Operator: Greetings. Welcome to Lithia Motors and Driveway third quarter 2026 results 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. Please note this conference is being recorded. I will now turn the conference over to Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin.
Jardon Jaramillo: Good morning. Thank you for joining us for our third quarter earnings call. With me today are Bryan DeBoer, Chairman and CEO, Tina Miller, Senior Vice President and CFO, Chuck Lietz, Senior Vice President, and Scott Cooke, Driveway Finance Corporation and Southeast Region Operations President. Today's discussion may include statements about future events, financial projections, and expectations about the company's products, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release.
Jardon Jaramillo: Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our Q3 results. With that, I'll turn the call over to Bryan.
Bryan DeBoer: Thank you, Jardon. Good morning and welcome to our quarterly earnings call. Our Q3 again demonstrated what makes Lithia and Driveway different. We delivered revenues just shy of $10 billion and adjusted diluted EPS of $10.34, up 9% from last year, growing earnings in a mixed retail environment. Our leaders continued to capture the profitability of our diversified and durable model, delivering quality results in any environment. During the quarter, same-store revenues declined 1.4%, a resilient result as we lapped revenue growth of nearly 8% in the Q3 of 2025. Our gross profit comparison was the best of 2026, and we exited the quarter with good momentum. Total vehicle GPU of $3,958 was down only $63 year over year, reflecting strong pricing discipline. Our teams responded dynamically to the market, and our progress puts us in position to accelerate our growth, diversification, and results going forward.
Bryan DeBoer: As a reminder, all vehicle operations results from this point forward are on a same-store basis. Used vehicle profitability was strong with GPU up 13% or $234 year over year. In North America, same-store SG&A as a percentage of gross profit improved 50 basis points sequentially, reflecting our ongoing focus on cost controls. Driveway Finance Corporation continues to grow, delivering finance operations income of $32 million, an increase of nearly 70% over last year as average managed receivables grew 22% and provision expenses also improved. Our model is designed so each business line reinforces the others, and this quarter demonstrated that dynamic. Our growth starts with our people who are pricing smarter and running leaner stores across our ecosystem.
Bryan DeBoer: Every customer relationship creates reoccurring value after the first sale, and a vehicle we sell today brings that customer back to our service drive tomorrow and eventually returns as a trade-in, all accelerating our DFC and Driveway platforms. I want to personally thank our store and support team members for the results they delivered this quarter and the care that they show our customers each and every day. Our diversified mix continued to drive stable earnings with used vehicle gross profit up 9.3% and after-sales gross profit up 2.4%, offsetting a modest quarter of new vehicles. New vehicle revenues declined 2.6% on 2.7% fewer units against a demanding comparison to last year's Q3, when new vehicle revenue grew 5.5%. By category, import units grew 0.8%, domestic declined 8.8%, and luxury declined 2.9%.
Bryan DeBoer: We view these conditions as cyclical and as comparisons ease in Q4, our team carry a strong trajectory into year-end and the following year. In used vehicles, our pricing strategy continues to deliver, and it is a great example of our ecosystem, technology, and people all working together as one. Total used gross profit grew 9.3% year-over-year, and used GPU was $1,993, led by our core 3 to 8-year-old vehicle category where GPUs rose 44%. Our work on dynamic AI pricing supports improved profitability, and used vehicles remain one of our highest return businesses, providing an entry point to our ecosystem for customers at every affordability level. F&I per unit was $1,736, a 4.7% decline year-over-year. As a reminder, DFC's growth shifts a portion of our F&I into captive platform, where each loan earns reoccurring counter-cyclical income that is 3 times more profitable over its lifetime.
Bryan DeBoer: Our growing remote F&I program is demonstrating the opportunity to improve F&I attachment and customer experiences at a greatly reduced cost. After sales continues to anchor our resiliency with gross profit growing in each of the last 8 quarters and margins expanding 100 basis points this quarter to 59.5%. After sales earns on every vehicle and operations, not only the ones we sell, and it is where the relationship we build at each sale keeps paying off. Lifetime oil contracts are an example of how we are building customer retention through higher attachment. With nearly 1 in every 4 North American customers now choosing to subscribe, up more than 200 basis points over last year. We are building on that improved retention in our service lanes, reaching customers before their next service is due and getting the most value out of each of them on each visit.
Bryan DeBoer: Adjusted SG&A as a percentage of gross profit was 68.5%, in line with Q2. In North America, same-store SG&A was 65.7%, likely sector-leading performance that demonstrates how our scale, diversification, and store leadership is transforming our operations. In our sales departments, we have combined roles, removed layers, and given our strongest leaders responsibilities across multiple stores and departments. Behind the scenes, automation, more efficient vendor relationship, and AI tools are also contributing. Every quarter of progress gets us closer to our global SG&A target of below 60% of gross profit. As volumes recover, a larger share of each gross profit dollar will drop to earnings. The UK delivered another standout quarter with gross profit up 7%. After sales led the way, growing profit 13.6%. New vehicle units grew 10.6% and new vehicle gross profit rose 8.5%, helped by our expanding partnership with some Chinese OEMs.
Bryan DeBoer: In used vehicles, retail units grew 4.6% and GPUs grew 4.9%. These results reflect strong execution by our UK teams and the potential of our international platform. Before we jump into finance operations, I would like to welcome Scott Cooke, who joined us in August as our Operations President after more than 25 years at Toyota Financial Services, most recently as their President and CEO. He brings deep global leadership, industry experience running one of the largest captive finance companies in the world, and is a wonderful cultural fit to Lithia and Driveway. Welcome, Scott. Driveway Finance Corporation continues to scale profitably. With managed receivables now at $5 billion in penetration, climbing towards our target of 20% or more, DFC is doing exactly what we built it to do, turning each vehicle sale into durable, stable income, a deeper, longer relationship with our customers, and a clear differentiated advantage.
