, that's helpful. That was my only 1. Um thanks team.

Thanks Dad.

Thank you. Our final question is from the line of Mike Albanese with Benchmark, please.

See, with your questions.

Uh, taking my question and, uh, I really appreciate all the great commentary on this call. That's...

fine. Um,

I just had a quick 1 on new vehicle volumes. Obviously pulled back your guide from mid single digits on the year to low single digits.

Is this you know is this just a a reflection of uh you know, updated Q2 results essentially, you know changing the base going forward is it more company specific obviously Regional and brand mix play play a role here or you know, macro related, obviously thinking tariffs and pricing uh implications on the consumer and the second half, you could just comment on your rationale there, that would be helpful.

Shure mic. I think if you take the first half of the year of the entire sector and then annualize it, you're going to get to a smaller number, okay? Because you do have more difficult comps coming in July because of the CDK event. So it's more of an industry thing. We just wanted to make sure that we fine-tuned it for you.

Got it, thank you. That's helpful. And then just another one here. Switching gears to Pinewood right now, that that's...

Positioned for growth really. Could you just maybe kind of frame your your expectations or or a timeline in terms of uh the rollout across your base and Beyond I mean maybe a better way to ask that would be how should we be you know sitting in an annual seat here. How should we be measuring success in that roll out?

Sure. I mean, I, it's, I'll give lots of kudos to Pinewood. They're good at. They're good at coding. They're good at, uh, capturing market share. They're now almost a third of the market share in the United Kingdom. So they're growing globally, it's pretty exciting. What they're doing. That gives them the capital to be able to do what they need to do in North America. Our rollout schedule is a couple, a couple stores, uh, by by the end of the year, with 2 specific manufacturers, we should have another 15 to 25 stores next year with full rollout in 27 and 28. Uh, I think the Pinewood teams, uh, are ready, and supportive of that. Uh, we're pretty, we're pretty excited about it. 1 other thing to note, uh, is well, as there was a Market to Market adjustment, but we still, we still beat the street by almost a dollar. Okay? After that, which was a pretty big number, uh, a relative to where where we sit today. The other thing is we have not recorded

Recorded the North American JV, uh, Equity. So that is not in that number. That's uh, coming in in, in future quarters. Okay? And this is

An exceptional investment.

That's embedded into our ecosystem. Even though our store, not all of our stores are on it yet, the UK is doing absolutely phenomenally. A lot of their improvements and gains that they're going to be making in SG&A can now be pushed through the utilization of the Pinewood AI solutions to be able to take them up a step. While that helps pave the way for us in North America for the bigger platform and portfolio to be able to be successful in the upcoming years.

Awesome, really helpful. Thanks, guys. Nice quarter.

Thanks Mike.

Thank you.

This now concludes our question-and-answer session. I'd like to turn the floor back over to Bryan DeBoer for closing comments.

Thanks, Rob. And thank you, everyone, for joining us today. We really look forward to seeing you on our third quarter call in October. All the best. Bye-bye.

This will conclude today's conference. We will disconnect your lines at this time. Thank you for your participation, and have a wonderful day.