Greetings, and welcome to the Lithia Motors Fourth Quarter 2024 Earnings Conference Call. This conference is being recorded. It is now my pleasure to introduce your host, Jardon Jaramillo, Senior Director, Investor Relations. Thank you, sir. You may begin.

Good morning. Thank you for joining us for our fourth quarter earnings call. With me today are Bryan DeBoer, President and CEO; Adam Chamberlain, Chief Operating Officer; Tina Miller, Senior Vice President and CFO; and finally, 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 differ materially from those expressed. 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 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've also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Jardon. Good morning, and welcome to our fourth quarter earnings call. Our Lithia & Driveway teams continue to deliver strong results, demonstrating the power of our integrated and scalable mobility ecosystem and the strength of our talented people. During the fourth quarter, we generated adjusted diluted earnings per share of $7.79. Though the earnings power of our ecosystem and design is just beginning to reveal its potential, these results underscore the effectiveness of our strategy to serve our customers seamlessly across digital and physical channels, leverage highly profitable adjacencies, while remaining grounded in our disciplined execution. Our ability to align our people, platform, and processes has enabled us to maintain momentum in unlocking our potential by increasing market share and driving differentiated operational efficiencies. Our focus on building customer loyalty through our diversified business model continues to drive profitability and strengthen our market position. Investments in our adjacencies are now contributing meaningfully to our earnings trajectory. Our omnichannel ecosystem has driven substantial improvements in customer engagement and unit sales, further reinforcing LAD's effectiveness. Looking ahead, our focus remains on loyalty, potential, and growth. Through disciplined execution and strategic investments, we are confident in our unique ability to deliver sustainable performance, capture market share, and unlock the profitability of our ecosystem. With our foundational strengths firmly in place to continue our growth as the world's largest auto retailer in 2025 and beyond, we are well positioned to build our recent momentum and continue our path to achieving $2 of EPS per $1 billion in revenue. Now on to key results for the fourth quarter. Lithia & Driveway grew revenues, a record $9.2 billion, a 20% increase from Q4 of last year. We are pleased to see our first quarter year-over-year operating profit increase in 9 quarters. This increase is a result of continued market share gains and our disciplined cost management efforts, which drove the full realization of our $200 million in annual cost savings target. Our teams have embedded consistent cost discipline into our daily operations, and we are seeing the benefits as we have now delivered 2 consecutive quarters of absolute sequential decreases in SG&A. As we begin 2025, we see even more opportunities for market conquest, adjacency profitability, and productivity improvements as we realize the full potential of our unique ecosystem. Our stores are well positioned to capitalize on a return to historically high SAAR levels, and we saw significant growth in new unit sales in the fourth quarter. We are now seeing total vehicle GPU stabilize near our long-term expectations. We saw improvements in our used unit sales trends, which continue to be a key focus, and our aftersales business delivered robust performance this quarter, reflecting the dedication of our team and our ownership in making decisions closest to our customer. Our investments in adjacencies are now integrated as a platform for sustainable and meaningful profitability. Financing Operations delivered profitability for the full year, demonstrating the strong earnings trajectory ahead. Additionally, we continue to refine our e-commerce strategies, bringing in new customers as part of our omnichannel strategy. This quarter also delivered strong returns on our Wheels investment, and we look forward to realizing the synergies presented by our partnerships. In 2025, we continue to focus on unlocking the profitability of our ecosystem by decisively acting to create customer loyalty, achieve our potential, and unlock growth in our ecosystem by delivering on our core strength execution. The foundation of the LAD strategy lies in our vast physical network supported by the industry's most talented people, high demand inventory, and dense store footprint. We continue to expand this network, adding new locations, developing key adjacencies, and forming strategic partnerships, all aimed at enhancing customer experiences and unlocking the potential of our platform. We operate as the largest retailer in one of the largest addressable retail markets globally, and our ability to grow profitability across every aspect of our business is now stronger than ever. We believe being the most competitive buyer in one of the largest and least consolidated retail markets is a key strategic advantage. Our steadfast strategy of