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Operator: Greetings, and welcome to Lithia Motors First Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Amit Marwaha. Thank you. You may begin.

Amit Marwaha: Thanks for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; Chuck Lietz, Senior Vice President of Driveway Finance; and finally, Adam Chamberlain, Chief Customer Officer. This discussion may include statements about future events, financial projections and expectations about the company’s products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.

We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which are made as of the date of this release. 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 first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Bryan DeBoer: Thanks, Amit. Good morning, and welcome to our first quarter earnings call. Our Lithia & Driveway teams remain focused on driving results and continuing on our journey to building a unique and highly profitable customer ecosystem. For LAD, the windfall of elevated GPUs for the past four years provided the extra capital that allowed us to grow revenue and earnings by nearly 3 times and build, acquire and fund all our crucial differentiating strategic adjacencies, Driveway, GreenCars, DFC and Pendragon Vehicle Management, or PVM. These important design and scale advantages have built a definitive pathway to a higher margin and lower cost business. While the extra capital helped us build out our advantages, we have been clear that elevated GPUs would return to some level of normality.

We remain diligent and nimble throughout this normalization process, still seeing that combined vehicle GPUs, because of geographic and manufacturer mix improvements, along with our unrealized performance potential, will normalize between $4,300 and $4,500 per unit. As strange as it may seem, my team and I welcome normalization and getting back to working for our profits through providing rich and irreplaceable experiences one customer at a time. Our current global footprint, core competency of acquisitions, growing high-margin adjacencies and experienced operationally focused leadership at all levels of the organization combined to form our strategy. We are positioned to deliver strong growth through reinventing our industry’s customer experiences and achieving a LAD profit equation of $2 of EPS for every $1 billion of revenue.

Now on to some highlights for the first quarter. Lithia & Driveway grew revenues to $8.6 billion, up 23% from Q1 of last year, helping outrun some of the declines in GPUs. Vehicle operations experienced weaker performance in January and February with declining new vehicle GPUs and used vehicle GPUs at below normalized levels. March, however, did improve, exceeding our internal expectations with good momentum in unit volumes and stronger used vehicle GPUs. Our investments in adjacencies are maturing as well as the path to profitability. Financing operations produced strong results with a loss of less than $2 million in the quarter compared to $21 million loss last year and over 90% improvement. Driveway and GreenCars burn rates have also been cut in half compared to a year ago as we continue to refine our customer e-commerce strategies, improve Driveway care center and advertising effectiveness, while continuing to convert new customers.

As a result and driven by market conditions, we generated adjusted diluted earnings per share of $6.11, a decrease of 28% from Q1 of last year. We continue to proactively manage our business with decisive actions aligned with local market and manufacture partner trends, leaning into what we know best: execution. Let’s move on to same-store sales results and vehicle operations. Total same-store sales revenues were down 2%, driven by ASP declines and gross profits declined 7%. Despite continued affordability issues from ASPs and higher interest rates, we continue to see resilience in the automotive consumer, though a bit less willing to pay a premium. MUVs across all our digital channels increased 9% quarter-over-quarter, reaching $12.3 million per month.

Digital transactions including Driveway grew to over 40,000 in the first quarter, up 32% compared to last year. GreenCars, the leading sustainable vehicle education channel, continues to grow as the lead generation channel and contributed over 730,000 MUVs, up 71% over last year, doing so with very little expense. Our teams have made great strides towards profitability in Driveway and GreenCars, and I want to commend Adam Chamberlain and Diana Deprez and their teams on the progress we have made in such a short time and their vision to achieve a profitable e-commerce channel someday soon. New vehicle revenues were up 2%, while gross profit declined 27% compared to the prior year. Unit volumes increased nearly 4% with ASPs declining 1%. New vehicle GPUs, including F&I, were $5,771 per unit, down $512 compared to Q4 and down $1,640 or 22% year-over-year.

With the return of inventory supply, we have seen an accelerated pace of GPU normalization to nearly $150 per month. New vehicle inventory day supply was 60 days compared to 65 days at the end of Q4 and 51 days at the end of the first quarter 2023. Moving on to used vehicles. Revenue was down 5% with units down only 2% and ASPs declining 3%. Used vehicle pricing is moderating in line with the recovering supply of new vehicles, and we continue to see the impact of lost production from 2020 to 2023, moving through our certified and late-model vehicles. Used vehicle GPUs including F&I were $3,901, up $150 per unit compared to Q4 and down $153 per unit compared to last year. As you may recall, Q1 and Q4 are traditionally the weakest quarters, and we are seeing more normalized seasonality trends in used cars.

