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spk11: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Lithium Motors Second Quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Jardon Jameo, Senior Director, Investor Relations. Thank you. He may begin.
spk06: Good morning. Thank you for joining us for our Second Quarter earnings call. With me today are Brian DeBoer, President and CEO, Chris Holshue, Executive Vice President, Tina Miller, Senior Vice President and CFO, Chuck Leitz, Senior Vice President of DriveWay Finance, and finally, Adam Chamberlain, Chief Operating Officer. 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 which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, .lithiadriveway.com, highlighting our Second Quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.
spk08: Thanks, Jardon. Good morning and welcome to our Second Quarter earnings call. Our Lithian driveway teams continue to drive results as we mature our unique and profitable mobility ecosystem. Our associates met the operational challenge we faced in the quarter and delivered much improved operating results and execution of our strategy with an adjusted diluted earnings per share of $7.87, a 30% improvement sequentially despite the CDK outage. We achieved our highest ever quarterly revenue, our first quarter of profitability in financing operations and laid the foundation for continued growth in our ecosystem as we serve customers wherever, whenever and however they desire. We've strategically used the higher profits and capital of recent years to grow scale, revenue and earnings by nearly three times since COVID began, plus built, acquired and funded all our crucial differentiating strategic adjacencies, driveway, green cars, DFC, PVM, and now wheels. These important design and scale advantages built and assembled during a period of low cost capital have paved the highway to higher margin and a lower cost business with unlimited potential to capture market share. We are now focused on growing this market share, leveraging our scale, realizing all the potential we have built and delivering operational efficiencies through customer experiences across our ecosystem. This quarter brought a unique challenge when CDK faced a cyber attack that impacted many of ours and others' dealer management systems. I'm proud of the way our team responded, quickly pivoting to create solutions and continuing operations across our network. We will talk about the impact on results and operations in a moment, but I want to recognize the impressive efforts of our team members who rose to the challenge, serving our customers 24-7. We continue to make significant progress with large sequential improvements in profitability even after the impacts of CDK. We've achieved the first promise stage of the 60-day plan that aimed to create at least $150 million in annualized SG&A cost savings that will be fully realized during Q3. Looking forward, we now believe there is potential to double this amount, primarily driven from inventory reductions and are expected to occur by year end. During Q2, we made significant progress in areas such as personnel, advertising and corporate level expenses and implemented a redesign of leadership roles to focus on maximizing profitability while leveraging our ecosystem. We are pleased to announce that we have purchased a minority stake in Wills in partnership with Marabani Corporation. Wills is one of, if not the largest fleet management company in North America with the best in class management teams, strong performance and surrounded by a robust competitive moat. This investment in a high margin and highly profitable fleet management operator has the potential to create transformative synergies between our retail and their fleet platforms. Alongside PVM and fast leasing, Wills completes our global omnichannel strategy focused on a complete mobility ecosystem. Now on to key results for the second quarter. Lithium driveway grew revenues to $9.2 billion, up 14% from Q2 of last year. While vehicle operations experienced headwinds as a result of the CDK outage, prior to the same store sales and delivered good momentum in our cost savings efforts. Diving into same store sales performance, total same store revenues were down .4% and gross profits declined 12.5%. Consumers remain resilient despite recent trends that reflect challenges from affordability and higher interest rates with unit sales in the quarter down only 3%. Total vehicle gross profit per unit remained resilient in the quarter at $47.62, similar to last quarter and down $951 compared to the same period a year ago. Our after sales business was down .4% in the quarter. This decline is primarily related to CDK which drove after sales down almost 40% during the 12 days of the outage. We expect some of the work will be deferred into early July as our systems and processes return to normal. Our teams have been nimble and responsive and we do not expect any long-term impacts. Our investments and adjacencies are maturing nicely as they move towards sustainable and considerable profitability. Financing operations produced strong results with income of $7.2 million in the quarter compared to a $18.7 million loss last year, achieving profitability earlier than expected. Driveway and green cars burn rates have also been reduced by 40% compared to a year ago as we continue to refine