Operator: Greetings, and welcome to Lithia Motors and Driveway First Quarter 2026 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance Corporation. 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. Our results discussed today include reference 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: Thank you, Jardon. Good morning, and welcome to our first quarter earnings call. In the first quarter, we again achieved record revenues reaching $9.3 billion and adjusted diluted EPS of $7.34 and as our leaders demonstrated the power of our differentiated and diversified model and the operational resilience that has defined our business across all cycles. Our teams executed well despite weather challenges and a dynamic macro backdrop, delivering solid revenue growth year-over-year. We also generated high-quality earnings as our aftersales business continued its steady climb. Used vehicle revenue grew nicely on a same-store basis, and Driveway Finance Corporation delivered another quarter of record originations.

These results reflect the differentiated power of our ecosystem when one part of the business faces a little bit of pressure. Our omnichannel platform creates opportunities that sustain earnings and cash flow generation. Across our network, our store teams and department leaders are leaning into what they do best: winning customers, growing share and finding new ways to drive profitability through volume, pricing discipline and cost efficiency. Every incremental customer we bring into our ecosystem multiplies the opportunity ahead of us, creating more DSC originations, stronger after sales retention and a deeper waterfall of future used vehicle trade-ins. During the quarter, our same-store revenues were down 1.7% and total gross profit was down 2.3%, reflecting resilient results against a very difficult year-over-year compensate comparison to the strong first quarter of 2025.

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Total vehicle GPU was $3,928 essentially flat sequentially from $3,946 in the fourth quarter a positive signal heading into the seasonally stronger months ahead. Our diversified earnings mix continued to provide balance as used vehicle revenues grew 4.6% on a same-store basis. After sales growth grew 5.7% and F&I per unit held steady at $18.13. Note that all vehicle operations results will be on a same-store basis from this point forward as well. New vehicle revenue declined 7.1% on a 7.1% decline in units, which reflected the challenging comparison to the first quarter of 2025 due to tariff avoidance pull forward last March. New vehicle GPU was $2,722 or down $227 year-over-year, but down only modestly from $2,766 in the fourth quarter. Luxury brand revenue was down 10.2%, domestic down 8.7% and imports down 5.4% year-over-year.

We continue to see these conditions as cyclical and our teams are focused on operational discipline as the market stabilizes. Our used retail performance continued its industry-leading trajectory with used revenue of 4.6% and unit growth up 0.6%. The used GPU was $1,680, down $115 year-over-year, but up meaningfully on a sequential basis from $1,575 in the fourth quarter. This reflects the early results of our efforts around more dynamic used vehicle pricing and finding higher demand vehicles. Our focus on this high ROI area provides a stable anchor to offset new vehicle cycles and bring more customers into our ecosystem, leading to growth in our F&I after sales and DFC business lines over time. F&I per retail unit was $1,813 essentially flat year-over-year with solid underlying product attachment and pricing.

As we have shared previously, record DFC penetration in the quarter intentionally shifted a portion of our finance gross profit from F&I to our captive finance platform where it generates reoccurring higher quality and countercyclical earnings over the life of the loan. Adjusting for mix shift, our F&I performance was up nicely and continued to build momentum. Inventory levels improved during the quarter, the new vehicle day supply at 49 days, down from 54 days at the end of the fourth quarter and used inventory was at 47 days compared to 48 days last quarter. After sales continues to be highlighted with revenues up 3.8%, gross profit of 5.7%, and we saw margins expand again year-over-year to 58.7%. The Growth was consistent across key categories with customer pay gross profit up 6.5% and warranty gross profit up 5%.

This stable broad-based growth demonstrates the underlying strength of our aftersales business and its ability to generate predictable, high-margin earnings through every part of the cycle. Adjusted SG&A as a percentage of gross was 71.5%. And while we historically see this metric increase in the first quarter, this year, we held essentially flat sequentially, a sign that the cost discipline is gaining traction. Our sales departments are responding to the challenge we set for them. finding ways to operate more efficiently while continuing to grow volume and serve our customers. The structural improvements we are making across our network from technology investments to vendor consolidation, to back-office automation will continue to build on a foundation for a stronger future.

In the U.K., our teams delivered strong results with gross profit up 12.5% SG&A as a percentage of gross profit improving 440 basis points year-over-year. Adjusted pretax income for the quarter grew 78%, building on the momentum we saw in 2025 and as we continue to optimize our international platforms. Our digital platforms also continue to increase our reach and enhance our customer experiences, making shopping financing in service simpler and faster. Our partnership with Pinewood AI continues to support our strategic vision to transform the customer experience, and we are jointly working to bring the Pinewood AI platform to all of the North American stores. Pinewood AI will reduce complexity and place team members in the same platform as our customers increasing retention, supporting operational efficiency and reinforcing the power of our integrated ecosystem.

Driveway Finance Corporation continued to scale profitably with financing operation income of $21 million for the quarter, up 71% year-over-year driven by record originations and improving loss provisions. With a steadily growing portfolio now at $5 billion, increasingly efficient securitization and clear runway for penetration growth towards our long-term 20-plus target, DSC is delivering on its promise to convert more of our vehicle sales into reoccurring countercyclical income. Now turning to capital allocation. Our philosophy remains very consistent, deploy capital where it generates the highest returns for shareholders. With our shares continuing to trade at a significant discount to our intrinsic value, we maintained our aggressive repurchase pace, retiring approximately 4% of our outstanding shares in the quarter with total repurchases of $259 million.