delivering customer solutions that are simple, convenient, and transparent enables us to capture a greater share of the customer's wallet and create durable customer loyalty throughout their ownership life cycle. These solutions are tightly integrated with our digital platforms, fostering a natural and lasting retention of our customers within our ecosystem, while brands like Driveway and GreenCars significantly extend our reach to 50 times more customers than our core physical businesses provide. The LAD digital ecosystem continues to deliver positive momentum. We recently launched the MyDriveway portal, offering customers 250-plus functions to provide more visibility and control while shopping and servicing. Our teams continue to deliver exceptional digital and physical customer experiences with a clear focus on extending our reach and expanding market share. The strength of our platforms, financial discipline, regenerative free cash flows, and a culture that inspires growth powered by people enable us to be agile in responding to customer needs and capitalizing on the tailwinds the industry carries into 2025. Our strategic positioning and the rollout of the MyDriveway consumer portal allows us to increase touch points throughout the customer life cycle across our adjacencies and equip our stores with the tools to improve market share, loyalty, growth, and ultimately profitability. Acquisitions remain a core competency, and we continue our disciplined approach to look for accretive opportunities that can improve our network, focusing on the United States. We target a minimum after-tax return of 15% and acquire for 15% to 30% of revenues or 3 to 6 times normalized EBITDA. To date, our acquisitions have yielded over a 95% success rate and an after-tax return of over 25%, demonstrating that LAD is not your typical high-risk roll-up strategy. In the near term, we are watching acquisition pricing and remaining disciplined as we look for strong opportunities while balancing this with the attractiveness of our own share buybacks. Our capital generation and improving earnings allows us the flexibility to do both and are reiterating our expectation that estimated future annual acquired revenues will be in the range of $2 billion to $4 billion per year. We remain focused on growth and view industry consolidation as a driver of continued strong long-term returns. With the capital engine we built, we were able to deploy our free cash flows to generate the highest returns, remaining flexible to market conditions. We are maintaining our adjusted capital allocation to balance acquisitions and buybacks equally, especially given the attractive relative values of our own shares. During the quarter, we repurchased $93 million or 0.9% of our outstanding shares. We continue to evaluate acquisitions and share repurchases, and we'll focus on share buybacks in the near term given market pricing dynamics on acquisitions. These elements combine for a clear and compelling pathway to generating $2 of EPS for every $1 billion in revenue in a normalized environment as illustrated in Slide 14 of our investor presentation. The key factors underlying our future steady state are now totally within our control and include the following: First, continue to improve our operational performance by realizing the massive potential built in our own existing stores. This includes increasing our share of wallet through greater customer life cycle interactions, sustained productivity gains, cost efficiencies, and growing each store's new, used, and aftersales market share. Through these levers, we see a pathway to achieve SG&A as a percentage of gross profit in the mid-50% range. Second, optimizing our network by acquiring and driving high performance in larger automotive retail stores in the stronger profitability regions of the southeast and south-central United States. This, alongside our digital channels, will bring U.S. market share to 5%. Today, we have a combined new and used vehicle market share a little over 1%. Third, financing of up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves, as you can see in our results. Our Financing Operations achieved full year profitability in 2024, and we expect meaningful profitability growth from here. Fourth, through scale, we are driving down our vendor pricing with solutions like Pinewood, leveraging corporate efficiencies and lowering borrowing costs as we path toward an investment-grade credit rating. Fifth, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure, and captive insurance. And finally, delivering ongoing return on capital to shareholders through increased share buybacks and dividends. We are well positioned to grow our complete mobility ecosystem that leverages unique scale and capabilities to create more frequent, meaningful, and durable customer experiences throughout the ownership life cycle. With the foundational elements of our strategy firmly in place, we are now fully focused on execution and our confidence in our ability to drive to new levels of performance and establish a new standard for the industry. Now I'd like to turn the call over to Adam for an overview on key operating performance and how we are igniting our store and department potentials.

