Lithia Motors, Inc.

Greetings and welcome to Lithia Motors and Driveway first quarter 2026 results conference call. At this time, all participants are in a listen-only mode. The 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. Please note that this conference is being recorded. I would now like to turn the conference over to Jordan Jaramillo, Senior Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our first 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 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 risk 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 reconciliation of comparable gap measures. We've 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 Brian DeBoer, President and CEO.

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 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 after-sales 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 DFC 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 comparison to the strong first quarter of 2025. Total vehicle GPU was 3928, essentially flat sequentially, from 3946 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 1813. Note that all vehicle operation results will be on the 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 $27.22 or down $227 year over year, but down only modestly from $27.66 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 of 0.6%. Used GPU was 1680 down $115 year over year, but up meaningfully on a sequential basis from 1575 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 DSC business lines over time. F&I per retail unit was 1813, 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 counter-cyclical 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 up 5.7%, and we saw margins expand again year over year to 58.7%. 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 after-sales 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 UK, our teams delivered strong results, with gross profit of 12.5%, And SG&A has a percentage of gross profit improving 440 basis points year over year. Adjusted pre-tax income for the quarter grew 78%, building on the momentum we saw in 2025 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, and 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 of 71% year-over-year, driven by record originations and improving loss provisions. With a steadily growing portfolio now at $5 billion, increasingly efficient securitizations, and clear runway for penetration growth towards our long-term 20-plus target, DFC is delivering on its promise to convert more of our vehicle sales into reoccurring counter-cyclical 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 US markets while continuing to diversify our UK 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 at 15% to 30% of revenue, or three to six times 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 and digital reach, scaling DFC penetration, improving cost efficiencies through scale, and growing contributions from our omni-channel 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 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.

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, enable 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 departments, 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, 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%, an 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 securitizations. 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 one-time $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 returns. 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 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 five 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 omni-channel 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?

Thank you. We will now 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. You may press star 2 if you would like to remove your question from the queue. 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 your questions. Our first questions come from the line of Michael Ward with Citi Research.

Please proceed with your questions. Thank you very much. Good morning, everyone.

Good morning, Mike. I wonder, you know, Brian, in the past you would talk about how some of your acquired stores, the SG&A costs were higher on a relevant basis to the more mature stores. Give me the update on where that is. And then, you know, 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 five, six, seven 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?

You are, Mike. This is Brian. I think in that calculation, I think it's about $31, $32 million per dollar. So we are getting some pretty good traction on cost management, a little different than last quarter, which is quite nice. It took us a little while to to get everyone's attention, but our sales departments are starting to understand a little better that they need to reinvent themselves in terms of what the org design is in those departments, where we've got four layers in many of those departments, and we think we can run with two, 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 six 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.

And Tina, you mentioned the rollout of some of the Pinewood technology. Do you have any Can you give any data points on what you're looking at from a timing standpoint on when it could be across all stores? And in addition, when that's completed, does it make that integration faster when you make acquisitions?

Yeah, Mike, that'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 toward 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, you know, puts customers in a similar just streamlined experience for, you know, 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, you know, good progress there. In the U.K., obviously, with Pinewood as 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.

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 three or four 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 agentic 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 70% SG&A cost.

Well, it sounds like it's on track. Really appreciate it. Thanks, Brian. Thanks, Tina. Thanks, John. Thanks, Mike.

Thank you. Our next questions come from the line of Brian Sigdahl with Craig Hallam. Please proceed with your questions.

Hey, good morning, Brian, Tina. I want to say on SG&A, there were some weather challenges from an industry just across the border earlier in the quarter. One of your peers yesterday said said that, you know, 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 guideposts you're willing to put on SG&A to gross profit ratio for the year.

Ryan, I think that's a fair statement that we saw a softer January. We hit forecasts in February or we're real close to it in North America the UK exceeded forecast. And in March, the UK exceeded forecast, and so did the United States.

Willing to put any guideposts around the year for what SG&A to gross profit will be?

You know, 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 large variability across manufacturers and across geographic areas of the country that I think is important for them to respond to, let alone the UK. We're seeing some nice movement because we're able to actually add franchises and partnerships and stores and dual franchises, much different than what the UK or Canada is, and we're doing that with Chinese brands, which is helping in the mainstream revenue lines in some way. So we're real pleased with what's happening, and I think SG&A, we're going to continue to drive towards that mid-high 50 percentile range in the long term.