Our strong cash generation and integrated ecosystem positions us to continue returning meaningful capital to shareholders while simultaneously growing through acquisitions when it makes sense. In the first quarter, we were disciplined and strategic in our acquisition activity, adding import and luxury franchises in attractive U.S. markets while continuing to diversify our U.K. portfolio with the addition of emerging Chinese OEM brands. This helps us establish broader relationships to capture growth as these manufacturers expand their presence internationally. Our acquisition results over the past decade have yielded high rates of return, consistently exceeding our 15% after-tax hurdle rates through consistent and disciplined underwriting, targeting purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA.

As we look ahead, we also stay disciplined in balancing repurchases, acquisitions, organic investments and balance sheet strength with a continued bias towards repurchasing while our shares are trading at a discount. Our confidence in the path ahead is grounded in the same strategic pillars that have driven our growth as follows: lifting store-level productivity, expanding our footprint in digital reach, scaling DFC penetration, improving cost efficiencies through scale, and growing contributions from our omnichannel adjacencies. Each of these levers builds momentum. And as they compound together, they reinforce our conviction in the long-term target of $2 of EPS and for $1 billion of revenue. The work our teams are doing today lays the groundwork for durable EPS and cash flow growth in the quarters and years ahead.

With that, I’ll turn the call over to Tina.

Tina Miller: Thank you, Brian. Our first quarter results showed sequential improvement in earnings with year-over-year comparisons, reflecting pressure from margin compression and demand pull forward in the prior year. The strength of our business model continued to generate solid free cash flow, support meaningful share repurchases enabled top line growth while maintaining balance. The design of our business and our disciplined approach provides optionality through our resilient cash engine, and the long run efficiency generated by our size and scale will continue to compound value over time. Our talented leaders drive the financial discipline and execution that allow us to return capital to shareholders while funding our growth.

Adjusted SG&A as a percentage of gross profit was 71.5% for the quarter, compared to 68.2% a year ago, while year-over-year pressure reflects the impact of lower new vehicle volumes and normalizing GPUs on our sales department, we held essentially flat sequentially. Our teams continue to focus on managing costs through growing market share and gross profit, which remains our most durable levers for SG&A improvement over time. our sales departments are actively rebalancing cost structures against current volumes and gross profit conditions, tightening variable compensation, aligning staffing to drive throughput and finding new ways to operate and protecting productivity while continuing to provide exceptional customer experiences. We’re making steady progress on a set of structural initiatives that will compound across the business.

lifting store and back office productivity through performance management and emerging AI tools, including chatbots and customer service automation, consolidating our technology footprint and retiring legacy systems improving our vendor economics at scale and removing manual work from our back office through automation. We’re already seeing early savings flow through our results and the contribution is expected to build as adoption broadens. Pinewood AI remains an important piece of this work, and we’re pacing the rollout with intention so that the efficiency gains we capture are durable. Ultimately, growing market share and volume is our most powerful lever for SG&A improvement combined with our unique ecosystem, every incremental customer compounds profitability across our adjacencies and as vehicle margins stabilize, that volume flows through to meaningful operating leverage.

Moving on to financing operations. Driveway Finance Corp delivered another quarter of high-quality growth with financing operations income growing 71%, as Brian mentioned. We originated a record $840 million of loans and increased net interest margin to 4.8%, up 20 basis points. North American penetration reached 18% for the quarter, also another record. Credit performance continues to be exceptional, with an annualized provision rate of 3% and average origination FICO score of 750 and 95% LTV in the first quarter. Our unique position at the top of the demand funnel creates a fundamental advantage in credit selection, minimizing credit risk. This quarter, our portfolio reached $5 billion, powered by record originations and increasingly efficient securitization.

As we continue to build toward our 20-plus percent penetration target, we anticipate steadily improving margins supported by efficient capital structures. DFC is delivering on its potential empowering the profitability of our unique ecosystem. Next, I’ll discuss the strength of our cash flow and balance sheet. We reported adjusted EBITDA of $374.6 million in the first quarter, a 9% decrease year-over-year, primarily driven by lower net income. Adjusted cash flow from operations, a representation of free cash flow was $381 million for the quarter after adjusting for a onetime $1.1 billion benefit related to our conversion to a VIN-specific used vehicle floor plan line. This cash flow paired with our strong balance sheet allowed us to opportunistically deploy capital to share repurchases while completing strategic acquisitions of new stores in key markets and brands.

We remain committed to share repurchases, and our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder return. This quarter, we continued our commitment to focus on share buybacks while shares trade significantly below intrinsic value, and we allocated nearly $300 million to share repurchases and buying back 4% of outstanding shares at an average price of $275. As we move through 2026, our capital allocation philosophy remains disciplined and opportunistic. With a strong balance sheet, regenerative free cash flows and ample liquidity available, we will continue allocating capital to repurchases while relative valuations are attractive and investing in accretive acquisitions at the right price.

This flexible deployment allows us to compound returns for shareholders through buybacks while enhancing our network through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio. The investments we have made over the past 5 years in our platform, our network and our people are now positioned to deliver increasing returns. As vehicle margins stabilize and our structural cost initiatives gain traction, the earnings leverage inherent in our model will increasingly flow to the bottom line. Our diversified omnichannel platform and disciplined share repurchases at attractive valuations are compounding together to build a stronger, more predictable earnings base that translates into durable free cash flow growth and long-term value creation for shareholders.

