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DATE

Tuesday, July 29, 2025, at 11 a.m. ET

CALL PARTICIPANTS

  • President and Chief Executive Officer — Bryan DeBoer
  • Senior Vice President and Chief Financial Officer — Tina Miller
  • President, Driveway Finance Corp. — Chuck Lietz

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RISKS

  • SG&A Pressure: Tina Miller stated, On a same-store basis, SG&A increased to 67.4% from 66.4%, reflecting cost pressures as we navigate declining front-end GPUs.
  • Lower New Vehicle Volume Guidance: Bryan DeBoer confirmed, Guidance was revised from mid single digits for the year to low single digits for new vehicle volumes, attributing this to industry-wide factors and more difficult comps.

TAKEAWAYS

  • Record Revenue: $9.6 billion, representing a 4% year-over-year same-store revenue increase in Q2 2025.
  • Diluted EPS: $9.87 reported diluted earnings per share in Q2 2025 (up 25% year-over-year) and $10.24 adjusted (up 30%) in Q2 2025.
  • Financing Income: Financing income more than doubled year-over-year, rising from $7 million to $20 million in Q2 2025, driven by a 50 basis point expansion in net interest margin to 4.6% in Q2 2025 and 15% U.S. penetration (up 240 basis points) in Q2 2025.
  • After-Sales Profit Mix: Over 60% of net profit now comes from after-sales operations in Q2 2025.
  • Adjusted SG&A as Percentage of Gross Profit: Adjusted SG&A as a percentage of gross profit was 67.7%, down from 67.9% a year ago in Q2 2025. On a same-store basis, SG&A increased to 67.4% from 66.4%, reflecting cost pressures.
  • Free Cash Flow: $269 million in free cash flow was generated in Q2 2025.
  • Share Repurchases: 3% of outstanding shares were repurchased in the first half of 2025, including 1.5% of outstanding shares repurchased in Q2 2025 at an average price of $306.
  • Adjusted EBITDA: Adjusted EBITDA was $489 million in Q2 2025, up 20% year-over-year.
  • DFC Portfolio: Managed receivables now exceed $4 billion in Q2 2025, with originations of $731 million at an average FICO score of 747 in Q2 2025; 3.1% loss ratio guidance assumes seasonality impact in Q2 2025.
  • Acquisition Performance: Over $500 million in acquired revenue year-to-date in Q2 2025, trending toward the low end of the $2 billion–$4 billion annual acquired revenue target; acquisition success rate is now cited as 99%, as stated by management during the Q2 2025 earnings call.
  • Omnichannel Initiatives: 25.5% of vehicles were sold through omnichannel sources in Q2 2025, totaling 45,000 units in Q2 2025; 97% of Driveway customers were new to the ecosystem in Q2 2025.
  • Pinewood Digital Platform: Rollout to a few stores is planned by the end of the year, with 15–25 additional stores expected in 2026 and full rollout by 2027–2028; Pinewood holds nearly one-third market share in the UK.
  • Incentives and Tariffs: New vehicle incentives increased by 0.5% sequentially to 6.5% of price in Q2 2025; management expects only moderate direct tariff impacts so far, with further adjustments possible if tariffs persist.

SUMMARY

Lithia Motors(LAD -0.54%) reported record revenue, driven by strong after-sales mix and significant growth in its financing arm. Execution on capital allocation led to meaningful share repurchases and organic capability enhancements, as reflected in expanding omnichannel sales and continued technology investments. Leadership articulated a strategy emphasizing cost management, M&A discipline, and the compounding structural benefits of diversification.

  • President and Chief Executive Officer Bryan DeBoer highlighted, "Our combination of local execution, integrated technology, and capital discipline positions us to grow profitably, take share, and advance to our long-term targets while continuing to lead the industry in innovation."
  • President, Driveway Finance Corp. Chuck Lietz clarified seasonality effects and CECL reserve impacts as drivers of near-term DFC profitability, stating that 15% penetration, previously a mid- and long-term goal, was achieved in Q2 2025.
  • Management identified AI-driven productivity improvements—particularly through Pinewood’s partnership—as driving a targeted 700 basis point SG&A reduction over several years, with the timeline indicated as approximately half a decade.
  • Over 50% of the after-sales same-store sales improvement in Q2 2025 was attributed to easier laps due to last year's technology disruptions, with the remainder from customer pay and warranty outperformance.
  • Leadership emphasized that tariff impacts have been minimal to date, with manufacturers managing part pricing and consumers shifting toward higher-efficiency and sustainable vehicles.
  • Omnichannel innovations, such as My Driveway, have driven user growth and process automation, with 137,000 users since launch in Q2 2025, advancing customer self-service and retention.

INDUSTRY GLOSSARY

  • SG&A: Selling, General, and Administrative expenses, a key operating cost metric impacting dealership profitability.
  • GPU: Gross Profit per Unit, a measurement of margin earned per vehicle sold.
  • DFC: Driveway Finance Corp., Lithia's captive finance subsidiary focused on auto loan origination and portfolio management.
  • CECL: Current Expected Credit Loss, an accounting methodology requiring up-front recognition of estimated credit losses at loan origination.
  • Omnichannel: Integrated approach that allows consumers to engage digitally and in-store across the vehicle purchase and ownership cycle.
  • My Driveway: Lithia’s customer-facing digital portal for vehicle transactions, service scheduling, and account management.
  • Pinewood: Proprietary digital platform and software partner, providing AI-driven productivity tools for dealership operations.

Full Conference Call Transcript

Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our second quarter earnings call. The first half of 2025 reaffirms the strength of our strategy with a 29% increase in EPS on a year-over-year basis, vastly outpacing the industry's profitability growth. Lithia and Driveway's strong earnings growth is enabled by an operational focus powered by our people and the profitability of our ecosystem and adjacencies. Our integrated physical and digital network services customers, while scaling a platform designed to compound value and earnings power with a diverse and resilient ecosystem.

In the second quarter, we delivered record revenue of $9.6 billion and a 4% year-over-year same-store revenue increase reflecting our continued ability to grow share and enhance the profitability of our platform. In addition, diluted earnings per share for the quarter was $9.87, and $10.24 on an adjusted basis, an increase of 25% and 30% year over year respectively. We saw strength across the business with record profitability in financing operations, expanding after-sales margins, and flat SG and A despite pressures from lower GPUs. We're encouraged by our adjacencies that are now contributing meaningfully to both earnings and consumer engagement.