Thank you, Bryan. In Quarter 4, our team demonstrated our ability to deliver exceptional customer experiences, focused on cost discipline and importantly, grow market share. Our focused approach of having the right leaders and the right products resulted in clear sequential improvement in sales trends, and we are confident in our ability to strengthen our opportunity areas, particularly used vehicle sales. I proudly stand by our leaders as they set a new bar for the industry in the months ahead. I'd like to focus today on 3 opportunities to drive profitability: revenue growth, inventory trends, and SG&A execution. As Bryan mentioned, we delivered our first year-over-year growth in operating profit in 9 quarters with positive contributions from new vehicles, aftersales, and value autos, all supported by continued strength in SG&A execution. We are confident in our ability to continue delivering on our growth strategy in 2025. Let's now turn to our same-store sales performance, where we saw strong performance in new vehicles and value orders. Total revenues increased by 3.1% and gross profits declined 3.7%, primarily due to the normalization of GPUs. Total unit sales increased 1.7% year-over-year, while total gross vehicle profit of $4,535 was consistent with the prior sequential quarter and was down $444 compared to the same period last year. New vehicle units increased 7.4% year-over-year, with particular strength in import manufacturers. Our front-end GPUs remain resilient at $3,082, decreasing sequentially from $3,188. Used vehicle units were down 4.3% year-over-year. We saw strong performance in value orders, which were up 24.6% year-over-year, and we saw improvement in certified and core unit trends. Front-end GPUs for used vehicles are stable year-over-year at $1,959 and declined sequentially by $177. Used autos continue to be the focus of our operations. And whilst we're encouraged by our progress, we expect to see significant improvement in the quarters ahead. An opportunity also remains with our aftersales performance, and this will be a key driver of growth in 2025. In the quarter, aftersales revenues were up 3.4%, compared to the prior year, delivering a 55.8% gross profit margin. Warranty work was core to this growth with a 19.9% increase in gross profit year-over-year. Our ability to manage technician headcount and drive operational efficiencies has positioned us well to meet ongoing demand whilst also maintaining a strong focus on providing exceptional customer experiences in our aftersales departments. Now turning to inventory, where we saw an overall decrease of approximately $200 million on our inventory balances from Quarter 3. We continue to see opportunities to decrease our inventory balances and are targeting 50 days sales outstanding for new and 40 days sales outstanding for used inventory balances in the second quarter as we look to achieve further flooring interest savings. The execution on our original cost saving plan of $200 million was fully realized in Quarter 4. Our adjusted SG&A as a percentage of gross profit was 66.3% during the quarter and 66.8% on a same-store basis despite the typically higher SG&A we experienced in Quarter 4 due to seasonality. Whilst we are pleased with 2 consecutive quarters of strong SG&A performance, we remain dedicated to achieving continued cost savings and maintaining a focus on disciplined cost management as we move through 2025. Opportunities to improve our cost structure remain with the potential to achieve SG&A of 65.5% to 67.5% on a same-store basis in 2025 through continued efforts in North America and our U.K. network where optimization remains. Our team's relentless focus on delivering exceptional customer experiences and achieving performance through people this quarter is impressive. I'm proud of the team's progress in 2024 and confident in our outlook for 2025 and look forward to inspiring customer loyalty, achieving the potential of our stores, and igniting growth across our ecosystem. I will now turn the call over to Tina to walk us through our key financial highlights.