This concludes our prepared remarks. With that, I’ll turn the call over to the operator for questions. Operator?

Operator: [Operator Instructions] Our first questions come from the line of Michael Ward with Citi Research.

Michael Ward: Good morning, everyone. I wonder, Bryan, in the past, you would talk about how some of your acquired stores, the SG&A costs were higher on a relative basis to the more mature stores. Can you give any update on where that is? And then the reason why I ask is, if I’m doing the math right, every 100 basis point improvement in SG&A is about $2 a share. And it seems to me that we have 5, 6, 7 points of improvement that could get there getting the acquired stores in line with historical? And then also what Tina was talking about with Pinewood and some of the benefits you have. Am I on the right track? Is that the way you’re looking at it?

Bryan DeBoer: You are, Mike. This is Brian. I think in that calculation, I think it’s about $31 million, $32 million per dollar. So we are getting some pretty good traction on cost management. little different than last quarter, which is quite nice. It took us a little while to get everyone’s attention. But our sales departments are starting to understand a little better that there’s — that they need to reinvent themselves in terms of what the org design is in those departments where we’ve got 4 layers in many of those departments, and we think we can run with 2. And I think a lot of our sales leaders are trying to figure out how to do that and combine jobs or oversee multiple departments or do things remotely. There’s all kinds of fun actions that are happening.

And I think that overlays the idea of acquired stores. I mean we have added over $27 billion in revenues over the last 6 years. So there’s a lot of opportunity of people that maybe have never sold value auto cars in the past. They’ve never really thought about doing more with less, and now they’re really starting to hit their stride.

Michael Ward: And Tina, you mentioned the rollout of some of the Pinewood technology. Do you have any — can you give any data points on like what you’re looking at from a timing standpoint and one that could be across all stores. In addition, when that’s completed, does it make that integration faster when you make acquisitions?

Tina Miller: Yes, Mike, it’s a great question. This is Tina. From Pinewood, I think right now, what we’re tracking toward is piloting a couple of the stores on that DMS system here in the U.S. later this year. So it would be towards the end of this year is what that pilot is looking toward making great progress on that with the Pinewood team and the technology, which we see it as an easier experience for employees, puts customers in a similar to streamlined experience for — with that technology there. We also are piloting and trying some of the AI technology that Pinewood has, both in the U.S. and the U.K. So I think good progress there in the U.K., obviously, with Pinewood out their DMS system, there’s good strong progress as they work through that, and we’re piloting here in the U.S. as well.

So excited to see that great partnership with the Pinewood team as we continue to iterate through how that can make our processes simpler and faster and better experiences for the customers and employees.

Bryan DeBoer: Mike, maybe just to add on a little bit. In terms of integrating a store, I don’t know that it would help integrate a store faster during a purchase. What it’s mainly intended to do is put the customers and our team members into the same environment to help with productivity. And I mentioned those 3 or 4 things in redesigning sales departments, service departments and so on. Those are the things we’re doing today. So this is an adjunct to that, that as that AI starts to help be a genetic and help make that process simpler and more unified between the customer and our team members. That’s what we’re really looking for. That’s why we invested in Pinewood AI, and it’s a big part of our future and being able to drive down that SG&A cost.

Operator: Our next questions come from the line of Ryan Sigdahl with Craig Hallum.

Ryan Sigdahl: I want to say on SG&A. — there were some weather challenges from an industry just across the board earlier in the quarter. One of your peers yesterday said that quantified that the exit rate or trajectory on SG&A to gross profit was much improved at the end of the quarter. Curious if you guys saw that or if you’re willing to comment kind of month by month what that looked like? And then any guidepost you’re willing to put on SG&A to gross profit ratio for the year?

Bryan DeBoer: Ryan, I think that’s a fair statement that we saw a softer January we hit forecast in February or we’re real close to it in North America. The U.K. exceeded forecast. And in March, the U.K. exceeded forecast and so did the United States.

Ryan Sigdahl: Willing to put any guidepost around the year or what SG&A to gross profit will be?

Bryan DeBoer: I would probably say this more, Ryan, that I think our teams got the attention. They’re responsive, they’re dynamic, and they’ve got they’ve got the con and they can make the decisions as they see what happens in the market. There is a large variability across manufacturers and across geographic areas of the country that I think is important for them to respond to. Let alone the U.K., we’re seeing some nice movement because we’re able to actually add franchises and partnerships in stores and dual franchises, much different than what the U.K. or Canada is, and we’re doing that with Chinese brands, which is helping in the mainstream revenue lines in some ways. So we’re real pleased with what’s happening. And I think SG&A, we’re going to continue to drive towards that mid- to high 50 percentile range in the long term.

Ryan Sigdahl: Then just on DFC, your penetration rate is near kind of your long-term target. Curious, as you think about the longer term, I mean, some of your peers are on orders of magnitude higher than where you guys are targeting? Any reason why that can’t go higher than the 20% and any reconsideration there?

Charles Lietz: Ryan, great question. This is Chuck. So yes, we were very pleased that we hit 18% for the quarter. And I do think that’s getting us close to our 20%-plus target. But I think really, it kind of goes back from a forward-looking perspective to Lithia Driveway just leaning more into used cars. And we really see a lot of opportunity to grow used cars. That really plays in well to DFC’s value proposition because historically, and I think going forward, we do better in used car penetration rate than new. And I think new is probably the area that holds us back versus some of the peers that you’re probably referencing us. But we definitely see positive upside to the 20% plus that we’re targeting.