These businesses are not just supporting core operations; they are expanding unit economics, reinforcing loyalty, and widening the profit gap between Lithia and the marketplace. As we look to the second half of 2025 and beyond, our focus remains on store performance, scaling high-margin adjacencies, deepening customer relationships across the ecosystem, and deploying capital in a way that is most valuable to our shareholders. Our combination of local execution, integrated technology, and capital discipline positions us to grow profitably, take share, and advance to our long-term targets while continuing to lead the industry in innovation.

We're pleased to see increasing momentum in our high-margin business lines, including financing operations, and after-sales, which expands our unit economics and adds consistency to our earnings profile. Our stores are adapting in real time to demand shifts, supported by their understanding of customer needs and OEM dynamics. We continue to monitor and respond to the evolving tariff landscape and broader consumer trends. We have diversified our earnings stream, and as a reminder, over 60% of our net profit comes from the after-sales operations. Our OEM partners have responded nicely, maintaining affordability and price stability.

With a broad product mix, we are well-positioned to serve customers across all segments and affordability levels while continuing to build upon the customer lifecycle with high-margin adjacencies that further improve the profit equation. What differentiates us is how our components work together; a national footprint with local autonomy, integrated digital tools, high-margin adjacencies that scale earnings across the ownership life cycle, while also being the preferred acquirer of businesses in the industry. In a fragmented sector, our ability to acquire, integrate, and operate at scale remains a key focus and competitive advantage. This quarter, we added stores in targeted high-return markets, continued optimizing our existing portfolio, and embedded adjacencies more deeply into our daily operations.

Our omnichannel platform is expanding both engagement and reach. Tools like the My Driveway portal are strengthening customer retention and digital brands like Driveway and GreenCars, as they continue attracting new customers into the ecosystem all while improving the customer experience and driving margin. Together, these abilities give Lithia a structural edge that supports sustained margin consistency and growth. This strategy is producing results and creates a foundation of tremendous potential and a more resilient and rewarding earnings model. This enables us to grow through volatility, allocate capital with confidence, and advance towards our long-term targets with clarity. Strategic acquisitions remain a pillar of our growth model and a proven differentiator of Lithia Motors, Inc..

Our history of sustainable high return and virtually risk-free growth has grown our revenue from $13 billion in 2019 to become the largest global auto retailer quickly approaching $40 billion in revenue. EPS has grown at a similar rate and we remain excited to operate and grow in one of the most unconsolidated sectors in the country. Our scaled, diverse strategy and cash engine now have the flexibility to not only accelerate share buybacks but also continue to grow both organically and through acquisitions. With a disciplined approach, we continue to target high-quality assets in the U.S., where population growth and operational profits are the highest.

We aim to acquire at 15 to 30% of revenue or three to six times normalized EBITDA with a 15% minimum after-tax hurdle rate. Our track record reflects a 95% success rate of above-target returns. Today, we are in a position of strength. Our growing capital engine and consistent free cash flow give us the flexibility to allocate where returns are most attractive. While waiting for market valuations on acquisitions to reset, the relative value of our own shares supports a more aggressive buyback strategy, which Tina will be discussing further. In the first half of the year, we repurchased 3% of our outstanding shares.

Over the long term, we continue to target acquiring $2 billion to $4 billion in revenue annually and will continue to deploy capital where it compounds value most effectively. As we move through the rest of 2025, our focus remains on the fundamentals. Expanding market share, improving throughput, maintaining cost efficiency to reach our potential.

Tina Miller: Thank you, Brian. Our momentum in the second quarter translates into improving financial leverage with continued year-over-year EPS improvement, the highest quarterly income to date for financing operations powered by strong fundamentals, and a focus on identifying ways to generate SG and A efficiency and free cash flow generation that funded the repurchase of 1.5% of shares in the quarter. These results underscore how ongoing cost control actions, a maturing captive finance platform, and balanced capital deployment are accelerating value creation. Adjusted SG and A as a percentage of gross profit was 67.7%, down from 67.9% a year ago.

On a same-store basis, SG and A ticked up to 67.4% from 66.4%, reflecting cost pressures as we navigate the declining front end GPUs. We're pushing levers to reclaim operating margin by increasing productivity through performance management and technology, optimizing our tech stack, and retiring duplicate systems, renegotiating national vendor contracts, and automating back-office workflows. These actions, combined with ongoing UK network rationalization, are designed to bend the SG and A curve lower again while giving store teams more time with customers. We expect the benefits to build each quarter, controlling SG and A even if front end GPUs continue to normalize. DFC continues to scale profitably, demonstrating the differentiation of our model.

Financing income more than doubled year over year from $7 million to $20 million, supported by a 50 basis point expansion in net interest margin to 4.6%. Disciplined underwriting remains the cornerstone, with second-quarter originations of $731 million, carrying an average FICO score of 747. This was achieved while increasing U.S. penetration to 15%, up 240 basis points versus last year. The optimization of risk and reward in recent vintages is driving improved performance, passing more of that spread through to earnings. Our market position at the top of the consumer funnel and high-quality originations keep credit risk low and preserve balance sheet capacity for continued growth.

With managed receivables now above $4 billion, our mature portfolio can continue to deliver outsized profitability relative to indirect lending, reinforcing our earnings growth trajectory. Strong origination flow, improving margins, and runway to increase retail penetration demonstrate a clear path to our long-term profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $489 million for the second quarter, a 20% increase year over year driven by increased earnings. During the quarter, we generated free cash flows of $269 million.

Our business continues to convert operating momentum into healthy free cash flow, giving us the flexibility to pursue a balanced strategy of buying back shares, funding accretive store acquisitions, and investing in the customer experience all while preserving a strong balance sheet profile. The steady self-funded cash engine lets us stay nimble in challenging markets and deploy capital where it will compound shareholder value fastest. This quarter, we continued our balanced approach to capital allocation. We deployed approximately one-third of cash flows to share buybacks at an average price of $306, representing 1.5% of outstanding shares.