Bryan DeBoer: We keep making it easier for customers to shop, finance, and service their vehicles with us, whether in stores or online. Our stores, DFC, Driveway, and GreenCars let us serve customers however, whenever, and wherever they choose. Pinewood.AI gives us a customer-first platform to truly deliver that experience. Ridgeview Partners' acquisition of Pinewood.AI, completed earlier this month, delivers a meaningful valuation gain on the investment this quarter while leaving our strategic alignment unchanged and providing an even brighter future for our growth. Moving team members onto one AI-native system will take cost and complexity out of the business while freeing up our teams to do what they do best, bond, build trust, and create memorable experiences with each and every customer. Turning to capital allocation, our approach remains the same. We put capital where it earns the best returns for our shareholders.
Bryan DeBoer: After a very active H1, we took a more balanced approach in Q3, repurchasing $85 million worth of stock while funding acquisitions and maintaining balance sheet strength. Our share count is 11% lower than a year ago, and that benefit to EPS carries forward every quarter. Our regenerative cash flows also gives us room to strategically grow our network. A few days ago, we acquired four Gossett Hyundai and Kia stores in Memphis, Tennessee, adding $250 million in expected annualized revenues and strengthening our presence in the Southeast region. So far this year, we have acquired $1.2 billion in annualized revenue of high-quality stores while divesting a quarter billion dollars of underperforming revenue, freeing up capital to be more efficiently used. These actions make our network more diversified across brands and regions, increases efficiency, provides growth for our people, and better utilizes our capital.
Bryan DeBoer: This growth is always underwritten with discipline and consistent execution. We target purchase prices of 15% to 30% of revenue or 3x to 6x normalized EBITDA. For more than a decade, this framework has delivered returns above 25%, which is well ahead of our 15% after-tax hurdle rate. These returns create a compelling growth opportunity in an unconsolidated industry and the scale necessary to continue to differentiate and leverage our considerable size and scale advantages. That same discipline guides how we deploy cash across the business, whether through share repurchases, acquisitions, or investments in our own operations, always building on our strong balance sheet. We head into the final quarter of the year with confidence and a higher-quality, diversified outcome.
Bryan DeBoer: Our results came together nicely with North America SG&A improving sequentially, record Q3 DFC income, double-digit growth in used vehicle GPU, and continued after-sales growth, all adding up to high-quality earnings. These gains build on each other as we continue allocating capital prudently and we remain on track to achieving our long-term target of $2 of EPS for every $1 billion of revenue. Our teams are delivering Auto Done Easy every day, demonstrating what makes Lithia and Driveway different. With that, I will turn the call over to Tina.
Tina Miller: Thank you, Bryan. Our Q3 showed continued progress, with earnings growing year-over-year and improving from the Q2. Our cash generation remains strong, letting us invest in growth, return capital to shareholders, and maintain a healthy balance sheet all in the same quarter. This optionality comes from our scale and the diversity of our earnings and positions us to act on opportunities in the quarters ahead. Behind all of it are leaders across our stores who stay focused on performance and on developing their people while building durable customer loyalty with each experience. As Bryan mentioned, our cost discipline is holding, and on a same-store basis, adjusted SG&A was 68.5% of gross profit. The year-over-year increase primarily reflects lower gross profits in the comparison and the structural changes underway across our stores and back-office positions us to capture meaningful operating leverage as gross profit strengthens.
Tina Miller: In our stores, the sales departments are leading the way. Our leaders are aligning compensation with profitable growth, matching staffing to each store's volume, and combining roles where technology allows. Together, these changes make our teams more efficient while strengthening the experience for our customers. The same focus on efficiency is reshaping how the rest of our business runs. Our back office is getting simpler with fewer systems, fewer vendors, and less manual work. The continued rollout of Pinewood.AI marks the next phase of this transformation. We are bringing it to our North American stores deliberately at a pace that protects the experience our customers and team members count on, so the improvements we make become part of our long-term cost structure. Moving on to financing operations. As Bryan mentioned, DFC delivered another excellent quarter.
Tina Miller: Originations reached $937 million with net interest margin of 4.7%, up 10 basis points from a year ago as our funding costs continue to improve with scale. North American penetration reached 18.3%, continuing its steady climb. Credit performance continues to reflect our disciplined underwriting. Origination FICO scores averaged 752 and front-end LTVs held at 94.6%. Our allowance for loan losses now stand at 2.8% of receivables, down from 3.1% as the conservative approach built into DFC from the start continues to pay off. Our ability to originate at the top of the funnel is building a high-quality portfolio, and as it grows, we gain deeper access to the securitization markets, more efficient funding, and fixed costs spread across a larger earning base. With penetration still growing toward our long-term target, we see significant runway ahead and expect continued year-over-year growth and profitability.
Tina Miller: DFC is delivering on its promise, adding durable earnings that build with every loan. Next, I will discuss the strength of our cash flow and balance sheet. Reported adjusted EBITDA of $443.5 million in the Q3, up a modest 1.3% year-over-year. Adjusted cash flow from operations, our representation of free cash flow, was $377 million for the quarter, up 12% from a year ago, bringing our year-to-date total to $987 million after adjusting for the one-time benefit related to our used vehicle floor plan in the Q1. Cash generation from every part of our business continues to provide flexibility. In the Q3, it supported our share repurchases, our dividend, and continued investment in our network while maintaining the strength of our balance sheet. We repurchased 246,317 shares at an average price of $345, which remains well below our view of intrinsic value.
Tina Miller: Year to date, we have returned more than $627 million to shareholders through buybacks and dividends. We ended the quarter with net leverage of 3.1 times, down from 3.2 times at the end of Q2, moving back toward our long-term target of below 3 and well under our bank covenant limit of 5.75 times. This measure excludes floor plan debt, which is secured by our vehicle inventory, unique to our industry, and integral to how we operate. Consistent with industry practice, we treat floor plan interest expense as an operating expense in EBITDA and leave the related debt out of our leverage calculation. We also exclude the ABS warehouse lines and term securitizations that fund DFC. As we finish the year and look ahead to 2027, we maintain a balanced approach to capital allocation.
