Greetings, and welcome to Lithia Motors First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Amit Marwaha. Thank you. You may begin.

Thanks for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; Chuck Lietz, Senior Vice President of Driveway Finance; and finally, Adam Chamberlain, Chief Customer Officer. This 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 first 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 first quarter earnings call. Our Lithia & Driveway teams remain focused on driving results and continuing on our journey to building a unique and highly profitable customer ecosystem. For LAD, the windfall of elevated GPUs for the past four years provided the extra capital that allowed us to grow revenue and earnings by nearly 3 times and build, acquire, and fund all our crucial differentiating strategic adjacencies: Driveway, GreenCars, DFC and Pendragon Vehicle Management, or PVM. These important design and scale advantages have built a definitive pathway to a higher margin and lower cost business. While the extra capital helped us build out our advantages, we have been clear that elevated GPUs would return to some level of normality. We remain diligent and nimble throughout this normalization process, still seeing that combined vehicle GPUs because of geographic and manufacturer mix improvements, along with our unrealized performance potential, will normalize between $4,300 and $4,500 per unit. As strange as it may seem, my team and I welcome normalization and getting back to working for our profits through providing rich and irreplaceable experiences one customer at a time. Our current global footprint, core competency of acquisitions, growing high-margin adjacencies, and experienced operationally focused leadership at all levels of the organization combined to form our strategy. We are positioned to deliver strong growth through reinventing our industry's customer experiences and achieving a LAD profit equation of $2 of EPS for every $1 billion of revenue. Now on to some highlights for the first quarter. Lithia & Driveway grew revenues to $8.6 billion, up 23% from Q1 of last year, helping outrun some of the declines in GPUs. Vehicle operations experienced weaker performance in January and February with declining new vehicle GPUs and used vehicle GPUs at below normalized levels. March, however, did improve, exceeding our internal expectations with good momentum in unit volumes and stronger used vehicle GPUs. Our investments in adjacencies are maturing as well as the path to profitability. Financing operations produced strong results with a loss of less than $2 million in the quarter compared to a $21 million loss last year—over 90% improvement. Driveway and GreenCars burn rates have also been cut in half compared to a year ago as we continue to refine our customer e-commerce strategies, improve Driveway care center and advertising effectiveness, while continuing to convert new customers. As a result and driven by macro market conditions, we generated adjusted diluted earnings per share of $6.11, a decrease of 28% from Q1 of last year. We continue to proactively manage our business with decisive actions aligned with local market and manufacturer partner trends, leaning into what we know best: execution. Let's move on to same-store sales results and vehicle operations. Total same-store sales revenues were down 2%, driven by ASP declines and gross profits declined by 7%. Despite continued affordability issues from ASPs and higher interest rates, we continue to see resilience in the automotive consumer, though a bit less willing to pay a premium. MUVs across all our digital channels increased 9% quarter-over-quarter, reaching $12.3 million per month. Digital transactions including Driveway grew to over 40,000 in the first quarter, up 32% compared to last year. GreenCars, the leading sustainable vehicle education channel, continues to grow as the lead generation channel and contributed over 730,000 MUVs, up 71% over last year, doing so with very little expense. Our teams have made great strides towards profitability in Driveway and GreenCars, and I want to commend Adam Chamberlain and Dianna Du Preez and their teams on the progress we have made in such a short time and their vision to achieve a profitable e-commerce channel someday soon. New vehicle revenues were up 2% while gross profit declined by 27% compared to the prior year. Unit volumes increased nearly 4% with ASPs declining by 1%. New vehicle GPUs, including F&I, were $57.71 per unit, down $512 compared to Q4 and down $1,640 or 22% year-over-year. With the return of inventory supply, we have seen an accelerated pace of GPU normalization to nearly $150 per month. New vehicle inventory day supply was 60 days compared to 65 days at the end of Q4 and 51 days at the end of the first quarter 2023. Moving on to used vehicles. Revenue was down 5% with units down only 2% and ASPs declining 3%. Used vehicle pricing is moderating in line with the recovering supply of new vehicles, and we continue to see the impact of lost production from 2020 to 2023, moving through our certified and late-model vehicles. Used vehicle GPUs including F&I were $3,901, up $150 per unit compared to Q4 and down $153 per unit compared to last year. As you may recall, Q1 and Q4 are traditionally the weakest quarters, and we are seeing more normalized seasonality trends in used cars. As new vehicle retailers, we are positioned at the top of the procurement funnel, giving us significantly more access to inventory than used-only dealers. This provides us a significant advantage as we continue to source over 70% of our used inventory directly from consumers. Our strategy of selling 1- to 20-year-old scarce vehicles also provides a vast opportunity to our new stores. To put this in perspective, nearly two-thirds of our stores have been recently acquired, and this continues to be a massive opportunity for us to gain market share and increase profitability. Our used vehicle inventory day supply was 58 days compared to 64 days last year and 53 days in the previous year. F&I per unit was $2,080 in the quarter, declining by $123 compared to last year. We continue to see consumers working to balance affordability due to higher ASPs, increasing negative equity, and high interest rates. This has created some affordability tension on monthly payments impacting F&I product penetration rates positively on financing, up 150 basis points, and negatively on service contract penetration