One-third was allocated to acquisitions of high-quality stores and targeted geographic regions, with the remaining capital invested in store CapEx, the customer experience, and opportunities to improve operating efficiency. Our capital allocation philosophy is to act opportunistically and with leverage comfortably below our target and ample liquidity, we're accelerating our share repurchases to target up to 50% of free cash flows and capitalize on what we view as a meaningful disconnect between our stock price and intrinsic value. This stepped-up buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions.

The Lithia Motors, Inc. strategy remains anchored in consistent differentiated profitable growth powered by an omnichannel platform that now delivers tangible earnings at every step of the ownership journey. Our passionate teams, differentiated digital and financial capabilities, and sound balance sheet provide the foundation to scale both core operations and high-margin adjacencies, unlocking the next chapter of value creation in 2025 and beyond. As we continue our progress to creating $2 of EPS per billion in revenue. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?

Operator: Thank you. We'll now be conducting a question and answer session. If you 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 if you'd 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. And our first question is from the line of Ryan Sigdahl with Craig Hallum. Please proceed with your question.

Ryan Sigdahl: Hey, good morning, guys.

Tina Miller: Good morning.

Bryan DeBoer: Morning, Ryan.

Ryan Sigdahl: I wanted to start with SG and A to gross profit. So certainly making good progress on the adjacent on the operating efficiencies. I hear you from an operational standpoint, but I look at the numbers, I guess, a little worse than we were expecting from an SG and A to gross profit leverage. Despite better GPUs. So I guess you talk through the operational improvements and then the financial implications and maybe some guardrails as to help the street and myself kinda think of how this layers into the income statement of the model as it relates to the second half of this year and then 2026?

Tina Miller: Hi, Ryan. This is Tina. I'll start with that question. I mean, I think when we think about SG and A as we've talked about before, a lot of it is driven by volume on the top line. Making sure we're really driving that growth or, you know, in terms of units and where that's happening in our stores. That continues to be the focus as we look at, you know, our leaders that we have in our stores, our department managers, and making sure they're really driving, you know, to get that market share and that growth that's available in their market.

And then looking at productivity and cost controls, you know, on that line as we look at SG and A. So I think it's a combined effort in both. We continue to pay a lot of attention to it, you know, and drive discipline through it and making sure we have the right leaders who are able to look at that. As we look at the rest of the year, you know, we did increase the outlook slightly as we think about SG and A just sort of balancing what's already occurred in the first half with continued discipline in the second half.

And as we've talked about, you know, that continued pace that we see, it needs to be that glide path down to getting toward that long-term target of 55% SG and A as a percentage of gross profit. But it's a diligence on it that we need to do, you know, every quarter.

Ryan Sigdahl: Very good. I don't believe you commented on The UK specifically, so I'll ask it here. But very challenging conditions from an industry standpoint. Changing EV mandates, etcetera, etcetera. But how do you feel about The UK from an industry overall and then where your business stands? From whether it be a cost or operational standpoint?

Bryan DeBoer: Thanks for the question, Ryan. I think The UK for us has been performing as expected. We're actually up profitability-wise by about 3% year over year. Which was a nice number relative to what's happening in the marketplace. Neil and his team's there understand that the top line is most critical, and they're obviously growing their businesses. And doing a nice job at cost management and so on.

So we're pretty pleased with where we sit today, and I think it took a year to get the network fairly well cleaned up, and they sit with a nice, clean portfolio with a lot of really great people that understand the consumers and understand the competition and should continue to flourish in the future.

Ryan Sigdahl: Great. I'll turn it over to the others. Thanks, Bryan, Tina.

Bryan DeBoer: Thanks, Ryan. Thanks.

Operator: The next questions are from the line of Michael Ward with Citi Research. Please proceed with your questions.

Michael Ward: Thanks very much. Good morning, Bryan. Good morning, Tina. Maybe just following up on the SG and A side. With the addition of Pendragon, it kind of distorts some of the comps in 2Q in particular. How does The U. S. Alone look on SG and A?

Tina Miller: I mean, our U.S. business continues to be strong on the SG and A side. And as you know, the SG and A footprint in The UK is just higher and so. When we look at our blended number, I think both of the both of the teams on both sides, I would say, continue to focus on SG and A, you know, and it's an area that, you know, we see long-term continued opportunity to drive that down over time. But our US business continues to do well on the SG and A front.

Bryan DeBoer: Mike? Yeah. It's right. I think it's also important. It's easy to get caught up in one number or another, but there's a lot of factors that go into how you think about your business and how you grow your business. It's easy to get caught up in what's happening quarter over quarter or year over year or so on, but Lithia and Driveway has built an organization that is focused on multiple assets of the customer life cycle to expand the wallet share of a consumer and staying in our ecosystem for a longer period of time.

And it's it's shocking the microscopic views that the market is taking on what we're doing when we've grown our organization threefold in revenue and threefold in earnings and have all of the levers and the dry powder in our adjacencies to continue to do the same thing. Let alone in our M&A strategies of how we attack the marketplace, we don't have blips. I think it I think it's also important. It's easy to get caught up in one number or another, but there's a lot of factors, right? That go into how you think about your business. And how you grow your business.

It's easy to get caught up of what's happening quarter over quarter or year over year or so on. But Lithia and Driveway has built an organization that is focused on multiple assets of the customer life cycle. To expand the wallet share of a consumer that staying in our in our ecosystem for a longer period of time. And it's it's shocking the microscopic views that the market is taking on what we're doing when we've grown our organization threefold in revenue and threefold in earnings and have all of the levers and the dry powder in our adjacencies to continue to do the same thing.

Let alone in our M&A strategies of how we attack the marketplace, we don't have blips. In terms of how we how we buy and how we operate because we didn't pay based off COVID level earnings. We don't have write-offs as two of our peers just had. But for some reason, everyone keeps discounting those types of things, and you know, Lithia and Driveway, as it continues to plot along, is the largest now auto retailer in the country and continuing to separate ourselves in terms of scale and size that we get into these microscopic views of SG and A was a half a point higher than it should have been.