Tina Miller: This means we can repurchase shares when undervalued, pursue acquisitions that meet our return hurdles, and extend the reach of our ecosystem and keep the balance sheet ready for opportunity. Our opportunistic strategy lets us create value in any market while continuing to strengthen and diversify our network. With our shares continuing to trade at a deep discount, buybacks remain attractive. Our progress this quarter reflects the continued evolution of our business. Changes in the way our stores operate are increasingly reflected in our cost structure. As Pinewood.AI comes to North America, the path to our long-term SG&A targets gets clearer. Our ecosystem keeps doing what we designed it to do, strengthen the relationship with our customers at every touch point. Our capital allocation stays disciplined, directing every dollar to its highest return while protecting the strength of our balance sheet.
Tina Miller: We are confident our teams keep turning this momentum into lasting value for our shareholders. This concludes our prepared remarks. With that, I will turn the call over to the operator for questions. Operator?
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question. Our first question is from Michael Ward with Citi. Please proceed.
Michael Ward: Thanks very much. Good morning, everyone.
Bryan DeBoer: Morning, Mike.
Michael Ward: Bryan, I wonder if you could provide some of the gives and takes as you have evaluated the PAG transaction and how it relates to Lithia.
Bryan DeBoer: Great question, Mike. It is neat to see that the valuation that they were receiving prior to going private was starting to look respectable at 12 to 13 times earnings. I think one of the big things is, and I do not mean to speak for Roger by any means, but I imagine when you look at the marketplace and look outside the public companies and then look at yourself when you are looking at your actual goodwill multiples of somewhere around three to six times earnings, once you strip out all the equity in the companies, that he bought that company for somewhere much less than what the marketplace's actual goodwill is relative to what typical car guys buy stores for. Obviously with a lot of nice luxury stores and diversification, it looks pretty good. I would also comment that Lithia Motors is quite diversified as well.
Bryan DeBoer: We obviously are sizably larger than what PAG was. And obviously at 7.5 times multiple, there is a lot of growth for us and gives, I think, a lot of our shareholders some confidence that there is a lot of room for our stock to run.
Michael Ward: Yeah, that is certainly what it seems like. Switching to the business at hand. You kind of alluded to the Pinewood integration would be by the end of 2028. Is that kind of a gradual process? And when I looked at that chart on page 9 in your chart deck, as you get to these 65% and even 60% SG&A levels, is that the type of thing we will see the progress as Pinewood gets integrated? And is that the right timing that it goes gradual through the next 2 years with the full integration throughout the North American market?
Bryan DeBoer: Yeah, great question, Mike, as well. The Pinewood integration is being rolled out pretty much by manufacturer because the APIs are developed by manufacturer, and should happen by the end of 2028. We are pretty good at that transition, but we would also say that the lowering of SG&A that is driven by AI or by the Pinewood solutions and customers and team members being in the same environment will typically follow that. The United Kingdom currently is doing a nice job reducing their cost structures, especially in their service departments, and gaining some really nice efficiencies, and it is starting to become pretty effective. They have been on that technology for about 6 to 9 months, and we are just now starting to see some of those nice gains that I mentioned in the script.
Bryan DeBoer: All in all, I would say that the drive to a sub 60% SG&A will trail the rollout of the Pinewood stores probably by 12 to 24 months.
Michael Ward: Okay, but that's the direction that we'll see over the next couple of years, and the Pinewood is a big part of that.
Bryan DeBoer: It sure is.
Michael Ward: Thank you, Bryan. Thank you very much.
Bryan DeBoer: Thanks, Mike.
Operator: Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed.
Ryan Sigdahl: Hey, good morning, Ryan, Tina.
Bryan DeBoer: Hi, Ryan.
Ryan Sigdahl: Morning. I want to start on the new GPU side. Heard from one of your peers intra-quarter, they expected a much more significant step down in GPU sequentially. Looking at your numbers, much less of a moderation. Curious how you saw regional performance stack up, company-specific performance stack up, and then anything else to call out.
Bryan DeBoer: Sure, Ryan. We have had pretty resilient new car GPU, and obviously, part of the reflection of that can also be seen on the used car GPU because you are taking a trade on those new cars and it is reflective on the other side. So we are pretty pleased about our ability to price vehicles and create demand top of funnel to be able to find the right customers that can pay us the appropriate prices for the cars that we are looking at. The market feels pretty good. In terms of regional differences, it could be that greater exposure to the higher doc fee states that some of our peers have may influence their GPUs a little bit more. But ultimately, we are seeing pretty good results across the company, and hopefully that will continue.
Ryan Sigdahl: Good segue into my next question on doc fees, Bryan, but FTC enforcement actions, more discussion there, specifically doc fees. Just clear the air on what you guys are hearing. Then you mentioned it, but primarily West Coast, but a lot of Lithia's footprint are in lower doc fee states. Just talk through how that flows through GPUs and from a financial standpoint.
Bryan DeBoer: Yeah. Doc fees are part of GPU. They are just embedded in GPU, and I think the important thing to note is the FTC's enforcement rules that were clarified in, I believe it was February and March. Lithia and Driveway was obviously in compliance way before that, years before that, and have typically always disclosed those doc fees across the country. So anything that you saw with us, if there was changes in a few stores, they happened in Q2. So I would be surprised if there is big differences between Q2 and Q3 because the enforcement action, and if there was changes, it had to be there.
Bryan DeBoer: The biggest thing that it does is with competitors that are a little less transparent on their pricing and how they get to their ultimate pricing, it should make those that were fully transparent and were disclosing a hypothetical $500 to $1,000 doc fee, it should allow them to be more competitive in the long run. In fact, it should have been shown even in Q2.
Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck, guys.