Operator: Our next questions come from the line of Rajat Gupta with JPMorgan.

Rajat Gupta: Just a couple on moved in parts and service. In the past, you’ve typically given more weightage to growing the volumes in that business. It seems like there were some reprioritization that happened in the first quarter given the performance on GPUs. I’m just curious, was there any change in how you’re approaching profitability there? Or was it just like a supply issue that led to the flattish volume number in the first quarter? And just how should we think about used car growth versus GPUs for the remainder of the year?

Bryan DeBoer: Rajat, this is Bryan. I think this is our — the secret sauce of Lithia. I mean, we hit 1.25% used to new ratio, which is the first time in a long darn time that we were able to do that. And it’s coming off the back of a marketplace to some extent, it’s a little tighter than it typically is. But values are still strong. And I think as we think about how do we drive performance in used cars, it’s getting that $26 billion to $27 billion of revenue that had never really sold value auto cars 3 years ago, 4 years ago to understand that, that is where the profits are in the business. And that ability to procure those through trade-ins or through other or other sources is quite important. If you look sequentially quarter-over-quarter, including F&I, our used cars moved from $2,830 in Q4 and to $3,309.

It was up $470. And I would attribute most of that to some repricing efforts on 2 key areas, and I may have spoke about that on the last call. It’s primarily the value auto cars, okay? And then secondarily, it’s vehicles that are low mileage for their model or their vintage, okay? And those 2 areas where we’re getting some pretty good traction fairly quickly. Also, remember that in our ecosystem, a lot of stores price things because that’s what they can sell it for, okay? But in our ecosystem, because we have Driveway and Green Cars marketplaces, it reaches out beyond the 30 to 50-mile range that a typical stores reach can achieve. And we’re now reaching 500 to 1,000, 2,000 across the entire country. So when stores are a little gun-shy because they don’t have the ability to sell that car at that price, when you start to expand the ecosystem, you all of a sudden are able to expand your pricing model.

And I think that’s where I attribute a lot of that increase sequentially.

Rajat Gupta: Understood. That’s helpful color. And just on parts and service, second quarter a pretty good profit growth. despite some of the weather challenges you might have seen. Any way to just double click on that and give us a little more detail into what’s driving that? I know maybe U.K. maybe had a bit of an FX benefit, but maybe if you want to break up U.S. versus U.K. as well, that would be helpful. And just any more detail within those regions and what’s driving the growth?

Bryan DeBoer: Yes. Our growth globally, the U.K. is slightly better than North America. But North America is starting to gain traction. What we’re finding again when we think about the customer experience and taking out layers and making it simpler, more transparent and more empowered by the customer, just creates better experiences. And I think when we think about going to market, it is about those frontline people making a difference each and every day to create memorable experiences. And that happens through lots of different options, okay? And those options create what we would call individualized experiences for each customer, where one customer may want to sit on their accounts or they may want us to pick up their car from work and another might like to enjoy sitting in our living room and seeing the new product and so on and so on.

So it’s really giving our people the flexibility to think on their feet, okay? And then the ability to execute lots of different ways to create a more appealing experience and a more memorable experience so they continue to come back month after month during their ownership life cycle.

Operator: Our next questions come from the line of Alex Perry with Bank of America.

Unknown Analyst: I guess first, I just wanted to ask a little bit more about your outlook for the U.K. It seems like performance there is improving. Can you talk about what specifically is driving that? And if you would expect that to continue?

Bryan DeBoer: Sure, Alex. Brian again. I think we’ve got an exceptional group of leaders and an acceptable group of operators that over the last 2 years, we’ve been able to purge and then modify the network to adjust to the consumer demands in the United Kingdom, and that includes adding Chinese brands, eliminating some other brands, finding some underperforming stores and getting rid of those. But most importantly, this is coming from the United Kingdom and Neil, Richard and our vice presidents that are there, and their teams underneath them. They are very good at structurally putting in plans and then executing to that plan. It’s a real refreshing thing to be able to know that halfway through the month that they’re going to hit forecast or they’re going to be above forecast, a million or two, whatever it is, they’re very definitive and they’re very intentional in their actions, okay?

We’re really hoping that the example that they said as we start to roll out Pinewood AI into the United States and into Canada, what they’re seeing over the last 2 years by being on Pinewood AI is an experience where their customers and their team members are sitting in the same environment. In fact, many of the stores now have moved their service drives from the back of the dealership or back a house to write on the showroom floor where they’re actually meeting and greeting customers, and some of those are even multiple tasks, meaning they may deal with sales, they may deal with service, they may deal with accessories or whatever else it may be, where they’re truly thinking about a one-touch type of experience. And then this is all wrapped around the idea of the Pinewood AI is now starting to give them the ability to manage their expenses in an incremental way downward, okay?

And I think, if I remember right, it was 447,000 hours that our CFO, there Richard had defined that service loans, AI will be able for them to capture that money within the next 4 quarters or so. So they’re making pretty good progress on that, and we’re pretty excited because that is the seeds to what’s going to happen in North America, and we’re really proud of their leadership over there.

Unknown Analyst: That’s incredibly helpful. And then just my follow-up question, I just wanted to ask if you had seen any impact from the current sort of geopolitical environment. any slowdown on the new vehicle side as you sort of look through April? Any change in mix seemed like you hit some of your targets through March, so that would sort of indicate that you haven’t been seeing anything, but I just wanted to ask about that.