Same-store sales might have been a little worse when our same-store sales revenue growth in used cars was the best in the sector so far. Okay. Last quarter and the quarter before, it wasn't. So the gaps that we're realizing because of the ecosystem are quite there. And you know, it's Tina and the teams are working diligently on SG and A, and we're gonna be able to deliver the performance. And this quarter, we felt that we picked up some of the gaps in where we stand.

And there's no question that we have a greater portion of our business that's sitting in blue states where population growth is not as exorbitant or robust as what it is in the southeast and south-central. We've been very fortunate to be able to change our mix to be able to expand where we sit and as such, we're more excited than ever about what we've built and the potential of what we have. So Mike, thanks for letting me get on my soapbox for a few minutes, but No. That's fine. I'm sure frustrating as a management team that you build something and all you do is get the penalties of it.

And then when there's one number out of out of seventeen that seems to jump out, people forget of what we've accomplished as a management team and more importantly, what the foundational elements of what we built. So the ecosystem has got the capacity to do in the future.

Michael Ward: Well, you know, my point was is it was performance is actually better than it looks. In two you know, Tina, is $20-30 million the new run rate per quarter? Is that what we're looking at? So a $100 million plus contribution, like 26?

Chuck Lietz: Hey, Mike. This is Chuck. You know, DFC is on a very specific growth trajectory, and yes, we feel, as you've said, DFC has definitely got out of the startup phase and continues to execute our strategy of being top of funnel and getting preferential loan selection. And we see just that continued growth rate trend continuing for the next foreseeable quarters going forward. So yes, definitely expect to see that level of run rate going forward.

Bryan DeBoer: Chuck's being very humble because I think the $20 million that we did was three times what we did in the previous year. The spreads are there. Our delinquency rates continued to strengthen. Okay, and become better. Which is great. And I think it's easy it's easy to forget that we made $20 million in the quarter, and I think we're targeting $60 or something. $70 for the year. Ultimately, at the current revenue base where we finance vehicles, which is in The US,

Michael Ward: Well, you know, my point was is it was about $32 billion in revenue, which is about $320 million in profitability at scale. At just that revenue base. And we've continued to say, that at a $50 billion domestic revenue base, we're gonna make half a billion dollars. Okay? That's real money that our competitors at this stage don't have. Okay? And it's important to clarify that we're not getting valued on that. Okay? And you know, in fact, for the last two years, we've been penalized for it. Okay? And I think there's a lot of confusion out there that it takes a lot of capital and a lot of courage and bold planning to be able to execute on the things that we're executing on.

Bryan DeBoer: To be able to bring you what is now a company that has the ability to compete in acquisitions, in consolidation, and in the bottom line profitability in ways others can't.

Michael Ward: Yeah. It's a marathon, not a sprint.

Bryan DeBoer: Thank you.

Michael Ward: But some of us still cheer for you, Bryan. Thank you.

Operator: Next question is from the line of Rajat Gupta with JPMorgan. Please proceed with your questions.

Rajat Gupta: Great. Thanks for taking the questions. And I'm sorry. I have to apologize in advance. I wanna follow-up on Mike's question, and your response. I mean, it looks like I mean, I Ryan, like, you obviously done a lot of acquisitions since the pandemic. You have grown your company threefold, as you've said, but I think it's been a couple years since you've had those under the hood. And think it's been ten quarters now. Since the same store metrics have underperformed your peer group. So I don't know if, like, one and a half year is enough time or we need to see more time. Before that starts to recover. So could you give us some visibility on when we should see your organic performance. I understand the adjacencies. I think DFC is great. But just the store performance metrics, when should we see that recoupling or doing Bez and Bez. And I have a quick follow-up. Thanks.

Bryan DeBoer: Rajat, I think if you look back three quarters, our performance has bridged a lot of that gap. Like I said, in used cars, we were number one in revenue growth. Okay? Number one. So and in service, we were middle of the pack. Okay. Remember that service is based off of smaller units and operation growth than what others are.

We believe it's somewhere between three and three and a half percent difference just from units and operation. We were about one and a half to 2% below what the peer group was. When it comes to new car sales, you know what? Stellantis is still struggling a little bit, and we still got a fairly large portion of that. Like AutoNation does. And the rest is yet to be seen. So if you wanna view the world as that, go ahead. It's one part of who we are. Okay, as an organization, and the ecosystem is beginning to perform.

Okay? And the same-store sales growth is starting to bridge the gaps that are there. I can't change overnight where our footprint is. Okay? If you remember, we were 80% West Coast based before acquisition of DCH. At the same time, we were almost 75% domestic, manufacturers. Today, we sit at less than 30% of our mix being domestic. We sit with over 40% of our mix being in the Southeast and south central. That automatically yields over double the operating margins of what the western two regions perform at.

So if you wanna just compare apples to apples, then you need to do deeper dives into what the marketplace is doing, where population growth is, and how operational profits and doc fees impact the operation of those operating profits.

Rajat Gupta: Understood. And, I mean, if you are if you do have a line of sight and, you know, a lot of these gaps narrowing and getting better over the next few years, could we see a more aggressive pivot to and get also, given the fact that you're at a significant discount to your peer group, could we see a more aggressive pivot to stock buyback? In the at least in the interim before the market can give you credit?

Bryan DeBoer: Sure, Raj. I mean, good insight. I mean, I think when we're trading at a 20 to 30% discount to the peer group, and we've got somewhere between 20 and 40% upside just from our adjacencies that are not fully realizing their potential. And the trajectory is there. Absolutely. I mean, as Tina mentioned, we're now allocating 50% of our capital to buybacks. I'm imagining we're in the market today buying and we're gonna continue to buyback until the world understands that what we built is something special and that the performance on each of these side metrics that I get that there's metrics. Okay?

Bryan DeBoer: You still have to look at the totality of what is being accomplished and not lose sight of that this is about TSR. Okay? It's about shareholder return, and the ability to grow a company, both top and bottom line. We as a management team, it's easy to get frustrated that the boldness that we took and the steps that we took to reinvent basically the industry and our sector. We've been pretty much penalized for the last two and a half years, and you know, this is a hell of a buying opportunity because at those kind of discounts, we're gonna back up the truck and continue to buy shares back.

Rajat Gupta: Understood. Thanks for the answers, and good luck.

Bryan DeBoer: Thanks, Rajat.