our e-commerce strategies, improve operating and advertising efficiencies, and convert new customers. All in, we generated adjusted diluting earnings per share of $7.87, a decrease of $28.7 million from Q2 of last year, with an estimated $1.10 impact from the CDK outage. We saw clear strength in operational performance in the second quarter and were on pace for nearly a 50% increase in sequential EPS. We continue to focus on unlocking the profitability of our ecosystem by decisively acting to meet customer demands and operate efficiently by delivering on our core strength, execution. Moving on to our unique and extremely difficult to replicate strategy. The foundation of the LAD strategy is our vast physical network built upon the industry's most talented people, highest demand inventory, and dense physical network. We continue to build the most extensive physical network in North America and the UK, adding new stores, foundational adjacencies, and strategic partnerships such as Wheels to expand our customer experiences and diversify our portfolio. Operating in the largest addressable retail market in the world, we continue to strengthen our ability to profitably grow across all elements of our business. Our strategy to expand and create customer solutions that are simple, convenient, and transparent, allowing us to capture more of the customer's wallet share remains unchanged. These solutions integrate digital solutions and create sticky natural retention of customers within our ecosystem, while magnetic brands like driveway and green cars provide access to 50 times more customers than our core physical businesses do. The LAD ecosystem, including driveway, showed a 2% increase in total MUVs year over year, reaching 12 million per month, with green cars contributing over 900,000 MUVs. MUV effectiveness is also building momentum, where we saw over 38,000 digital units in the second quarter, up 5% compared to last year. Our teams have made great strides in our digital channels, with a Google rating of 4.7 out of 5 year to date, and renewed focus on reaching profitability and expanding market share. As emphasized by recent events with CDK, technology provides an avenue for sizable increases in productivity within our business. We are excited about the progress our Lithia UK platform is making with Pinewood Technologies, as we can continue to convert our stores there onto a single platform. Solutions such as Pinewood Systems bring the ability to place customers and associates in the same ecosystem in order to increase productivity, substantially improve our current customer experience, and enhance our operational resiliency. This quarter, our investment in Pinewood Technologies generated a nice return which reflects the market's positive view of the platform's possibilities. These strengths, combined with our mission, growth powered by people, financial discipline, and regenerative free cash flows, enable us to quickly respond to local market dynamics. This capability allows us to increase touch points throughout the customer's lifecycle across our adjacencies, and equips our stores with the tools to improve market share loyalty and ultimate profitability. Acquisitions continue to be a core competency, and we remain disciplined as we look for recreative opportunities that can improve our network focused on the United States. As a reminder, we target a minimum after-tax return of 15% or greater, and acquire for 15 to 30% of revenues, or 3 to 6 times normalized EBITDA. We reiterate our expectations that estimated future annual acquired revenues will be in the range of $2 to $4 billion per year. Life to date, our acquisitions have yielded over 95% success rate, and after-tax returns to over 25%, demonstrating that LAD is not your typical high-risk roll-up strategy. This quarter, we welcomed two stores from the Sunrise Group in Tennessee, and the Woodbridge Hyundai store located in the Greater Toronto Area to Lithian Driveway. To date, in 2024, we have acquired $5.6 billion in annualized revenues. I would like to personally welcome all our new associates to the Lithian Driveway family. We are growth-oriented, and see industry consolidation as a driver of strong long-term returns. With the capital engine we have built, we are able to deploy our free cash flows to drive the greatest returns responsive to market conditions. As discussed last quarter, we have adjusted our capital allocation targets to equally balance acquisitions and share buybacks. During the quarter, we repurchased $202 million, or .9% of our outstanding shares. We continue to monitor valuations on both acquisitions and share repurchase, and remain opportunistic. Weaving these elements together, and assuming a normalized SAR and GPU environment, we see more clearly a pathway to generating $2 of EPS for every billion dollars in revenue, as we illustrated in slide 14 of our investor presentation. The key factors underlying our future steady state are now totally within our control as follows. First, continuing to improve our operational performance by realizing the massive potential that we have built in our existing stores. This includes increasing our share of wallets through greater customer lifecycle interactions, sustained productivity gains, and growing each store's new used and after sales market share. Increasing profitability with continued cost efficiencies, combined with the technology catalysts created by customers and team members coexisting in the same solutions will help as well. Through these levers in our business, we see pathway to achieve SG&A as a percentage of gross profit with adjacencies in the mid 50% range. Second, optimizing our network by acquiring and driving high performance in larger automotive retail stores in the stronger profitability regions of the southeast and south central United States. We also expect further growth in our digital channels to increase our market share to ultimately reach a blended US market share of 5%. Today we have combined new and used vehicle market share of 1.1%. Third, financing up to 20% of units with DFC and maturing beyond the headwinds associated with Cecil Reserves. Our financing operations achieve profitability in Q2 and is expecting to continue consistent profitability growth going forward. Fourth, through scale and size, drive down vendor pricing with solutions like Pinewood, improve corporate efficiencies to save costs, and lowering borrowing costs as we path towards an investment grade credit rating. Fifth, maturing contributions from our horizontals including fleet management, DMS software, charging infrastructure, and captive insurance. And finally, deliver ongoing return of capital to shareholders through increased share buybacks and dividends. We continue our journey in building a total mobility ecosystem and are well positioned to maximize our unique and powerful scale and reach to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale. Our original design elements are now firmly in place and we look forward to focusing all of our attentions on execution to establish new levels of performance for our industry. Now before we move on, I would like to share some organizational changes that I spoke to that are designed to support our evolving company delivering at a high level of performance. I am very excited to announce the promotion of Adam Chamberlain to Chief Operating Officer. Adam's leadership as Chief Customer Officer and Eastern Regional Presidency since 2022, combined with his extensive experience in automotive industry, positions him perfectly for this new role. Adam's commitment to improving operations and creating customer sensor culture will be instrumental in driving a more connected and convenient experience across our ecosystem. Diana Depries will step into the Chief Customer Officer role, partnering with Adam in operations to continue to build out driveway channel along with our customer ecosystem and related experiences in our after sales business. With these changes, Chris Holeshoe will be handing the baton to Adam, allowing Chris to strengthen our ecosystem to spark growth and serve as the company appointee on the boards of Pinewood Technology and Wheels. Chris has been instrumental in our growth and we are excited to see his continuing contributions to expand our partnership and enhance the company. These changes provide the organizational leadership and design to deliver best in class results and continue to execute on our strategy. Driving profitability through seamless customer experience across our unique ecosystem and aligns our future success in differentiation. Congratulations Diana, Chris and Adam.
spk05: Thank you Brian. It's an honor to be stepping into this new role. I look forward to leading our drive to operational excellence and enhancing our focus on creating a customer centric culture. Thank you also Chris for the operational foundation that you've built and I'm excited to use this to springboard our company to the next level. We have the team and clear strategy to grow our market share and achieve store potential within a few years. I'm excited for the team to execute at high levels of performance and realize the massive profitability opportunity our ecosystem provides.
spk08: Thank you Adam, Diana, Chris. I'm excited and looking forward to accelerating our journey to reach our potential. Now I'd like to turn the call over to Tina.
spk01: Thanks Brian and thank you everyone joining us today. Our financing operations segment primarily driven by DFC continued its upward trajectory and achieved profitability earlier than expected with income in the second quarter of $7.2 million compared to a loss of $18.7 million in the second quarter of last year. This adjacency continues to grow and we are seeing the benefits of diversity in our business model as we increase penetration rates and are now past many of the initial headwinds from Cecil Reserve. We continue to strategically balance yields, growth, and risk through our underwriting and focus on high credit quality loans at market rates of interest. The DFC portfolio balance has now grown to over $3.6 billion with origination volumes of $562 million during the quarter. Originations were consistent this quarter in the prime credit quality band similar with other quarters. Overall, our financing operations business continues to perform better than expected. We reiterate that we expect to continue profitability in 2024 and remain confident in the ability for financing operations to deliver long-term earnings growth with a fully scaled and seasoned portfolio. As a reminder, each loan originated by DFC is expected to contribute up to three times more profitability compared to traditional indirect lending and presents significant upside potential