Bryan DeBoer: Yes. I think it appears that the quarter ended up strong. We feel pretty good about the start of Q2. I think that the geopolitical climate has been balanced with some higher tax returns. I mean, I really feel like it doesn’t feel quite as good as March was in the United States. But I also know that if the war can come down and if tariffs can gain some clarity, and it’s a matter of things can fall in the line that we can through this and hopefully have a decent second half of the year. So it’s a little bit of a mix of things, but we’re sure pleased with where the market’s at, despite it only being a 15 8 SAAR as an industry. We really believe that when affordability can get a grip on things and start to trend back down a little bit, then we should be able to start trickling up again towards that 17 million units a year number.

Operator: Our next questions come from the line of Jeff Lick with Stephens.

Jeffrey Lick: Congrats on a great quarter guys. Brian, I was wondering if we could dig into the used a little more DPU at $1,700-ish. First of all, could you remind us what percent you guys self-source versus any sourcing from auctions? And then I was just wondering, Bryan, if you could just kind of pontificate a little bit as we get into these lease returns and we’ll probably have a little bit more of a higher level of supply in the summer that change the dynamic one way or another for you? I’m assuming it does. I’m just curious how that will change the dynamic for you guys and the…

Bryan DeBoer: Good insights, Jeff. Our customer-sourced vehicles our 2,483 a unit. And remember, without F&I, the numbers I gave previously were with F&I, okay? Our 24 83 on our customer acquired units, okay? The units that are acquired outside from the — not from the customers like auction are around $700 to $800. So it’s a big delta between those. At one time, you remember, we were $1,000 to $1,100 a difference. Now the difference is $1,500, okay? So it’s hyper important of our ability to continue to acquire cars from trade-in. And I think if you look at where we are, this is a big opportunity for Lithia. I mean, we acquired less cars year-over-year by about 3% from our customers. okay? But we also still drove up our margins.

So that, I believe, is more of a pricing function than a cost function, okay? But I believe that we can attack both if we’re properly valuing cars that are coming in off-trade in, making sure that any online pricing through Driveway or others, are met and matched to be able to ensure that those customers are creating a 2-part buying process, meaning they’re giving us their trade and they’re buying a car from us. So we’re pretty pleased with what’s happening there. In terms of the off-lease vehicles, we do see a little bit of a bulge there. We’re actually — it’s surprising when we try to push used cars and we talk value auto. Some stores get it. Others just go buy more lease vehicles. So off-lease vehicles and — to be fair, that’s okay, too.

We were actually at 22% of our volume was from — I may have that off. I’m sorry, 40% of our volume was CPO last quarter, okay? So that was a pretty big amount, okay? And I think that could be indicative that we’ve got lots of stores. That’s natural, okay? I mean that’s part of our staple diet in our business that you just automatically sell those CPO cars. So I think with more cars available, it will help us definitely. We just want to make sure that our teams are still focused on their core product between 4 and 8 years and most importantly, make sure they’ve got the affordable cars of $15,000 average price or so in our value auto cars.

Jeffrey Lick: And then just a quick follow-up. You had talked on the last call about some of the used car managers maybe being a little quick to break price and maybe not the greatest buyers. And so you kind of thought, hey, there was some room there on the spread at that $1,700. I’m just curious where you’re at there and where you think you might be able to get that because previous presentation last year as potential of 1,800 to 2,100 [indiscernible]

Bryan DeBoer: Jeff, we’re not — we’re going to be — we want you to be conservative here in this response, but these numbers will probably shock a lot of people on the call, okay? Our price to market, okay? The price that we sell our vehicles for through both driveway because our stores price cars on Driveway and our stores is approximately 95% of what the 1 price used car retailers are selling the same Carrefour. That’s an apples-to-apples comparison. If you then figure that your average price is somewhere between $25,000 and $30,000, you’re talking about $1,250 that could come just from the pricing equation. Why can’t that happen overnight, okay? The reason is, is because most of our cars are still sold within 20 to 30 miles of the footprint of those cars.

So the more that we can create visibility, you get more eyeballs on cars and to higher-demand cars, then will command the price that are needed, okay? Where we do pretty good and we sell cars about for market is certified, okay? That’s where we sell cars for market. What we don’t do is when it’s the value auto car or it’s a car that’s less than its miles for its age. That’s where we lose approximately 8% to 9% on pricing. And that makes up that entire 5%, okay? So that’s our focus, is how do you convince your stores to look past the transaction that isn’t getting them to market pricing on the deal. And that is some underpricing or dropping your pricing too quickly. But most of the time, it’s under pricing. It’s they don’t price the car right at the start.

Why? They’re salespeople, their service departments and their sales managers are convinced that, that car can’t sell for that price. And they don’t let it season long enough to be able to do that. I believe, and I think our team believes velocity can hurt your gross profit in used cars. Velocity can hurt your gross profit in used cars. Okay, your ideal time to sell in used cars is between 15 and 40 days, okay? And if you sell it before that, you probably sold it for too little, okay? So it’s a function of both eyeballs, belief, end market pricing to be able to get that $1,200 approximate dollars that we know is sitting out there.

Operator: Our next questions come from the line of John Saager with Evercore.

John Saager: I wanted to discuss the rollout of Prime rod. So you’re expecting to complete that by the end of — can you discuss the impact that will have on expenses during the course of the rollout. I would expect that there would be some headwinds that you counter along the way as you’re working through the process. Is there any way you could quantify those headwinds for us?

