Good morning and welcome to the Lithia & Driveway Third Quarter 2023 Conference Call. I would now like to turn the call over to your host, Amit Marwaha, Director of Investor Relations. You may now begin.

Thank you for joining us for our third quarter earnings call for 2023. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; 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 products, markets, and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements, which 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 a 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.

Thanks, Amit. Good morning, and welcome to our third quarter earnings call. We appreciate everyone joining us today and the opportunity to update you on our business, growth initiatives, and progress towards our long-term strategies. In Q3, Lithia & Driveway grew revenues to $8.3 billion, up 13% from Q3 of 2022, resulting in adjusted diluted earnings per share of $9.25. Overall same-store sales momentum improved sequentially, led by new vehicle units up 5% and aftersales revenues up over 4%. Sequentially, GPUs were in line with our expectations for both new and used vehicles, while F&I margins remained resilient. Year-to-date, GPUs for the new vehicles have come down approximately $100 per month or down 19% from the end of 2022. We are well supplied with new vehicles and parts to meet customer demand across the domestic brands throughout year-end. Our teams are driving both growth and profitability while we focus on continuous gains in efficiency across vehicle operations, DFC, and our other adjacencies. Our business model is flexible and diversified, giving our store teams the tools and autonomy to adjust with local market dynamics and manufacturers. Our goal is to provide customers with a wide variety of products and services and access to solutions that fit their needs throughout the vehicle ownership life cycle. This allows us to create a culture that is responsive to varying needs and delivers the best possible experience for customers wherever, whenever, and however they desire. Moving on to our financing operations. Driveway Finance Corporation, or DFC, posted Q3 results in line with expectations as receivables grew to $3.1 billion. The DFC team has been methodically and prudently navigating the shifting currents of increasing rates in the ABS and credit markets. The team has managed loan loss provisions in line with expectations and steadily growing their loan portfolio. Our plan remains on track to gradually expand margins, move towards profitability late next year while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on results of both vehicle and financing operations later in the call. At the heart of our strategy is expanding consumer solutions that are simple, convenient, and transparent. Our network is being designed to be within 100 miles of consumers, which allows us to leverage our physical and virtual infrastructure. Over time, we expect this will generate more convenient impressions, more memorable experiences, better returns on capital, and an ecosystem that is unreplicable. Acquisitions are a core competency to our design and organization. We remain disciplined and opportunistic as we look for accretive opportunities that can improve our business. We target after-tax returns of 15% or more, 15% to 30% of revenues, or 3 times to 7 times normalized EBITDA. Life-to-date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%. We're looking for acquisitions that are complementary to our network development strategy and meet our return thresholds in an unconsolidated industry. During the third quarter, we completed two acquisitions in the United States. Combined, they are expected to generate approximately $290 million in annualized revenues. And year-to-date, we've acquired over $3.8 billion in revenues. In addition, I'm pleased to announce the impending purchase of Pendragon U.K. Motors, the Pendragon Fleet Management business, or PVM, and strategic partnership with Pinewood Technologies. This transformative transaction is a crucial step towards executing our long-term design and brings with it a strong partnership with a highly profitable and innovative DMS CRM system, expands our footprint further into fleet management, and finally, grows our retail footprint in the United Kingdom. We expect our annual revenue run rate to grow to approximately $38 billion and are excited with the addition of two fundamental pillars, DMS and Fleet Management Company, or FMC, to our global business. We'd like to welcome our new and future partners to our Lithia family as we expand our worldwide presence. As a reminder, we target annualized revenues acquired in the range of $3 billion to $5 billion per year. Our primary focus remains on building out our US network and complementing our network strategies. We are proud of our team's track record of executing and integrating multiple transactions as we make our way towards and beyond $50 billion in revenue. Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and will have acquired over $22 billion in revenues once the Pendragon transaction is completed. In addition, Driveway Finance Corporation, our captive finance division, continues to make steady progress as our top finance partner and has line of sight to realizing the full potential and contributions to our profitability in the future. As you may recall, the average loan we originate at DFC is 3 times more profitable over its lifetime relative to the fees we receive from third-party commissions. Shifting to our omnichannel platforms. We're making steady progress, growing online MUVs up 34% across our digital channels, while digital transactions grew to over 37,000 units in the third quarter, up 21% compared to last year. Supported by the education provided by GreenCars, sustainable vehicle sales accounted for 16% of total new vehicle sales in the quarter, up from 10% in Q3 of '22. LAD remains on track to become the preferred international omnichannel provider of products and services, meeting a diverse set of customers' needs throughout the ownership life cycle and across multiple adjacencies. Our plans have positioned us to improve margins and lower our SG&A through a combination of growth efficiency, diversification, and scale. Combined, these efforts will disconnect the ratio of $1 of EPS from every $1 billion in revenue and achieving $1.10 to $1.20 for every $1 billion of revenue by 2025. This will be driven by a few key assumptions, namely: achieving through scale a blended US market share of 2.5% through both acquisitions, channel expansion, market share gains, and same-store growth improvements in a normalized SAAR environment; second, driving SG&A as a percentage of gross profit to below 60% through increased leverage of our cost structure in a normalized GPU environment and optimizing our network; third, continued maturity and growth of our first adjacency, DFC, achieving profitability in the latter half of 2024; fourth, continuing to expand revenue and consumer optionality with Driveway by attracting 98% new customers through a seamless and transparent one-price experience with seven-day return privileges and shipping directly to your home; fifth, GreenCars, educating consumers on sustainable transportation and expanding our penetration levels of electric vehicles; and finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. The above opportunities are now well underway, combined with DMS and FMC design additions, set us up for further growth and profitability in the coming years. In a normalized environment, we can now clearly see the path for significant change where $1 billion of revenue will ultimately generate $2 of EPS. Key factors underlying our future steady state and now totally within our control are as follows: first, optimizing our network and continuing to diversify our portfolio by focusing on acquiring larger stores located in higher profitability regions of the South Central and Southeast US, filling in the Midwest and integrating our international businesses while growing our omnichannel platform and other mobility verticals; second, financing up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves; third, through size and scale, we will continue to drive down vendor pricing, develop competencies internally to save costs and lower borrowing costs as a path towards an investment grade credit rating; fourth, to increase our share of wallet through improving the customer life cycle by leveraging our cost structure to reduce our SG&A as a percentage of gross profit to below 50%; and finally, maturing contributions from other horizontals, including fleet management, software, charging infrastructure, and consumer captive insurance. In closing, Lithia & Driveway provides a unique and unreplicable mobility platform and transportation solutions that deliver great customer experiences throughout the ownership life cycle at a global scale. Our design is durable, diversified, vast, and nimble to meet the needs of consumers with both online and in-store solutions, coupled with financing solutions like DFC. The combination of our strategy and experienced teams gives us the confidence in our ability to eclipse $50 billion in revenue and produce a ratio of $1.10 to $1.20 of EPS for every $1 billion of revenue in the midterm and ultimately over $2 long term. With the completion of the Pendragon transaction, all elements of our original design are now securely in place, allowing us to do what we do best and are known for, and that's execute. With that, I'd like to turn the call over to Chris.

Thank you, Bryan. First off, I'd like to provide an early welcome to the 6,000 associates at Pendragon that will be unifying with our Lithia & Driveway UK operations team to build what will be one of the strongest dealership platforms in the United Kingdom with over 10% market share in the brands we represent. Our strategic vision and commitment with Neil Williamson, our UK regional president, was to ensure that his team has the opportunity to bring our mission of growth powered by people across the Atlantic. With this partnership, we are well underway to solidifying that journey. Since the inception of our plan, we have positioned the organization to ensure that whether in the United States, Canada, or the United Kingdom, our cultures would remain centered on entrepreneurial leadership at the local market level empowered to achieve our high performance. Our seasoned and experienced regional operational leaders remain positioned to drive us towards the future. We remain committed to delivering a customer-centric experience to be the retailer of choice wherever, whenever, or however our customers desire. Focusing on our customers first will always ensure that we provide solutions that create sustainable growth and provide best-in-class returns to our shareholders. Now as it relates to the quarter, overall, consumer demand remains strong for both vehicle sales and service despite the high-interest rate environment and opportunities in OEM production. We believe we are at the late stages of a full production recovery that caused over 10 million units of product that vanished from the North American pipeline because of COVID-19 supply constraints. While the average consumer APR on financed vehicles is up over 200 basis points year-over-year, the average monthly payments remain stable as consumers continue to invest in personal transportation needs at all price levels and incentives continue to accelerate. While a rebound in new vehicle production was impacted, the related depressed production put pressure on used inventory availability. This trend has highlighted the benefits of having a diverse network and over 2,000 used vehicle procurement specialists and a long-standing and disciplined approach to procuring vehicles from multiple channels. Lastly, with the age of the car parked at record levels and the number of units in operation increasing, the tailwind we have to deliver customer-centric aftersales to all levels of affordability will remain strong for years to come. Same-store new vehicle revenues were up 5.5% due to unit volumes increasing 5% and ASPs rising 0.5%. New vehicle GPUs, including F&I, were $6,678 per unit, down from $7,500 in Q1 of this year and $8,165 in Q3 of 2022. We expect this trend in GPUs to continue, resulting in further reduction in margins in line with our outlook that new vehicle SAAR will return to historical levels in the US, UK, and Canada in the next 24 months. New vehicle inventory days supply was 55 days compared to 47 days at year-end and 39 days in Q3 of 2022. High demand inventory that has been slow to reach our lots, particularly among the imports, is improving. Despite the headlines related to the OEM strike in North America, supply for D3 vehicles across our network remains healthy at over 70 days on ground. Shifting to used vehicles, same-store used vehicle revenues were down 8% with unit volumes decreasing 2% and ASPs decreasing 6%. Used car price declines are driven by the availability of later model vehicles and the reduction in several years of new vehicle supply declines. Core product or vehicles three to seven years old make up 50% of our unit sales, and trade-ins for these vehicles are the primary procurement channel for value autos, which makes up 20% of our unit panels. While this has put significant pressure on the procurement of vehicles to meet demand, it also reinforces the competitive advantage we have of being top-of-funnel new car dealers where over 75% of purchases are coming from consumer channels only available to franchise dealers. The competitive advantage enables us to provide the transportation needs to customers that fit their budgets regardless of market economic conditions. For used vehicles, including F&I, GPUs were $3,940, down 14% from last year. Overall, low inventory supply is supporting overall ASPs, but GPUs are seeing variability due to procurement pressure and affordability for consumers when financing vehicles in this environment. We expect GPUs to fluctuate as supply normalizes. Shifting to used vehicle inventory levels, vehicle inventory days supply was 58 days compared to 65 days this time last year. Our physical footprint will soon span over 500 locations worldwide, which combined with the ability to shop, sell, and service vehicles wherever, whenever, and however customers desire, will create massive benefits as we leverage the size and scale of our network and give customers the optionality and experience that they desire. As Bryan mentioned, we are dedicated to creating an international omnichannel provider of products and services that meet a diverse set of consumer needs, and we are still in the early innings of this unrealized opportunity. In the third quarter, Lithia & Driveway's online channels averaged 13.3 million unique visitors, an increase of 34% from the same period last year with advertising spend down 10%. Total e-commerce sales now represent 22% of retail transactions. Driveway's strategic growth and cost structure continue to be refined as we work towards the rightsizing of that business. Brand recognition remains on track as we work towards improving the consumer experience and our product offerings. The average distance to deliver a shop vehicle from our stores is now 800 miles, and most customers have never shopped or serviced with us before. As our physical footprint grows, each location provides the ability to connect with 50 times more customers without the fixed investment as we expand the power and the reach of Driveway. During the quarter, service, body, and parts delivered strong same-store sales, rising 4%, and overall gross profit margin increased 120 basis points. Customer pay, which represents 60% of our aftersales business, was up 3%, while warranty sales were up 13%. As the average age of the vehicles continues to trend higher and the complexity of new vehicles continues to increase, our factory trained and certified technicians will continue to be a coveted asset that will only enhance our omnichannel solutions. Excluding Driveway-related costs, adjusted SG&A as a percentage of gross profit was consistent with last quarter at close to 60% versus 62.7% on a consolidated basis. We remain focused on reducing overall SG&A in our operating model where size and scale combined with technology, improved productivity, reducing overall personnel costs, which will be the catalyst to drive down SG&A to 50% long term. In closing, our team is well positioned to build one of the most dynamic omnichannel growth engines to meet the needs of our consumers. While we have yet to fully capitalize on the unprecedented size and scale we have created, we will continue to stay focused on execution that results in exceeding our goal of delivering $2 in EPS for every $1 billion in revenue.