As new vehicle retailers, we are top of the procurement funnel, giving us significantly more access to inventory than used owned dealers. This provides us a significant advantage as we continue to source over 70% of our used inventory directly from consumers. Our strategy of selling one to 20 year-old scarce vehicles also provides a vast opportunity to our new stores. To put it in perspective, nearly two-third of our stores have been recently acquired, and this continues to be a massive opportunity for us to gain market share and increase profitability. Our used vehicle inventory day supply was 58 days compared to 64 days last year and 53 days in the previous year. F&I per unit was $2,080 in the quarter, declining $123 compared to last year.

We continue to see consumers working to balance affordability due to higher ASPs, increasing negative equity and high interest rates. This has created some affordability tension on monthly payments impacting F&I product penetration rates positively on financing, up 150 basis points, and negatively on service contract penetration rates, which declined 270 basis points as compared to last year. Now on to aftersales. For the quarter, revenues increased 3% and gross profit increased 7%. Customer pay revenue, which accounts for 56% of the aftersales business, was up nearly 3%. While warranty sales, which makes up 23% of the business, increased by 10%. Aftersales continues its steady performance of growth despite our primary driver of one to four year-old vehicles in the car park being the smallest in over a decade.

This speaks volumes to strong upside created from the complexity of a growing number of different propulsion systems, resulting in longer warranty periods and a stickier customer attachment to new vehicle retailers. Moving on to acquisitions and our long-term strategy. We completed the Pendragon acquisition at the end of January, establishing our partnership with Pinewood Technologies, adding a profitable fleet management business and rounding out our footprint in the U.K. by adding a net 140 locations. In addition to Pendragon, we expanded our U.S. footprint in our least dense North Central region with the addition of the Carousel Group. To date, in 2024, we have acquired $5.4 billion in annualized revenues, and I would like to personally welcome all our new associates to the Lithia & Driveway family.

Acquisitions are our core competency at LAD, and we remain disciplined as we look for accretive opportunities that can improve our network. As a reminder, we target after-tax return of 15% or greater and acquire from 15% to 30% of revenue or 3 times to 6 times normalized EBITDA. Life to date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%, demonstrating that LAD is not your typical high-risk roll-up strategy. Our scale allows us to find our growth through acquisitions and adjacencies through free cash flows and reasonably leveraging our balance sheet. With elevated acquisition pricing, current stock valuation and placing M&A and share buybacks at parity, we have adjusted our capital allocations to target 50% to 60% towards acquisitions and 15% to 25% towards shareholder return.

We continue to monitor valuations on both acquisitions and share repurchases, being patient for strong assets priced within our acquisition hurdle rates. We still expect pricing to take some time to rationalize and reiterate our expectations that estimated future annual acquired revenues will be in the range of $2 billion to $4 billion a year. The foundation of the LAD strategy is our vast store network made up of the industry’s most talented people, highest demand inventory and dense expansive physical network. We have built and will continue to build the most extensive network in North America and the U.K. and added important foundational adjacencies and strategic partnerships to modernize the customer experience and diversify our profitability.

Operating in one of the largest retail addressable markets in the world, we have built and solidified our ability to continuously grow in all aspects of our business. Expanding consumer solutions that are simple, convenient and transparent is the heart of our strategy, allowing us to capture more of the consumer wallet share and create a sticky and natural retention of consumers within our ecosystem. Magnetic brands like Driveway and GreenCars provide a pathway to 50 times more customers than our core business offer. Solutions such as Pinewood Technology, bring the ability to increase associate productivity and substantially improve our current customer experience, stitching together our robust ecosystem and placing it at our customers’ fingertips.

Combined with our mission, growth powered by people, financial discipline and regenerative free cash flows, we are able to respond quickly to local market dynamics while increasing the touch points throughout the customer life cycle through our adjacencies and equipping our stores with the tools necessary to improve market share, loyalty and ultimately profitability. Weaving these elements together and assuming a normalized SAAR and GPU environment, we continue to see a clear pathway to $1 billion in revenue, ultimately generating $2 in EPS. Key factors underlying our future steady state and now totally within our control are as follows: first, continuing to improve our operational performance by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer life cycle interaction, leveraging our cost structure, personnel productivity gains and growing each store’s new and used and aftersales market share.

In the long term, we look to achieve an SG&A as a percentage of gross profit with adjacencies in the mid-50% range in a normalized GPU environment. Tina will be providing more color on the impact of our U.K. footprint on SG&A in a few moments. Second, continue focusing on acquiring larger automotive retail stores and the higher profitability regions of the Southeast, South Central and North Central United States. Combined with further growth in digital channels, we expect to reach a blended U.S. market share of 5%. Today, we are at a combined new and used vehicle market share of 1.2%. Third, financing up to 20% of our units with DFC and maturing beyond the headwinds associated with CECL reserves. As a reminder this is our first adjacency and it remains on track to achieve consistent profitability during the latter half of 2024.