rates, which declined by 270 basis points as compared to last year. Now on to aftersales. For the quarter, revenues increased by 3% and gross profit increased by 7%. Customer pay revenue, which accounts for 56% of the aftersales business, was up nearly 3%. While warranty sales, which make up 23% of the business, increased by 10%. Aftersales continues its steady performance of growth despite our primary driver of 1- to 4-year-old vehicles in the car park being the smallest in over a decade. This speaks volumes to strong upside created from the complexity of a growing number of different propulsion systems, resulting in longer warranty periods and a stickier customer attachment to new vehicle retailers. Moving on to acquisitions and our long-term strategy. We completed the Pendragon acquisition at the end of January, establishing our partnership with Pinewood Technologies, adding a profitable fleet management business and rounding out our footprint in the U.K. by adding a net 140 locations. In addition to Pendragon, we expanded our U.S. footprint in our least dense North Central region with the addition of the Carousel Group. To date, in 2024, we have acquired $5.4 billion in annualized revenues, and I would like to personally welcome all our new associates to the Lithia & Driveway family. Acquisitions are our core competency at LAD, and we remain disciplined as we look for accretive opportunities that can improve our network. As a reminder, we target after-tax returns of 15% or greater and acquire from 15% to 30% of revenue or 3 to 6 times normalized EBITDA. Life to date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%, demonstrating that LAD is not your typical high-risk roll-up strategy. Our scale allows us to find our growth through acquisitions and adjacencies through free cash flows and reasonably leveraging our balance sheet. With elevated acquisition pricing, current stock valuation, and placing M&A and share buybacks at parity, we have adjusted our capital allocations to target 50% to 60% towards acquisitions and 15% to 25% towards shareholder returns. We continue to monitor valuations on both acquisitions and share repurchases, being patient for strong assets priced within our acquisition hurdle rates. We still expect pricing to take some time to rationalize and reiterate our expectations that estimated future annual acquired revenues will be in the range of $2 billion to $4 billion a year. The foundation of the LAD strategy is our vast store network made up of the industry's most talented people, highest demand inventory, and dense expansive physical network. We have built and will continue to build the most extensive network in North America and the U.K. and added important foundational adjacencies and strategic partnerships to modernize the customer experience and diversify our profitability. Operating in one of the largest retail addressable markets in the world, we have built and solidified our ability to continuously grow in all aspects of our business. Expanding consumer solutions that are simple, convenient, and transparent is the heart of our strategy, allowing us to capture more of the consumer wallet share and create a sticky and natural retention of consumers within our ecosystem. Magnetic brands like Driveway and GreenCars provide a pathway to 50 times more customers than our core business offer. Solutions such as Pinewood Technology bring the ability to increase associate productivity and substantially improve our current customer experience, stitching together our robust ecosystem and placing it at our customers' fingertips. Combined with our mission, growth powered by people, financial discipline, and regenerative free cash flows, we are able to respond quickly to local market dynamics while increasing the touchpoints throughout the customer lifecycle through our adjacencies and equipping our stores with the necessary tools to improve market share, loyalty, and ultimately profitability. Weaving these elements together and assuming a normalized SAAR and GPU environment, we continue to see a clear pathway to $1 billion in revenue, ultimately generating $2 in EPS. Key factors underlying our future steady state and now totally within our control are as follows: first, continuing to improve our operational performance by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer lifecycle interaction, leveraging our cost structure, personnel productivity gains, and growing each store's new, used, and aftersales market share. In the long term, we look to achieve an SG&A as a percentage of gross profit with adjacencies in the mid-50% range in a normalized GPU environment. Tina will be providing more color on the impact of our U.K. footprint on SG&A in a few moments. Second, continue focusing on acquiring larger automotive retail stores and the higher profitability regions of the Southeast, South Central, and North Central United States. Combined with further growth in digital channels, we expect to reach a blended U.S. market share of 5%. Today, we are at a combined new and used vehicle market share of 1.2%. Third, financing up to 20% of our units with DFC and maturing beyond the headwinds associated with CECL reserves. As a reminder, this is our first adjacency and it remains on track to achieve consistent profitability during the latter half of 2024. Next, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure, and captive insurance. Fifth, through size and scale, we will continue to drive down vendor pricing with solutions like Pinewood Technologies, which improved corporate efficiencies to save costs and lower borrowing costs as we pathway towards an investment-grade credit rating. And finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks. Please refer to Slide 14 of the LAD investor presentation for further details and reconciliations. As we approach the middle of the decade, we are well positioned to maximize our unique and powerful mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership lifecycle at global scale. Our strategy combined with our experienced and focused team will continue to expand market share, leverage our size and scale, and grow our complementary adjacencies to produce an ultimate long-term EPS to revenue ratio of over 2:1. All elements of our original design are now securely in place, and we look forward to focusing all of our attention on execution to establish new levels of performance for our industry. With that, I'd like to turn the call over to Tina.