to our profitability and is a key element as we move toward our 2 to 1 EPS to revenue target. Moving on to SG&A. Adjusted SG&A as a percentage of gross profit was .9% during the quarter which reflects the impacts of the CDK event and 67% on a same store basis which excludes the higher expense profile of our UK business. We continue execution of our UK network optimization including streamlining operations and divesting, merging and closing targeted stores. Moving on to our balance sheet and cash flow performance. We reported adjusted EBITDA of $435 million in the second quarter driven by the impact of the CDK outage on unit sales, lower new vehicle GPUs as supply normalized and higher interest expense. We ended the quarter with net leverage of approximately 2.3 times, comfortably below our target of three times and our bank covenant requirements of 5.75 times. We maintain our financial discipline even with planned growth and target leverage below three times. These figures adjust for the impact of floor plan debt which is unique to our industry and related to the financing of vehicle inventory. This financing is integral to our operations and collateralized by these assets. The industry treats the associated interest as an operating expense in EBITDA and excludes this debt from balance sheet leverage calculations. Similarly, we have ABS warehouse lines and issuances to capitalize BFC which are also excluded from our leverage calculations. During the quarter, we generated free cash flows of $127 million. Free cash flows were impacted by declining EBITDA due to decreasing margins, the CDK outage in June and an increase in capital expenditures compared to prior year mainly related to construction at recently acquired locations to meet manufacturer requirements. Our capital allocation strategy focuses on the regenerative cash flows from our business which preserve the quality of our balance sheet while supporting our growth initiatives and navigating today's complex environment. Earlier this year, we adjusted our capital allocation strategy to more closely balance acquisitions with shareholder returns. As a result of the rebalance focus in the second quarter, we repurchased .9% of our outstanding shares at a weighted average price of $256. Approximately $615 million remains available under our share repurchase authorization. Our vision and ability to deliver on synergies through acquisitive growth remains unchanged and our 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 revenue. Our culture and business is designed to grow and deliver consistent strong performance. Coupled with the diverse and talented members of our team, this gives 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?
spk11: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Ryan Sigdal with Craig Hallam.
spk02: Hey, good morning guys. Congrats, Adam.
spk11: Thank you, Ryan.
spk02: Good morning, Ryan.
spk13: Brian, I want to start with something you said in your prepared remarks. I believe I caught it right, but you said we're on pace for a nearly 50% increase in sequential EPS. I guess if am I looking at the $7.87 in the quarter into Q3 for that 50% or I guess some context around that statement would be helpful.
spk08: Ryan, so the concept was that CDK cost us $1.10. Add the $1.10 onto the $7.87 and you get what our tracking would have been without the CDK event, which is almost 50% and just a little over 40% excluding the Pinewood impact.
spk02: So that's Q2 versus Q1,
spk13: correct? That 50% is what you're referring to? Exactly right. Thank you. Thank you. Then looking at slide 14 for my follow-up, midterm I believe is a new kind of statement in there and it's for $40 to $50 billion of sales, which isn't far away from where you guys are today. So I guess any timeframe around what type of timeframe we're looking at for midterm or I guess is it really just about reaching that revenue range and you can get the $1.20, $1.30 of EPS?
spk08: Yeah, I think when we think about midterm we think two to four years and if we think long term it's five to eight years. So I think that's the appropriate way to look at this. I think we're probably going to be able to eclipse those numbers a little bit quicker and as you saw in the quarter we've got some pretty good tailwinds. We made some pretty good improvements in operations and I think most importantly of the four peer groups that have announced so far our SG&A as a percentage of growth was the lowest on a same store basis of all four, which is much different than it was even last quarter. So you're starting to see the impact of the 60-day plan start to take hold and that 60-day plan we're going to be realizing most of that starting on July 1st like we said last quarter.
spk02: Good to see. I'll turn it over to the others. Thanks guys. Good luck. Thanks Ryan. Thank
spk11: you. Our next question is from Rajat Gupta with JP Morgan.
spk09: Great. Thanks for taking the questions. I just had a couple. You're following up on the SG&A and the cost reduction plan. Given like 60 days were complete on the $150 million, is there a good framework to think about SG&A to gross in the third quarter? I think previously it cited something like $64 to $67. Are we going to be within that range in the third quarter itself or is it going to be later in the year or maybe next year? Maybe you should clarify that and have a follow-up.