Thanks, Chris. The financing operations segment had a disciplined quarter and narrowed our quarterly operating losses. We executed on our core competencies. DFC originated $502 million in loans in the quarter, and the portfolio now exceeds $3 billion. We hit another milestone as our weighted average APR on loans originated in the quarter hit 10%, up 50 basis points from the prior quarter and 240 basis points over a year ago. This was achieved without an impact to credit quality as the weighted average FICO increased 2 points from the prior quarter to 732. In addition, the weighted average front-end LTV decreased slightly from the prior quarter to 95.6%. For the quarter, we had a 9.7 penetration rate declining from the second quarter, primarily due to our focus on increasing yield rates and to move in line with our top-tier competitors that we benchmark to. Penetration was also impacted by increasing rate subvention from OEM captive lenders, taking our new vehicle mix down to 24% in the quarter. We monitor the overall auto lending ecosystem, and DFC's underwriting standards are consistent with the rates and structures being offered by lenders in Lithia & Driveway's extensive network. As such, DFC's lending practices have not impacted LAD sales volumes. Third-quarter net interest margin increased to $29.9 million as our weighted average APR in originations moved higher. Cost of funds benefited from amendments to our warehouse facilities and the maturation of our capital structure. We now have 84% of our portfolio funded via ABS term issuances for our warehouse facilities as of the end of the quarter. Net provision expense decreased from the prior quarter to $23.1 million, and the allowance for loan losses as a percentage of loans receivable stayed flat at 3.2%. The increasing credit quality of recent originations along with the impact of decreased origination volumes have outweighed the volatile current macroeconomic environment. 30-day delinquency rates were flat from the prior quarter at 4.1% and down 1.9% from a year ago, reflecting improved portfolio credit quality. We expect that by early 2024, the performance of more recent vintages will offset the negative headwinds resulting from the 2021 and early 2022 vintages that are most exposed to the decline in used vehicle pricing. Overall, the financing operations segment had an operating loss of $4.4 million for the quarter and losses sit at $43.8 million year-to-date. While we are still in the startup phase, we remain confident in our path to profitability and that we are tracking to break even towards the latter half of 2024 and will be profitable on a monthly basis exiting next year. We are confident that DFC will realize $650 million of earnings in the LAD future state from a fully mature portfolio and a $50 billion LAD revenue base. With that, I'd like to turn this call over to Tina.