Thanks, Bryan, and thank you to everyone joining us today. Our financing operations segment, primarily driven by DFC, continues to grow, and we see clear line of sight on how this adjacency is now providing incremental profitability and diversifying our business model as it matures. As a reminder, a loan originated by DFC is expected to contribute up to 3 times more profitability compared to traditional indirect lending. The financing operations segment moved toward profitability with a first quarter operating loss of $2 million, down from a $21 million loss last year in Q1 and a portfolio balance growing to over $3.5 billion. Within the United States, DFC's penetration rate was 11.7%, up from 10% last quarter. We continue to strategically balance yields growth and risk through our underwriting and focus on high credit quality loans at market interest rates. Origination volume was $493 million during the quarter, a 15% increase compared to Q4 2023. The weighted average APR on loans originated was 10.2%, essentially flat compared to the prior quarter and up 124 basis points from a year ago while originating at a consistent credit quality. Loans originated in the quarter had a rated average FICO score of 735 and a front-end Loan-to-Value ratio of 95%, consistent with the prior quarter. As a 100% captive auto loan portfolio, DFC can have first and last look on deals that fit our credit risk appetite, providing ample opportunity to grow while maintaining our underwriting standards, particularly in the used vehicle market. Net provision expense increased slightly from the prior quarter to $25 million, driven by the growing portfolio. The allowance for loan losses as a percentage of loan receivables stayed flat at 3.2%. 30-day delinquency rates decreased by 80 basis points from the prior quarter to 3.8%, consistent with seasonal expectations and were flat year-over-year, reflecting the maturing portfolio and continued execution from our loan servicing team. Our financing operations business continues to perform as expected, and we reiterate our expectation to break even in 2024. We remain confident in the financing operations' ability to deliver long-term earnings growth to LAD and achieving our end-state financial goals with a fully scaled and seasoned portfolio. Simply put, the best is yet to come as this first adjacency can take us a long way towards our 2:1 EPS to revenue target. Moving on to SG&A. Adjusted SG&A as a percentage of gross profit was 69.4% during the quarter, mainly reflecting the higher expense profile of our U.K. business. On a same-store basis, which excludes the impact of the Pendragon stores and is more representative of our historical performance, our adjusted SG&A as a percentage of gross profit was 66.9%, a 180 basis point increase sequentially from the fourth quarter, mainly driven by declining new vehicle margins and below normalized level used vehicle margins early in the quarter. With the completion of the Pendragon transaction, our U.K. business represents 18% of our revenue mix and 13% of our gross profit mix in the quarter. We thought it would be helpful to provide some early insights on the financial profile of our U.K. business as it becomes a more meaningful part of our consolidated results going forward. Total vehicle gross profit per unit in the U.K. was $2,600 in the quarter, 45% lower than our North American vehicle operations. One of the main contributors of this difference is regulations around F&I in the U.K., resulting in a lower F&I per unit. Gross profit mix from aftersales is similar in the U.K. at just under 40%. Our U.K. footprint is comprised of smaller stores compared to our average North American location with a revenue average of less than $50 million per store. While knowing this leading into the investments, the smaller store size with SG&A being more fixed in nature, resulted in SG&A as a percentage of gross profit at 85% during the quarter for the U.K. As a result, we see our consolidated SG&A as a percentage of gross profit