spk08: Sure. Sure Rajat. This is Brian. Hope all's well. I think most importantly when we think about SG&A going forward, I think what you're seeing is the SG&A is going to be somewhere around where we were this quarter in Q3 for two reasons. Even though right sizing and the 60-day plan are taking hold. Okay and I can give you some specifics on that in just a second. It's important to remember that we still have the possibility that new car GPUs are a little bit inflated still. So that could offset it and by the time you hit September, October you start to feel that going into the winter seasonality. I would also say this. So we did eclipse the first half of what we've now called the 60-day plan. We've earmarked 150 million and we eclipsed that on July 1st. I got the report yesterday. We're now over $200 million that will be realized mostly in Q3. Okay with the remaining difference of about $100 million coming primarily from inventory reductions which we've got lots of opportunity to improve there and it may take us closer to the end of the year. So I would say if we're lucky we'll get to realize some of that in Q4 but definitely into 2025 we'll get the benefits of most of that.
spk09: Got it. That's very clear. And then just in parts and services, clearly June was impacted by CDK. I was curious if you could give us a sense of the run rate you saw in April, May and maybe what you're seeing in July. And also I would love to know if there's any opportunity to take more price and perhaps some of the acquired stores over the last couple of years where they might not have been as proactive or opportunistic like the legacy stores.
spk08: Thanks. Yeah I think if we think about our potential which I think is what you're indicating on the newly acquired stores, we've spent now what four and a half years being able to add almost $25 billion in revenue of some good stores but a lot of stores that have massive potential and I think to highlight that if you get a little more detailed into our numbers, our value auto sales which is over -year-old vehicles is now only 12 percent of our mix. It used to be in the mid-20 percent of our mix meaning that we're not selling those things that Lithia typically does so that's one of the opportunities. Obviously in service body and parts there's further opportunities to be able to grow that and obviously the leverage of the whole gets there. Now in terms of parts and service which was the first part of your question, pre-CDK event we were tracking in the mid to low single digits on a same store sales basis and then obviously when you're handwriting our O's it's a little bit more difficult that we did get most of the business we had during that 12-day period into the books in June however there was a little carryover for the first 10 days or so so we are seeing a little bit of lift in July however July also has two extra days relative to last year so anything that I give you it automatically should be up about eight percent or nine percent just because of the fact that we've got 23 days instead of 21 days in July. Thanks Rajan.
spk11: Got it, thank you. Our next question is from Brett Jordan with Jeffreys.
spk04: Hey good morning guys. Hi Brett. Brian I think you just said the quote the possibility that new card GPUs are a little inflated still. Could you sort of talk about where you see that glide path now and maybe the cadence in the quarter on GPU?
spk08: Sure, sure. We were fortunate that June ended up ended up looking pretty darn good and if you look sequentially quarter over quarter we were basically the same as we were last quarter on our total vehicle GPU. Now going back five years okay we were about 3500 to 3700 in total GPUs including FNI. Today we sit at 4700 still okay. We do know that our FNI is structurally different than it was before because of the ability to improve for five years so we think that there's a couple hundred dollars there that would have taken our FNI from 1600 up to about 1800 dollars and then the single biggest difference and this is a big difference when you start to think about your SG&A as well is we now have a good portion of our business in the high margin regions of the southeast and south central which has higher FNI, less regulation, a lot higher averaged store size which really helps us a ton so we think that our normalized total vehicle gross profit with FNI is between 42 and 4500 dollars meaning that if we're still sitting at 4700 there's a chance that two to 500 dollars still has to come out but we're going to do everything in our power and I would say this we believe we're starting to believe that we could be at the bottom which is great now we can actually build back up because everything that we're talking about does get diluted a little bit by this overhang of GPUs but I do think that we've got the ability to be able to power through this now and be able to grow earnings and grow our same store sales base from this point forward.
spk05: Okay and a quick question on the dollar. I'll add a little
spk08: bit more to share with you too on that Brett.
spk05: Okay hey Brett, hey Brett yeah just to add to that you know pre-COVID we were seeing incentives of percentage of MSRP in the kind of 10 to 11 percent range right now we've climbed kind of slowly through the year and running about six to six and a half percent so if you take then the delta to pre-COVID levels of about four to five percent that could be another two to two thousand five hundred based on the average selling price of a car sort of mid to late 40s does that make sense? So there's kind of there's kind of offset between the two whether we decrease a little bit sequentially but we also expect with day supply we expect some of the OEMs to be stepping up incentive levels as well. Okay all
spk04: right on the the CDK dollar 10 as far as been a business interruption insurance or is is there a piece of that you can bring back and maybe timing that that is that going to fall within this year if you get some recovery?