Bryan DeBoer: You bet, Ryan. Thanks.
Operator: Our next question is from Rajat Gupta with JP Morgan. Please proceed.
Rajat Gupta: Hey, good morning. Thanks for taking the questions. Just wanted to start with parts and services. If I heard correctly, I think you mentioned UK was up 14%, which would imply US after sales probably flat, maybe slightly up. I am curious to get your thoughts on what driving some of the sluggishness there. Not just for you guys, but also hearing the same from some of your peers as well. When can we expect the US after sales business to start recovering again? Any outlook comments you can give would be helpful. I have a quick follow-up.
Bryan DeBoer: Sure, Rajat. I think that the United Kingdom, and I will start with that at the low teens. We are seeing that our AI in the United Kingdom is generating additional business, and it is coming from. I was on the phone with Neil and Richard and their teams earlier this week, and they shared that the idea of a pre-sale is something that is making a difference in their revenue base. Meaning when the customer books the appointment with the AI, the AI is consistently asking for additional service things to be done, like windshield wipers, like, "Oh, yeah, I probably need my fluids changed. Oh, yeah, I need this." We are getting around 10% to 11% additional pre-sales on every AI. If I had to guess, before the AI went in, I will bet we had close to zero. Okay?
Bryan DeBoer: Because most of our upselling is done once we do an inspection. Okay? That is a big difference. So they are getting some pretty good lift, and it is something that we are trying to figure out how to accelerate some of that AI in America, even before all the stores have the Pinewood acquisition. So we will see how that goes. In terms of, and I think you are probably right, Rajat, that in the US, we are probably up slightly in terms of gross profit in aftersales. I think relatively speaking, that is probably a pretty solid number, knowing that we are compounding 2 years of pretty good same store sales increases that were mainly driven off some pretty large recalls with a few of the Korean manufacturers and a few of the other Japanese manufacturers. So I think all in all, with what was dealt us, that is a pretty good number, relatively speaking.
Bryan DeBoer: But again, Rajat, I will sit here and say that when I look at our business and I look at the opportunities that are afforded us, it is the single biggest area in our business that we have lots of opportunity to delight customers, okay? We need to do that through creating personalized experience the way each customer individually wants to be treated, okay? We have got good transparency. We have got great people out there. We just need to open up our ears and our eyes and figure out what they are really asking for and give it to them quicker and less costly than what others can. I think that is when we look forward and look at the My Driveway portal or look at the network that we have built, that is still our big opportunity, and we will continue to push on that.
Rajat Gupta: Understood. That is helpful color. Then maybe one on just capital allocation. Given where you are from a leverage standpoint, a little above 3x, and potentially entering a rate hike cycle here. Is it safe to assume that the focus would be on delevering in the near term to get to below 3x and staying there? Just curious how we should think about buybacks or M&A in the near term.
Bryan DeBoer: Sure, Rajat. We do produce almost $1.5 billion in free cash flows a year, and we did delever from 3.2 to 3.1 in the quarter. We do like the number of less than 3x, because obviously that helps us pathway towards IG and gives us the flexibility to scale if we need to. So we will continue to balance capital with a focus still probably on buybacks, knowing that acquisitions are quite costly, especially in North America. That is really the balancing act that we are always doing is looking at the crazy trading or PE that we trade at relative to what other transactions are at. So, we will stay focused, we will stay disciplined, and we will continue to deploy capital in the right manner and feel comfortable in that 3x leverage range.
Rajat Gupta: Understood. Great. Thanks for taking the questions. Bye-bye. Thank you.
Bryan DeBoer: Thanks, Rajat.
Operator: Our next question is from Jeff Lick with Stephens Inc. Please proceed.
Jeff Lick: Good morning. Thanks for taking my question. Bryan, I was just curious, you used the term demanding compares for Q3. It actually kind of flips in Q4 where it compares, it has the appearance of being a little easier. I was wondering if you could address how we should think about Q4, maybe caution us about overreacting. Then maybe building into that, new GPUs were a little weaker sequentially than we have seen in the past. One of the things we have heard is that potentially the changeover inventory maybe got pushed out a little bit, meaning that there is going to be more 2026s on the lot this far into the quarter. Any thoughts on where GPU trends on the new side could go because of that dynamic?
Bryan DeBoer: Yeah, sure. Jeff, was that first part of the question related to aftersales? That Q4 looks a little like.
Jeff Lick: No, it is interesting. Your new comp was down 8.3% in Q4 last year, which.
Bryan DeBoer: Yep
Jeff Lick: You completely bucked the trend because your used comp was up 5% or 4.7%. So there is an interesting dynamic there as well.
Bryan DeBoer: I understand the question. I think when we think about Q4, we have basically adjusted our company with diversification of Driveway, of Driveway Finance, of GreenCars, as well as a global footprint that changes how we look at our business. We used to have a Q1 and a Q4 that were our softest quarters by a large amount, like 20% to 25% lower than Q2, Q3. We are fortunate that in the United Kingdom, Q1 is typically a pretty strong quarter for us, just because there is such a disproportionate earnings that occurs in March in the United Kingdom that it helped balance out Q1. Unfortunately, Q4, and I mentioned this last quarter as well, Q4 is our toughest quarter. We not only have Snow Belt, but we have the United Kingdom that does not have a big registration month in it.
Bryan DeBoer: We are still looking for ways to be able to strengthen Q4. The good news is that Q4 does have December in it. A lot of times on year-end product or model changeovers, October can be a decent month. It is really November that can be a little bit tougher than normal. The exciting thing for us is when we look at this Q4 versus last Q4, we are starting the quarter with a nicer day supply. If you remember, even though we were up 5% plus in used cars last year, we also had pretty good degradation in GPUs, and I think that focus on GPUs going into Q4 can help us knowing that our day supply is looking a little better than last year.