Next, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure and captive insurance. Fifth, through size and scale, we will continue to drive down vendor pricing with solutions like Pinewood Technologies, which improved corporate efficiencies to save costs and lower borrowing costs as we pathway towards an investment-grade credit rating. And finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. Please refer to Slide 14 of the last investor presentation for further details and reconciliations. As we approach the middle of the decade, we are well positioned to maximize our unique and powerful mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership life cycle at global scale.

Our strategy, combined with our experienced and focused team, will continue to expand market share, leverage our size and scale and grow our complementary adjacencies to produce an ultimate long-term EPS to revenue ratio of over 2:1. All elements of our original design are now securely in place, and we look forward to focusing all of our attentions on execution to establish new levels of performance for our industry. With that, I’d like to turn the call over to Tina.

Tina Miller: Thanks, Bryan, and thank you to everyone joining us today. Our financing operations segment, primarily driven by DFC, continues to grow, and we see clear line of sight on how this adjacency is now providing incremental profitability and diversifying our business model as it matures. As a reminder, a loan originated by DFC is expected to contribute up to 3 times more profitability compared to traditional indirect lending. The financing operations segment moved toward profitability with a first quarter operating loss of $2 million, down from $21 million last year in Q1 and a portfolio balance growing to over $3.5 billion. Within the United States, DFC’s penetration rate was 11.7%, up from 10% last quarter. We continue to strategically balance yields growth and risk through our underwriting and focus on high credit quality loans at market interest rates.

Origination volume was $493 million during the quarter, a 15% increase compared to Q4 2023. The weighted average APR on loans originated was 10.2%, essentially flat compared to the prior quarter and up 124 basis points from a year ago while originating at a consistent credit quality. Loans originated in the quarter had a rated average FICO score of 735 and a front-end LTV of 95%, consistent with the prior quarter. As a 100% captive auto loan portfolio, DFC can have first and last look on deals that fit our credit risk appetite, providing ample opportunity to grow while maintaining our underwriting standards, particularly in the used vehicle market. Net provision expense increased slightly from the prior quarter to $25 million, driven by the growing portfolio.

The allowance for loan losses as a percentage of loan receivables stayed flat at 3.2%. 30-day delinquency rates decreased 80 basis points from the prior quarter to 3.8%, consistent with seasonal expectations and were flat year-over-year, reflecting the maturing portfolio and continued execution from our loan servicing team. Our financing operations business continues to perform as expected, and we reiterate our expectation to break even in 2024. We remain confident in the financing operations ability to deliver long-term earnings growth to LAD and achieving our end-state financial goals with a fully scaled and seasoned portfolio. Simply put, the best is yet to come as this first adjacency can take us a long way towards our 2:1 EPS to revenue target.

Moving on to SG&A. Adjusted SG&A as a percentage of gross profit was 69.4% during the quarter, mainly reflecting the higher expense profile of our U.K. business. On a same-store basis, which excludes the impact of the Pendragon stores and is more representative of our historical performance, our adjusted SG&A as a percentage of gross profit was 66.9%, a 180 basis point increase from the fourth quarter mainly driven by declining new vehicle margins and below normalized level used vehicle margins early in the quarter. With the completion of the Pendragon transaction, our U.K. business represents 18% of our revenue mix and 13% of our gross profit mix in the quarter. We thought it would be helpful to provide some early insights on the financial profile of our U.K. business as it becomes a more meaningful part of our consolidated results going forward.

Total vehicle gross profit per unit in the U.K. was $2,600 in the quarter, 45% lower than our North American vehicle operations. One of the main contributors of this difference is regulations around F&I in the U.K., resulting in a lower F&I per unit. Gross profit mix from aftersales is similar in the U.K. at just under 40%. Our U.K. footprint is comprised of smaller stores compared to our average North American location with a revenue average of less than $50 million per store. While knowing this leading into the investments, the smaller store size with SG&A being more fixed in nature, resulted in SG&A as a percentage of gross profit at 85% during the quarter for the U.K. As a result, we see our consolidated SG&A as a percentage of gross profit increasing to the mid- to high 60% range in the near term with our long-term targets moving to be in the mid-50% range as GPUs normalize, and we continue to optimize our business and mature our adjacencies.

We see opportunity to increase profitability over time in the U.K. as we fully integrate the teams into the Lithia & Driveway culture, migrate our stores into a single platform on the Pinewood DMS system and drive higher levels of performance. As previously discussed, we are actively working on optimizing the U.K. network. Moving on to our balance sheet and cash flow performance. During the quarter, we completed an amendment to our main credit facility used to fund our vehicle floor plan and working capital, increasing the capacity from $4.6 billion to $6 billion and extending the maturity to 2029. This solidifies our capital structure to take us beyond $50 billion in revenue. I want to take a moment and thank all of our banking partners for their support and continued confidence in our business.