spk01: Yeah Brett this is Tina we do have cyber insurance and obviously are going to work with our carriers around that it does take some time to put that claim together and work that through so you know hopefully there's something there but we didn't record anything in the second quarter. All right thank
spk00: you.
spk11: Our next question is from John Murphy with Bank of America.
spk03: Good morning everybody I just had two questions for you guys. You know first Brian on the Wheelzink acquisition or or sort of tie up here I'm just curious when you think about fleet management you know how does it kind of dovetail into the the core business is it you know something where you know you sell the new vehicles in you manage them and then you you're able to sell them out of the fleet in into your business and then retail them I mean what's the general the general take here on fleet management?
spk08: Yeah I may have jump Chris jump in a little bit on this but let me just let me take a shot at this okay I think most importantly in the relationship we look at Synergies first however they have very high levels of service expectations for their drivers and I challenge all of us on the lithium driveway teams to be able to meet those those demands because it is a different level of service than probably even what our retail customers get so most importantly for us to realize the synergies in the partnership with wheels which are primarily the ability to sell some of the some new vehicles to them to help embellish the fleets that they service okay that's an important thing they divest somewhere around 100,000 plus vehicles a year which if we can do a good job and play pay market and build driveway green cars in the lithium you know channels to be able to attract more customers and obviously we've now got a pipeline of vehicles that maybe competitors don't have ultimately we'll have to be the the highest payers for those but those relationships can grow and build and bond in addition they maintain all those cars okay and that is maintained through multiple different networks of retailers today if we could get some of that business or all of that it's a massive lift to service in parts long term that's that's where we start with the synergies the the other neat part about it is when I talk about the service level that they provide their drivers we were inspired Chris and I when we met with them what almost 16 17 months ago now at their ability to provide services to consumers to their drivers that we have never even contemplated okay they've got the relationships the api's in their apps the pricing methodology and the contracts negotiated where you get into more of subscription services like what we try to do with service contracts but these are big dollar amounts their business is based off small dollar amounts such as selling people toll services where customers says I want my tools to be done on my app okay I want to pay for everything in one spot rather than to have to go into the toll companies or those municipalities they don't have to do that okay and they negotiate with municipalities discounts of that on that and then pass some of the discounts along to their their users so it's pretty exciting there's probably a half a dozen examples like that that we believe could be monetizable within the lithium and driveway portals to be able to access and be a you know a conduit to further growth in our fni products or our subscription services creating greater ties with our consumers and more touch points than what we currently have
spk03: that's incredibly helpful and just a second question on interest which is an obvious question but you guys have not really addressed too much I think here is I mean if you look at what's happened in the last two and a half years we have a basically about a 400 basis point or maybe a little little more you know rate increase to the to the auto consumer and you know everything that you've done over that that time frame is just better and better and the industry is putting up record profits there's no real discussion about how big a benefit that could be as rates come back down and you know people look about you know ASPs and your GPUs and say they're just not sustainable but they've been sustainable and very strong in the face of that and you know effectively you're looking at something that's almost a 15% picky or incremental to the ASP so I'm just curious you know as a on the good guy side of this you know how do you guys think about what the potential could be here and you know I think maybe conservative on your GPU and ASP assumptions in the face of this what's your take?
spk01: John this is Tina I mean on the interest side and I'll start maybe with just our business right we obviously have several those are variable debts so there is a tailwind that we can get as rates get cut from that perspective you know around consumer affordability you know it's impacted and we've talked about that in the past around what that monthly payment is and then I think that gives you know a good strength and tailwind for consumers going forward since they're monthly payment shoppers and Brian I don't know if you have anything to add to that but you know I think affordability is something we've always commented on that's important that drives our business.