Thanks, Chuck, and thank you, everyone, for joining us today. In the third quarter, we reported adjusted EBITDA of $457 million and $1.8 billion for the trailing 12-month period. This result was driven by strength in new vehicle demand and service and parts, offset by the impact of declining new vehicle gross profits with returning supply, higher floor plan interest costs, and investments associated with our adjacencies. We ended the quarter with net leverage, excluding floor plan and debt related to DFC at 2 times, up a little over a quarter of a turn from the second quarter. During the quarter, we generated free cash flows of $261 million and $870 million year-to-date. We continue to maintain strong cash flow generation and a disciplined balance sheet as we execute our growth plans. Our capital allocation strategy targets 65% toward acquisitions, 25% directed to internal investments, including capital expenditures, and 10% for shareholder return in the form of dividends and share repurchases when they are appropriate and opportunistic. Our acquisitions completed during the quarter were funded through using free cash flows from operations and through our working capital facilities. We maintain our targets and financial discipline with leverage below 3 times, even with the purchase of Pendragon expected to occur in the fourth quarter. We're confident in our ability to achieve an investment grade rating over time. However, in the near term, we are prioritizing growth and acquisitions to drive our long-term strategy. Our goal is to fund the growth strategy and investment in adjacencies as they mature while maintaining a strong, disciplined balance sheet structure. One of the unique elements of our strategy is the resilient annual cash flow generation of our existing business and our ability to ensure acquisitions are cash flow accretive on day one. We see significant synergies in deploying our capital towards growth as we build out our network, expand the markets we operate in, and invest in adjacencies that provide consumer-centric solutions for the full vehicle ownership life cycle. Our team is headed towards achieving our revenue goals and margin expansion to have LAD's EPS to revenue ratio producing $1.10 to $1.20 in earnings per share for every $1 billion in revenue and in the longer term, generating $2 in earnings per share. As demonstrated by our achievements over the past few years, our culture of growth and high performance, coupled with the talents of our teams, gives us the necessary tools to achieve our plan and create value for our shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the audience for questions.