Operator: Thank you. Next question is from the line of Daniela Hanigan with Morgan Stanley. Please proceed with your question.

Daniela Hanigan: Hi, Brian. Just a quick one. On used car availability and growth, what's the mix or strength coming from across CPO, core and value autos? You cited 70% self sufficiency, which is really strong in this fragmented used car market. How do you view competition from the likes of the online pure play retailers? And is there greater opportunity to grow and consolidate here?

Bryan DeBoer: Great question, Daniela. And I think as we think about our mix, what we're seeing and part of the reason for the outperformance in used vehicles on same-store is because we're growing our over nine-year-old bucket quite nicely. It was up 50% year-over-year. That obviously means that the other buckets didn't grow quite as fast. But that's because the supply in those buckets really aren't there. We are purchasing over two-thirds of our vehicles directly from consumers. Those are yielding almost a $1,700 price difference between those vehicles. Purchased from auctions around the street. Okay? And that's a massive competitive advantage over used-only retailers. That are not up funnel quite as much.

One of the other notes that I think is important to understand is that in our ecosystem, Driveway actually purchased over double the amount of vehicles through our AI. Valuations and those purchasing metrics, so quite a difference year over year, and that's starting to impact our ability to find the vehicles. To be able to meet our consumers' demand at the right affordability levels.

Daniela Hanigan: Got it. Thank you. And then can you just comment on the M and A environment? I know you have the target for $2 billion to $4 billion in annual acquired revenues per year. Does the policy uncertainty change that? More or less dealers to the table this year, next year, etcetera? Any comments around that?

Bryan DeBoer: Sure. We've done just over half a billion dollars so far this year. we should be able to achieve the low end of that 2 to $4 billion range. By year-end and have a fair amount of stuff that have come into play over the last few months. But, again, I would state this. We don't flex on pricing. Okay? We watch the market come to us. We act when there's opportunities that make a good ROI sense. And I said in my prepared remarks that we're 95% successful on acquisitions. We're actually 99% successful now. That we've purged some of the smaller stores that were in groups, which created that extra 4%.

So this is a pretty easy roll-up strategy. And we believe the market will come back to us as profits begin to normalize, they've they've done nicely, but we need that to happen for a couple of years. Because that's what determines pricing. Okay? So we are there is an advantage to having a discounted stock price that in the event that M&A is a little pricier than we can buy our shares back.

Daniela Hanigan: Thanks, Brian.

Bryan DeBoer: You bet.

Operator: The next questions are from the line of Mark Jordan with Goldman Sachs. Please proceed with your questions.

Mark Jordan: Hey. Thanks for taking my question. For the aftersales segment, how much of the stronger same-store sales growth can you attribute to lapping last year's CDK issues? And there any additional color you can provide regarding how the different channels performed?

Bryan DeBoer: Good really, really good question. I would say that the lapping of performance in same-store sales was driven by a little better than 50% by the easy lapse of comp. Okay? I don't know what the other peers had communicated that. With the rest coming from outperformance. Where a lot of it's being driven by customer pay and some by warranty.

Mark Jordan: Perfect. And then did you benefit in after sales from any tariff-related inflation pass through during the quarter? And is that factored into your full-year outlook for mid single digit comp for the segment?

Bryan DeBoer: So, Mark, we don't we I would say that there's slight impacts from tariffs, but most manufacturers have controlled their pricing on parts as well. Okay? Now going forward, there may be implications there, but we didn't see impact from tariffs at any scale. Okay? And you can see that we were up, what, one and a half percent in margin. In aftersales, which usually is indicative that there was a higher mix of labor, which is a 60, 65% margin business rather than a 30 to 35% margin business, which is parts. So I would, without having the specific tariff-related data, say that it had minimal impact.

Mark Jordan: Excellent. Thank you very much.

Operator: The next question is from the line of Ron Joseko with Goldman Guggenheim Securities. Please proceed with your questions.

Ron Joseko: Yeah. Good morning, team. And thanks for taking my questions. Hey, Bryan. Wanted to start with the DFC growth this quarter and then especially after another strong quarter for DFC. I guess the back half guide does imply a pretty meaningful step down versus what you did this quarter. Trying to understand what's informing that because NIMs and credit performance both still look strong. So I don't know if this is just a lean towards conservatism. It looks like you still want to grow the book pretty aggressively, but it's tough for us to bridge Certainly to the low end of the range, at least.

Chuck Lietz: Yeah. Ron, this is Chuck. Great question. First, I think you actually hit on some of it and that, you know, again, one of the great things about DFC is we've grown our penetration rates. We're getting very close to hitting that consistently, that 15% penetration rate. Then hopefully, we can build on that to 20. And as you know, as we continue to ramp up those originations, that can have a drag on some of our, you know, near-term profitability when we have to take that, CECL reserve upfront. And then secondarily, there is some seasonality in our numbers. Know, the summer months generally are those months that the consumers don't necessarily pay their auto loans.

So if you look at some of the published reports, you are seeing delinquency rates pick up. But you kinda get past the summer months, we hope that those start to tick down a little bit and don't start, you know, weighing us down with actual charge offs. So somewhat of it is due to the growth rates, the other part would be seasonality. Our 3.1% loss ratio includes and assumes that seasonality, but it does change the profit equation. So if you look at the at the first quarter, you can't just take it times four and say, we're good. Right?

Ron Joseko: Okay. No. That's super helpful color. And then Bryan, might have a chance for you to get back on your soapbox here, but on SG and A, you laid out a bunch of buckets you're targeting to start taking costs out and improve efficiencies. I guess, any way to think about the cost savings potential for some of the things you laid out, performance management, tech stack, vendor contracts, automating workflows, and then The UK. I know it's a lot, but just kinda how you feel about it.

Bryan DeBoer: Sure, Ron. I think most importantly when you think about SG and A costs, we're obviously trying to grow our top line. Most importantly, because that's what that's what generates the net profit as an organization. Because if I grow top line, in new and used vehicle sales, I get the 62% of my net profit that's generated from aftersales. Okay. So massive point to remember. And obviously, to be able to grow the aftersales, you gotta spend money to do it. Our SG and A is made up primarily of personnel expenses in the sales department. Okay? So anything that occurs there is going to pay later in aftersales. So important to remember that.