increasing to the mid- to high 60% range in the near term with our long-term targets moving to be in the mid-50% range as GPUs normalize, and we continue to optimize our business and mature our adjacencies. We see an opportunity to increase profitability over time in the U.K. as we fully integrate the teams into the Lithia & Driveway culture, migrate our stores into a single platform on the Pinewood DMS system, and drive higher levels of performance. As previously discussed, we are actively working on optimizing the U.K. network. Moving on to our balance sheet and cash flow performance. During the quarter, we completed an amendment to our main credit facility used to fund our vehicle floor plan and working capital, increasing the capacity from $4.6 billion to $6 billion and extending the maturity to 2029. This solidifies our capital structure to take us beyond $50 billion in revenue. I want to take a moment and thank all of our banking partners for their support and continued confidence in our business. We reported adjusted EBITDA of $362 million in the first quarter, driven by continued strength in new vehicle sales and aftersales, offset by lower new vehicle GPUs with returning supply and higher floor plan interest expense. Unique to our industry is the financing of vehicle inventory with floor plan debt. This finance is integral to our operations and collateralized by these assets. The industry treats the associated interest as an operating expense and EBITDA and excludes the debt from the balance sheet leverage calculation. Similarly, as we have ABS warehouse lines and ABS issuances to capitalize DFC, we exclude those from our leverage calculations. Adjusting for these items, we ended the quarter with net leverage of approximately 2.25 times, comfortably below our target of 3 times and our banking covenant requirement of 5.7 times. We continue to maintain our financial discipline even with planned growth and target leverage below 3 times. During the quarter, we generated free cash flows of $218 million. We define free cash flows as EBITDA adding back stock-based compensation less the following items paid in cash: interest, income taxes, capital expenditures, and dividends. Free cash flows were impacted by the declining EBITDA and an increase in capital expenditures compared to the prior year, mainly related to construction at recently acquired locations to meet manufacturer requirements. The benefits of our capital allocation strategy is the regenerative cash flows generated from our business, allowing us to preserve the quality of our balance sheet while supporting our growth initiatives and navigating various cross currents in today's environment. Being responsive to valuation trends, we evaluate M&A opportunities in the near term on parity with being opportunistic in our share repurchases. We have adjusted our capital allocation strategy to target 50% to 60% toward acquisitions, 25% toward internal investments, which includes capital expenditures, and the balance of 15% to 25% toward shareholder return. Since the end of the quarter and as of the end of last week, we have repurchased approximately 58,000 shares at a weighted average price of $264. Approximately $452 million remains available under our share repurchase authorization. Our vision and ability to deliver on synergies through acquisitive growth remains unchanged, and our strategy is flexible with the consistent cash flow generation of our vehicle operations business, coupled with our ability to deliver on accretive acquisitions. The team has the necessary infrastructure and tools to drive revenues and margins toward our long-term target of achieving $2 in EPS per $1 billion in revenues and are focused on execution. Our culture and business is designed to grow and deliver consistent strong performance, and our diverse and talented members of our team give us the necessary foundation to achieve our plan and to continue driving 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 Ryan Sigdahl with Craig Hallum.