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 –

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 hey Ryan great question this is Chuck so yeah 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 lithium 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 rates 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.

Thanks, Chuck, Brian, Tina. Good luck, guys.

Thanks, Ryan. Thank you. Our next question has come from the line of Rajat Gupta with JP Morgan. Please proceed with your questions.

Great. Thanks for taking the questions. Just a couple on used and parts and service. You know, in the past, we've typically given more weightage to growing the volumes in that business. It seems like there was some reprioritization that happened in the first quarter, you know, 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, you know, the flat, the slavish volume number in the first quarter? And just how should we think about, you know, used card growth versus GPUs, you know, for the remainder of the year?

Rajat, this is Brian. I think this is the secret sauce of Lithia. I mean, we hit one and a quarter percent use 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 that'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 to $27 billion of revenue that had never really sold value auto cars three years ago, four 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 sources is quite important. If you look sequentially quarter over quarter, including F&I, our used cars moved from $28.30 to in Q4 to 3309. It was up $470. And I would attribute most of that to some repricing efforts on two key areas. And I may have spoke about that on the last call. It's primarily the value auto cars. And then secondarily, it's vehicles that are low mileage for their model or their vintage. And those two 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. 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 store's reach can achieve. And we're now reaching 500, 1,000, 2,000 across the entire country. 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'd attribute a lot of that increase sequentially.

Understood. That's helpful, Connor. And then different parts and service, you know, second quarter is pretty good, you know, 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 UK maybe had a bit of an FX benefit, but maybe if you want to break up US versus UK as well, that would be helpful, and just any more detail within those regions and what's driving the growth.

Yeah, our growth, globally, the UK 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 couch 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 they, and then the ability to execute lots of different ways to create a more, a more appealing experience and a more memorable experience. So they continue to come back month after month during their ownership life cycle.

Understood.

Okay, great. Thanks for the color.

I'll jump back into you.

Thanks Raja. Thank you. Our next question has come from the line of Alex Perry with Bank of America. Please proceed with your questions.

Hi. Thanks for taking my questions here. I guess first, I just wanted to ask a little bit more about your outlook for the UK. It seems like performance there is improving. You know, can you talk about what specifically is driving that and if you would expect that to continue? Thanks.

Sure, Alex. Brian, again, I think we've got an exceptional group of leaders and an exceptional group of operators that over the last two 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're 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 forecasts or they're going to be above forecasts. a million two or 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 two 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 of house to right 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. And I think, if I remember right, it was 447,000 hours that our CFO there, Richard, had defined that in primarily service alone, AI will be able for them to capture that money within the next four 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 real proud of their leadership over there.

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, you know, 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 hadn't been seeing anything, but just wanted to ask, you know, about that. Thanks.

Yeah, 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 calm down and if tariffs can gain some clarity and some other things can fall into line that we can power through this and hopefully have a decent second half of the year. So, you know, it's a little bit of a mix of things, but, you know, we're sure pleased with where the market's at, despite it only being a 15-8 SAR 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, you know, to start trickling up again towards that 17 million units a year number.

Perfect.

That's really helpful. Best of luck going forward. Thanks, Alex.

Thank you. Thank you. Our next questions come from the line of Jeff Licht with Stevens. Please proceed with your questions.

Good morning. Thanks for taking my question. Congrats on a great quarter, guys. Brian, I was wondering if we could dig into the used a little more. GPU at $1,700-ish. First off, could you remind us what percent you guys self-source versus any sourcing from auctions? And then I was just wondering, Brian, 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 – a higher level of supply in the summer. Does that change the dynamic one way or another for you? I'm assuming it does, but I'm just curious how that'll change the dynamic for you guys.

Good insights, Jeff. Our customer sourced vehicles are 2,483 a unit. And remember, without F&I, the numbers I gave previously were with F&I, okay? are $2,483 on our customer-acquired units. The units that are acquired outside, 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 difference. Now the difference is $1,500. 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. But we also still drove up our margins. So that I believe is more of a pricing function than a cost function. 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 two-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 four and eight years. And most importantly, make sure they've got the affordable cars of $15,000 average price or so in our value auto cars.

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 with that at that 1700. I'm just curious where, where you're at there and where you think you might be able to get that because previous presentations last year, the potential of 1800 and 2100.

Okay, 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 one price used car retailers are selling the same car for. That's an apples to apples comparison. If you then figure that your average price is somewhere between 25 and $30,000, you're talking about $1,250 that could come just from the pricing equation, okay? 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, okay? So the more that we can create visibility, you get more eyeballs on cars, and the 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, okay? 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, okay? And that makes up that entire 5%. 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 underpricing. They don't price the car right at the start. Why? Their salespeople, their service departments, and their sales managers are convinced that that car can't sell for that price. Okay, 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 a used car 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, and market pricing to be able to get that 1,200 approximate dollars that we know is sitting out there.

Awesome. Thanks very much and best of luck on Q2.

Thank you. Our next questions come from the line of John Sager with Evercore. Please proceed with your questions.

Good morning, everyone. Thanks for taking my questions. I wanted to discuss the rollout of Pinewood. So you're expecting to complete that by the end of 28. 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 encounter along the way as you're working through the process. Is there any way you could quantify those headwinds for us?

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, three quarters to five quarters old, it took us about two 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 two to three week prep process and a two to three 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 a third 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 two-month period, the true cost of Pinewood is lower. And most importantly, the true benefit of Pinewood is it allows you to do things and have 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. Okay. Those redundancies can come out almost immediately. Hopefully that helps, John. Follow up on that?

Yeah, that makes sense. Actually, the timing of that is fast, but it is going to take a long time to get there until 2028. And so I wanted to ask about how does that impact the timing of the path to your medium-term target? So to get SG&A as a percent of growth down to that 60% to 65% range, what are the primary initiatives or drivers you're 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 do that?

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 SAR. Okay. 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 four-legged stool that's wrapped around a couple things. First and foremost, we call it the everyday plan. It came off the back of the 60-day plan a couple 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 three 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 and multiple stores. Okay. Which we've moved that quite nicely. We're up to almost two and a half stores per office manager and about 1.4 stores for a general manager. Okay. Big moves there. And lastly, and not least, is this idea of remote F&I or remote desking. or possibly even remote service advisors. Meaning when you're maybe half a person short, you don't add a full person. And that makes massive, that's probably the easiest example, but that's our push each and every day in our organization over the last few quarters.

If I could maybe push back just a little bit on that.

You've had relatively stable GPUs for the last two or three quarters now. And the long-term trend on SAR 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?

Yeah, John, our GPU decrease each of the last four quarters has been around $150 to $200 a unit. And that, on a base of 100,000, 150,000 units, It's a big number, OK? 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 three people that have reported so far. We had one person that was double digit declines in new vehicle sales. And that all has implications on your SG&A costs. you know, I really believe that a 17 million SAR is out there. It may not be coming off the back of tariffs and, you know, in a war, but, you know, 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 four legs of our stool, okay? And we'll continue to drive down costs. And I think in the quarter, it appears that you know, we're right in step and stride in terms of year-over-year SG&A, okay, and should be able to exacerbate that, okay, relative to our peers. The other thing to remember is we also have the tailwind of DFC, okay, and that's on track to hit somewhere around $100 million in profitability on its way to a half a billion dollars profitability. So that's not an 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 United K business, UK business, we're typically either second or third lowest in terms of SG&A cost as a company. Okay. Important to remember.

Thank you very much. You bet. Thanks.

Thank you. Our next questions come from the line of Chris Battaglieri with BNP Paribas. Please proceed with your questions.

All right. Thanks for taking the questions. This first one is, can you elaborate on the $20 million contract buyout? Is that a DMS, or what was that? What does that implicate for future cost savings?

Yeah, it's just the planned vendor termination where, with part of it, there was a buyout of the contract.

Okay.

And then I wanted to ask, you mentioned the importance of marketplace to getting your targeted GPU stability. Just hoping to get an update on driveway. And then it seems we made a change to the chief technology officer, you know, earlier in the quarter. Just kind of curious to give us an update on the roadmap 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.

You bet, Chris. This is Brian again. It was 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. 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 will end up in a good space doing coding and other things that he is amazing at. Okay, but as an organization, we just felt it was an impediment having it as an independent department and it needed to be integrated into operations fundamentally to be able to respond quicker and to be able to capture that marketplace. driveway as a whole it was up 8% in volume across its platform which was a nice 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 big number there it's still there I don't I don't know that we dedicate enough resources to it, but we also believe that there will be a time and place where that marketplace disconnects again because we think the 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 up an opportunity to turn the accelerator back on in driveway. So real successful, we're still sitting at 96% 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.

Appreciate it. Thank you. Thanks, Chris.

Thank you. Our next questions come from the line of John Babcock with Barclays. Please proceed with your questions.

Hey, Corinne. Thanks for taking my questions. I guess just first on the M&A market, could you talk about how that looks right now and then As a tag along to that, you know, you obviously have typically divested a couple stores each year. And I just want to get a sense, you know, recognizing future acquisitions may add to that. How much of your footprint do you think, you know, 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 can provide on that would be useful.

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 one large deal out there that 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, one, two, we've got three stores under contract and two stores that are close to being LOI'd. 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. Okay. 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 and the store's 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. Okay. Our focus, again, is in the northeast 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.

Okay, thanks. And now just shifting gears to parts and service, could you break down your growth this last quarter across customer pay and warranty?

Our gross mix?

Are you looking for mix?

No, growth. So growth in revenue. Oh, growth. I think it was 7% on customer pay and 5% on warranty. They were virtually, they were real close.

Yeah, 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.

And revenue was five and four, customer and warranty, okay?

All right, perfect. Thank you.

That's all I have. John, thanks.

Thank you. Our next questions come from the line of Brett Jordan with Jefferies. Please proceed with your questions.

Hey, good morning, guys. 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?

Yeah, great question, Brett. 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 as 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 for 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. At one time, it was as high as six or seven. So that's a big number that then can be applied to disequity and allow customers to have a little less down payment and still be able to finance their vehicles. Now, anything I talk about as disequity, don't apply that directly to our DFC. explanations, okay, because we have extremely disciplined strategies on that. We only have about a 96% check, 96% LTV on our DSC loans, and we're way over 100 as a company as a whole, okay, 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, Brett.

Yeah, thank you. And just real quick on the geopolitical impact in the U.K., I think you sort of talked about the U.S., 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 in sort of a consumer standpoint as the quarter has progressed?

No. What we've actually found, and I would say that Neil and the teams have done a nice job The UK 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 re-registered, even though you get spikes in those two 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 UK looks short term. They're able to see out a good 60 to 90 days because 80% of their business is orders. 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, 60-90-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 after sales side. So hopefully that gives you a little bit of color, Brett.

It does. Thank you.

Thank you. Our next question has come from the line of Daniela Hagian with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking the question. 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 BUI stores relative to your other OEM stores in the UK? And what are your views on Chinese OEMs coming to the US, either directly or indirectly? Thank you.

Great, Danielle. 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 that 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, okay? The EVs that were brought in by BYD and MG two and a half, three years ago, they virtually sold no cars. It was less than a half a percent market share, okay? It wasn't until about a year ago that they started to bring in plug-ins and hybrids and ICE engines until they gained market share, okay? And that's because of affordability, okay? So important to remember that, okay? 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. 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 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. In the United Kingdom, our Chinese brands, 14 out of 15, are not exclusive. They're sitting on the same showroom with Ford stores and Stellantis stores and Renault stores that have a unit and 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 five to 10 years. 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 hyper, hyper 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%. And on the BEV, there is zero price advantage at this stage in the United Kingdom. So 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 $10 million or $15 million, you know, 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. Okay, 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.

All right, thanks, Brian. Appreciate that. You bet, Daniela.

Thanks for the question.

Thank you. We'll now turn to our final questions from the line of Mark Jordan with Goldman Sachs. Please proceed with your questions.

Hey, thank you very much for squeezing me in here. I'll just do one quick one on news retail. You know, looking through this 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 declined. Can you talk about what drove the decline there? Maybe was it a mix or something else that drove that?

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. Okay. Especially, remember, those vehicles were driven off a 13, 14 million SAR 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. So I think when you start to see incentives come up, that drives the late model vehicles down accordingly.

Thank you very much. Thanks, Mark. Thank you.

We have reached the end of our question and answer session. I would now like to turn the floor back over to Brian DeVore for closing comments.

Hey, thanks for your questions today. Thanks for joining us, and we look forward to seeing you on our Lithian driveway second quarter call in July. Bye-bye, everyone.

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.