Our first question comes from Daniel Imbro with Stephens.

Bryan, I'll try to follow the rule to keep it to one question or at least one topic, but yes, I wanted to maybe focus on Pendragon a bit. I guess you said in the slides you still expect it to close in the fourth quarter. Can you maybe talk about the path forward to getting the deal closed, what are the upcoming dates or important things to keep in mind? And then stepping back from just the near-term accretion, there's obviously a lot of pieces of the asset. There's the Pinewood system, there's growing the technology, there's fleet. What excites you most? What do you see as the most near-term opportunity for financial accretion and strategic rationale? What are the longer-term pieces? Can you just provide more detail on kind of strategically how you view all the different assets of Pendragon?

As you noted, there was a circular battle in the United Kingdom instead of a proxy battle. We received the final vote results from shareholders about five hours ago, which is fantastic. Seventy-two percent of the outstanding shares were voted, and the approval rate was an impressive 99%. This shows that everyone recognizes that transitioning to a software-as-a-service model is the right move and ultimately supported our deal. Moving forward, we just need FCA approval, and we anticipate closing towards the end of Q4 or, at the latest, early Q1, depending on the FCA's approval of the overall transaction. We've done our preliminary work, so we expect a smooth process. Once we reach that stage, there will be several components to consider. Our primary focus is on transitioning Pinewood Technologies, led by Bill Berman, who will drive marketing and growth. As indicated in our recent press releases, this software company is set to expand rapidly on a global scale beyond North America. We have already received verbal commitments from three of the top ten major groups in the UK to collaborate with us, along with another group likely to join. Additionally, we will be expanding our platform across Western Europe, marking the first phase of our software company's development. Regarding the North American joint venture, we have a development plan in place, but it may take one to two years before we launch and can monetize it effectively. This is essentially a strategy to connect and optimize our $110 million tech stack costs and integrate the fundamentals of our strategy, which differ from many competitors. The significance of the Pendragon transaction for our future cannot be overstated, as it establishes two key pillars of our growth strategy out of the initial four or five we've developed. First, the software component positions us in a high-profitability space while giving us a pathway to optimize our cost structures. Second, Pendragon Vehicle Management, our fleet management division, is also a high-margin business that fosters significant synergies with automotive retail, service, vehicle procurement, and divestiture. This integration represents two crucial aspects of our strategy. Additionally, it brings in $4.5 billion in revenues, supported by high-end and mainstream dealerships, giving us a nearly 10% market share in the UK luxury brands sector. Moving forward in the UK, our growth potential is mainly tied to brands like VW, Toyota, and expanding our relationship with BYD, which already covers about a third of southern UK where Pendragon operates. Our focus will then shift back to North America, where we aim to build a network targeting a $60 billion to $70 billion optimized footprint, ensuring we create a comprehensive platform for our customers throughout the vehicle lifecycle. I realize that was extensive, Daniel. I hope that provided the insight you were looking for, and I'm open to any quick follow-up questions.