As we think about driving down our cost structures, in sales and in the service adviser pay, which makes up the small portion of SG and A personnel costs. Okay? Those are productivity jobs. Okay? And what we're pretty excited about is the Pinewood AI that we have a partnership. And now I think in a couple weeks or whatever, we'll we'll have about a third ownership in that in that company. That AI technology is going to put our customers and our sales associates in both the service and sales departments into the same environment, which helps us to drive down personnel costs.

So a lot of the 700 basis points that we're looking at achieving is coming from AI improvements and then skimming up how we look at staffing those departments. So a big part of that. The remaining couple hundred basis points is coming from vendor and scale and other types of things. So but we're really looking at gaining productivity in those productive jobs and, hopefully, at some point, which some of the AI is helping us today, but ultimately, that's the stuff that's embedded in the Pinewind system that we're helping co-develop with them.

Ron Joseko: Yeah. That's super helpful. And, yeah, I appreciate the detail on the AI sourcing of

Bryan DeBoer: Ron, because when you think about AI, When we when we started on this journey ten years ago, we thought technology was there to bring customers in and to be able to touch customers. Throughout their life cycle. Today, when we look at what technology and engineers and these partnerships with great companies like Pinewood can do. It's incremental simplification of simple things like scheduling appointments. Okay? If we can have AI schedule appointments, which is as simple as what we now have in our My Driveway portal, that allows consumers in all of our stores other than three to be able to schedule appointments. Well, that takes off the load of the BDCs and the service advisers.

What we have to do a better job of is looking at productivity metrics and then driving those cost reductions into the store. Okay? Now the sixty-day plan and the everyday plan started on that venture, but it's easy to get sloppy and it's easy to think that top-line growth is gonna also fix your SG and A costs. When ultimately you still have to force the cost savings, and we're encouraging our store leaders and our department leaders to do such. And they get it. Okay? And it's it's important that we lead the pack in all these categories, and we'll continue to be able to drive those costs down.

Ron Joseko: Yeah. That's great color, and for taking my questions.

Bryan DeBoer: Yeah, sure. Happy to hear that one too.

Operator: The next questions are from the line of Jeff Flick with Stephens. Please proceed with your question.

Jeff Flick: Good morning, everybody. Congrats on a nice quarter. Bryan, I was wondering just if we could talk a little bit, you know, tapping into your, you know, historic expertise and experience here. You know, when we talk if we assume that a 15% tariff unit like a car is, you know, 85%, 87%, whatever cost is probably gonna be where we end up just across the board, you know, the price increase required, you know, at the at the invoice level, the OEM invoice level is pretty substantial. So at some point, someone, you know, on the units that are tariffed, you know, there are gonna be have to be conversations. I'm just curious how you see those playing out?

What will be the mechanism mean, at some point, like, the OEMs have to go to the dealers and say, look. You know, you've gotta show the pain. I'm just kind of curious how you see that playing out.

Bryan DeBoer: Sure, Jeff. And I think let me answer the first your direct question, and then let me embellish a little bit on how we think about it as a mitigation strategy. The most important thing is our manufacturers are all competing to sell cars, so it's important to keep that in play. And only about half of the vehicles are being impacted by tariffs. Okay? The rest are not. So when we think about the remaining half what happens? I believe that manufacturers have already begun to either decontent cars or not charge for other upgrades. I believe that consumers can save other dollars.

They're they're thinking about, they're thinking about, you know, that I don't have to pay for as much gas because we now have, what, 36% of our vehicle sales are sustainable vehicles that get better gas mileage. And I think Chuck would sit here and argue that the DFC has the ability to help with financing, and manufacturers can subsidize in the financing capacities. We've now got our government that's allowing us to write off, you know, certain interest costs on auto loans, and there's a lot of other moving parts.

So a finite 15% increase when we think about the tariff on the 50% of our inventory that influences things is just another thing in our in our daily lives. And each of our stores will respond to that. Now in terms of who is Lithia and Driveway and how do we respond to it, think if you look at our profit equation today, okay, and compare it to that of our peer groups, we're already diversifying that portfolio with 60 plus percent of our net profits. Being directly attributed to after sales. Okay, with less than 20% of our net profit currently being attributed to new vehicle sales. Including F and I.

And you know, as a retailer, we think about those equations.

Bryan DeBoer: And I think as you look at going forward and you push through all the differences in the dry powder within the adjacencies, you know, that 61, 62% that's being derived from aftersales of our net profit starts to become even higher. And you know, and new cars are just a pathway to be able to get to our high margin businesses, the financing and servicing parts, cars, and trucks. So know, it's an interesting time in the industry, but to me, it's pretty exhilarating. Okay?

And our ability to deal with these situations, we've got all the levers to pull and start to change the industry, create solutions for customers that make it easier for those that are gonna be able to grow market share, be less impacted by whatever changes do come from tariffs or our model or franchise laws or whatever might else might be there.

Jeff Flick: Well, in one follow-up while I've got you in kind of big picture mode here. You know, for the first time we heard as it relates to The UK the notion that Chinese OEMs which, you know, none of the publics have represent some formidable competitive pressures and maybe I'm just curious your take on the Chinese OEMs. And if you wanted to go one step further and say, you know, when do they. what's the implications? Do they eventually wash up on US shores

Bryan DeBoer: I think it's also important to remember that our presence in the in The United Kingdom does include BYD and MG. Five total stores. We are getting to see what's occurring there. It's still it's pretty bumpy. Okay? If you remember, we started out pretty strong with BYD, but it came to a dull roar in about a quarter and a half. You know, and now there's another surge out there. And it's starting to impact the marketplace. But again, in The UK, it's pretty easy to adapt. Okay? And it's still not a material amount of our profitability equation.

To how we think about it, and I'd still go back to it a 110% tariffs today with the Chinese and a BYD price competitive wise in The United Kingdom. Isn't much less than what a BMW or a Mercedes is for the same type of equipment and the same type of propulsion.

So, you know, we'll continue to be diversified, and we'll continue to keep our pulse on what occurs in The United States and look to whether or not, you know, those models are including dealers or if they do even come to The United States, but there's been now three failed attempts by large Chinese manufacturers coming into The US that not really yielded the results the same as a lot of other places in the world.