I want to start on new GPUs. They declined a little bit more sequentially, I think, than you guys and us expected. But curious what you've seen in April. And then any expectation kind of for the next several quarters through the rest of this year?

Sure, Ryan. Thanks for joining us today. We did see a slight acceleration to around $150 a unit in the quarter. We also had imports up, which were up about 9% in revenues and units which carried some of that, which is typically a little bit lower cost cars, doesn't have quite as many trucks. So that could have been some of the influence there. The other thing I would say is we're still at about $1,000 higher, including F&I, of where we believe normalization will finally fall into line, okay? And there's still some work to go. We also have a small amount of regional differences. But all in all, I mean, that's where it started with really, the top level where GPUs fell a little bit more than what we really expected at the $100 a month.

Good. And if I could just ask one longer-term question. If I'm looking at Slide 14, kind of the bridge to that $100 billion of sales, $1.75, $2 of EPS. If I look back to the previous expectations, operating margins were expected to be 7% plus, now 5% plus. I guess, what's the offset there, assuming lower operating margin but similar EPS flow through?

Sure. About half of that is due to the addition of Pendragon, which impacted margins from the United Kingdom. The remainder is likely due to more conservative factors, including other items that could affect operating margins, such as interest costs or possibly buybacks.

Our next question comes from Bret Jordan with Jefferies.

Could you talk a little bit more about F&I? I mean, obviously, it's hard to attach extended warranties to customers that can barely afford the rate side of the equation. But do you see much downside in F&I? Or are we sort of stable at the run rate in the first quarter?

We experienced a decrease of $124 per unit, with new units down by slightly more at $180. We're observing improved incentives related to fleet and finance, which impacts our profitability due to flat fees. This factor contributes to the situation. Additionally, as we continue to expand our penetration with DFC, it also plays a role. Our penetration rate has reached approximately 11.5%, which is encouraging. However, this is primarily in finance. When we do not receive reserves from our third-party lenders, it slightly reduces our gross profit per unit. We estimate that a normalized state is likely around the $1,900 range, as there will be some effects from average selling prices, where a lower cost structure results in lower finance income. Despite this, we are noticing a positive trend towards achieving that normalized state.

Okay. And then you talked about the trend in the quarter of January, February seeing some below normalized levels and March improving. Could you talk about the U.K. trend in the quarter?

Chris, do you want to talk about the U.K.?

Yes, you bet. Bret, so U.K. kind of has an anomaly every quarter, and the anomaly in the first quarter tends to be a massive March with a lot of deliveries with the plate changeover that you have. So you have a kind of a very modest January, a very modest February and then a monster March, and that came to fruition like we expected. The focus, though, longer term, is obviously to continue to figure out how to get more consistency in the business in each of the quarters and try to match a little bit more relative to some of the performance that we see in the U.S. outside of the F&I performance, which is much more regulated in the U.K. than it is in the U.S.

Okay. And Bryan, a follow-up question, is leasing going to be a headwind to F&I because there's just less attachment as leasing comes back? Or is that not material for you?

It is, and that was one of the things that I had mentioned, that with subvented leasing, and that's where a lot of the incentive dollars are still going, we're basically at a normalized state of incentive dollars in leasing, which obviously is in flat fees. So it does impact our F&I. I think it's important to also point out that finance incentives are still off some as well. So they're about half of where they normally are, which means that those finance customers still aren't getting quite the benefits of manufacturer incentives of lower, more affordable pricing. And then most importantly, for cash buyers, it's still down like 80%, meaning that the incentives that are coming on the hood for cash directly to the consumer is still down considerably. And I think that obviously can be good tailwinds in the future as that begins to come back.

Our next question is from John Murphy with Bank of America.

I just wanted to follow up on the comment you made, Tina, about sort of some pressure on the used business early in the quarter. And it just seems like there's pressure on used vehicle pricing which has been reasonably as expected, but it also seems like there's a bit of volatility in that business. I was just wondering if you could kind of expand on that. And if there's anything that is unusual in the first quarter that might normalize going forward? And it just sounds like things are a little bit more volatile there than usual.

Yes, John, it's Chris. I want to address the trend we discussed in Q4. I mentioned that we were in a tough spot trying to acquire used cars during that period, which increased pressure on our margins in the latter half of 2023 and into the early months of 2024. Our teams have adjusted to ensure that each vehicle we take in trade produces about $1,800 more than what we pay at auction, which has become a significant focus for gross profit dollars. We observed a continued recovery throughout Q1, particularly in gross profit per unit, with March showing the strongest results we've had in the past year. Additionally, for the first time in February, we experienced a positive same-store comparison for used cars after about 15 months. While the situation remains very volatile and unpredictable, being a premier used and new car dealer allows us first access to most trade-ins, which is a significant advantage we need to maximize.

And then just one follow-up on partner service. Plus 3.2% is nothing to sneeze at, but it was a little bit lower than we were expecting. Do you foresee the ability to get a little bit deeper in the age spectrum and sort of broaden retention a bit to get that up into the mid-single digits? Or do you think as we're seeing, Bryan, as you mentioned, the shrinkage or this very low 0 to 4 car population, it's going to be challenged for the next couple of years?