spk08: John I think when we think it from a impact and magnitude to the organization and I'm sitting here next to Adam who spent a lot of his career with manufacturers his focus and the operational team's focus of our presidents and regional vice presidents we have tons of opportunity in terms of inventory and being able to control inventory and now that the ecosystem is fairly well built and our people are out there swinging and they they get this we're talking about almost a billion dollar cut in total inventory between new and used by year end while still maintaining our same growth rates okay and if nothing else improving velocity of our turns to be able to improve that but you know we're talking that that's almost a hundred million dollars in interest rate savings at today's rate compounded with the things that Tina just spoke to. Okay
spk02: thank you very much guys. Thanks John.
spk11: Our next question is from Douglas Dutton with Evercore.
spk07: Hey team thanks for taking my question here. Just had a question on the buyback. Obviously a very strong quarter there about 200 million in repo. You know is that what would you handicap as the new normal there going forward Q3 Q4 and 25 you know do you think high eight figure low nine figure buyback could be the norm or are we going to go back to that you know 10 to 12 percent level of free cash?
spk01: Yeah I mean I mean for us this is Tina when we think about capital allocation it really is balancing valuations that we're seeing out there from an M&A perspective as well as the stock price and how we can be opportunistic in it and so you know from our perspective it's always running that math as we look at what the opportunities are M&A as you know is core to our business and our strategy and we see you know really strong value and continuing to grow the footprint. Our focus is here in North America especially in the United States where there's lots of opportunity in the fragmented market so you know we don't really set sort of a set dollar amount on our approach it's really looking at what is that opportunistic purchase that we can make you know from that perspective. Brian do you want me
spk08: to embellish a little bit on that too? Keep this in mind as well Doug the marketplace is pricing acquisitions close to three years average earnings on inflated earnings so when we look at that and the opportunity that's not that appealing because we typically look at pretty high returns on what we expect to be able to buy things through we think that will subside okay and I think our standard line is you already got that earnings why do you expect us to pay for it but we are we are competitive buyers and we'll continue to grow and find opportunistic acquisitions expecting somewhere between two and four billion dollars in the years to come. More importantly than that the value that our stock trade's at now one of the one of the lowest in the sector so we would say we're at trough earnings potential okay we're also at trough multiples so when we look at the fact that I can look around this room with the six of us in here and confidently say that the two dollars of EPS for every billion dollars of revenue is a very high probability of success in the mid to long term range okay and you can see the reconciliation on page 14 we updated the slide because our forecasting is quite clear on it we've now disseminated through the organization it's clear that we're about 80 cents right now in that ratio so about a 0.8 to 1 rather than a 2 to 1 we've got somewhere around 60 to 70 cents that we think can be realized in the potential within our stores as well as the acquisitions that come from the capital that we've allocated and that I just walked through with you our financing operations of what Chuck talked about at maturity gets us to 22 to 25 additional cents we talk about capital efficiencies that Tina just spoke to and the idea of using some of the capital for share repurchases especially if we're going to be penalized this much okay that's another 25 to 35 cents okay massive amounts as well we haven't even got into the new adjacency that Chris is going to be working on with wheels and pine wood and the things that we don't even share with the world that's the advantages of what lithium and driveway built in an ecosystem that is totally different than what anyone else in the space has and now you're starting to see that that realization come true and as long as operation can keep going which I know it will under Adam's leadership that we'll be able to take that potential and realize the true potential of we've built over the last eight to ten years
spk07: awesome I appreciate the detailed answer there and you actually answered my my follow-up as part of that so I will turn it over thanks team great thanks our
spk11: next question is from Colin Langen with Wells Fargo
spk10: oh great thanks for taking my questions can I just follow up on your comments on sort of you addressed sort of new GPU coming down only I think you said two to five hundred dollars that did include when you quoted at FNI I think in the past you've talked pretty clearly how you think new GPU at least alone would normalize at pre-covid levels so has that part of it changed is it just FNI is offsetting some of that and if it's your own why why why has it changed yeah thanks
