Lithia Motors, Inc.

Greetings. Welcome to Alicia and Driveways 2025 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that today's conference is being recorded. I'll now turn the conference over to Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our second quarter earnings call. With me today are Brian DeBoer, President and CEO, Tina Miller, Senior Vice President and CFO, and Chuck Leitz, Senior Vice President of Driveway Finance. 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've also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our second quarter results. With that, I'd like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Jardon. Good morning and welcome to our second quarter earnings call. The first half of 2025 reaffirms the strength of our strategy with a 29% increase in EPS on a year-over-year basis vastly outpacing the industry's profitability growth. Lithium Driveway's strong earnings growth is enabled by an operational focus powered by our people and the profitability of our ecosystem and adjacencies. Our integrated physical and digital network services customers while scaling a platform designed to compound value and earnings power with a diverse and resilient ecosystem. In the second quarter, we delivered record revenue of $9.6 billion and 4% year-over-year same-store revenue increase, reflecting our continued ability to grow share and enhance the profitability of our platform. In addition, diluted earnings per share for the quarter was $9.87 and $10.24 on an adjusted basis, an increase of 25% and 30% year-over-year, respectively. We saw strength across the business with record profitability in financing operations, expanding after-sales margins, and flat SG&A despite pressures from lower GPUs. We're encouraged by our adjacencies that are now contributing meaningfully to both earnings and consumer engagement. These businesses are not just supporting core operations, they are expanding unit economics, reinforcing loyalty, and widening the profit gap between Lithia and the marketplace. As we look to the second half of 2025 and beyond, our focus remains on store performance, scaling high margin adjacencies, deepening customer relationships across the ecosystem, and deploying capital in a way that is most valuable to our shareholders. Our combination of local execution, integrated technology, and capital discipline positions us to grow profitably, take share, and advance to our long-term targets while continuing to lead the industry in innovation. We're pleased to see increasing momentum in our high-margin business lines, including financing operations, and after sales, which expands our unit economics and adds consistency to our earnings profile. Our stores are adapting in real time to demand shifts supported by their understanding of customer needs and OEM dynamics. We continue to monitor and respond to the evolving tariff landscape and broader consumer trends. We have diversified our earnings stream, and as a reminder, over 60% of our net profit comes from the after sales operations. Our OEM partners have responded nicely, maintaining affordability and price stability. With a broad product mix, we are well positioned to serve customers across all segments and affordability levels while continuing to build upon the customer lifecycle with high margin adjacencies to further improve the profit equation. What differentiates us is how our components work together, a national footprint with local autonomy integrated digital tools, high margin adjacencies that scale earnings across the ownership lifecycle, while also being the preferred acquirer of businesses in the industry. In a fragmented sector, our ability to acquire, integrate, and operate at scale remains a key focus and competitive advantage. This quarter, we added stores and targeted high return markets, continued optimizing our existing portfolio, and embedded adjacencies more deeply into our daily operations. Our omnichannel platform is expanding both engagement and reach. Tools like the MyDriveway portal are strengthening customer retention in digital brands like driveway and green cars as they continue attracting new customers into the ecosystem, all while improving the customer experience and driving margin. In July, we completed a transaction to transfer our North American joint venture back to Pinewood AI, paving the way for Pinewood's full rollout of the industry's pinnacle, cloud-based solution across North America. In addition to our high-margin adjacencies, we have a set of operational levers that tighten costs and lift throughput at the store level. Today, myDriveway's customer portal reduces service costs and drives higher retention. Soon, the Pinewood AI will allow us to replace multiple legacy and third-party solutions, allowing both customers and our team members to operate in the same environment. This will improve the sales experience, streamline workflows, and further reduce our cost structure. Layer onto that scale-driven advantageous pricing as we unlock meaningful SG&A leverage while freeing store teams to focus on selling and servicing vehicles. Together, these abilities give Lithia a structural edge that supports sustained margin consistency and growth. This strategy is producing results and creates a foundation of tremendous potential and more resilient and rewarding earnings model. This enables us to grow through volatility, allocate capital with confidence, and advance towards our long-term targets with clarity. Strategic acquisitions remain a core pillar of our growth model and a proven differentiator of LAD. Our history of sustainable high return and virtually risk-free growth has grown our revenue from $13 billion in 2019 to become the largest global auto retailer, quickly approaching $40 billion in revenue. EPS has