We reported adjusted EBITDA of $362 million in the first quarter, driven by continued strength in new vehicle sales and aftersales, offset by lower new vehicle GPUs with returning supply and higher floor plan interest expense. Unique to our industry is the financing of vehicle inventory with floor plan debt. This finance is integral to our operations and collateralized by these assets. The industry treats the associated interest as an operating expense and EBITDA and excludes the debt from the balance sheet leverage calculation. Similarly, as we have ABS warehouse lines and ABS issuances to capitalize DFC, we exclude those from our leverage calculations. Adjusting for these items, we ended the quarter with net leverage of approximately 2.25 times, comfortably below our target of 3x and our banking covenant requirement of 5.7 times.

We continue to maintain our financial discipline even with planned growth and target leverage below 3 times. During the quarter, we generated free cash flows of $218 million. We define free cash flows as EBITDA adding back stock-based compensation less the following items paid in cash, interest, income taxes, CapEx and dividends. Free cash flows were impacted by the declining EBITDA and an increase in capital expenditures compared to prior year, mainly related to construction at recently acquired locations to meet manufacturer requirements. The benefits of our capital allocation strategy is the regenerative cash flows generated from our business, allowing us to preserve the quality of our balance sheet while supporting our growth initiatives and navigating various cross currents in today’s environment.

Being responsive to valuation trends, we evaluate M&A opportunities in the near term on parity with being opportunistic in our share repurchases. We have adjusted our capital allocation strategy to target 50% to 60% toward acquisitions, 25% toward internal investments which includes capital expenditures and the balance of 15% to 25% towards shareholder return. Since the end of the quarter and as of the end of last week, we have repurchased approximately 58,000 shares at a weighted average price of $264. Approximately $452 million remains available under our share repurchase authorization. Our vision and ability to deliver on synergies through acquisitive growth remains unchanged, and our strategy is flexible with the consistent cash flow generation of our vehicle operations business, coupled with our ability to deliver on accretive acquisitions.

The team has the necessary infrastructure and tools to drive revenues and margins toward our long-term target of achieving $2 in EPS per $1 billion in revenues and our focused on execution. Our culture and business is designed to grow and deliver consistent strong performance, and our diverse and talented members of our team give us the necessary foundation to achieve our plan and to continue driving value for our shareholders. This concludes our prepared remarks. With that, I’ll turn the call over to the audience for questions. Operator?

Operator: Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ryan Sigdahl with Craig Hallum. Please proceed with your question.

Ryan Sigdahl: Hi, good morning, Bryan, Tina. I want to start on new GPUs. They declined a little bit more sequentially, I think, than you guys and us expected. But curious what you’ve seen in April. And then any expectation kind of for the next several quarters through the rest of this year?

Bryan DeBoer: Sure, Ryan. Thanks for joining us today. We did see a slight acceleration to around $150 a unit in the quarter. We also — imports were up, which — up about 9% in revenues and units which carried some of that which is typically a little bit lower cost cars, doesn’t have quite as many trucks. So that could have been some of the influence there. The other thing I would say is we’re still at about $1,000 higher, including F&I, of where we believe normalization will finally fall into line, okay? And there’s still some work to go. We also have a small amount of regional differences. But all in all, I mean, that’s where it started with really, the top level where GPUs fell a little bit more than what we really expected at the $100 a month.

Ryan Sigdahl: Good. And if I could just ask one longer-term question. If I’m looking at Slide 14, kind of the bridge to that $100 billion of sales, $1.75, $2 of EPS. If I look back to the previous expectations, operating margins were expected to be 7% plus, now 5% plus. I guess, what’s the offset there, assuming lower operating margin but similar EPS flow through?

Bryan DeBoer: Sure. About half of that is the bringing on of Pendragon. So the dilution of lower margins from the United Kingdom affected to some degree. And I think the rest is more conservative that we — that other things that are below operating margins such as interest costs or possibly buybacks can influence things a little bit more as well. Thanks, Ryan.

Ryan Sigdahl: Very good. Thanks, Bryan. Good luck, guys.

Operator: Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.

Bret Jordan: Hi, good morning, guys. Could you talk a little bit more about F&I? I mean, obviously, it’s hard to attach extended warranties to customers that can barely afford the rate side of the equation. But do you see much downside in F&I? Or are we sort of stable at the run rate in the first quarter?

Bryan DeBoer: We were down $124 a unit. New was down a little bit more at $180. So we’re seeing a lot better incentives when it comes to fleet and finance, which takes away some of our profitability because of flat fees. So that has a little bit to do with it. And then obviously, as we continue to penetrate with DFC, that influences a little bit as well. We were up to what about 11.5% penetration rate, which is quite nice. But it does influence — that’s in finance, obviously. Whereas when we don’t get the reserve from our third-party lenders, it does lower GPUs a little bit. We believe a normalized state, Bret, is probably in the $1,900 range, okay, because there is some impact that will come from ASPs, which just is a given throughput of a lower cost amount means a lower finance income. But outside of that, I think we’re seeing a nice trend there towards that normalized state.