It did cover it, yes. And then if I could, just a quick follow-up, maybe just on the US business. With the ongoing strike, you guys have decent domestic exposure. What have you seen here maybe progressing into October? We've heard anecdotes of parts availability issues and discounting slowing as inventory works down. Just how are you guys planning for that here in the fourth quarter? What are the puts and takes as you look at the rest of the year from the ongoing strike?

I think most importantly, believe it or not, our D3 inventory sits still above 70 days supply on the ground, okay? And in transit, we're still sitting at the same amount we were six weeks ago before the strike. Both of those numbers are consistent. So we look pretty strong going into the year and we'd encourage that we try to find a middle ground. So in the future, in Q1, we've got some inventory sitting out there. I will say this. If you remember and go back, Lithia at one time was three quarters domestic unit sales. Today, Lithia only sits at 23.9% domestic unit sales, okay? So we've flipped it on its head. And now with the international expansion as well as luxury and import expansion domestically, we don't have as much exposure as we used to. And again, we sit pretty nicely right now with units on the ground, and let's hope for some type of reconciliation over the next four to five weeks.

And on the parts side, has there been any change in parts availability for your service progress?

Yes, so we have the highest level of parts inventory that we've seen in the last six months. So what the production ramp-up has done is given us parts on the ground, I think, preparing for the expected kind of decline in overall parts in the coming kind of quarters. No line of sight on what that's going to look like, and I understand that there's a lot of training going on right now to kind of make sure that we can keep as many of those parts coming into our stores as possible. I think the pressure that we have right now is more on special parts, kind of fast-moving parts, special warranty-related parts that are supplies are being strained. But it's too early really to judge the impact on that when you're seeing overall warranty up 13%.

I just wanted to follow up on that inventory question. Outside of the D3, how does your inventory stand? And how many sales do you think you're kind of losing or not fulfilling because of that tight inventory in the US?

The current demand is strong for both new and used vehicles. However, the main challenge we're facing is affordability. With rising interest rates, most of our consumers have a FICO score below 720, which affects how we manage pricing since overall average payments are holding steady. As production declines and the average selling price of trim packages decreases, we expect to see new vehicle sales returning to the 16.5 million to 17 million SAAR range we experienced for five consecutive years before the pandemic. Meanwhile, many customers are opting for the used market to manage their payments. We've lost 10 million units in production, which has created a strain on the availability of late-model vehicles. We believe our position as a leading new car dealer—where 70% of our vehicles come from trade-ins—gives us a significant advantage. This helps us avoid sourcing vehicles from areas where prices are inflated to fill inventory. While we experienced some pressure on used car gross profits this quarter, this situation is likely to persist as we focus on maintaining volume despite the impact on pricing, which affects our reconditioning and finance and insurance operations.

And if I could sneak one follow-up. On SG&A attach rate to GPU, so as GPUs come down, there's some natural attach rate on SG&A or sales comp without you taking any specific actions to lower SG&A or execute incredibly well. Can you kind of remind us how you think about that SG&A attach rate as GPUs on new slowly fade here?

Our primary focus is on throughput. In favorable conditions, we anticipate that 50% of gross revenue increases will contribute to the bottom line. This principle also applies during downturns. We've seen a $100 million decline in gross year-over-year this quarter, while our overall variable expenses decreased by approximately $47 million, which is around 50%. The challenge arises when we exert significant pressure on GPU, particularly regarding unused products, as we continue to pay sales associates to sell older inventory that may not be as profitable. This can sometimes create a short-term mismatch with some products. We're committed to addressing this. Utilizing technology to enhance productivity while maintaining above-average pay and performance is our goal. We see opportunities in this area that we will pursue in Q4 and into the next year.

I just had a question on Driveway performance in the quarter. You mentioned in the prepared remarks that the SG&A to gross, excluding Driveway, stayed flat sequentially. Previously, we had assumed that the Driveway losses were coming down, maybe like from $15 million monthly to more like $5 million to $10 million. I mean, curious how that progressed through the quarter. Was it an incremental headwind? Any color on that to dissect the SG&A performance would be helpful.

We are making significant progress with Driveway. The burn rate has remained consistent mainly because the gross profit margins on used cars have slightly decreased. We have successfully reduced our expenses in Driveway by over 20%, which is a substantial achievement. Our goal is for Driveway to serve as a consumer portal, enhancing engagement significantly. We are experiencing more traffic than we can manage, with over 3 million unique visitors each month. Currently, Driveway functions primarily as a financing source; however, we want it to enhance the user experience. Customers are drawn to Driveway not only for financing options but also for its convenience, simplicity, and the sense of empowerment it provides. There is still work to be done, but it's exciting to see the developments at Driveway. Additionally, our incubator, GreenCars.com, is achieving notable success. We are investing about $150,000 to $200,000 per month in marketing, which has resulted in over 700,000 unique visitors. These visitors are researching and purchasing cars at Lithia at a rate of about 1,200 per month. There is minimal connection between GreenCars and our dealerships. If we consider Lithia's market share, it could indicate that GreenCars has the potential to attribute sales to about 75,000 units a month. We are also exploring ways to monetize the educational aspect of GreenCars as consumer interest in sustainable transportation grows.

And then just on DFC, we've seen some widening in spreads in the ABS market. Benchmark rates have also gone up. Does that in any way change your thinking around DFC penetration in the near term? Or perhaps some other way to ask is, how much flexibility do you have to manage to your full year guidance or the fourth quarter guidance as well as the 2024 guidance for DFC without hurting financing availability for your customer base?

So first, as we've been saying it also in my prepared remarks, our penetration rate did come down to 9.7 this quarter. And for many of the reasons you cited, we're really focused on increasing our yields, making sure that we maintain our discipline in terms of our credit underwriting standards, and then supporting our stores. And we feel like our value proposition to both our customers and to our stores for right now in terms of just letting our portfolio season, making sure that we focus on maintaining our discipline is more important than, say, achieving a specific penetration rate. Relative to your second part of your question, I don't see any real material impact to maintaining our guidance between now and the end of the year. Obviously, that's subject to change if there are other sort of macroeconomic factors that come up in the fourth quarter. But I think we can be fairly comfortable that in the next 65 to 80 days, we should be able to continue the path forward.

A specific question if I look at Slide 18 and the mix of CPO versus core versus value. Looking at those ROI expectations from a year ago tied back to this one, as you'd expect, the ROIs are down for CPO and core; it's actually up for value autos. So I guess my question is, are you seeing improved GPU on value autos despite the more competitive broader narrative around the used market overall?

I think what you're seeing mostly on that chart is that the turn rate is going up. So as that supply continues to be pressured and you're going to see the same thing happen in core on the 10 million units that Chris was talking about. When that bubble moves in or that lack of bubble moves into core, we're going to see the same thing that our turn rate is going to go up. We're going to have to be more efficient. And as you know, I mean, we do procure almost three quarters of our vehicles directly from consumers, whether it's through off-lease, whether it's through purchasing directly from consumers or whether it's through trade-in.

And then my follow-up question. Just as you think about the 2025 targets, you're reiterating them in the slide deck here, but curious how much of an impact. We know kind of the puts and takes between Driveway and DFC and the core business and M&A, et cetera. But one that is probably a bigger focus now is the rising interest rates. I guess, how much does that impact net income and profitability? And what are the assumptions if rates keep going higher on your ability to achieve that 2025 EPS target?

