Lithia Motors, Inc.

Greetings and welcome to the Lithia and Driveways 2025 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Jardon Hamadio. Thank you. You may begin.

Good morning. Thank you for joining us for our Third Quarter Earnings Call. With me today are Brian DeBoer, President and CEO of 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 product, 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 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, investors.lithiadriveway.com, highlighting our third quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed, where we improved our same store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from reoccurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year-over-year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and after sales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026. Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is outpacing the industry while also being more durable despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our reoccurring after sales department, resilient F&I attachments, and a focus on increasing market share created strong top and bottom line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was 4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5%, with units up 2.5%. New GPU was $2867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest, year-over-year and import brands relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year-over-year Well done, Team Lithia. Lastly, used front-end GPU was $1767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level. We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the F&I and after sales attachment to deliver more connected and repetitive ownership experiences with our customers. F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached 1847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DSC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2. Floor plan interest expense declined 19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. After sales continues to be the largest single driver of customer retention and earnings growth. After sales revenue increased 3.9%, while gross profit rose a hefty 9.1%, with margins expanding to 58.4, up 280 basis points year over year. We saw strength in all key after sales categories, with customer pay gross profit up 9.2%, and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of after sales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve, even as GPUs continued to normalize. In the UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high margin after sales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. driveway finance continues to build a growing base of stable earnings with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into reoccurring stable earnings through any economic cycle. I'm happy to congratulate our DFC team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy, we remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritize repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI valuados, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S. focused in our acquisitions, prioritizing stores that strengthen our network, especially in the southeast and south central regions where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complimentary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15% to 30% of revenue, or three to six times normalized EBITDA, with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases, When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set and strategic design now providing meaningful tailwinds, Lithium Driveway's differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase DFC penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership lifecycle. Strengthening used vehicle after sales in our captive finance business deepens customer economics and smooths out any economic cycles, while inventory and network scale improves speed and choice. Operational leaders across the network are driving store and departmental towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina.