Lithia Motors, Inc.LADNYSE
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Operator: Greetings, and welcome to the Lithia Motors, Inc.'s 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, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin. Good morning. Thank you for joining us for our third quarter earnings call.
Jardon Jaramillo: With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, 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 Bryan DeBoer, President and CEO.
Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our third quarter earnings call. This quarter was all about execution at speed. 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 recurring 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 aftersales 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.
Tina Miller: 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 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 recurring aftersales 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 $2,867, 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 were 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 $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level.
Bryan DeBoer: 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 aftersales 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 $1,847, up $20 year over year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC 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. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales 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 aftersales 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 aftersales 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 aftersales 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 recurring 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 prioritized 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, value autos, 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 complementary 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, Lithia Motors, Inc.'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 life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve 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.
Tina Miller: Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In The UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in The UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term DFC profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from the line of Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question.
Ryan Sigdahl: Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. Wanna start with EVs. EVs were given the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through kind of what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward?
Bryan DeBoer: Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix. Which was a nice number. We actually started the month of September and this is close to correct. Okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit. Going into the month, and then we ended at just under 2,000. With really the only product that's remaining is a little bit of the higher price stuff. Which we spoke to in the past. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus that we they're basically replacing the $7,500 credit on top of that. To be able to keep that volume, hopefully, somewhat static. I imagine it's gonna drop a little bit, and I don't have the preliminary October results, but I would imagine it'll drop a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration I think, was the highest we've ever had on a blended basis. We were almost 40% lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next twenty-four to thirty months or whatever the length of those terms are. So need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out, in September were really first-generation BEVs. A lot of first-generation BEVs, Hondas, Toyotas, Subarus, and some of the domestic products that now second-generation cars are coming either in the twenty-sixth model cycle by the end of the year or early in 2026. So we're gonna have rather than a 200-mile range car, we're gonna have three to 400-mile range car. For about the same price.
Ryan Sigdahl: Yeah. It's great color, and not just consumers coming back, but like you said, the first rate of refusal for that inventory on the used side coming in the door for you guys. Wanna switch over to The UK. Appreciate the disclosure on kinda North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding kind of the margin challenges there, the labor challenges, etcetera. But sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that The US did, you know, a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market?
Bryan DeBoer: No, Ryan. Great questions. And I think the insights on the labor market really happened in January. And it was twofold. One was a minimum wage, and then one was a payroll tax. And the actual impact to the organization was $20 million. For us. Okay? And they curbed about $11 million of it in the first six months, sheerly through headcount reductions and productivity gains. They've now earmarked another 8 or $9 million, but it'll get them beyond what the impact was, but there's another 3 million coming in 2026. So they're really working on how to do that. And I think even though our SG&A is higher than last year, and the market has shifted, our team's doing a pretty nice job relatively speaking of how to respond to that. And a lot of the increases I think we were up $1,010 million dollars approximately in operational net profit in parts and service. So big improvement there. Our used cars are beating the market by a little bit, and our new cars are in line with the marketplace. And I would say this, last year, we had let's see, we had three BYD stores and an MG store which are Chinese brands. This year, right now, we have seven total brand total Chinese stores with, I believe, five more that open in the next sixty days. So unlike The United States where you have to go buy and pay goodwill to be able to shift your manufacturer mix in The UK If you've got a facility and you've got good relationships, with manufacturers, you have the ability to add and respond pretty quickly to the marketplace. So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So you know, I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now.
Ryan Sigdahl: Helpful. Thanks, Bryan. Good luck.
Bryan DeBoer: Thanks, Ryan.
Operator: Thank you. Our next question comes from the line of Federico Merendi with Bank of America. Please proceed with your question.
Federico Merendi: Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio?
Bryan DeBoer: Would love to, Federico. And I think let me speak directly to the used car market as a whole. And as a whole for Lithia Motors, Inc. not specifically to our DFC part of our organization. Okay? Because their buying behaviors are different in the marketplace. Of more of a prime type of lender. What we're seeing in the in the marketplace, in the used car marketplace, is a lot of opportunity. This is from a Lithia standpoint. In the value auto segment. Okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think. Okay? Lower-priced vehicles are only financed about 50% of the time. Okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto are typically quite scarce. Okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay? And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because you know, at a $15,000 car, if you've got $3 in disequity, you're now financing 20% over LTV with profitability and without down payment. So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer typically saves their money or has the ability to finance at a fairly high LTV. Loan to value. Okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis. In the quarter. And a lot of our real strong tailwinds. Other market dynamics that are important to remember. We actually achieved 74% of our used car sourcing. In the quarter was bought directly from consumers. Okay? And that's trade-in, obviously, or buying them directly off the street from consumers. Or off-lease vehicles. So on and so on. That's the highest we've had all year. Okay? Meaning, that our teams are keeping pretty much every vehicle that they can make stop, steer, and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately you make pretty good money on because the vehicle is scarce. Okay? Some other little tidbits of information Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have driveway and green cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1, 5.2% margins on both certified and core product. Okay? As a percentage. Right? Our value auto this quarter was almost 16%. Okay? And remember, that's a lot lower-priced car So our actual annual return on our value add is a 130% cash on cash return. Okay? Massive improvement. Relative to certified and core, that's under 50%. Okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America only 11% of used vehicles sold are one to three-year-old vehicles. Okay? Only 11%. Okay? So we spend very little of our time, and it only makes up about a fifth of our total sales. Selling those. We do it because we've got the off-lease returns, and it's easy People expect us to have those certified cars. Another quarter of the market comes from Coradas or three to eight-year-old vehicles. Okay? And we were about you know, that makes up 26% of the market which leaves over nine-year-old vehicles makes up 63% of the marketplace. Okay? That's a huge amount. Okay? That's a number that's bigger than new car star. Okay? So remember, that's where the big money is in the business, and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped, Federico. Thanks for your question.
Federico Merendi: Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. I mean, we have seen that in The US, the EV regulatory environment has changed. And Continental Europe is it seems that they're moving to that direction. What do you think is going to happen in The UK over the next I don't know, eighteen months in the regard of EVs.
Bryan DeBoer: Yeah. So, Federico, let me just reiterate for everyone that UK makes up a little over 10% of our revenue and makes up about five to 6% of our net profit. So we don't have a ton of impact coming from The UK. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles, into the marketplace. So and I think when they when BYD when MG and those others first came in the market, they were electrified vehicles. Okay? Today, the reason why they're gaining market share is they're selling ICE vehicles and plug-ins. Okay? And I was there four weeks ago, okay, and traveled the marketplace. We now have a cherry franchise there as well. Looking at the product and what I see in the electrified vehicles. At the price point that they're selling them for in The UK, they have zero ability to compete in North America. Okay? And that may change, and they may have margin that they can still take out of the formula. But I looked at a cherry vehicle that was £37,000, which is an equivalent to almost $48,500 American dollars. Okay? It was an electrified vehicle that had about a 256, 57-mile range. Okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less. Okay? So we're actually not as concerned, and it's great to be able to see what's happening in The UK. Remember this also. In China and UK, they've plateaued in terms of electrified vehicle sales. They both sit at about 55%. Penetration rates. Okay? And that's the same as it was last year. Okay? So, really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the labor Party in The United Kingdom is definitely into sustainable vehicles. You know? At times, I wish we were a little bit more into that as well, but you know, that's probably now five to seven years out in in The United States. But you know, it is making it hard expense-wise. In the in The United Kingdom, and I imagine they'll embellish that further with more quotas on electrified vehicles.
Federico Merendi: Thank you very much, Bryan.
Bryan DeBoer: Thank you.
Operator: Thank you. Our next question comes from the line of Michael Ward with Citi Research. Please proceed with your question.
Michael Ward: Good morning, Bryan. How are you, sir?
Bryan DeBoer: Good. Did you Two things. On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. If I'm doing the math right, over the last couple of quarters. Is that correct?
Bryan DeBoer: I believe you're correct, Tina. Do you got any insights there? I'm looking here real quickly.
Tina Miller: Yeah. I think that that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build other higher demand cars at the current time.
Michael Ward: You know? And Yeah. Now we need better cars. It is. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once they people buy them, they love them.
Bryan DeBoer: I think you're right about that. The big thing is is we're conquesting second and third-generation Tesla customers. Massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high. And I would say our managers and store leaders are not as opinionated of whether they should sell an electric car plug-in hybrid, or an ICE engine. You know? They seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience. So the life cycle of the ownership is a much different experience than maybe their first one or two experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price in range, and in speed, which is something that a man that a lot of consumers are looking at that the performance elements of the car are quite excited and we're really excited about the next gen of the of the Japanese and Korean imports that are hitting in the next couple months. Okay, to really be able to start to push those vehicles out to the consumers at really affordable levels.
Michael Ward: And it sounds like the profitability aspect probably bottomed with the three q. With the the rush to buy. So maybe that's just a little bit. The second thing is, you kind of alluded to that you have about it sounds like, about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is have the multiples come back into check? And it looks like it sounds like you have a lot of opportunity there.
Bryan DeBoer: Yeah. You know us. I mean, we don't use these threats on deals. We're fortunate that we've got great relationships with our manufacturer partners, allows us to fish in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first March of the year. But we've got some really nice deals coming in Q4. And are pretty excited that you can find them in this type of market, especially the quality of the deals and you know, it's those long-term relationships that may take three to five years to be to be get into that point where certain things start to drive the decisioning of those sellers. And we're fortunate that they chose us to be able to be their suitors. And their successors at what we would look at as, you know, well within our 15% hurdle rates on ROI and three to six times EBITDA and on and so on.
Michael Ward: Well, you're keeping that allocation plan tight. It's nice to see, so thank you.
Bryan DeBoer: Thank you, Mike.
Michael Ward: Appreciate it.
Operator: Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan. Please proceed with your question.
Rajat Gupta: Great. Thanks for taking the questions. I just wanted to dig in a little bit more on The U.S. Versus UK performance. Anything more you can share in terms of, you know, how the GPUs were in US versus UK? And how was the services growth, I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on US in terms of how you feel you're doing versus the marketplace now? Particularly given, like, historically, you've had some tough exposure in terms of your regional mix. So curious, like, how that's doing versus the broader market. And I have a quick follow-up. Thanks.
Bryan DeBoer: Yeah. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we where we sit in the marketplace. I mean, the it does look like that we massively beat on used cars. The market is showing flat. Okay? So think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, you reflect back on the used-only retailers that have reported so far, remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that. Also, if you look at our aftersales business, we were up over 9% in gross profit. Okay, which was a really really nice number as well. And that's driving a lot of the profitability. In The United States. Which is great. I mean, really, the new car market was where maybe a little bit of weakness lied. Okay, because ultimately, our GPUs did come down. Even though we were up five or 6%, that also looks better than what the marketplace was. So I'd say this. I think our team is responding and you know, to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be we're going to look nice in terms of top-line revenue growth and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity I think our team believes there's lots of opportunity. And they're really driving towards that two to one ratio. In terms of The UK, The UK's profitability was only was down 2.4% year over year. So it wasn't that much, and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America. Okay, which is the sound byte. Now we did we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles. Okay, for the nation. Okay? So if that's true, we probably beat by five to 7% in terms of GPUs and obviously on the top-line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this. My team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better. We've got great people. That understand the opportunity and know it's game on and are looking for how to show that Lithia Motors, Inc. is the best operator in the segment. And most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last five years, to really differentiate ourselves as operators.
Rajat Gupta: Got it. Got it. That's helpful color. I just wanna follow-up on, you know, Mike's question around just m and a. Just a little more finer point on that. If possible. You reiterated your $2 billion target for the year. But you also noted, like, you're very return focused. So I'm curious, like, is that, like, a hard target that you wanna meet here in the fourth quarter? If not, like, would we expect that excess cash flow to go into buybacks? I'm just curious, like, know, how much of I mean, is that something you're, like, you're forcefully working towards to achieve? Know, in the fourth quarter? Thanks.
Bryan DeBoer: Yeah. I think the return thresholds at any given time are balanced. But we that is a hard number. We don't flex. Okay? And we haven't had to flex even over the last three or four years where earnings were elevated and as such prices were elevated, we've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still. Okay, which gives us another 50% of lift when we think about, where we stand there. So you know, there's good opportunity out there. You just gotta be able to fish in a bigger pond. To find the opportunities that are great. Okay? And I think you know, one thing that I know about how we think about our network is we do look at density. We are starting to gain market share and expand loyalty. Okay? And at about 188 miles from over 95% of the population in our in in, The United States. We sit in a nice place to be able to grow and push market share. And I think our team spent the last three or four years getting to understand the benefits of what driveway.com can do what the My Driveway consumer portal can do, and how DSC can help drive sales. While still being extremely controlled in what we buy. In DFC to be able to get there. So we're pretty pleased and you saw that we bought, what, 5.1% of our shares back in one quarter. Okay? The implications of that, we buy the whole company back in five years. Okay? That's 20 quarters. Okay? So I don't believe that can happen. And if but if the world can't see what we built, and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DSC and Driveway and Fleet Management businesses and Pinewood experiences and partnerships I'm not sure what they're looking at, but this management team and our board believe that we have the we have a rocket launching into space. And if people don't get it, we'll continue to buy our shares back.
Rajat Gupta: Understood. Thanks for all the color, and good luck.
Operator: Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question.
Glenn Chin: Good morning, folks. Finally. Can we just scroll down a little more into your use performance? So you know, as you pointed out, very promising 6.3% same-store unit growth. I mean, that's the best number you've put up in almost four years. Can you just tell us what drove that, Bryan? Was it a change in focus? Change in process? It doesn't sound like it was a change in market.
Bryan DeBoer: Well, I can tell you this. Adam did a nice job kicking off used car focus. And to be fair, that's my love. Okay? So everyone's getting the message and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn. We bought $25 billion in revenue, with not a lot of messaging to the stores over that first three or four years of ownership. That we keep every car. Okay? And we bring people into our ecosystem through affordability, and then they eventually step up to buy better or newer cars then eventually buy new cars. Okay? And that is our model. And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way and it's a higher quality car than 16% profit margin on those value auto cars. We're gonna continue to push, though, in all three of the buckets. Okay? And I know that our team can do it, and it's truly a focus. On being able to walk, chew gum, and then eventually run at the same time. And I think our top our teams in the walk stage and we'll continue to get to jog and run on used cars. But it's the biggest area that we built the ecosystem for. Okay? And even our sustainable vehicles and used cars is looking like a quite quite nice number at almost 20%. Of our sales were electrified and used cars as well.
Glenn Chin: And you've emphasized that messaging to me the last several quarters that was it was going to be a point of focus for you and the team. I mean, so so is last quarter the inflection point? Meaning, I mean, should we expect positive comps from from here on out? Is that a safe assumption?
Bryan DeBoer: Absolutely. Okay. If you remember pre-COVID, Clint, pre-COVID, the company the company basically for eight years. Had high single-digit, low double-digit, increases in used cars quarter over quarter. I don't remember a quarter that we were ever below seven and a half, 8%. Okay? I mean, the market is there. Remember, we have less than 2% of the used car market. Okay? And we're top of funnel. Okay? We we built our ecosystem to be able to grow used cars out by finding the best cars reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America. Okay? And on top of that, 75% of our cars or three-quarters of our cars are coming directly from consumers, so we don't have to pay option fees. Okay? It's about a thousand dollar advantage over used car retailers. Okay? Important thing to remember and we're just getting started.
Glenn Chin: Yep. And to your point, I mean, I'm looking at my model here. You have positive comps every quarter prior to COVID. Apologize for the noise. Back to as far as my model goes from so from 2012 through 2020, you have positive comps every quarter.
Bryan DeBoer: Well, great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales. Okay? And we've got tough comps. Okay? And we had tough comps last quarter. Because we had all the carryover units from CDK. That gave us a bigger number last year in used car sales. So we're just getting started.
Glenn Chin: Very good. Thank you.
Operator: Thank you. Our next question comes from the line of Christopher Bottiglieri with BNP Paribas. Please proceed with your question.
Christopher Bottiglieri: Hey, guys. Thanks for taking the question. Two quick ones for me. The self-sourcing was 74%. This quarter, the highest of the year. Can you just remind us what that looked like pre-COVID?
Bryan DeBoer: Actually, pre-COVID, we were low seventy percentile. The area that's grew is what we procure directly private party. Meaning, what we buy directly from a consumer, they don't actually trade in the car. And buy a car from us. And that was three or four percent if I remember pre-COVID. And that's pushing eight to ten percent in most quarters now. A lot of that is driven off of the driveway ability to be able to procure a couple thousand cars a month. Okay? And that driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think. And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements ten years ago is that we buy cars for about 12 to $1,500 less than what the used-only retailers. Primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale not having auction fees, having more of our cars come off trade-in, okay, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about a thousand to $1,500 less than what Carvana and CarMax sell them for. Okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have much like what we have in Driveway.
Christopher Bottiglieri: Gotcha. Okay. Yeah. That's what my I show that too, that thousand $15 gap in my price surveys and whatever believes me. But, anyway, my follow-up question would be can you just give elaborate more on the net losses as percentage of managed receivables this quarter and then also the allowance for the end of the quarter? A percentage of ending receivables. Just wanna get a sense. Sure. Great. Check with You had a, yeah, you had a really good quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe part of the subprime market. You guys don't really play there, but just kinda curious how you're thinking about that allowance going forward.
Chuck Lietz: Yeah. Chris, this is Chuck. I would say know, there's a lot of noise in the marketplace, but we're very happy how our portfolio is performing. Just a couple of quick data points. Our first payment default, which is the biggest in the of fraud and highly likely fraud, is actually down year over year. Our delinquency rates are down year over year. On a sequential basis, and our default rates, which leads to the provision that you're talking about, are also at or below at each credit segment year over year after we adjust for seasonal adjustments. So this really speaks to the power of our ecosystem. Of being top of funnel, Chris. And that this credit discipline while still increasing our originations by 33% over last year, That's pretty much, you know, key to DFC's ability to drive and hit our long-term goals of 500,000,000 of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that at where we've got it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question, Chris.
Operator: Thank you. Our next question comes from the line of Jeffrey Lick with Stephens Inc. Please proceed with your question.
Jeffrey Lick: And the rest of the team. Good morning, Bryan. Congrats on a great quarter. Bryan, I was wondering if we could if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're gonna be lapping a tougher Q4 than last year with the election bump and I think the OEMs had some dealer incentives. And you know, then we as we get into next year, I mean, we there really hasn't been any talk on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026?
Bryan DeBoer: I think that's a good insight Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to Performance Through People. And our store leaders out there are making good people decisions, and a lot of those were made in the summer and are now taking hold. Now what happens in the in the quarter? Will we'll we'll have to see. I would say this, when we look at tariffs, and the impact of those tariffs on GPUs I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year over year. We feel like there's a turn there I just got from one of the Korean manufacturers this morning that dropped that dropped their APR on their two highest moving products. Down to 0% again. On top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the some of the the comparative numbers that came from the election period last year So we're feeling pretty good. I would also say that the tariffs though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite is to whether we're at 50% or 150% tariffs on China the North American market is not gonna behave. Like Europe or the rest of the world. Okay? Knowing that those vehicles are selling for a certain price and the rest of the world, and then adding on a doubling factor to the cost of that vehicle there's no chance that I think that Chinese manufacturers are here in the next half decade at or so at scale. Okay? Someday, they may be able to do that. And the product quality that I saw was pretty good. I mean, it was it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there. The good news is I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increases in two of the main import Japanese brands talking about 250 to $300 increases. On their main product lines like CRVs RAV fours, and so on. And these cars are now full hybrids or they're plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification. To be able to help with the affordability. Component and offset that or maybe even more than offset that.
Jeffrey Lick: And just a quick follow-up. Any elaboration on the 300 basis point improvement service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that? How sustainable you view it? Any details would be great.
Bryan DeBoer: Yeah. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory or parts business. And the 65% labor businesses. And our labor portion of our business was up a lot more. But will say this, we are retaining more growth. And our manufacturer partners, because of inflation, it they are increasing our labor rates on warranty. And corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up. Yeah. K? And we're able to bring that to the bottom. Mike, go ahead, Tina. I would add to that, Jeff, too. We had strong performance both in customer pay and warranty in the third quarter. And those are more heavily labor-based. And so that shift and that overall performance also drove some of the margin improvement.
Tina Miller: Yeah. That outpaced by seven, 6%. Yeah.
Jeffrey Lick: That's a good point. Great. Well, it was a great quarter. I'm happy for you guys, and I look forward to catching up later.
Bryan DeBoer: Thanks, Jeff.
Operator: Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Bret Jordan: Hey, good morning, guys. As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units maybe in some cases. Are you getting similar GPUs and aftersales and mix out of those brands as you do out of your legacy UK product?
Bryan DeBoer: Good question, Brett. And the answer is yes, on GPUs. Are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kinda fall in this area between The US manufacturers and the Japanese and Korean and other European mainstream manufacturers. And luxury cars. Okay? So important to remember that. Here's the difficult thing. So even though our volumes are increasing quite nicely, with the Chinese brands, there's no units in operation. Okay? So the way that we're making a difference is we're going out and doing what Lithia Motors, Inc. does best and we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost three to one used to new. In the mainstream or Evans Hallsha brand. In The United Kingdom. So a lot of our business model, when we think about adding Chinese or opening those points, is in the interim, why you build your units and operations, which is what drives your aftersales business, you've gotta sell used cars. And he's doing a nice job being able to quickly get to those two, three, and four to one one ratios. Keep it up. It's neat. It's neat to be able to see that in set the buy bar maybe even a little higher for our North American store stores because ultimately, I'll tell you this, we sit at 1.2 used to new ratio on in in North America. The marketplace is at 2.5 to one. Okay? Just to put in in reference of what we're looking at, that's what we believe the potential is. Okay? And in The UK, it's a little bit better use to new ratio, and Gary gets all of it. Okay? Which tells us that we should be able to get that. So Gary and Neil in The UK, big shout out to you guys.
Bret Jordan: Okay. And then a question on aftersales, the growth rate. Could you parse that out between price and car count? You know, how much is, just same service price inflation versus incremental traffic in the bay? And I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through?
Bryan DeBoer: Good question, Brett. A little bit more than half is coming from price increases. With a little less than half coming from, from customer count. And RO.
Bret Jordan: Okay. And we continue to sort of see inflation being a comp driver at the end of the year, or we seen most of it play out already? Guess, what what how long is the tailwind from price?
Bryan DeBoer: I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things, is we've gotta grow our RO count. And you know, our top performing or what we call our Lithia Partners Group stores they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth. But they're also carrying along with it most of the improvements in top-line growth. Okay? And that shouldn't be that way. Our Northeast and Northwest regions are a little bit softer in terms of RO count. But we're challenging them, and I think they see the opportunity. And there could be some nice tailwinds there that that that that come into play as you know, we really start to help people see a more bright future on growing your customer base.
Bret Jordan: Great. Thank you.
Bryan DeBoer: Thanks, Brett.
Operator: Thank you. Our next question comes from the line of Daniela Haigian with Morgan Stanley. Please proceed with your question.
Daniela Haigian: Thanks. Just squeezing one in here on forward demand. Bryan. As we pass through the peak tariff fears from April. Excuse me. And now we're seeing OEMs revise up their guidances. It kinda clears the bar. On this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26?
Bryan DeBoer: Sure. Sure. Daniela, real quick, the 10% was used vehicle. Volume. Okay. Okay? Thank you. So just to clarify that to make sure that was clear. And that's an early October number where two-thirds of the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on. And then determine what their three to five-year product cycle is going to look like. To decide where they're gonna ultimately build those cars. Okay? And I think we sit in a nice position as new car retailers and we have to remember this. We're a new car retailer. But less than a quarter of our profitability is derived from new cars. Okay? Remember that 61% of our profitability is coming from aftersales business. I think that's why we spend a lot of time in aftersales. New cars is somewhat a function of your marketplace. Okay, and what your manufacturer's incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new We, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mixed base is what dictates that. In our geographic base. So, hopefully, that helps you a little bit, Daniela. You have a follow-up on that?
Daniela Haigian: Thanks. No. That's alright. We went through a lot of topics here.
Bryan DeBoer: Great. Thanks for your question.
Operator: Thank you. Our next question comes from the line of Michael Albanese with Benchmark Company. Please proceed with your question.
Michael Albanese: Yeah. Hey, guys. Thanks for taking my question. Hung with you till the end here. Just a quick one circling back on used, specifically the value autos. Just given what you said about the, you know, typical credit quality of a buyer there and generally how much is financed, Are the value autos or value auto demand inversely or, you know, correlated with consumer affordability. Or maybe a better way to ask the question is, if new and used again a question. Go ahead.
Bryan DeBoer: Go ahead. That's a yes on the first question. Go ahead and balance sheet. Yeah. Okay.
Michael Albanese: And to take that a step further, I guess, and maybe a better way I thought to ask it was you know, if the gap between new and used pricing kinda widens and there is a trade down, you know, where does value fit within that? And you know, is there a segment within your mix, CPO core value that generally sees a pickup in demand or, you know, does it depend on a host of different variables at any given time?
Bryan DeBoer: Yeah. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer. Okay? It's too different levels of affordability. So definitely certified vehicles and some of the you know, I would say one to five-year-old vehicles. Have an impact based off new vehicle pricing. Tariffs, so on and so on. But value auto is so far downstream. Remember this, value auto, that 63% of the market that I told you is based off what, 41 million units. Okay. 42 million units, something like that. You're talking about 24 million units or a 160% of what your new car SAAR is in that segment. It is a bulletproof segment. Okay? It's where it's where probably most of the money is made in used car. Okay? And it's something that everyone can do. As a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean, we get 80, 90% of those cars from trade-in. Okay? So it's a very stable thing. But again, we have a third of our stores that probably don't keep those cars. You know? We've gotta help them understand that you're making 16% margin, and you know, yeah, I get it that you make a little bit less in f and I. But as a whole, the returns are massively better than any other segment.
Michael Albanese: So does it come down to essentially sourcing being able to source these vehicles? And hold on to them and right? Like, what's driving demand specifically above the office? It's sourcing, but remember, the sourcing is right under your nose.
Bryan DeBoer: It's just the it's it's it's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop, steer, and go and that they can lower the expectations that I don't just sell new cars. Okay? And then you've got a secondary problem. Once those two people decide, then your salespeople and your technicians are gonna convince you you shouldn't do it. Why? Because they get comebacks. Okay? Meaning that there's a car that breaks forty-five days later or four days later, and they're trying to keep a car deal together rather than just take the person out of the car sell them another car, okay, and go fix that car so it's an easy experience for your consumer. Okay? So that sets you back. So we've always said that it typically takes a couple years to get people on that treadmill. To be able to keep all different all three of our categories. Okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing in certified. It should also be growing in late model conquest vehicles. And it should be growing in core product. Okay? All three of those buckets have the potential to grow in a double-digit manner, and we'll get those there.
Michael Albanese: Do you generally see if you have a customer in value over time move up into core or CPO? Or You do. I think there's half of the customers that are always gonna buy a car that's depreciated and that they can buy that's a value. Okay? And they don't care that the car is scarce, and they don't really care what Kelley Blue Book says or what Black Book says. They just buy the card that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using it as a stepping stone. A lot of parents will pay cash for cars for their kids. And it's an entry-level car. And then, hopefully, next time they're buying a certified used car and maybe eventually they buy new cars. So the waterfall, believe it or not, goes both ways. That as a new car retail abreth we look at affordability and how do we keep everyone in the Lithia Motors, Inc. life cycle at every affordability level. And I think as you see us move through economic cycles, affordability will shine and reign supreme at Lithia Motors, Inc. Because of our ability and the behavioral mindset of most of our stores today that understand that we can walk and chew gum at the same time. Meaning, new car, sell core product, sell value auto products, and then sell a certified product.
Michael Albanese: Got it. Thank you, Bryan. Nice quarter, guys.
Bryan DeBoer: Appreciate it.