Bryan DeBoer: With that, I would urge everyone to just look at our relativity of Q4 to Q3, and then you can apply that looking back last year and then looking forward to this year and maybe get some indication of what Q4 could turn out to be.
Jeff Lick: Any thoughts on the GPU dynamics with the 2026s and 2027s? Is that going to have any impact on Q4 GPU?
Bryan DeBoer: I would not expect so because our inventory looks pretty clean. I think we are sitting at close to 60 days, okay? It is sitting in the right places. I do not expect any abnormalities there.
Jeff Lick: Then, a quick follow-up on your used unit comp, down 3, but your used GPU dollars up 9. You guys have been talking in the last few calls about trying to find that balance of units versus profitability. It appears like you are doing a pretty good job on profitability. Any more thoughts on just kind of the fine-tuning and where this is going to settle out?
Bryan DeBoer: Sure, Jeff. I think it is important to remember we are at the infancy of this. Though we are getting traction, we are getting a couple hundred dollars in GPU, many of our stores are still not adapting to that, because I think we think about it as a micro funnel as a store, and then the macro funnel as a Driveway and Lithia. A lot of our micro funnels still have not figured out that they do not need to sell the car to the first person that walks in, because their funnel is small and they flinch and sell it to the first person. If we can help the macro funnel feed into the micro funnel better, they get more customers sooner and hopefully can hold on price to be able to drive that. We are really seeing it grow in our core product.
Bryan DeBoer: We try to teach our stores about scarcity, and scarcity starts in that core product. We were up $500 in GPU year over year on core product, which is 3 to 8-year-old vehicles. Now, on the opposite side of that, we were down $300, $400 on certified. They are balancing some of those things out, but ultimately the two together get you a lot more trade-ins. Ultimately, that GPU is what helps us lever our cost structure, okay? That is how we were able to maintain our SG&A about the same as last quarter. It should be sector leading, I would imagine, okay, which is where we should be as the largest auto retailer in the world, and maybe more importantly, that a great team of people that is powered by them.
Bryan DeBoer: They know what they are doing. I trust that they will continue to do that and find the GPU and bring it to the bottom line.
Jeff Lick: One relationship, just real quick, that you have brought up in the past was that, I think it only pertains to the Driveway business, was that you were priced at one point 10% below Carvana and CarMax. You have been closing that gap. You kind of highlighted that as almost like a GPU reserve, that as you get closer and closer to parity, you get back. Can you maybe elaborate on that and explain kind of where you are at in that process?
Bryan DeBoer: Sure. We are still 5% below them. The double-digit number was relative to what we call value auto product, which is our lowest priced cars. Those were, we were selling them for about 12% under market. It has improved slightly. Where we have really improved is on the core product. I do not have the exact relativity to market, but I am going to guess we are 97%, 98% now on core product. You are correct that that 5%, as an aggregate on a $30,000 car, is $1,500. I mean, that is the prize of why Lithia built a bigger funnel. Why GreenCars and Driveway exist is to bring more people in so our stores have greater options to be able to stabilize pricing at something closer to what market conditions are.
Bryan DeBoer: Generally speaking, most new car dealers sell their used cars for way less than what the one price used only retailers are selling cars for. That is because they focus on new cars. They are not quite as savvy and do not have as big a top of funnel to be able to find the right customers that are willing to pay or be able to finance that car at a higher price.
Jeff Lick: Awesome. Thanks very much, and best of luck in Q4.
Bryan DeBoer: Thanks.
Operator: Our next question is from Alex Perry with Bank of America. Please proceed.
Alex Perry: Hi. Thanks for taking our questions here. I guess maybe as a follow-up to that question and more as it pertains with some of the FTC enforcement actions, how much did you have to raise sort of the advertised price to the consumer in order to comply? How is it impacting the used vehicle comps and maybe sort of the price competitiveness with the CarMaxes and Carvanas out there?
Bryan DeBoer: Yeah, good question, Alex. At Lithia and Driveway, we were in compliance with virtually every store. So there wasn't any price adjustments, and we were fully disclosing any additional fees that were charged to customers online, and then when they come into the store, they actually match. Okay? I think a lot of the game had been in Florida is a lot of dealers had tendencies to price low and then have a big doc fee when you came into the store. That's not how our dealers ever did it, okay? We've always been full disclosure in every state across the country. So a little bit different. You may ask some of the others, and I think the biggest offenders are typically the private guys and the guys that aren't groups, that don't have legal departments and don't play by the same rules. Okay?
Bryan DeBoer: But outside of that, I am going to guess that most of the publics were in compliance back in March when this got announced, and I am imagining most of the private larger groups were in compliance.
Alex Perry: Really helpful. Then I just wanted to follow up on the after-sales business. Could you just maybe talk to us about pricing there? Are you seeing increased work deferrals with where sort of pricing has gone and given the sort of affordability issues out there? Do you think some of the softness is related to share loss to some of the cheaper independents? Do you think pricing needs to come in at all in after sales?
Bryan DeBoer: Great question, Alex. It is easy to get over our skis and raise prices when inflation was going up so much and everyone was doing it. We really encourage our stores to stay affordable as they can. The simplest way that we do it is we do it with aftermarket parts and non-OEM parts post-warranty period. Now, if a customer doesn't seem to show resistance, we will continue to replace their parts with OEM parts. But if they show pricing resistance, we are pretty good at being able to detect that and move them to an after-sales part and be able to compete in terms of what our pricing is on both labor and parts. Okay? I will say, though, Alex, not all of our stores behave the same. It is really easy to get into the mode that we are warranty shops and we are not customer-focused shops, okay?
Bryan DeBoer: Again, when I talk about Auto Done Easy or optionality with our customers, I would encourage many of our team members to think a little broader that we have got to keep our prices in line. We have got to be able to offer the great service and the great optionality for home pickup or in-store work at affordable prices, and we are very acutely aware of how to do that. Alex, the last thing I would remind everyone, we now have 156,000 users on the MyDriveway portal, and that is an area that creates transparency, simplicity, and empowers our customers to be able to choose those things and communicate with their service advisors or their salespeople immediately the way that they want. Okay? I know that we are still in our infancy, knowing that we have almost 10 million customers.