Bret Jordan: Okay. And then you talked about the trend in the quarter of January, February seeing some below normalized levels and March improving. Could you talk about the U.K. trend in the quarter?

Bryan DeBoer: Chris, do you want to talk about the U.K.?

Chris Holzshu: Yes, you bet. Good morning, Bret. So U.K. kind of has an anomaly every quarter, and the anomaly in the first quarter tends to be a massive March with a lot of deliveries with the plate changeover that you have. So you have a kind of a very modest January, a very modest February and then a monster March, and that came to fruition like we expected. The focus, though, longer term, obviously is continue to figure out how to get kind of more consistency in the business in each of the quarters and try to match a little bit more relatively to some of the performance that we see in the U.S. outside of the F&I performance, which is much more regulated in the U.K. than it is in the U.S.

Bret Jordan: Okay. And Bryan, a follow-up question, is leasing going to be a headwind to F&I because there’s just less attachment as leasing comes back? Or is that not material for you?

Bryan DeBoer: It is, and that was one of the things that I had mentioned, that with subvented leasing, and that’s where a lot of the incentive dollars are still going, we’re basically at a normalized state of incentive dollars in leasing, which obviously is in flat fees. So it does impact our F&I. I think it’s important to also point out that finance incentives are still off somewhat. So they’re about half of where they normally are, which means that those finance customers still aren’t getting quite the benefits of manufacturer incentives of lower, more affordable pricing. And then most importantly, for cash buyers, it’s still down like 80%, meaning that the incentives that are coming on the hood for cash directly to the consumer is still down considerably. And I think that obviously can be good tailwinds in the future as that begins to come back. Thanks, Bret.

Operator: Our next question is from John Murphy with Bank of America. Please proceed with your question.

John Murphy: Good morning, everybody. I just wanted to follow up on the comment you made, Tina, about sort of some pressure on the used business early in the quarter. And it just seems like there’s pressure on used vehicle pricing which has been reasonably as expected, but it also seems like there’s a bit of volatility in that business. I was just wondering if you could kind of expand on that. And if there’s anything that is unusual in the first quarter that might normalize going forward? And it just sounds like things are a little bit more volatile there than usual.

Chris Holzshu: Yes. John, it’s Chris. I’m going to jump in on this and maybe just talk about the trend that we talked about in Q4, which was — I think the term I used was we were in a bit of a firefight trying to procure used cars back in Q4, which put a lot of pressure on margins in really the back half of 2023 and into the first couple of months in 2024. I think as our teams have kind of adjusted to ensuring that every vehicle that we can take in on trade generates about $1,800 more than a vehicle that we buy in auction, overall gross profit dollars, I think there’s a big focus. And we saw that trend continue to recover throughout Q1 both in GPUs, where I think we had the strongest GPU in March than we had the last 12 months.

And also on a same store comp basis. It was the first time in February that we saw a positive comp in same-store used cars in like 15 months or something like that. So I think we’ve kind of got our arms around this. It is very volatile. It is really finicky. But being a top of funnel used car dealer, obviously — or new car dealer, where we get first access to most trades is a huge benefit that we need to continue to capitalize on.

John Murphy: And then just one follow-up on partner service. Plus 3.2% is nothing to sneeze at, but it was a little bit lower than we were expecting. Do you foresee the ability to get a little bit deeper in the age spectrum and sort of broaden retention a bit to get that up into the mid-single digits? Or do you think as we’re seeing, Bryan, as you mentioned, the shrinkage or this very low 0 to 4 car population, it’s going to be challenged for the next couple of years?

Bryan DeBoer: John, this is Bryan. I think we’re really positive of what’s happening in aftersales. Most importantly, at 3.2%, when the car park is so much smaller as our main driver of the business, which is one to four year-old vehicles, if you think about the 10 million less units that are available for us to be up in same-store sales is big, which means we’re digging into older model vehicles, I think it also speaks volumes to the fact — and I think 3% is probably a low point of the next coming few years. But when we think about after sales growth, the complexity of vehicles is getting crazy, okay? Let alone the fact that it’s not just a BEV. Now we got BEVs in most manufacturers. We got plug-in hybrids. We got hybrids.

We got ICE engines. And all the products are new, meaning that there’s a higher breakage rate when there’s new products, okay? I mean, we’ve got the major advantage of longer warranty periods now, which is massive, okay? We’ve got the factory-trained technicians and, most importantly, the specialty tools that others can’t do. So the stickiness to new car dealers, we think, is a heck of a lot higher than what it was in the past and should bode well for us in the future regarding attachment and same-store sales growth.

John Murphy: Very helpful. Thank you.

Bryan DeBoer: Thanks, John.

Operator: Our next question comes from Rajat Gupta with JPMorgan. Please proceed with your question.