Jeff Flick: Awesome. Well, thanks for taking the questions.

Bryan DeBoer: Thanks, Jeff. Appreciate your insights.

Operator: Our next questions are from the line of Federico Marendi with Bank of America. Please proceed with your questions.

Federico Marendi: Good morning, everybody. Earlier, you mentioned that the 55% SG and A target long term and I appreciate the commentary on the actions to reduce the SG and A, but seems to me that an important part of the equation is also this footprint, this your size. And I was wondering how much larger has to Lithia become enable that target. Reach.

Bryan DeBoer: Frederico, congratulations. Too on taking over the research And welcome to the space. I think when we think about our trajectory and our timing of SG and A, we're looking out a half a decade to be able to accomplish it because it's easy for us to say, oh, that we can reduce our personnel expenses, which makes up most of the SG and A cost, but ultimately, if we're not competitive in terms of salaries and compensation with what the what the industry is. You ultimately can lose your people.

Now if we can provide solutions that allow our people to be more productive, and ultimately make more money than the industry, okay, then ultimately the throughput that we gain from that can create the disconnect in profitability. So we can move a little bit ahead of where the industry's out, but not massively ahead of the industry. Okay? And think when we think about the trajectory on that, about half of the improvements do need to come from personnel costs, and they are focused in the sales and service departments, on the support staffs. Okay?

And that's something that I think I challenge my stores to be thinking about what do we have for BDCs, 20 years ago, we didn't have BDCs, and know, they're great in certain locations where you have massive amounts of volumes.

The department leaders have figured out ways to get productivity out of both. But in many situations, we added business development centers and service and sales that are basically doing the same job that our advisers and our sales associates are doing. So you know, lots of opportunities to be able to attack that. The remaining portion of that is coming from scale. And is coming from the adjacencies of what they provide. With lower marketing costs, more efficient inventory, and so on.

Federico Marendi: Thank you, Brian. And my last question would be on the omnichannel initiatives. Could you give us an update and also how you fare compared to your competitors?

Bryan DeBoer: Sure. I'm not sure that everyone counts the same, but some of the facts that I do know, at least in terms of us, we sold over twenty five and a half percent of our vehicles through omnichannel sources with digital support. Or forty five thousand vehicles in the quarter. Except considerably from where we've been in the past. Our driveway channel continues to be over ninety seven percent new customers. To the ecosystem. Which is quite effective, and we continue to drive that channel. And I believe more importantly than ever, having an omnichannel solution within our stores, it's important.

There's a lot of the reasons that a BDC was developed is because salespeople weren't as equipped to be able to deal with Internet leads fifteen, twenty years ago and today, they're equipped to be able to do it. Our IT solutions are able to use AI to be able to sort leads, to be able to do a lot of their communications and work for us, to be able to catalyze the change to be able to drive those costs down. So in terms of digital solutions, it kinda goes hand in hand with our SG and A solutions.

Pretty excited to where we've been able to grow and build Driveway, and we sit here today with a My Driveway portal that has I'm not a 100% sure on this, but I believe it was a 137,000 users. Remember that went live in December of last year. So we're about seven, eight months in, and that's growing. Consumers are now doing more of the stuff themselves in a simple, transparent, and empowered way.

Federico Marendi: Thank you, guys, and look forward to working with you.

Bryan DeBoer: Thanks, Federico.

Operator: Our next questions are from the line of Chris Bottiglieri with BNP Paribas. Please proceed with your question.

Chris Bottiglieri: Hey, guys. Thanks for taking the question. Hi, Chris. The first one, hey. Hey. One I wanna follow-up was on - you raised the GPU guy by about $200 a unit at midpoint, and there's been some strength kind of year to date. But how do you think about tariffs impacting that outlook? What do you expect the industry to do from inventory levels like brand mix and incentive levels? As those trended to Q2 - '25 and '26? Do have any view on kind of the drivers of those?

Bryan DeBoer: Sure, Chris. I think when we think about the impacts of tariffs, we gotta go back to affordability because I think we still have the ability to order cars. We still have the ability to guide. And support manufacturers on decontenting cars and to be able to keep affordability front and center. It's easy to get lost in that these increases are gonna create this higher price level. We make 5% to 7% on the new vehicles that we sell and have hearing costs and so on and so on. So there's structural support within the industry and across competition that we're not here to kill each other, and there's only so much margin in cars.

And 5% to 7% is pretty small. So manufacturers are going to have to respond where, you know, we continue to believe that incentives are going to have to grow again. And I think as we think about how that shakes out, each of the manufacturers and each of the segments are gonna have to think about how they go to market to be able to respond to that. As a as a side note for the quarter, incentives were only up about a half a percent. Went to 6.5% of the price of a vehicle. From 6% in the previous quarter. So I think there's still a lot of room.

It's easy to get lost in that these increases are gonna create this higher price level. We make 5% to 7% on the new vehicles that we sell and have a hearing costs and so on and so on. So there's structural support within the industry and across competitions that we're not here to kill each other, and there's only so much margin in cars in 5% to 7% pretty small. So manufacturers are going to have to respond, where you know, we continue to believe that incentives are going to have to grow again. And I think as we think about how that shakes out, each of the manufacturers and each of the segments are gonna have to think about, and we're not here to kill each other, and there's only so much margin cars. And five to seven percent is pretty small. So manufacturers are going to have to respond, where you know, we continue to believe that incentives are going to have to grow again. And I think as we think about how that shakes out, each of the manufacturers and each of the segments are gonna have to think about capture customers to be able to sell them another car four to five years from now.

So we think we're pretty insulated from the impacts of tariffs and it's easy for us to get, you know, confused about what manufacturers have to do versus what a retailer has to do. We're quite diversified, and you can see as we think about our model just move downstream. Whether it's decontented in new cars or whether it's more mainstream new cars or whether it's selling more value auto cars. Retailers are pretty adaptable.

Chris Bottiglieri: Gotcha. Really helpful. And then on the credit side, I mean, your own credit performance has been pretty spectacular. You've done the portfolio a lot. Just curious what you're seeing. You'd peel the onion back. Like, are you noticing any differences between the '21, '22 vintages and the 23, twenty fours? You know, any differences between borrowers that student debt and those that don't? Just seems like the broader credit environment is a little bit choppier, but yours looks – rates. To see what we can learn from you.