Bryan DeBoer: We've got a long ways to go to get full adoption on that's an area that customers will be able to opt for affordability a little bit more if they choose to. Hopefully we'll be able to detect a little quicker as to if they're defecting or they're thinking about defecting, come back to them with some offers that fit their budgets. Great question, Alex. It's a real opportunity for us as well.
Alex Perry: Perfect. That's incredibly helpful. Best of luck going forward.
Bryan DeBoer: Thank you.
Operator: Our next question is from John Saager with Evercore ISI. Please proceed.
John Saager: Hey, guys. Thanks for taking my call. I just wanted to follow up about the sustainability of used GPUs. I think this is obviously strong progress. You've talked about this for a while now. Second quarter in a row, around $2,000. Is this kind of a new floor of what investors can expect? Because I think even with sort of changing macro, the initiatives that you've taken on should be applicable. You're buying and selling in sort of the same market. As we look out into 2027, are you thinking about $2,000 as roughly a new floor?
Bryan DeBoer: I would say looking into 2027, that is absolutely accurate. I would remind everyone that the used car market typically does soften in Q4, so we could see a little bit of sequential decline. But overall, we should see a trajectory that GPUs continue to climb above the $2,000 GPU level. Okay? Again, the prize and why we designed the entire ecosystem, including DFC and Wheels and all the other componentry that Lithia is a party to, was designed to be able to capture that $1,500 a unit. You extrapolate that over 350,000 vehicles, and it's a pretty big number of about, what is it? About $500 million, I think, is the possibility if we can capture that just to get to what the average is for the marketplace of the one-price retailers.
John Saager: Makes sense. Okay. How should we think about the sort of the percentage of stores that are already at target relative to the whole group? Is that a way that we can think about the amount of progress that you've made so far towards your end goal here?
Bryan DeBoer: John, let me get back to you on that because this is going to be a total swag. I'm going to guess it's less than a quarter of our stores that have a micro funnel that is efficient enough to be able to sell their average car at market. Okay? It's a small amount. A lot of those are the traditional Lithia stores that have been with us for years and understands how to build the right top of funnel and how to finance every type of customer that walks in the door. To be able to do it in that 15 to 45 days of age rather than in the 0 to 15 days of age, which is what many of our stores, they underprice vehicles too soon, okay?
Bryan DeBoer: They do not let the car season in the marketplace to be able to find the right customer for that seat, and they just turn it. I do not mind doing that if it is a certified car that I can replace real easy. I think all of us would say that if it is a scarce car or it is a core product, if you cannot replace it, let it sit through three or four customers and generate additional business before you actually spin it and sell it to someone. There is a lot of opportunity here, and I think we will be able to see it in the coming quarters.
John Saager: Okay, thanks so much.
Bryan DeBoer: Thanks, John.
Operator: Our next question is from John Babcock with Barclays. Please proceed.
John Babcock: All right. Good morning. Thanks for taking my questions. Just first one on, you have been working with the Chinese OEMs in the UK, and they are going to be expanding into Canada over the next year or so. Just kind of curious to the extent that you are doing work with them in Canada, and any sort of discussions you have ongoing.
Bryan DeBoer: Sure, John. I think in Canada, I think we are pleased to see that they are choosing to partner with dealers when they move into the marketplace. That is a real positive thing. They are looking for exclusivity in Canada, which is much different than how it is in the United Kingdom, where we are spending $50,000 to $100,000 by buying a small image program and a sign and having the cars on our lot in 60 days. In Canada, they are looking for exclusive franchises and exclusive locations. I would also note that the real estate costs in Canada are about 30% higher than the United States as a whole, which makes it even more cost ineffective to be able to do that. Our numbers are showing somewhere between a six and an eight-year break even because of the lack of service and parts business, going into that market. Okay?
Bryan DeBoer: The United Kingdom, remember, most of our franchises in the United Kingdom, they are dueled with American manufacturers or French manufacturers or German manufacturers, not obviously the luxury manufacturers. And that is really easy because then I have an after-sales base, and any business that I get on the new car side is plus business. So if we were to circle back now to Canada, I think we probably will be an early adopter, maybe a couple of franchises in Canada. But ultimately, we are probably at a wait and see approach, just so we have got our foot in the pond to be able to see what happens in the United States in the event that they eventually come to the United States.
John Babcock: Okay. That is helpful. And then separately on F&I, there was a little bit of a pullback there in terms of the F&I PBR. Could you just talk about that a little bit? How much of that is driven by consumers pulling back on spending? And if that is the case, if you could talk about maybe what products they are deciding to hold off on purchasing notice.
Bryan DeBoer: Sure, John. I think on F&I think it is important to note that our F&I is also affected by our DFC penetration, which was pushing 20%, which is great. Good job, Chuck. Good job, Scott. It is nice to see that because that is the main pathway to achieve. Well, today we are what, $31 billion in revenue domestically, and we say that you should be able to convert that into a 0.1 in terms of profitability. So that is $310 million in profit from Driveway. That does affect our F&I average in the short term, though in the long term, it gets us three to four times more profitability on each transaction that we do. Back to F&I.
Bryan DeBoer: I would say, John, that I think affordability does create a little bit of drag on the optionality of buying service contracts or lifetime oil products or those types of things, and we are seeing a little bit of that. Outside of that, we have got lots of opportunities to continue to grow F&I, and I imagine that downward trend should be able to be curbed pretty quickly.
John Babcock: Okay, thanks. If you do not mind, just one more question. Just back to parts and service. I know people have already asked about this to some extent, but I was wondering if you could break out the performance across warranty and customer pay in the quarter, and also just generally, how were volumes in the quarter and how were they last quarter?