John, this is Bryan. We're very optimistic about the developments in aftersales. It's significant that despite a smaller car park primarily consisting of 1- to 4-year-old vehicles, we achieved a 3.2% increase. This means we are reaching into older models, highlighting the impact of having 10 million fewer units available for same-store sales. I believe that 3% could serve as a low point for the coming years. Regarding aftersales growth, the increasing complexity of vehicles is remarkable. We now have battery electric vehicles, plug-in hybrids, hybrids, and traditional combustion engines, all of which are new and tend to have higher breakage rates. We also benefit from longer warranty periods, an advantage that's substantial. Our team consists of factory-trained technicians and we possess specialized tools that competitors lack. This creates a stronger connection to new car dealers, which we believe will lead to increased customer loyalty and positive results in future sales growth.

Our next question comes from Rajat Gupta with JPMorgan.

I just had a question on the U.K. business. We saw that the wholesale losses were once again very high in the first quarter, like $21 million gross profit loss. I mean, curious, was that all related to U.K. related inventory liquidation? Or was there something else going on? Just curious what happened there? And then how should we think about the inventory situation into the second quarter? Then I have a quick follow-up.

Yes. Rajat, this is Bryan. Most of our problems in the U.K., remember, were only Jardine, and it happened in Q4. We worked through most of that in the United Kingdom. So most of those losses are relative to what's happening in the United States.

What caused the short wholesale loss in the first quarter? I didn't see similar issues at other companies. Was it due to excess inventory in the regions, or what made the material change compared to the last quarter?

Yes. Look, I think the big thing was in January, we really tried to clean up inventory so we could go buy fresh inventory. And I think that's what we saw. And Chris mentioned that we got the benefits of that coming out of those divestitures. So cleaning up inventory at the beginning of the quarter was the real disconnect. And now we're starting to see some of those tailwinds coming in March and hopefully again in April.

Got it. That's helpful. And then we saw some press reports around headcount cuts in the U.K. Was that a part of a planned reduction when you announce Pendragon? Or was there something incremental given what's going on in the region right now?

Yes, Rajat, let me address that. This is Bryan again. We have initiated headcount reductions in the United Kingdom. It's still early days and things are changing rapidly, so it's too soon to determine the exact outcomes. More importantly, we are a large company, and a 1% reduction in SG&A translates to $50 million or $1.40 in EPS. Our focus, led by Chris, Adam, and our operational teams, is to increase that reduction to the 3% to 5% range, which would save between $150 million and $250 million following some recent cuts. In terms of the Lithia & Driveway model, we are concentrating on finding productivity improvements through technology and hard work. That's where we are directing most of our efforts. The U.K. will have its own initiatives, but we genuinely believe there is still a 3% to 5% opportunity for savings and we encourage each of our stores to seek out those possibilities.

Our next question comes from Douglas Dutton with Evercore ISI.

So I have a question on the Driveway finance book, now at about $3.3 billion. Is there a level that this book has to be at to achieve that profitability target by the end of the year? Is that $3.7 billion, $4 billion? Is it more or less? Just curious there.

Thanks, Doug. This is Chuck. Relative to the size of our book, we feel very comfortable that we can achieve the profitability at that $3.3 billion. As a credit business, most of our revenue streams are fixed, and we've already subsequently fixed our cost of funds. So this is a business that's very predictable. It's very consistent. And we feel very confident even at sort of about a $3.5 billion level that we can achieve our path to profitability this year, which we're very excited about.

Chuck is very humble. I'm going to give him some big kudos here. It's been a 4-year journey to get to profitability. And I think from this point forward, we're looking like we can achieve profitability on a monthly basis without any outlying changes, which is great. As a side note, in March, we did make over $2 million in the month, okay? There was a little bit of anomaly that still would have shown profitability. But things look good. Delinquencies are down. And the pains that we took and the times of elevated GPUs were the right time because those are massive barriers to entry for anyone getting into this business is you have to establish CECL reserves, okay? So now we're finally at the point where our net interest margins are outrunning those CECL reserves, and now we can play around with penetration rates to truly capture that additional $1,500 or so. On every car deal that we put into DFC over the life of that loan, it's $1,500 more than what we make on sending it to a third party.