Thank you, Adam. The clear momentum Adam outlined in our operations has enabled us to accelerate our focus on creating value through our Financing Operations segment, efficient capital allocation, and disciplined balance sheet management. Starting with our Financing Operations segment, primarily driven by DFC, we continue to see solid progress with profitability of $9 million this quarter compared to a loss of $2 million in the same quarter last year. The benefits of our diversification strategy are apparent as our seasoned portfolio continues to grow, and our capital and securitization efficiency improves with the market building confidence in our operations. 2024 was the turning point with profitability of $15 million for the full year. We expect to continue to see this profitability trajectory in 2025 as we balance yields, growth, and risk with an emphasis on high-quality loans and disciplined underwriting. The Financing Operations portfolio balance is now over $3.9 billion, with DFC originating $501 million in loans during the quarter. Our portfolio quality continues to be strong with new origination FICO scores expected to average 730 in 2025 and sustained improvements in net interest margin, which increased 135 basis points year-over-year and 55 basis points sequentially. Overall, our Financing Operations continue to deliver on our financial milestones ahead of schedule. The adjacency is a key element of our $2 EPS for every $1 billion of revenue target as each loan originated by DFC contributes up to $1,500 more profitability than traditional indirect lending. We remain confident in this segment's long-term earnings growth and expect increasing profitability with a fully seasoned portfolio. Now moving on to our cash flow performance and balance sheet. We reported adjusted EBITDA of $419 million in the fourth quarter, driven by relatively flat net income as higher unit sales offset continued GPU normalization and higher floor plan interest expense year-over-year. During the quarter, we generated free cash flows of $180 million. Free cash flows were impacted by higher floor plan interest expense and an increase in capital expenditures compared to the prior year, mainly related to construction to meet manufacturer requirements at recently acquired locations. Our capital deployment strategy focuses on the efficient allocation of our business's regenerative cash flows, preserving the quality of our balance sheet while supporting our growth initiatives and allowing us to respond opportunistically to a complex environment. This quarter, we continued our focus on closely balancing acquisitions to shareholder return as we see elevated pricing on store acquisitions even as margins normalize compared to our share's current valuations. Prospectively, we look to allocate 30% to 40% of free cash flow to share repurchases. Our capital allocation strategy is guided by M&A transaction pricing. And as acquisition pricing normalizes, we will actively reassess. Capital expenditures have trended down and are now primarily related to network optimization and OEM requirements. Under this rebalanced focus in the fourth quarter, we repurchased nearly 1% of our outstanding shares at a weighted average price of $377. $469 million remains available under our share repurchase authorization. We ended the quarter with net leverage of 2.5 times, in line with our long-term target of 3 times and well below our bank covenant requirements of 5.75 times. While we opportunistically allocated capital during Q4, we maintain our long-term focused financial discipline to support our planned growth and target leverage below 3 times. These metrics adjust for the impact of floor plan debt, which is unique to our industry and related to the financing of vehicle inventory. This financing is integral to our operations and collateralized by our inventory. The industry treats the associated interest as an operating expense and EBITDA and excludes this debt from balance sheet leverage calculations. Similarly, we have ABS warehouse lines and issuances to capitalize DFC, which are also excluded from our leverage calculations. Our strategy is to achieve strong, consistent growth and best-in-class shareholder returns through our omnichannel platform. We have the right team, tools, and financial foundation in place to drive scale and profitability in our core business and adjacencies. Our diverse and talented team is committed to delivering exceptional customer experiences to build loyalty, and we have the foundation to ignite our potential as we grow in 2025 and beyond. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions.

Our first question comes from Ryan Sigdahl with Craig-Hallum.

I want to start with what you're seeing in the current environment. So clearly, sentiment has improved, SAAR has improved, kind of towards the tail end of Q4, seems like trends have continued in January despite some weather and various impacts. But curious what you guys are seeing from a trend standpoint, kind of how you view the new administration, tariffs? If there's any impact in noise kind of recently? But just kind of a current market update would be great.