Chuck Lietz: Yeah. Chris, this is Chuck. Great question. thought that 2021 vintage, both for us as well as the market, really was one that's not performing as well as we all hope in the industry and the and the segments. But that really led for us to take that major shift for us to move upmarket and really try to de-risk our portfolio. And as you said, we're really starting to see that start to flow through in our twenty three, twenty four, and even into our twenty five or vintages. We really feel strongly that are starting to see a separation on preferential selection from some of the key metrics like delinquency and, you know, some of the default rates.

So, we expect that preferential selection to continue as we go forward and hopefully see the results of that we go forward in the market and our financial.

Bryan DeBoer: I love I love how Chuck is so humble on things. I think it's important to note that when you think about the different vintages of our portfolio, remember this. Okay? At 15% penetration rate, that was our mid and long term goal. Okay? And we accomplished that by lowering our LTV by 1% to 90 to less than 95%. Okay, our original targets were a 100 to a 105% LTVs. Okay? More importantly than that, our average FICO score on our incoming business this quarter was 746. Okay? That's 36 points higher than what our original forecast had established at seven ten. Okay? We were also fifteen percent fifteen points higher FICO this year over last year. Okay?

So when we think about our loss ratios, we're able to skin better and better paper from our stores, and they're doing an excellent job at giving us first look, and we're gonna continue the pathway towards the 20% which is our super long term goal. So we're pretty excited of what we see. And we're bucking the trends. Two years ago, we bucked the trend last year, and we're bucking the trend this year, and we're not seeing any softness across our portfolio. And it's continuing to add value to our ecosystem and to our customers' relationships.

Chris Bottiglieri: That's great. Thanks, guys.

Chuck Lietz: Thanks, Chris.

Operator: The next question is from the line of Doug Dutton with Evercore ISI. Please proceed with your questions.

Doug Dutton: Yep. Just a quick one for me, team. Curious on something that was contradictory here. We have in the Q2 deck, for Driveway, DFC, 50 to $60 million of finance operations income targeted for '25 is the estimate. And then something that was spoken to earlier was that $20 million in the second quarter and $33 million year to date. Is gonna continue to grow. So those things are sort of at odds, and I was just curious if you could clarify which one of these is correct.

Chuck Lietz: Yes, Doug. This is Chuck. You know, our financing income is actually our segment. We do have a couple of other businesses that are included in that. Notably, we do have a finance company in Canada as well as a fleet management company in The UK that also does financing that does get consolidated into that. So I think if you were to peel back, sometimes we do refer just to the DFC, which is The US portion of our business. For some of our numbers. But the $20 million and the $7 million that Bryan referenced was for our financing income segment.

Chuck Lietz: So, hopefully, that clears up that. And remember, Chuck talked about the seasonality, and when we talk about improvement, it's year over year improvements. I mean, we made $10 million last year. in DFC as a whole, and we're gonna make 60 to 70 this year.

Doug Dutton: Okay. That's helpful. That was my only one.

Bryan DeBoer: Thanks, Doug.

Operator: Thank you. Our final question is from the line of Mike Albanese with Benchmark. Please proceed with your questions.

Mike Albanese: Yeah. Hey, guys. Thanks for taking my question. And I really appreciate all the great commentary on this call thus far. I just had a quick one on new vehicle volumes. Obviously, pulled back your guide from mid single digits on the year to low single digits. Is this you know, is this just a reflection of, you know, updated Q2 results, essentially, you know, change in the base going forward? Is it more company specific, obviously, regional and brand mix play a role here or macro related, obviously, thinking tariffs and pricing. Implications on the consumer in the second half? If you could just comment on your rationale there, that'd be helpful.

Bryan DeBoer: Sure, Mike. I think if you if you it takes the first half of the year of the entire sector. And then annualize it, you're gonna get to a smaller number. Okay, because you do have more difficult comps coming in July. Because of the CDK event. So it's more of an industry thing. We just wanted to make sure that we fine-tuned it for you.

Mike Albanese: Got it. Thank you. That's helpful. And then just another one here. Switching gears to Pinewood. Right now that's positioned for growth really, could you just maybe kind of frame your expectations or timeline in terms of the rollout across your base and beyond? I mean, maybe a better way to ask that would be how should we be, you know, sitting in an annual seat here, how should we be measuring success regarding that rollout?

Bryan DeBoer: Sure. I mean, I'll give lots of kudos to Pinewood. They're good at, they're good at coding. They're good at capturing market share. They're now almost a third of the market share in The United Kingdom. So they're growing globally. That gives them the capital to be able to do what they need to do in North America. Our rollout schedule is – it's pretty exciting what they're doing. That gives them the capital to be able to do what they need to do in North America. Our rollout schedule is a couple a couple of stores. by the end of the year with two specific manufacturers.

We should have another 15 to 25 stores next year. with full rollout in 2728. I think the Pinewood teams are ready and supportive of that. We're pretty we're pretty excited about it. One other thing to note as well as there was a mark-to-market adjustment but we still beat the street by almost a dollar. Okay, after that, which is a pretty big number. Relative to where sit today. The other thing is we have not recorded the North American JV, equity, so that is not in that number. That's coming in future quarters. Okay?

And this is an exceptional investment that's embedded into our ecosystem even though our store not all of our stores are on it yet, The UK is doing absolutely phenomenally. And a lot of their improvements, a lot of the gains that they're going to be making in SG and A now can be pushed through the utilization of the Pinewood AI solutions. To be able to take them up a step while that helps pathway us in North America for the bigger platform and portfolio to be able to be successful. In the upcoming

Mike Albanese: Awesome. Really helpful. Thanks, guys. Nice quarter.

Bryan DeBoer: Thanks, Mike.

Operator: Thank you. This now concludes our question and answer session. I'd like to turn the floor back over to Bryan DeBoer for closing comments.

Bryan DeBoer: Thanks, Rob, and thank you, everyone, for joining us today. We really look forward to seeing you on our third-quarter call in October. All the best. Bye-bye.

Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.