Excellent. And then just one more for me here. As we get through the year-end and less vehicles are coming off lease from the past 2 or 3 years, how should we think about used vehicle sales and GPUs reacting to this lack of supply? You mentioned the firefight analogy earlier. Is it going to continue to be a firefight like that, where profitability is crimped? And do you see offsets to that on presumably better new vehicle volumes?

Yes. Thanks, Doug, for your questions, too. This is Bryan again. I think most importantly, inventory supply boils back down to people, okay? It's a belief and it's the ability to find vehicles. And whether there's less off-leased vehicles or not, it's not what's most important. We can find vehicles with good people that are mining for cars deeper through the 5 to 6 channels that we typically mine vehicles. There are 10 million fewer units available out there, which is a given. But remember this: we're in the plus 9-year-old vehicles, which is really important to remember of the 37 million units that are sold out there each year today, which is depressed still by about 10%. 63% of the vehicles of the 37 million vehicles are over 9 years old, okay? That's where we focus our money. Those units turn at 4 times the speed of a certified vehicle. They turn at 2 times the speed of a core vehicle. And we make about the same amount of money on about half the investment, meaning that the vehicles' average selling price is about half. Obviously, if you combine those together, the return on a value auto vehicle can be as much as 5 to 8 times over what it is on a certified vehicle. So when it comes to Lithia & Driveway, that's our real focus, and we get those vehicles as trade-ins off of our core vehicle product. So a little bit of a waterfall effect. Hopefully, that gives you some color on that, Doug.

Our next question comes from Chris Bottiglieri with BNP.

One follow-up question and one bigger-picture question. Thanks for the help on the color for Pendragon. Can you give us a sense for the restructuring, like you closed the used car store, there's a headcount number you defined. Can you give us a sense like what the impact on SG&A gross will be in used? Like how many units you'd be giving up by closing these businesses? Just on how to model the business, that seems pretty disruptive. That would be helpful color, if you could provide any.

Yes. This is Chris again. I think right now, we're right in the middle of that restructuring and really getting our arms around the business and trying to focus the teams on evaluating what performance in each one of the locations looks like. Some of the things that you alluded to are happening. We're right in the middle of those, like the car store shutdown and actually submitting potentially selling some of those assets out. But we're going to continue to work through that in Q2 and have a solid plan that we're focused on getting to kind of what more of a steady-state business would look like in the second half of 2024 here.

Great. Then I have a bigger picture question. So you guys are the best class operator and your estimated gross is only 300 basis points below pre-COVID despite some mix benefit from larger stores, and your GPUs have more room to fall. So my question is, it would seem that most of the dealers pre-COVID in aggregate were barely profitable. Hard to tell if it's understated as small business isn't private. But if profitability goes back to pre-COVID or even lower for these private dealers, what do you think happens in the industry? Like what are some of the puts and takes? How does this benefit look in that scenario?

Chris, I appreciate your kind words. This is Bryan. At Lithia & Driveway, we tend to keep a low profile and maintain our humility. I’m not sure if we can claim to be the best operators, but our unique design stands out compared to independent operators and our peers. Looking at our current results, I encourage our teams to focus on increasing market share, cutting costs, maintaining margins, and enhancing the customer experience to build loyalty. We see significant opportunities ahead, and we won't become complacent, especially as we navigate the challenges of declining gross profits. While we prepared for these circumstances, our work is far from finished. Achieving a $2 earnings per share for every $1 billion in revenue is a serious commitment for my team and me, and our primary focus is on that. We aim to enhance earnings per share and deliver results that benefit our shareholders through exceptional customer experiences that drive loyalty, market share, and profitability. We respect our independent competitors and don’t intend to disrupt their efforts; instead, we plan to gain market share in our unique way. With Driveway, GreenCars, and other resources at our disposal, we can expand our reach beyond Lithia. We also face some residual challenges from the Western market that may impact our results, but we're focused on taking proactive measures rather than making excuses.

Our next question comes from Ron Josey with Citi.

I wanted to focus a little bit more on newer sales channels, Bryan, and ask about Internet specifically with having sales up 8% sequentially to 41,000 units, traffic reaching 12.3 million across all of the properties. Just talk to us about the overall platform for online awareness strategy here. I think there was comments a few quarters ago just about a lot more traffic than you knew what to do with. So would love to hear an update there. And then lastly, I think you mentioned called burn rates for cut in half as you refine your e-commerce strategy. Just any insights on these improvements would be very helpful.