Thanks, Ryan. This is Bryan. I think we're pretty excited entering the year because we're finally seeing the tailwinds of volume coming back, whether those are driven by economic change or political changes. We definitely see a pathway by year-end, exiting the year at 17 million SAAR. And more likely that we believe that there could even be an 18 million year in the future, knowing that there's about 11 million to 12 million units that have been suppressed or not sold over the last 5 years that things look pretty good. Now if we're looking at other macro issues, I think tariffs is probably one of the larger things. And I'd probably never thought I'd be sitting here saying I'm glad I have an extra 20 days of inventory over most of the industry. But we are sitting in a nice position with inventory if tariffs do end up coming in. The tariffs for us, we have about 36% to 38% of our vehicles we estimate that could be impacted by tariffs and being that we've got a 50-plus day supply, we should be sitting quite nicely to be able to work through any negotiations that are happening between the 2 countries or 3 countries or 4 countries or whatever it ends up being at. So all in all, the market is there, okay? And I think in terms of our performance this quarter, I don't believe that we captured all of our opportunity, okay? We did a solid job in the new cars, okay? But that gives indication that there was a market there that we did not capture on used cars, okay? I believe that it's highly likely that we could see double-digit same-store sales growth on used cars in the coming years, okay, as well as possibly on new cars. And that's a good sign for the industry as well. When it comes to aftersales, again, I think our warranty business filled our shops up 20%, and our customer pays were sacrificed because of it, only up 2%, okay? We've got to be able to walk and chew gum in our service departments. At the same time, meaning that when warranty goes up, we're still servicing our customer pay work. So all in all, lots of opportunity for us, knowing that our ecosystem is fully built and grounded, we're 100% focused on capturing that opportunity.

That's great. My follow-up question, just looking at your 2025 new vehicle GPU outlook, it seems a little more pessimistic or maybe conservative, I guess, however you want to view that versus some of your peers that are saying we're closer to the bottom and new normal than we are kind of needing a lot more normalization to go. I guess the question is, what are you seeing in terms of, is it industry dynamics? Is it conservatism? And then kind of secondly to that, is the $2,500 to $2,700 of new vehicle GPU, is that the target new normal, which I think you've said in the past? Or is that the average that you expect for the year from a kind of guidance standpoint?

Ryan, I think when we think about GPUs, this has been the theme probably for the last 4 or 5 years that we're a little bit more conservative on GPUs. We think if we don't do that, then people get out of control on their cost structure. So with our rightsizing plans and our 60-day plans in place, it's imperative that we match GPUs with our cost structure. So we probably are a little more conservative because of that reason. In terms of the $2,500 to $2,700, that is what we're looking at for the year. We believe that the normalized level is somewhere in the $2,300 to $2,500 level, okay? And add another $2,000 in F&I gets you to the $4,300 to $4,500, okay? So there is some that will come out. But I really believe if demand is that where it's at today, and we're in the middle of winter, okay? I really believe that we've got a lot of upside when it comes to Q2, Q3 when seasonality for us really starts to take hold.

Nice job guys. Good luck.

Our next question comes from the line of Bret Jordan with Jefferies.

I think you talked about significant improvement in used. And I guess sort of could you parse out what is volume versus GPU there, sort where you see us in the used profit cycle?

Yes. I think we're obviously pleased with our value orders, as I said in the prepared remarks, with solid growth both through the quarter and on a full-year basis of double digits as well. But overall, we have to be disappointed with the decline in performance overall. And we've got a significant focus on driving used in 2025, especially when we can show we're up on new cars, 55% of our used cars are sourced through trade-in. So there's no logic trail to say why we should be different on used, if that makes sense. In terms of GPUs on used cars, we saw a lot of volatility in pricing in 2024. If we look at historical norms, we think there may still be a slight upside on used cars, but that remains to be seen as we kind of try and drive the volume back as well. Does that make sense?

And I guess, you also mentioned in the prepared remarks improving U.K. efficiency and SG&A. Could you just give us an update where you are, what inning there?