Bryan DeBoer: Sure, John. We’re basically doing a rollout by manufacturers. And what we saw in the United Kingdom, and this is data that’s, what, 3/4 to 5 quarters old. It took us about 2 quarters to complete the rollout on 150 businesses in the United Kingdom. It went extremely smoothly. We did not see additional costs in that rollout. It’s truly a 2- to 3-week prep process and a 2- to 3-week climatization process where they get used to that work. We’re also going to be preempting in the sales department, a CRM product. So they’ll get used to the CRM product way before the Pinewood full DMS comes in and about 1/3 of our stores are already on that product in North America. So we’re very cognitive of that. There was a cost last quarter, if you remember, in CDK that we ended up buying out that contract.

So that’s been front loaded and is behind us. But beyond, once you get through the integration point, which is truly a 2-month period, okay, the true cost of Pinewood is lower and most importantly, the true benefit of Pinewood is it allows you to do things and have our — the IT solutions because it puts the customer and the team member into the same environment, there’s not redundancies, okay? And today, with multiple vendors, with CDK having all these attached vendors, there’s massive amounts of redundancy. Those redundancies can come out almost immediately. Hopefully, that helps, John. A follow-up on that?

John Saager: Yes. That makes sense. Actually, the timing of that is fast. But the it is going to take a long time to get there until 2028. And so I wanted to ask about like how does that impact the timing of the path to your medium-term targets. So to get SG&A as a percent of gross down to that 60% to 65% range. What are the primary initiatives or drivers are using to get there? Is there like a revenue per employee number that you have in mind? Or is there some other way of tracking that progress? And do you need Pinewood to be fully rolled out before you…

Bryan DeBoer: No we don’t. No, we don’t. I mean Pinewood is going to help us take it from mid-60s to mid-50s, okay? And I think that’s how we think about it. So in the interim — the single biggest thing that can help us get there is a marketplace that has stable GPUs and is a 17 million SAAR because we gain leverage as we gain volume, okay? Alongside that, what can we focus on, we focus on what we can control. And we basically built a 4-legged stool that’s wrapped around a couple of things. First and foremost, we call it the everyday plan. It came off the back of the 60-day plan a couple of years ago. That’s vendor management, that’s compensation management. And that’s typical productivity and efficiency metrics that our people are pretty good at, okay?

And they’re pretty savvy at. The other 3 items are what I mentioned briefly. It’s job combinations. It’s re-architecting the sales departments and the service departments to remove layers and combine jobs, okay? It’s managers and leadership overseeing multiple departments in multiple stores, which we’ve moved that quite nicely. We’re up to almost 2.5 stores per office manager and about 1.4 stores for a general manager, big moves there. And lastly, and not least, is this idea of remote F&I or remote desking or possibly even remote service advisers, okay? Meaning when you’re maybe a half a person short, you don’t add a full person. And that makes massive — and that’s probably the easiest example, but that’s our push each and every day in our organization over the last few quarters.

John Saager: If I could maybe push back just a little bit on that. You’ve had relatively stable GPUs for the last 2 or 3 quarters now. And the long-term trend on SAAR is around $16 million, not $17 million. So is it realistic to sustainably have SG&A as a percent of GP below 60%, given those long-term trends?

Bryan DeBoer: Yes, John, we — our GPU decrease each of the last 4 quarters has been around $150 to $200 a unit. So — and that on a base of 100,000, 150,000 units, it’s a big number, okay? And that’s something that we have to manage. So that is something. I do believe that the volumes, for some reason, each and every quarter, there’s something that’s semi-soft and again, this quarter, you’re seeing it with the 3 people that have reported so far. We had 1 person that was double-digit declines in new vehicle sales, and that all has implications on your SG&A costs. So I really believe that a 17 million SAAR is out there. It may not be coming off the back of tariffs and in a war, but I hope things can settle down because I think there’s a world where that can happen, okay?

If it doesn’t, we’re still managing on those 4 legs of our stool and we’ll continue to drive down costs. And I think in the quarter, it appears that we’re right in step in stride in terms of year-over-year SG&A, and should be able to exacerbate that, relative to our peers. The other thing to remember is we also have the tailwind of [ D&C. ] And that’s on track to hit somewhere around $100 million in profitability on its way to $0.5 billion profitability. So that’s not in SG&A, okay? So let’s not focus as much on SG&A because we are an industry that has costs, but that also gives us the opportunity to drive them down. And I think as an organization, we typically — if you equalize for the companies that have the United business, U.K. business, we’re typically either second or third lowest in terms of SG&A cost as a company, okay?

Important to remember.

Operator: Our next questions come from the line of Chris Bottiglieri with BNP Paribas.

Christopher Bottiglieri: The first one is, can you elaborate on the $20 million contract buyout. Is that a DMS or what does that implicate for future cost savings?

Tina Miller: Yes. It’s just the planned vendor termination here with part of it, there was a buyout of the contract.

Christopher Bottiglieri: Okay. And then wanted to ask, you mentioned the importance of marketplace to get in your targeted GP stability. Just hoping to get an update on Driveway. And then it seems that you made a change to the Chief Technology Officer earlier in the quarter. Just kind of curious if you can give some update on the road map for technology and like what are some of the initiatives that have to be done? What’s gone right? What’s gone wrong? Just an overall update on all that would be helpful.