You bet, Ron. I may touch on it briefly and let Adam chime in a little bit as well since he and Dianna are the ones driving the successful results in driving GreenCars. I think when we think about top of funnel, what we're doing is adapting to the omnichannel. And I think it's taken some of the stores a little bit longer to get into that rhythm that customers truly should have the optionality to do things in their home or in the dealership. And I think that's a result of a 32% increase in total transactions that were done online year-over-year. That's a big input with only about a 9% top of funnel improvement. So good improvements there. When it comes to Driveway, we did reduce our burn by 50%, which is good. I'll let Adam talk a little bit about where do we go from there, but we're sure hoping that we can reduce it by another 50% over the coming periods. And I think from my standpoint, the work that Adam and Dianna and the teams in Driveway have done over the last 90 to 180 days is constructive. They have their pulse on multiple different levers to pull. And I can see a pathway again to get to breakeven and even profitability in the mid- to near future. Adam, any additional thoughts?

This is Adam. Yes, just to pick up, Bryan, where you left off. We've managed to drive down the burn rate, as you said, by about 50% year-on-year, and we see further enhancements possible really through two levels. We've become much more efficient in our marketing spend, so marketing spend is down about 40% year-on-year. And we've become much more efficient in our transaction processing through things like automated sales force process and things like that. So yes, we're working hard and see further improvements possible, Bryan.

Our next question comes from Colin Langan with Wells Fargo.

I just want to follow up. You mentioned new GPUs decreasing by $150 monthly. If I look at the same store, it seems like it's actually closer to $110 or $115. Isn't some of that pace going to be reflected in Pendragon's impact? Is it around $100?

You got it, Colin. This is Bryan. The difference between same-store and total is roughly $40. In total, it's about $300 or $400, primarily stemming from the dilution in the U.K. due to lower GPUs in that market.

Okay. So when we're thinking about the U.S. new GPU decline, it actually is kind of the same pace as it was the end of last year? Or actually has that gotten worse, too?

I think it's somewhat similar, but perhaps a little worse. The reason we presented it that way is because January and February were challenging, though we did see some recovery in March for both new and used.

Got it. And then you mentioned that the target for SG&A. it sounds like it's still mid-50% even with the Pendragon addition. Because coming on at 85% in the U.K.

Correct.

Do you think you could achieve the same profit level for the U.K. business, or is there more potential for growth in the U.S. business that could help you reach that target?

The mid-50% includes the adjacencies. In the U.K., I don't envision a situation where SG&A matches what is seen in the United States due to differences in throughput leverage. The U.K. has some significant advantages, especially with their average personnel costs being notably lower than in the U.S. However, I don't anticipate the U.K. reaching those normalization levels. Most of the gains are coming from the U.S. through network enhancements, which involve maximizing potential in stores by increasing market share and reducing costs, as well as the adjacencies I mentioned earlier.

Our next question comes from David Whiston with Morningstar.

Just curious with all the waiting for a Fed interest rate cut, even if we do get even just one this year, do you think that's going to matter much to your customers? Or do they need to get multiple cuts to really bring a lot of people back?

Our customers are surprisingly resilient. I mean, we've been quite shocked at their ability to adapt. I mean, we now have an average rate at DFC of about 10.2%. Our average rate as an organization is about 10%. We're at 7% on new vehicles and about 12% on used vehicles. I don't know that 0.25 or 0.50 is going to make much difference. I think it's more general economic factors at this stage that they feel comfortable with their jobs. They feel comfortable with their family and their affordability levels.

Okay. Regarding the balance sheet, since you will continue making acquisitions, do you plan to pay down the revolver balance, or will you leave it as is and focus on growth?

Well, you did probably notice, David. I mean, we are carrying some pretty big costs from M&A most recently. Our leverage is still quite nice, sitting at a little over 2 times, which is good. And if you remember, our covenants allow us to go all the way to 5.75. So we sit quite nicely to be able to constructively do M&A or balance that depending on stock price with share buybacks. You will find that we will be more constructive than we probably are in the past because we have put those two things at parity. But in terms of debt paydown, if that's the best use of capital, then we would also use it to pay down debt.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Bryan DeBoer for closing comments.

Thank you, everyone, for joining us today, and we look forward to updating you on Lithia & Driveway's second quarter results in July. Bye-bye, everyone.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.