Sure, Bret. This is Bryan again. We're actually quite pleased with what's occurring in the U.K. relative to market conditions, it's obviously a little softer market. You probably saw that from some of our peers as well. But we have improved our position when it comes to cost management. I think we were around just over 80% SG&A as a percentage of gross, which is still far from the 75% that we're targeting, okay? But going through the winter months and knowing those gloomy days over the United Kingdom are there, we're pretty positive on where we're at. We've rightsized that part of the organization. So you'll start to see that come into same-store sales this quarter, okay? So you'll get to see some of those improvements. But all in all, we're really pleased with the investment. We are getting our feet on the ground a little bit when it comes to reporting and it comes to that idea of performance through people and managing people. But you know what, we've got great leadership over there with Neil and his teams, and we're excited with what the future holds. Lastly, we also have cleaned up the entire mess that I would say that we bought. If you recall, there were those 30 to 50 businesses that were too small to operate. All of those have been shuttered now or they've been sold. We've monetized on all of them but 2, and the remaining 2 will get monetized by the end of March, okay? So we're pretty pleased with where we sit on that. In terms of the associated real estate, our leaders in the U.K. did a nice job. We're almost 100% gone on selling all those properties in terms of the leased properties. We've worked through almost 70% of the equivalent pounds that those cost. So we're really pleased where we sit on that as well.

Our next question comes from the line of Rajat Gupta with JPMorgan.

Just the first one on the SG&A curve. I think Adam, you cited like there's more opportunities here. Could you elaborate what areas that might be? Is it more in the U.K. versus the U.S.? Just curious if you could dive a little bit deeper there. And I have a quick follow-up.

Thank you for the question, Rajat. Looking back at our 60-day plan that we discussed in late summer last year, we successfully implemented the measures identified in it. In the fourth quarter, we reduced inventory by an additional $200 million, which is a good sign. We anticipate there's still around $50 million to $70 million in vehicle inventory that needs to be addressed as we move through the current quarter and into the second quarter. I believe we will be in a solid position. However, it's important to stay disciplined and ensure we don't just add costs back in. We've made SG&A discipline a key focus for us moving forward. Specifically, I expect that new car inventories will decrease by another $50 million to $70 million. Bryan is likely the best person to provide insights about the U.K.

You bet, in fact, let me just recap a little bit on the entire organization. If you remember, we finished $200 million in cost reduction. There's another $50 million to $70 million in interest cost savings coming from inventory. We also found another almost $50 million in personnel costs in the support functions, okay, as well as tech costs. Those will be realized in the first half of 2025 for an aggregated total of almost $320 million. There's another $20 million to $30 million that's in the U.K. But like I said, you'll see that in the same-store sales results this coming quarter. I think most importantly, when you think about driving down SG&A, we're talking about approximately 1.5% SG&A reductions over the coming 5 years, okay, to drop us into that mid-50% range, okay? That's going to come through growth of top line. So it's imperative that we're able to grow our same-store sales growth and then do it in a way that it's cost efficient. We announced the release of the Driveway portal and those 250 functions that help our team members and associates do things easier and gain productivity. That's part of it, okay? If our customers can do their work and have transparent, simple and empowered experiences within that portal, that relieves some of the pressure in the service departments and the sales department as well. So it's a combination of those 2 elements, top-line growth and disciplined reductions that are coming from the uniqueness of our ecosystem that we're going to be able to get to that mid-50% SG&A cost. Thanks, Rajat.

Just one follow-up I had. On parts and services, you had pretty good warranty growth as you talked about. I was still a little surprised to see just 3.5%, like revenue growth, 4.5% gross profit growth. I mean curious how do you accelerate that to the mid-single-digit guidance for the full year? You also have some easy compares from the CDK outage in 2Q, 3Q. So I would imagine it would be higher than the mid-single digits. But any more color you could give there on the initiatives in that business, where you are in technician adds, et cetera, that can give us some comfort in the acceleration.