Rajat Gupta: Great. Thanks for taking the question. I just had a question on the U.K. business. We saw that the wholesale losses were once again very high in the first quarter, like $21 million gross profit loss. I mean, curious, was that all related to U.K. related inventory liquidation? Or was there something else going on? Just curious what happened there? And then how should we think about the inventory situation into the second quarter? Then I have a quick follow-up.

Bryan DeBoer: Yes. Rajat, this is Bryan. Most of our problems in the U.K., remember, were only Jardine and it happened in Q4. We worked through most of that in the United Kingdom. So most of those losses are relative to what’s happening in the United States.

Rajat Gupta: So what drove like the short wholesale loss in the first quarter? We didn’t notice that at other companies. So curious — or was it just like excess inventory into the regions? Or what drove the material change there versus the last quarter?

Bryan DeBoer: Yes. Look, I think the big thing was in January, we really tried to clean up inventory so we could go buy fresh inventory. And I think that’s what we saw. And Chris mentioned that we got the benefits of that coming out of those divestitures. So cleaning up inventory truly in the month was — at the first part of the quarter was the real disconnect. And now we’re starting to see some of those tailwinds coming in March and hopefully again in April.

Rajat Gupta: Got it. That’s helpful. And then we saw some press reports around headcount cuts in the U.K. Was that a part of a planned reduction when you announce Pendragon? Or was there something incremental given what’s going on in the region right now?

Bryan DeBoer: Yes. Rajat, let me jump in on that. This is Bryan again. We obviously have structured headcount reductions in the United Kingdom. I think everything is still pretty new and in flux there. So I think it’s premature to be able to figure out exactly what that’s going to look like. I think more importantly, we’re a sizable company today where, as a company, if we cut SG&A by 1%, it’s $50 million or $1.40 in EPS. I think where Chris, Adam and our operational teams are really focused today is how do they — how do we push that into the 3% to 5% range and save $150 million to $250 million after coming off some cuts over the last few years as well. And I think when we think about the Lithia & Driveway model, it’s about finding productivity increases that can come through technology and can come through just heavy lifting and rolling up our sleeves.

So that’s where we’re focusing the bulk of our efforts. And obviously, the U.K. will have their own efforts, but we really believe that there is a good 3% to 5% of fat that’s still in the store and would encourage each of our stores to continue to look for those opportunities.

Rajat Gupta: Got it. That’s helpful. Thanks for the color.

Bryan DeBoer: You bet, Rajat.

Operator: Our next question comes from Douglas Dutton with Evercore ISI. Please proceed with your question.

Douglas Dutton: Hi, good morning, team. So I have a question on the Driveway finance book, now at about $3.3 billion. Is there a level that this book has to be at to achieve that profitability target by the end of the year? Is that $3.7 billion, $4 billion? Is it more or less? Just curious there.

Chuck Lietz: Thanks, Doug. This is Chuck. Relative to the size of our book, we feel very comfortable that we can achieve the profitability at that $3.3 billion. As a credit business, most of our revenue streams are fixed, and we’ve already subsequently fixed our cost of funds. So this is a business that’s very predictable. It’s very consistent. And we feel very confident even at sort of about a $3.5 billion level that we can achieve our path to profitability in this year, which we’re very excited about.

Bryan DeBoer: Chuck is very humble. I’m going to give him some big kudos here. It’s been a four year journey to get to profitability. And I think from this point forward, we’re looking like we can achieve profitability on a month basis without any outlying changes, which is great. As a side note, in March, we did make over $2 million in the month, okay? There was a little bit of anomaly that still showed — would have showed profitability. But things look good. Delinquencies are down. And the pains that we took and the times of elevated GPUs were the right time because those are massive barriers to entry to anyone getting into this business is you have to establish CECL reserves, okay? So now we’re finally to the point where our net interest margins are outrunning those CECL reserves, and now we can play around with penetration rates to truly capture that additional $1,500 or so.

On every car deal that we put into DFC over the life of that loan, it’s $1,500 more than what we make on sending it to a third party.

Douglas Dutton: Excellent. Thanks, team. And then just one more for me here. As we get through the year-end and less vehicles are coming off lease from the past two or three years, how should we think about used vehicle sales and GPUs reacting to this lack of supply? You mentioned the firefight analogy earlier. Is it going to continue to be a firefight like that, where profitability is crimped? And do you see offsets to that on presumably better new vehicle volumes?

Bryan DeBoer: Yes. Thanks, Doug, for your questions, too. This is Bryan again I think most importantly, inventory supply, I believe, boils back down to people, okay? It’s a belief and it’s the ability to find vehicles. And whether there’s less off-leased vehicles or not, it’s not what’s most important. We can find vehicles with good people that are mining for cars deeper through this five to six channels that we typically mine vehicles. There is 10 million less units available out there, which is a given. But remember this, we’re in the plus nine year-old vehicles, which is really important to remember of the 37 million units that are available — that are being sold out there a year today, which is depressed still by about 10%, okay?