I may let Tina follow up with it on the interest costs. I think most importantly, we have now all the foundation that we originally designed into our plan back in 2017. So our ability to achieve the 2025 targets, when we're producing over $1.2 billion, $1.4 billion in capital, the interest costs do impact things and do change the calculus on whether to buy shares back or whether to buy businesses or whether to expand on the adjacency and the design. But today, we have everything in place that we need ultimately to achieve the $2 in EPS for every $1 billion in revenue. Now that's a steady-state basis. If you remember in the prepared remarks, we talked a lot about the driving forces behind that. But in terms of where the market looks, the biggest driver of achieving that 2025 target is really the ability to get the acquisitions and then execute today. Now also remember that we're assuming that's a 17 million SAAR and it's a normalized environment, okay, and we've always been very clear about that. But ultimately, that's really a short to midterm part of the game today. Our design isn't really focused on 2025 any longer. It's focused on $2 of EPS for every $1 billion of revenue, and we'll let your minds wander on what that can do. And we've got that now earmarked between the DMS, the fleet management, Chuck's area in Driveway Finance Corporation, plus so many other things that when you have an ecosystem as large as ours now, it's about figuring out how to connect the dots in the ecosystem to make sure that we maximize that performance to get below the 50% SG&A as a percentage of growth. Anything on interest rate?

Just to add to that, when we think about our return metrics when we're looking at deployment of capital, we are factoring in what the interest rates are, and our hurdle rates have remained similar. So if you think about the acquisitions that we're looking at and the capital and the profit accretion that we're looking at, that is factoring where rates are today and the higher for longer sort of tone out there. So that's baked into how we think about our approach for capital deployment as well.

I wanted to follow up on Driveway specifically. I heard in the prepared remarks that awareness for Driveway and brand recognition are on track. Can you provide more details on awareness and brand recognition? Additionally, Bryan, you mentioned that Driveway is getting more traffic than we can handle or expected. Please elaborate on that in terms of potential upsides, downsides, and your approach to managing that traffic.

I think in terms of awareness, the experiences on Driveway are quite accepted by our consumers. And again, these are new consumers of Lithia; over 98% of the consumers haven't done business with us in the last 1.5 decades. So their awareness is growing relative to what our typical store network looks like. The issue still is that we're not really getting repeat and referral business yet, even though we're now pushing almost three years in activity; that's because we have an acute focus on shop and sell and need to expand it into the life cycle and ownership experience post-sale. And we've done a lot of the geofencing; we built a lot of the aftersales models. We just need to activate them within Driveway and within the network to create greater attachment to the brand. In terms of the traffic, I think as a young digital retailer, it does take time to build your sales centers to focus on the customers' needs. And I think it's imperative that we, as traditional retailers as well, don't let that pollute our processes and keep it pure with our consumers. Our consumer acceptance rates are quite high. I think we're at 4.4 on Google Scores, which is up from where we were about a year ago at 4.2. I believe that it could be 4.8 or 4.9 if we can just create this ecosystem in Driveway, like we have in the store that's more physical, where it's actually playing in the stores or in the consumer's house in the same way that we do in the stores. And that's going to take a little bit more coding and a little bit more repeat and referral business. But ultimately, the traffic is overly strong, and our care centers are still learning which customers are the best to be able to focus on when there's that much traffic there. Chris, was there anything else that I missed?

No, Bryan, I just think you nailed that you have shop and sell, and then you have service parts, you have your Driveway Finance products. And then eventually, making the connection with RV and kind of the motorcycle businesses that we have. I think that the sky is the limit, but we just have to stay focused on kind of one tactical execution at a time. And as Bryan said, we have some opportunities there to continue to improve that experience.

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Amit Marwaha for closing remarks.

Thank you, everyone, for joining us today. We’ll look forward to speaking to you over the next couple of weeks. Look forward to seeing you next quarter. Thank you.

Bye, all.

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