Bryan DeBoer: Sure. Volumes on service as well? Parts and service?
John Babcock: Yes.
Bryan DeBoer: Okay.
John Babcock: Yep.
Bryan DeBoer: Here. I will just give you the quick revenue numbers. Customer pay was flat. Warranty was up. My glasses need a fine-tuning here. Up 6.1%. Parts wholesale was down 4.3%, which means do-it-yourselfers, and collision was down 1.5%. On gross, customer pay was flat, warranty was up 10%, parts wholesale was flat, and collision center was flat. The warranty is being driven, and I mentioned this last quarter, there are some franchise laws changes that are allowing us to get the full hours that we typically need to pay our mechanics. Manufacturers in Florida and New Jersey and I believe Virginia, now are required to pay that. A lot of the lift in gross profit, the differential is coming from that 4% difference is coming from just those three states alone.
John Babcock: And then just from a unit perspective, overall, I assume with the relatively flattish growth on the same store sales basis, we should assume volumes were down during the quarter?
Bryan DeBoer: I do not have my It is technically called repair orders, and I think it was down slightly.
John Babcock: Okay.
Bryan DeBoer: I think it was down slightly.
John Babcock: All right. Appreciate all the detail. Thank you.
Bryan DeBoer: You bet. Thanks.
Operator: Our next question is from Bret Jordan with Jefferies. Please proceed.
Bret Jordan: But I guess when you think about
Bryan DeBoer: Hey, Bret.
Bret Jordan: Hey, good morning. When you think about customer pay price, it would seem like car counts were down a little bit. What do you think price inflation year to date has been on an average repair order?
Bryan DeBoer: Ooh. Which would ultimately be the cost of our technician and the.
Bret Jordan: Technician parts, yeah.
Bryan DeBoer: parts. I would probably say 4% to 5%.
Bret Jordan: Okay.
Bryan DeBoer: It is a total swag, Bret, but I am going to guess it is something like that.
Bret Jordan: All right, great. On the UK, you called out the Chinese success story over there. How was the legacy business? What is the Chinese contribution to that north of 10% growth in the UK? Is there an opportunity to keep that above trend growth by adding more Chinese to the footprint?
Bryan DeBoer: About half of that success is coming from the Chinese. Fortunately, our market share in our luxury brands have been really good. We have been able to continue to grow our BMW, Porsche, Mercedes, and Land Rover franchises, and that makes up a lot of our business over there. The other thing is, we have got a pretty good footprint in our mainstream brands as well that have done a pretty good job. If you look a little deeper into that, our used car successes in our non-luxury is exceptional. Our leader, Gary, over there that runs our mainstream brands, he is exceptional about filling every single parking spot on those lots and then turning those quickly at the right prices, that we think that there is still a lot of opportunity there.
Bryan DeBoer: Now, is there more opportunities to be able to add Chinese, I think was the second part of the question, Bret. We are actually seeing pretty good saturation of the first seven that came in 3, 4 years ago. They continue to add points in the United Kingdom. So even though there is growth of the Chinese now pushing 14%, 15% of the entire marketplace, it is starting to taper off. And the brands that are growing, we are starting to see that the number of stores they are adding is outpacing the growth rate by units of those brands. The other thing that I would layer in, there are 5 more new Chinese that have entered the market this year. They are the ones that are actually growing at the faster rate. So there is some adoption that we are looking at adding a few of those in some of the opportune areas.
Bryan DeBoer: What we basically end up doing is we end up substituting or swapping out like a Renault, or a Citroën, or a Stellantis, or something like that is just not able to compete and perform at the same level where you end up just swapping those brands out. And many of those stores already have 2 or 3 brands sitting in them. Hopefully that gives you a little bit of color on that, Bret.
Bret Jordan: Thanks. Does the underlying consumer in the UK feel better than they did? It seemed like the end of last year sort of felt like a soft backdrop. Are you seeing that the market feels a little healthier?
Bryan DeBoer: I think that if Neil was answering this question, I think they would indicate that it is neutral to positive, but not vastly different. The one thing that the Chinese were able to do was to drop into an affordability bucket, and that is where we have really done a nice job, because if the new cars are more affordable, it basically takes away the sale of a used cars. And we have been bucking that trend, which is great to be able to see. So, I think a lot of the confidence is coming from the fact that there is a little bit more affordability in what is coming to marketplace. I would also caveat this, since we got so deep into the United Kingdom market, it is a fallacy to think that the Chinese are taking market share because of BEV.
Bryan DeBoer: Remember, the first manufacturers that went into Western Europe, that went into the United Kingdom, came with just BEVs. They had less than 1% market share, and they were stagnant for over a year. It wasn't till they started to introduce their other products, plug-in hybrids and even ICE engines, that they began to get traction in market share. Meaning that the whole formula is about solving for affordability, not solving for sustainability. So just a little bit of a caveat, and I think it's the same will hold true in many other parts of the world.
Bret Jordan: Great. Appreciate it. Thank you.
Bryan DeBoer: You bet, Bret.
Operator: Our next question is from Daniela Haigian with Morgan Stanley. Please proceed.
Daniela Haigian: Great. Thank you, and good morning. My first question is on the DFC, which had another excellent result. I just wanted to get a sense of, I know it is a very high-quality book, average FICO is quite high, but have you seen any changes in consumer behavior in the past six weeks or so with the higher rate or oil environment?
Chuck Lietz: Hi, Daniela. This is Chuck. Thanks for your question. Yes, in terms of looking at the consumer and any changes in behavior, for us, in our portfolio, we have not seen any change in behavior. If anything, our book continues to maintain its high credit quality, and our delinquency rates are actually 20% better up and down the credit stack on a year-over-year sequential basis. So, our consumers are performing well and continue to perform well, and that really leans into our stated strategy of really getting preferential selection on a risk-adjusted return basis, and we expect that to continue as we move forward with DFC.
Daniela Haigian: Thank you, Chuck. Next one is for you, Bryan. I wanted to ask about agentic AI. There has been a lot of discussion around the potential for this technology to change how consumers shop for vehicles. How do you think about the impact on the traditional dealership model? Do you see this as an opportunity for Lithia to lean into scale, inventory, and this kind of full ecosystem that you have built out? Thank you.
Bryan DeBoer: Thanks, Daniela, for the question. It is an exciting time for our business, and I would like to speak to the investors about that just as much as I would like to speak to our own team members, because this is a fearful thing for them at times, because they could look at it as making themselves obsolete. I would encourage all of my team members and all of our team members to think about it as you get to do what you do best, and that is create memorable, trusting relationships with our customers. Let the agentics do the stuff that we either forget to do not like to do, or it is just too repetitive, okay? So let agentics do the boring stuff. That is what we are seeing in the United Kingdom.
Bryan DeBoer: We have some of it in the United States, a lot of it in service and parts, and we are seeing early success. Now, how do I quantify it? We sit at a little bit of a sub 70% SG&A, and we have publicly disclosed that we believe that we can get to sub 60% SG&A. We believe that half of that improvement is going to come from agentics. It will come through simple things like what I just spoke about, pre-sales and service. It is really easy to forget to ask people, "Do you want your windshield wipers done? Do you want me to check your tires? Do you want me?" We get busy in our business, and our people get busy. We do not want to lose business and lose service ability of our customers because we are busy.
Bryan DeBoer: Agentics can fill that gap in a nice way so we can spend the time creating attachments with our customers. If we look at where is the other 500 basis points of that thousand-point drop, that is from improvements in volumes and underperformance in our stores. It is new stores that have not yet adapted to the idea that I am going to sell older used vehicles. They have not adapted to the idea that post-warranty period, I am going to sell non-OEM parts. They have not maybe adapted to the ideas that I do not mind going to people's homes to be able to do whatever they want. I think as retailers, it has been really easy to be able to sit on our laurels and make a lot of money.
Bryan DeBoer: I think those days are behind us, and I would challenge my entire team and challenge the industry to get better at what we do by thinking about what our customers are wanting and giving it to them the way that they want it. Hopefully that gives you some color on how we see agentics in the future, but that is probably the tip of the iceberg as to how it can help our teams do a better job.
Daniela Haigian: Great. Thank you, Bryan.
Bryan DeBoer: Thanks, Daniela.
Operator: Our next question is from Mark Jordan with Goldman Sachs. Please proceed.
Mark Jordan: Hey. Thank you very much for fitting me in here. Chuck, this might be a question for you. It looks like the second quarter in a row here on the slide presentation where we have a higher midterm outlook for income from financing operations. Can you talk about what changed there? Is it just really the pull forward or some of the portfolio growth and the penetration nearing your 20% target, or is it just something else?
Chuck Lietz: Mark, great question. This is Chuck again. We are really seeing two main things that are driving our forward-looking profitability growth. The first one is, as you mentioned, just our consistent preferential selection of the quality of the portfolio and our outperformance of the market on our charge-off and delinquency metrics. The second is certainly the growth. We are closing in on almost doing $1 billion in originations in the quarter. Bryan certainly mentioned the higher penetration rate. That is obviously flowing through to our bottom line. I think all of this points towards signs of achieving preferential selections from a risk-adjusted return basis, growing our portfolio. This business will continue to be consistent, predictable, and repeatable in terms of its growth, otherwise absence of seasonal adjustments for charge-offs. We are very bullish on DFC's forward-looking outlook.
Mark Jordan: Perfect. Thank you very much. Bryan, one for you, if I could. Just thinking about new vehicle affordability, obviously it has been pressured for a while now, but are you seeing any changes in terms of customer behavior here in the US, any noticeable shifts in behavior over the last few months?
Bryan DeBoer: We really haven't. The good news is, there are a number of manufacturers that understand that they can gain market share if they can just get into that lower price point as well. I should say, incentives aren't getting much better, so I still believe that there are opportunities for our manufacturer partners to be able to provide a little bit better leases, which can affect affordability in big ways. They haven't jumped back in on that fully. We were at 31% lease penetration. Hopefully, we can get back close to 40%, and that really keeps those customers in funnel and in life cycle so we can get them back in two, three years. Anyway, outside of that, Mark, not big changes in affordability or in behaviors of our consumers.
Mark Jordan: Excellent. Thank you very much.
Operator: Our final question is from Rob Sussman with UBS. Please proceed.
Rob Saltzman: Hey, team. Thanks for squeezing me in here. Just a quick one on DFC. With rates moving higher and funding costs for DFC likely moving higher with it, how do you think about the balance between passing through higher funding costs to customers and absorbing maybe some of that in order to drive sales? How do you think about the balance of that, would be the question.
Chuck Lietz: Yeah. Rob, this is Chuck again. Obviously, there is a time lag between how quickly we can sequence through changes in our cost of funds rates as the markets move in an upward direction versus what the market will and our customers will bear. This is really part of our overall strategy where DFC, we are there to support our stores and help drive overall growth and meeting the needs of our customers in conjunction with our stores. However, having said that, we actually look at each contract on an individual basis on a fully risk-adjusted NPV basis to make sure that it is still profitable for Lithia and Driveway.
Chuck Lietz: And taking that balance between supporting our stores and making sure we are meeting the needs of our customers and still being profitable on a risk-adjusted basis, that is, I believe, how we will continue to really balance those risks of the higher rates versus supporting our stores.
Rob Saltzman: Thanks so much, guys. Really appreciate you squeezing me in here.
Bryan DeBoer: Thanks, Rob.
Operator: There are no further questions. I would like to turn the conference back over to Bryan for closing remarks.
Bryan DeBoer: Thanks, Sherry, and thanks, everyone, for joining us today. We look forward to talking to you again for our Q4 and year-end earnings call in February. Bye-bye.
Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
