Lithia Motors, Inc.

Greetings, and welcome to the Lithia and Driveways 2025 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jamarillo, Senior Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our fourth 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 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 gap measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Brian DeBoer, President and CEO.

Thank you, Jordan. Good morning and welcome to our fourth quarter earnings call. In the fourth quarter, we achieved record revenues driven by impressive used vehicle sales that greatly outpaced the market. Quarterly revenue was $9.2 billion, setting a new record for full year revenue of $37.6 billion, up 4% from 2024. Adjusted diluted EPS was $6.74 for the quarter, with full year adjusted EPS of $33.46, up 16% from 2024. Our operational leaders leaned into growing our top line and flexing their muscles across all aspects of our ecosystem, including DFC, which saw a $19 million year-over-year increase in pre-tax income and delivered a 16.7% penetration rate in December, exemplifying Auto Done Easy. I'd like to commend our ops leaders for leaning into used cars, especially value autos, focusing on the customer experience, and earning considerably more share and positioning us again at the top of our peer group. Together, we're challenging our store and sales department leaders to reinvent their profit equation through more dynamic pricing and reducing SG&A while outperforming in volume. Growing our market share and increasing volume is a turbo boost to our ecosystem's future profitability as we increase DFC penetration after sales retention and benefit from the waterfall of used vehicle trade-ins. During the quarter, our same-store revenues were essentially flat, and gross profit was down 1.2%, reflecting strong execution relative to the market. Total vehicle GPU was $39.46, down $258 year-over-year, in line with industry-wide compression in both new and used vehicle margins. Despite these headwinds, our diversified earnings mix and focus on market share delivered double-digit growth in after-sales and stable F&I performance to help offset front-end pressures. Note that all vehicle operation results will be on the same store basis from this point forward. New vehicle revenue declined 6.6% on an 8.3% unit decline as industry demand softened and supply normalized. New vehicle GPU was $2,766, down $300 over last year. Performance varied by brand, with luxury brand revenue down 12.7% year-over-year, partially due to the difficult prior year comp. Domestic and import brands were also soft, particularly late in the quarter when sales promotions didn't materialize. Our used retail performance has returned to our historical industry-leading mid-single-digit growth levels, with used revenue up 6.1%, driven by 4.7% unit growth. Our value auto platform continued its strong momentum with 10.9% unit growth, demonstrating our growth at the most affordable price points. Used GPU was $1,575, down 151 year-over-year as we increased market share considerably, while now turning to the opportunity to improve unit profitability as well. Our focus on this high ROI area provides a stable anchor to new vehicle cycles and allows us to increase the number of customers in our ecosystem while growing our F&I and after sales profitability. F&I per unit was $18.74, up $10, demonstrating the resilience of this high margin business. This steady growth came despite our record DSC penetration, where we intentionally shift finance gross profit from F&I to our captive finance platform. Adjusting for these mixed shifts Underlying F&I product attachments and pricing was healthy, reflecting strong execution across our network. Inventory levels remained consistent with new vehicle day supply at 54 days, essentially flat from 52 days last quarter, and used inventory at 40 days compared to 46 days in Q3. Flat inventory plus lower interest costs drove $6.5 million in year-over-year floor plan interest. After sales was also up nicely with 10.9% growth in revenue and 9.8% growth in gross profit while delivering 57.3% gross margin. We saw consistent growth across all categories with customer paid gross profit of 10.9% and warranty gross profit of 10.1%. This stable broad-based growth demonstrates the underlying strength of our after sales business model and its power to create customer loyalty. Our sales departments have been challenged and are responding to improved SG&A leverage and ensuring more of our gross profit is realized on the bottom line. This quarter GPU compression outpaced our cost reduction efforts, which Tina will talk to in just a moment. As we look ahead into 2026, we flatten the organization, continue to focus on efficient customer experiences, and are making technology investments that will drive efficiency. In the UK, our teams delivered a 10% increase in same store gross profit while navigating challenging market conditions as well as regulatory labor cost increases. We're capturing market