Bryan DeBoer: You bet, Chris. This is Bryan again. It’s neat that the management team really wanted because the ecosystem is so integrated, they wanted to take IT themselves. The after sales team wanted to integrate that. The sales teams wanted to integrate everything across the DFC driveway and green cars. So they were the ones that basically built structure to allow George to be able to go on to bigger and better things, which is exciting. George is a class act and we’ll end up in a good space, doing coding and other things that he is amazing at. But as an organization, we just felt it was an impediment, having it as an independent department and then it needed to be integrated into operations. Fundamentally to be able to respond quicker and to be able to capture that marketplace.

So Driveway as a whole, it was up 8% in volume across its platform, which was a nice number. And more importantly than that, we’ve started to gain some traction in new vehicles. New vehicles was up almost 500% in Driveway business. So a big number there. It’s still there. I don’t know that we dedicate enough resources to it, but we also believe that there will be a time in place where that marketplace disconnects again because we think the market — e-commerce market is being pushed somewhat fictitiously in regards to one of the competitors out there. And once their financing changes, it should change and possibly open us an opportunity to turn the accelerator back on and driveway. So real successful. We’re still sitting at of all customers that come into Driveway are still new to the ecosystem entirely.

So pretty cool to be able to have that still out there.

Operator: Our next questions come from the line of John Babcock with Barclays.

John Babcock: I guess just first on the M&A market. Could you talk about how that looks right now? And then as a tag on to that, you obviously have typically divested a couple of stores each year and I just want to get a sense, recognizing future acquisitions may add to that. How much of your footprint do you think you still have to turn over. So in other words, maybe it’s underperforming or for some other reason, you want to divest it. So any color you could provide on that would be useful.

Bryan DeBoer: Great, John. As you can tell, we’ve been — we’ve always remained disciplined on acquisitions. We typically pay somewhere between 10% and 30% of revenues and there’s deals including 1 large deal out there that’s sold for 120% of revenue. We don’t see how those returns can make sense. And obviously, with our stock price at where we’re at, that’s what we reinforce. In terms of what have we done and what does our network look like in terms of cleanliness, we’ve done almost $500 million so far in revenue this year. That’s net of divestitures. We’ve got, let’s see, 1, 2. We’ve got 3 stores under contract and 2 stores that are close to being LOI and outside of that, I’ve got one more store that we would consider not part of our network strategy and will be divested.

Those are all in North America. The United Kingdom is fully clean. They’re really now iterating on which brands are best to put into their facilities. And outside of that, we shouldn’t have many other problems other than there’s an occasional time where someone offers us some stupid amount of money in the stores always kind of performed mediocre. In those times, we do redeploy the capital into buybacks or to finding other acquisitions that are more attractive pricing wise. Our focus again is in the — or the Southeast and the South Central, okay? And again, that is where stores are a little bit pricier okay? We have been able to find some pretty nice acquisitions at appropriate pricing, but the market is still quite frothy.

John Babcock: Okay. And now just shifting gears to parts and service. Could you break down your growth this last quarter across customer pay and warranty?

Bryan DeBoer: Our gross mix? Are you looking for mix?

John Babcock: So growth in revenue.

Bryan DeBoer: Growth. I think it was 7% on customer paying 5% on warranty. They were virtually — they were real close.

Tina Miller: Yes, they were really close. Those are gross profit numbers that he’s quoting in terms of the growth, but they were both pretty close to each other.

Bryan DeBoer: And revenue was 5 and 4 million customer and warranty, okay?

Operator: Our next questions come from the line of Bret Jordan with Jefferies.

Bret Jordan: Could you talk about the impact of negative equity, I guess, on recent volumes. It’s obviously getting some press. But is the conversion being impacted as customers come in and realize that their car is going to require a check as opposed to generating a return on the trade.

Bryan DeBoer: Yes. Great question, Bret. It’s funny. That was what we were discussing prior to the call. So negative equity has climbed a little bit. It started to subside, which is nice to see. But remember, this is the advantage of being as far up funnel as you possibly can be as a retailer. As a new car retailer and is a certified used car retailers, those are the cars that have the most margin which means the most incentives, right, which allows us to absorb the disequity in their future financing of their new vehicle, okay? So that’s really why you want to be up funnel is to be able to transfer disequity so then someone doesn’t have to write a check. Now most customers still are writing a check. It’s around $2,000 is the true amount that they write a check for.

but this is where our stores and the traditional network of automotive retail is pretty darn good, okay? Our average disequity that we’re focused on in the stores is $2,000 higher than what our AI and Driveway technology approves in the e-commerce platform of driveway.com. So that $2,000 is the benefit of what we get or having some level of negotiation and experts in our stores that are financing cars each and every day. So really, though, does it impact our business? It impacts affordability I think it’s important to remember that our manufacturers still don’t have tons of incentives out there. I think we’re averaging just under $4,000 a unit, okay? At one time, it was as high as $6, 000 or $7,000. So that’s a big number that then can be applied to this equity and allow customers to have a little less down payment and still be able to finance their vehicles.

Now anything I talk about is equity don’t apply that directly to our DFC explanations, because we have extremely disciplined strategies on that. We only have about a 96% check, 96% LTV on our DFC loans, and we’re way over 100 as a company as a whole — way over 100. So we’re financing everything we can, but most of that is going to our captive partners, our manufacturer captives or other bank relationships. Hopefully, that helps, Bret.

Bret Jordan: Yes. And just real quick on the geopolitical impact in the U.K. I think you sort of talked about the U.S., but — and maybe it requires sort of looking into April. But given the spike in energy costs over there, you sounded like U.K. beat expectations in the first quarter, but was there any deterioration of the consumer standpoint as the quarter has progressed?