Operator: Thank you. Our next question comes from the line of Mark Jordan with Goldman Sachs. Please proceed with your question.
Mark Jordan: Hey. Thanks for fitting me in here. Just a quick one on m and a. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system? You know, whether it be instituting best practices, putting inventory on the driveway platform, or maybe just consolidating systems. What are the drivers there that you expect when you bring a new dealership on?
Bryan DeBoer: Sure. So, typically, the way that we get the returns that we're expecting and it's typically two to three times lift in net profitability, about a quarter of it comes automatically from scale synergies, lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy, and that comes in the first, I would say, six months. Okay? The other two key drivers and like I said, they support each other. Is used vehicles. I mean, it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyotas and you sell Fords too. Okay? Most new car dealers get spoiled off of selling the cars that they sell new. Okay? I believe our current run rates on all the stores that we bought it's somewhere north of two-thirds of the cars that they sell when we buy them. With it that they sell used or the same like model that they sell new. Okay? And for reference, when a store is mature at Lithia Motors, Inc., it's a sixty-forty split the other way. Meaning we sell about 40% of the brand we sell new We sell about 60% of Conquest vehicles. Okay? A lot of that comes from the ability to keep an over five-year-old car. Okay? Because of those that alignment of your consumer your service advisers, your salespeople, your other personnel that it's just a mindset that you have to get past. Okay? Alongside that all also, is this new car retailers, it's really easy to get spoiled off of maintenance in service. And off of warranty work. It makes great profit. Okay? So why do warranty work after the sale? It's more difficult. It takes more time. You've gotta do diagnostic. There's drivability issues, so on and so on. Okay? Well, we sell non-OEM parts for a reason. Keep our customers at an affordable level post-warranty period. Okay? So that's the other big lift that we get. Believe it or not, both of those things help embellish the life cycle of a customer which helps us sell more new cars as well. Okay? And then we can get into the gross profit part of the equation and if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car, And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection. Okay, that helps us as well in terms of what our price to market is. Is relatively better than what they're able to get. On an individual basis. So, hopefully, that gives you some color on how do we get that two to three times improvement in profitability. That's how we get it.
Mark Jordan: Great. Thanks very much.
Operator: Thanks, Mark. Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Please proceed with your question.
Colin Langan: Oh, oh, thanks for taking my questions. If I look at your full-year targets, most of them seem pretty wide, but SG&A to gross, it's actually been trending pretty close to the high end of that target. And, usually, Q4, things tend to step up seasonally. So is the outlook that SG&A actually could even Seasonality hold in in Q4? Or is it just a more muted increase sequentially that should be looking at? And then how should we think about SG&A maybe longer term?
Bryan DeBoer: Sure, Colin. Thanks for the question. I think when we think about SG&A, or we most importantly think about $2 of EPS for every billion dollars of revenue? We've given light guidance. I think it's on slides 14, if I recall from the slide deck. Okay. As to where we believe it can be, but that's not how we manage our business. We manage our business on a net profit basis year over year and a top-line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our wheels, you know, fleet management businesses. And those type of things. So that's it is an important delineation. But we purely look at that our goal is to get to $2 of EPS for every billion dollars of revenue. And the easiest way that I can get there is to have quarters like this where we grow top line at seven and a half percent. And we continue to grow used cars at double-digit numbers, and grow our gross profit in the in the aftersales space. So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs. As well. So, hopefully, that gives you some insights and remember, slide 14 helps lay out our pathway to the $2. And you know, I would say this. The entire foundation is built, and like I said, we're just getting started.
Colin Langan: Just one quick modeling follow-up. Tax is really low in the quarter. Is that what's driving that? And is that sustainable, I guess, as we move forward? Should we put in the new rate, or is that just a one-off?
Bryan DeBoer: Colin, don't I think we got a half an hour later together. We're running awfully we'll get we'll get you that information. On our one and one.
Colin Langan: Yeah. No problem. Thanks, Colin.
Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Bryan DeBoer for closing remarks.
Bryan DeBoer: Thank you, everyone, for joining us today. Look forward to seeing, you on Lithia Motors, Inc.'s here, and results. And believe it or not, February. It was a vast year. Looking forward to continue to delight you.
Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.