63% of the vehicles of the 37 million vehicles are over 9 years old, okay? That’s where we focus our money. Those units turn at 4 times the speed of a certified vehicle. They turn at 2 times the speed of a core vehicle. And we make about the same amount of money on about half the investment, meaning that the vehicles average selling price is about half. Obviously, if you combine those together, the return on a value auto vehicle can be as much as 5 time to 8 times over what it is on a certified vehicle. So when it comes to Lithia & Driveway, that’s our real focus, and we get those vehicles as of trade-ins off of our core vehicle product. So a little bit of a waterfall effect. Hopefully, that gives you some color on that, Doug.

Douglas Dutton: Appreciate it. Thanks, team.

Bryan DeBoer: You bet.

Operator: Our next question comes from Chris Bottiglieri with BNP. Please proceed with your question.

Chris Bottiglieri: Thanks for taking the question. One follow-up question and one bigger-picture question. Thanks for the help on the color for Pendragon. Can you give us a sense for the restructuring, like you closed the used car store, there’s a headcount number you defined. Can you give us a sense like what the impact on SG&A gross will be in used? Like how many units you’d be giving up by closing these businesses? Just on how to model the business, that seems pretty disruptive. That would be helpful color, if you could provide any.

Chris Holzshu: Yes. This is Chris again. I think right now, we’re right in the middle of that restructuring and really getting our arms around the business and really trying to focus the teams on evaluating what performance in each one of the locations looks like. And so yes, like some of the things that you alluded to are happening. We’re right in the middle of those, like the car store shutdown and actually submit — potentially selling some of those assets out. But we’re going to continue to work through that in Q2 and have a solid plan that we’re really focused on, getting to kind of what more of a steady-state business would look like in the second half of 2024 here.

Chris Bottiglieri: Great. Thank you. Then I have a bigger picture question. So you guys are the best class operator and your estimated gross is only 300 basis points below pre-COVID despite some mix benefit from larger stores, and your GPUs have more room to fall. So my question is, it would seem that most of the dealers pre-COVID in aggregate were barely profitable. Hard to tell if it’s understated as small business isn’t private. But if profitability goes back to pre-COVID or even lower for these private dealers, what do you think happens in the industry? Like what are some of the puts and takes? How does this benefit look in that scenario?

Bryan DeBoer: Well, Chris, you’re being awfully generous there. This is Bryan. I think for us, if you’ve been around Lithia & Driveway long enough, we keep our heads down. And most important, we stay pretty humble. So I don’t know if we’re best in class operators. I do know that our design is quite special and is different than what the independent operators or our fellow peers are doing. Most importantly, I think today, looking at our results, I would challenge our teams to continue to dig deeper in terms of market share, in terms of cost cutting, in terms of keeping margins and really expanding the customer experience to be able to grow in loyalty. So we have a lot of opportunity, Chris, and we’re not going to sit here and pat ourselves in the back when we’re sitting here with — hurrying to try to figure out how to respond to declining GPUs. We obviously had planned well for those things, but we’re not done, okay?

The achievement of a $2 of EPS for every $1 billion of revenue is not something that my team and I take lightly. It’s something that is 100% our focus. It is about EPS and the results and bringing that back to shareholders. And we do that through great customer experiences that create more loyalty, higher market share and better profitability. So I would say, relative to where independent competitors, we love the industry. We’re not here to try to disrupt what they’re doing. We’re here to conquest market share in our own way. And we obviously have Driveway, GreenCars and other assets within our design that allows us to conquest market share outside of the Lithia footprint. And all of our focuses are really that. We do have some hangover from the Western market still, and I think that does dilute some of our results and what our performance looks like.

But again, we’re not here to make excuses. We’re here to take action.

Chris Bottiglieri: Got you. Okay, thank you, Bryan.

Operator: Our next question comes from Ron Josey with Citi. Please proceed with your question.

Ron Josey: Great. Thank for taking the question here. I wanted to focus a little bit more on newer sales channels, Bryan, and ask about Internet specifically with having sales up 8% sequentially to 41,000 units, traffic reaching 12.3 million across all of the properties. Just talk to us about the overall platform for online awareness strategy here. I think there was comments a few quarters ago just about a lot more traffic than you knew what to do with. So would love to hear an update there. And then lastly, I think you mentioned called burn rates for cut in half as you refine your e-commerce strategy. Just any insights on these improvements would be very helpful.

Bryan DeBoer: You bet, Ron, I may touch on it briefly and let Adam chime in a little bit as well since he and Dianna are the ones driving the successful results in driving GreenCars. I think when we think about top of funnel, what we’re doing is adapting to the omnichannel. And I think it’s taken some of the stores a little bit longer to get into that rhythm that customers truly should have the optionality to do things in their home or in the dealership. And I think that’s a result of a 32% increase in total transactions that were done online year-over-year. That’s big input with only about a 9% top of funnel improvement. So good improvements there. When it comes to Driveway, we did reduce our burn by 50%, which is good. I’ll let Adam talk a little bit about where do we go from there, but we’re sure hoping that we can reduce it by another 50% over the coming periods.