Bryan DeBoer: No. What we’ve actually found and I would say that Neil and the team have done a nice job. The U.K. is built differently. It basically is built off March and September and those months are massive. What they’ve done a nice job is diversification. They now sell used cars at different times. Those places don’t get reregistered, even though you get spikes in those 2 months in use. They’re trying to sell those at all times, which is a good thing. Also in their after sales business, that somehow gets spikes. So now they’re starting to balance their portfolio we’re pretty confident on where the U.K. looks short term, okay? They’re able to see out a good 60 to 90 days because 80% of their business is orders. Okay. So they’re feeling pretty good about Q2.

I got off the phone with Neil yesterday and then the rest of the team the day before. So all things are looking pretty good there and our ability to adjust franchises to be fair, within a 90-day period, 69-day period and do it at about a $50,000 entry price, basically signage for these brands in the store, it’s pretty easy to be able to balance your volumes on the new car side and still maintain your units and operations with some dual brand on the aftersales side. So hopefully, that gives you a little bit of color, Bret.

Operator: Our next questions come from the line of Daniela Haigian with Morgan Stanley.

Daniela Haigian: Just one quick one. We’ve covered a lot of the core businesses here, but more strategically thinking about the influx of Chinese EVs taking share in Europe. How are the unit economics at your BI stores relative to your other OEM stores in the U.K.? And what are your views on Chinese OEMs coming to the U.S. either directly or indirectly?

Bryan DeBoer: Great, Daniela. I think it’s critical that everyone hears this, okay. Our relationships with the Chinese manufacturers are growing in the United Kingdom, and we cherish those relationships. However, we need to not apply the economics that are happening in Western Europe over Canada or the United States, okay? And here’s the reason why. You heard me talk about this idea the Chinese manufacturers are coming into the United Kingdom. They now have about 12% market share, okay? It’s not happening from EVs. It’s happening from ICE engines and hybrid engines. The EVs that were brought in by BYD and MG, 2.5, 3 years ago, they virtually sold no cars. It was less than 0.5% market share. It wasn’t until about a year ago that they started to bring in plug-ins and hybrids and ICE engines until they gain market share, okay?

And that’s because of affordability.So important to remember that. Remember this also, in Canada, they’ve now decided that they’re going to bring 50,000 vehicles into Canada as well. That authorization by the federal government is authorized for all electrified vehicles, not just BEVs, okay? So remember that as well. In those areas, they do have the ability to take some market share if pricing allows it and if tariffs keep that in an advantageous spot. Here’s the problem. The Chinese manufacturers in Canada, which is the most likely scenario of how they’re going to look at things in the United States have decided to use a dealer network in Canada. They’ve also decided that the network is going to be fairly lean initially, and that it’s going to be exclusive stores.

Hear that, exclusive stores, okay? In the United Kingdom, our Chinese brands, 14 out of 15 are not exclusive, okay? They’re sitting on the same showroom with Ford stores and [ Stellantis ] stores and Renault stores that have a unit in operation base, in after sales that allows those stores to have incremental gross profit that helps the stores profitably. If we were to have to have opened stores independently, even in the United Kingdom, those stores would not be profitable. Why? Because 60% of our profits come from after sales. And there is no units and operations built for the next 5 to 10 years, okay? So when you think about Canada or the United States, you’ve got to think about the dealer network and how is it going to be designed. Also remember that in Canada, real estate is -expensive.

We may have some facilities that have some vacancy and it may make sense to create some partnerships in Canada. We may have the same thing in the United States. We’ll have to see what their strategies are. But if we’re talking about 50% to 100% tariffs in Canada, the price advantage on like-for-like cars in the United Kingdom is somewhere around 7% to 8%, okay? And on the BEV, there is 0 price advantage at this stage in the United Kingdom, okay? So I don’t — it’s difficult to overlay. And I think that for us, it was easy to be a pioneer in the United Kingdom. But being a pioneer in the United States or in Canada, when you’re opening an exclusive facility and that facility could cost up $10 million or $15 million, pioneers are probably going to get shot and the settlers are going to be the ones that get rich, and we may take a little bit of a wait-and-see approach on that.

Hopefully, that helps. Oh, you asked about margins as well. The margins on those vehicles are very similar to our mainstream margins in the United Kingdom.

Operator: We’ll now turn to our final questions from the line of Mark Jordan with Goldman Sachs.

Mark Jordan: I’ll just do one quick one on used retail. Looking through the slide deck here, it looks like the average selling prices for core and value auto has increased nicely both year-over-year and quarter-over-quarter. But prices for CPO vehicles decline. Can you talk about what drove the decline there? Maybe was it a mix or something else that drove that?

Bryan DeBoer: Sure, Mark. I actually think it’s what one of the other analysts had asked about, which is the availability of those cars is becoming easier, especially remember, those vehicles were driven off of 13 million, 14 million SAAR during COVID. So we’re starting to get some units back into operation and availability of those. So we’re excited to see that happen. The other thing that can drive ASPs on certified vehicles is incentives, okay? So I think when you start to see incentives come up, that drive to late-model vehicles, down accordingly.

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

Bryan DeBoer: Thanks for your questions today. Thanks for joining us, and we look forward to seeing you on our Lithia Driveway second quarter call in July. Bye-bye, everyone.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.

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LITHIA MOTORS INC

Q1 2026

Earnings Transcript

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