spk08: so so in my comment when I said we're at 4,700 and we're going to go to 40 we think we're going to be at 42 to 45 five that was total GPU okay between new end use we do believe that the way that you get there that two to five hundred dollars is some recovery of used vehicles which are still at depressed levels below where they were pre-covid okay and if we can get more into the value auto cars at we're making about 200 more on every value auto car and turning about three to four times as fast okay then what we do on a certified car so we think that there's a lot of opportunity there so it's probably I would say three to five hundred dollars return of used vehicles and maybe eight to a thousand drops still in new vehicles if we can prevent that then that's the upside but I think we're real close to normalization at this stage out you know not assuming some macro factor that changes things okay but we feel real comfortable with where we're sitting today that it's it's been a softer landing rather than a pretty abrupt landing got it that's a helpful clarification and
spk10: then you mentioned a dollar 20 cdk impact I think the question earlier is you know recovery how should we think about that instead of insurance recovery I was sort of wondering how how much of that lost sales that's in a dollar 10 in a quarter is a good portion recoverable is it most kind of just sort of lost and you're not going to see any sort of benefit into q3 as maybe things are deferred how should we think about what kind of maybe it's good question Colin yeah
spk08: so it was a dollar 10 and I would think that a portion of it and I would say less than the majority is probably recoverable it may be as little as 10 to 20 cents a lot of it is really service in parts that was backlogged in terms of production levels but you have to remember this even though cdk had this event 55 percent of the industry wasn't on cdk in the united states okay so understand that that customers don't typically wait around for 12 to 15 days to buy another car they may wait around a little bit on service just because it may be their only service point especially 40 percent of our stores are in isolated markets okay so that probably helps a little bit but ultimately those new and used car customers probably bought okay most customers buy within 72 hours of making the decision to buy even though they may research for two to four weeks they typically buy when they want to buy so I don't believe there's a ton of that dollar 10 that's sitting out there unfortunately
spk10: got
spk11: very helpful thanks for taking my question
spk02: thanks
spk11: colin our next question is from ron josey with city group
spk12: hi this is uh james michael i'm for ron a two-part question here focused on your evolving omni channel strategies so first up can you talk about any shifts you're seeing in the broader online competitive environment and any update on marketing roi or underlying conversions across your driveway green cars digital sales channels secondly how are you balancing investments to tackle that 50x online customer tam while at the same time cutting burn rates by 40 thank you
spk08: thanks for the question james i think when we think about our our green cars and our driveway channels we're quite pleased to see that our top of funnel is staying pretty consistent while still reducing marketing budgets by over 50 so we're pleased with that we think that we're ready to turn the the afterburners on on both of those channels again because what we were struggling with was customer retention and satisfaction where we were at a 3.7 google score last year to date so far we're at a 4.7 i'd congratulate our green cars and our driveway teams massively that's a massive shift meaning that our ability to grow and improve what we used to call a golden ratio which is the bottom of funnel relative to the top of funnel can be massive now that we've got satisfied customers what you get is repeat and referral business that start to come back now okay that's how you access the 50x or 50 times more customers than what our core businesses typically touch okay we are still seeing that 98 plus percent of our customers in driveway and green cars are new to lithia and green cars and driveway so that's that's really exciting to still be able to have but we've built a channel with an experience that's transparent convenient and simple and it's a it's it's a great way to be able to access this especially as our procurement of used cars and our ability to to really leverage the network that we've built start to take hold in the overall ecosystem
spk02: very helpful thank you thanks james
spk11: our next question is a follow-up from with jp morgan
spk09: oh great thanks for squeezing me in again i just had a question on the used car gpus in the second quarter it looks like the same store numbers were up sequentially but the overall numbers took a big dip i mean i'm sure like uk had like a bit of a mixed impact but i was curious were there any kind of like one-time liquidation type events in the uk that that might have driven that reduction and how should we think about just used car gpus going forward thanks
spk08: raja you nailed it that was a great summation that you had there on unused car gpus we do think that there's opportunity for growth but again operationally we have to get back to selling and keeping those value auto cars that yield the big profits and turn so quickly that will lift our overall gpus back up and they're way less sensitive to market condition but no there wasn't any any one times or anything like that that was true market conditions
spk02: got it
spk09: okay thank you
spk08: thanks raja
spk11: ladies and gentlemen we've reached the end of the question and answer session i would like to turn the call back to brian devore for closing remarks
spk08: thank you everyone for joining us today we really look forward to updating you again and seeing the impacts of the 60 60 day plan really take hold we'll talk again in october for the third quarter results bye bye
spk11: this concludes today's conference thanks for your participation you may disconnect your lines at this time
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