grown at a similar rate, and we remain excited to operate and grow in one of the most unconsolidated sectors in the country. Our scaled, diverse strategy and cash engine now have the flexibility to not only accelerate share buybacks, but also continue to grow both organically and through acquisitions. With a disciplined approach, we continue to target high-quality assets in the U.S. that strengthen our network, especially in the Southeast and South Central, where population growth and operational profits are the highest. We aim to acquire at 15 to 30 percent of revenue, or three to six times normalized EBITDA, with a 15 percent minimum after-tax hurdle rate. Our track record reflects a 95 percent success rate of above-target returns. Today, we are in a position of strength. Our growing capital engine and consistent free cash flow gives us the flexibility to allocate where returns are most attractive. While waiting for market valuations on acquisitions to reset, the relative value of our own shares supports a more aggressive buyback strategy, which Tina will be discussing further. In the first half of the year, we repurchased 3% of our outstanding shares. Over the long term, we continue to target acquiring $2 to $4 billion in revenue annually, and will continue to deploy capital where it compounds value most effectively. We have clear line of sight to our long-term revenue of EPS growth targets powered by five strategic levers. Improving store-level performance, expanding our footprint and digital reach to grow U.S. market share from 1.1% to 5%, financing up to 20% of units through scaling DFC, reducing costs through scale efficiencies in SG&A discipline, and capital structure, and finally, capturing growing contributions from omni-channel adjacencies like e-commerce, fleet, software, and insurance. Let's turn to our key operating results and how the performance is being driven at the store and departmental level. This quarter marked another meaningful step forward in the consistency of our performance. We delivered year-over-year growth, particularly in after sales, and continued to see sequential improvements in used autos, especially in the value auto segment. While the June 2024 outage contributed to softer comps in the prior year, this quarter's results reflect operational progress yielding organic revenue growth through each month of the quarter supported by disciplined SG&A control and strong execution across our stores. As we move through the rest of 2025, our focus remains on the fundamentals, expanding market share, improving throughput, maintaining cost efficiency to reach our potential. Turning to same store sales performance, total revenues and gross profit both increased by just over 4% due to sequential strength across all business lines that are partially offset by declining GPUs. Total vehicle gross profit of 4318 was down $128 compared to the same period last year. New vehicle units increased 2% year over year, with front-end GPUs at $3,175 up slightly sequentially. Used vehicle units increased 4% year-over-year. Our value auto sales continued to trend impressively with 50% same-store sales improvement versus last year. Front-end GPUs for used vehicles were flat year-over-year at $1,900. We saw a slight increase in new vehicle inventory day supply of 63 at quarter-end, This compares to an unusually strong sales month in March with absolutely inventory increasing by only 5% sequentially. Used vehicle DSO increased slightly to 48 days from 45 days in Q1. Flooring interest savings were significant this quarter with a 28% decline year-over-year. F&I delivered 4.5% year-over-year growth in same-store sales gross profit and $1,841 on a per-unit basis a $25 year-over-year increase reflecting the continued steady growth of this high profitability area. After sales was once again a key earnings driver. Same store after sales gross profit grew 8.5% year-over-year, helped by solid momentum in both customer pay and warranty work. Gross profit expanded even faster at 11.9%. As the segment's gross profit margin widened to 57.8%, a 188 basis point increase from last year, reflecting stronger mix and operating efficiency. Warranty remains a standout with gross profit up 21.9% on elevated OEM service activity and higher technician productivity. With after sales now contributing more than 60% of the net income of our company, we see continued headroom to compound growth and earning stability in 2025 and beyond. With the foundation of our strategy now in place, lithium driveway differentiated model is delivering results. Leveraging our national physical network throughout the customer life cycle with inventory and network scale advantages, industry leading digital customer solutions, and deepening customer economics through captive finance and expanding after sales all underscore the consistency, resiliency, flexibility, and potential of our model. Our leaders are executing across the network by driving towards store potential, integrating adjacencies, and creating memorable customer engagements across the ownership journey. Our integrated ecosystem is delivering tangible results and we are confident in our ability to lead the industry in consistency, profitability, and long-term value creation. Before turning things over to Tina, I would like to thank and congratulate Gary Glandon, our Chief People Officer, on his upcoming retirement. His leadership is leveraging LADD's greatest strength, our people, and is a perfect exclamation point on an illustrious 25-year career as head of people functions and his five years here at LADD. We look forward to seeing our people and culture teams that Gary has built, led by Katie Macadino, continue to flourish and drive our mission of growth powered by people. With that, I'll turn the call over to Tina.