share in our high margin after sales business across the UK network while focusing on sales throughput, particularly in used vehicles. Adjusted pre-tax income for the UK increased 53% for the full year compared to 2024, and we see continued opportunities to strengthen our results in 2026. Well done, Neil, and well done, UK team. Our digital platforms continue increasing our reach and enhancing the customer experiences to make shopping, financing, and servicing simpler and faster. Our partnership with Pinewood AI has delivered exceptional returns, and we're excited to pilot the Pinewood dealer management system in our first North American store soon, creating a single modern platform and reducing complexity, accelerating workflows, and placing our team members in the same systems as our customers to deliver faster, more seamless customer experiences. Together, these technology investments deepen customer retention, support operational efficiency, and reinforce the power of our integrated ecosystem. Driveway Finance Corporation continues to scale profitably with record income, healthy net interest margins, and disciplined credit quality. Our expanding market share creates a larger origination funnel and a path to our long-term 20% penetration target that will convert more sales into reoccurring countercyclical income. As DFC continues to scale, This platformer will differentiate our customer offerings while driving higher quality, more diversified earnings streams. Now on to capital allocation, where we remain focused on maximizing shareholder return through disciplined deployment. With our shares trading at a deeply discounted valuation, we accelerated repurchases this year, retiring 3.8% of our shares in the quarter and 11.4% of our shares in 2025 at prices that we should drive meaningful accretion with. We also strengthen our balance sheet through opportunistic refinancing while preserving capacity for our growth investments. Going forward, we'll maintain this balanced capital strategy between buybacks, selective M&A, organic investments, and balance sheet strength. our integrated ecosystem continues to strengthen. Growing after-sales profitability, accelerating used vehicle growth, expanding DFC penetration, and ongoing operational improvements in our sales departments will create a stronger earnings base. With improving operational efficiency, robust free cash flow generation, and disciplined capital deployment, we're well positioned to deliver compounding earnings growth in 2026 as industry conditions normalize by doing what we do best, growing through the power of our people. Strategic acquisitions remain a core pillar and key differentiator, and in the past six years, we've more than tripled our revenue while pairing scale with consistent EPS growth. This growth was accomplished while also building a 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 through high return acquisitions. We remain disciplined and strategically focused on prioritizing stores that strengthen our network density and elevate our brand mix in high opportunity markets. In the fourth quarter, we added iconic luxury stores, improved our import mix, and expanded a little bit with our Canadian footprint. For the full year, we acquired $2.4 billion in expected annualized revenues, diversing our portfolio and expanding our reach. Our results over the past decade have yielded high rates of return. We achieved nearly double our 15% after-tax hurdle rate through consistent and disciplined acquisitions, targeting purchase prices of 15 to 30% of revenue, or three to six times normalized EBITDA. Looking ahead in 2026 and over the long term, we continue to target two to four billion dollars of acquired revenue annually, balancing our share valuation and acquisition prices to strategically accelerate shareholder return. With a half a decade of tremendous results behind us, we are looking ahead to 2026. Our strategic design is showing durable results as the industry normalizes. The elements that support our long-term $2 of EPS per $1 billion of revenue targets continue to build momentum as we lift store-level productivity and throughput, expand our footprint and digital reach to grow U.S. and global share, increase DFC penetration, reduce costs through scale efficiencies, optimize our capital structure, And finally, capture rising contributions from omnichannel adjacencies. The continued development of these levers will convert momentum into durable EPS and cash flow growth. Our network and digital platform create engagement across the entire ownership lifecycle, while our strengthening used vehicle after sales and DFC businesses deepen customer relationships throughout economic cycles. Leaders across our organization are unlocking store potential, integrating adjacencies, and enhancing customer experiences. These capabilities demonstrate resilience, operational flexibility, and the compounding momentum that will drive sustained shareholder value creation. With that, I'll turn the call over to Tina.