And I think from my standpoint, the work that Adam and Dianna and the teams in Driveway have done over the last 90 to 180 days is constructive. They have their pulse of multiple different levers to pull. And I can see a pathway again to get to breakeven and even profitability in the mid- to near future. Adam, any additional thoughts?

Adam Chamberlain: Hi, good morning. This is Adam. Yes, just to pick up, Bryan, where you left off. We’ve managed to drive down the burn rate, as you said, by about 50% year-on-year, and we see further enhancements possible really through two levels. We’ve become much more efficient in our marketing spend, so marketing spend is down about 40% year-on-year. And we’ve become much more efficient in our transaction processing through things like automated sales force process and things like that. So yes, we’re working hard and see further improvements possible, Bryan.

Bryan DeBoer: Great. Thanks, Ron.

Ron Josey: Thank you.

Operator: Our next question comes from Colin Langan with Wells Fargo.

Colin Langan: Great. Thanks for taking my question. Just want to follow up. You mentioned new GPUs down $150 a month — on a monthly basis. If I look at same store, I think it’s actually closer to like $110, $115. Isn’t some of that pace going to be reflected in Pendragon’s impact? Is there — is it like about $100…

Bryan DeBoer: You nailed it, Colin. Yes, you nailed it. This is Bryan. I mean, the difference between same-store and in total is basically about $40, okay? And it’s about — I think it’s about $300 or $400 in aggregate. And it’s coming from the U.K. dilution from lower GPUs in the United Kingdom.

Colin Langan: Okay. So when we’re thinking about the U.S. new GPU decline, it actually is kind of the same pace as it was the end of last year? Or actually has that gotten worse, too?

Bryan DeBoer: I think it’s somewhat similar. I mean, it’s — I think it’s a little bit worse. But again, I think the reason we displayed it as it was, is it was tough in January and February. And then we saw a little bit of recovery again in March in both new and used.

Colin Langan: Got it. And then you mentioned that the target for SG&A. It sounds like it’s still mid-50% even with the Pendragon addition. Because coming on at 85% in the U.K.

Bryan DeBoer: Correct.

Colin Langan: I mean, so what are the — so do you think you could get that U.K. business to be the same profit level? Or is it just there’s more room to go on the U.S. business that could kind of keep you on that target?

Bryan DeBoer: So remember, the mid-50% is including the adjacencies. So — and in terms of the U.K., I don’t think we see a world where SG&A is similar to what the United States are. They just don’t have the leverage of throughput. They do have some big advantages. Their average personnel cost is quite a bit different than the United States. But I wouldn’t see that the U.K. could get to those normalizations. Most of it is coming in the United States from network improvements, meaning reaching potential within the stores by growing market share and cutting costs, okay, as well as the adjacencies that I spoke to at the beginning of the answer.

Colin Langan: Got it. All right. Thanks for taking my question.

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

David Whiston: Thanks. Good morning. Just curious with all the waiting for a Fed interest rate cut, even if we do get even just one this year, do you think that’s going to matter much to your customers? Or do they need to get multiple cuts to really bring a lot of people back?

Bryan DeBoer: Our customers are surprisingly resilient. I mean, we’ve been quite shocked of their ability to adapt. I mean, we now have an average rate at DFC about 10.2%. Our average rate as an organization is about 10%. We’re at 7% on new vehicles and about 12% on used vehicles. I don’t know that 0.25 or 0.50 is going to make much difference. I think it’s more general economic factors at this stage that they feel comfortable with their jobs. They feel comfortable with their family and their affordability levels.

David Whiston: Okay. And on the balance sheet, given you will do — continue to do some acquisitions, do you want to pay down that revolver balance at all? Or are you just going to let that sit there for a while and keep growing?

Bryan DeBoer: Well, you did probably notice, David. I mean, we are carrying some pretty big cost from M&A most recently. Our leverage is still quite nice, sitting at a little over 2 times, which is good. And if you remember, our covenants allow us to go all the way to 5.75. So we sit quite nicely to be able to constructively do M&A or balance that depending on stock price with share buybacks. You will find that we will be more constructive than we probably are in the past because we have put those two things at parity. But in terms of debt paydown, if that’s the best use of capital, then we would also use it to pay down debt.

David Whiston: Okay. Thank you.

Operator: We have reached the end of the question-and-answer session. I’d now like to turn the call back over to Bryan DeBoer for closing comments.

Bryan DeBoer: Thank you, everyone, for joining us today, and we look forward to updating you on Lithia & Driveway second quarter results in July. Bye-bye, everyone.

Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.