Sure, Rajat. This is Bryan. After analyzing our peers, we are not satisfied with 3.5% as it fell short of market expectations, which is important. The exciting part is that both Adam and I can confidently say we have challenged our aftersales leaders to aim higher. This won't change in a matter of months; it's a process that will unfold over a few quarters. We've identified various strategies to increase warranty and customer payments. It's not a technical issue but rather a mindset challenge among service advisers and management, who often believe there are only limited hours available and they can find efficiencies. We just announced the launch of our Lithia & Driveway Partners Group, which previously focused only on store managers and is now being expanded to department-level managers. This initiative is designed to enhance performance pride within our stores and is directly associated with evaluating departmental potential, which aims to set a higher standard to capture market opportunities. I believe we can achieve high single digits to low double digits, similar to our performance before COVID, within the next three to four quarters. The market is present, and the options we are providing through our portal and in-home service functions should allow us to capture market share and expand that business. We have surpassed the regional variations in population growth, so the differences are not as significant anymore. There’s really no valid reason for our 3.4% performance while others are achieving high single digits. We will get there, Rajat. Thank you for raising that.

Our next question comes from the line of Christopher Bottiglieri with BNP Paribas.

I wanted to follow up the first one on the guidance for '25 on the gross margin rate for service. It looks like you've been doing really good, like 56% grosses, looks like you have that dropping for some reason next year to 52%, 55%. Is that just mix with customer pay? Or is that anything you're doing with Wheels for next year? Just trying to understand why...

Chris, this is Bryan. Yes, it's more of a mix between the labor part of the aftersales and the inventory part. So service versus parts. We believe that as cars become more complex, and more rip and replace, that there's a bigger parts content on cars than there is a labor content. So you're going to generally see us lean towards margin reductions because of the bigger parts mix, okay? It's not that we got smaller business. It's purely just the mix of those. And it may end up happening slower than what we expect, but we do hedge that on the more conservative side because of the parts mix.

Got you. Okay. I wanted to get a clearer understanding of the GPU guidance. If you examine the GPU guidance on the used side, you indicated a range of $1,800 to $2,300 in same-store guidance, which is quite broad. However, there's a U.K. component affecting the comparison base. You're wrapping up at $1,700 in Q4 and $1,800 in Q3. At the midpoint, this represents a significant rebound compared to '24. I'm curious if there were any overlooked challenges in '24, such as inventory write-downs, that might provide insight into the anticipated rebound in '25. What factors do you believe will drive that recovery in used GPUs? Also, it seems like F&I is expected to see some recovery in the '25 guidance as well.

Chris, this is Bryan again. I think when it comes to the GPUs, the major factor is the U.K., okay, because obviously, they're considerably lower. The other thing is in the U.K. F&I is much lower as well. So that has implications on that. I do believe that there's an opportunity to grow our F&I and obviously, I mean we're targeting that $2,000 number. But as average sales prices get higher, the financing amounts get higher as well. And obviously, that drives F&I profitability. So I do believe that there's some nice upside that we could also realize. And again, we try to be realistic as we can with what we see in the current marketplace.

Our next question comes from the line of Jeff Lick with Stephens.

First question, your store count went from 467 to 459. There wasn't any press release highlighting that, and I don't recall you mentioning it. Could you explain what led to the closure of those stores and why the count decreased? Additionally, regarding the aftersales guidance, I'm curious about the 52% to 55% range. What factors would influence being closer to 52% versus 55%?

Regarding store count, the decrease is solely due to the divestiture and closures of stores in the U.K. that were announced a year ago. Those have now been finalized, which helps to clarify things. As for the guidance of 52% to 55%, the main factor influencing this is related to recalls and the proportion of parts involved. As I mentioned earlier, the mix of parts is the reason for providing that range. I believe that a figure between 54% and 55% is likely appropriate in the short term. Therefore, you shouldn't observe significant margin deterioration; it's more about changes in the parts mix. Our profitability on parts is around 30%, while it's 65% on labor sales in the service department. This difference can lead to rapid changes depending on whether a repair order consists mainly of parts or labor.

I have a couple of quick follow-up clarifications for Adam. You mentioned that 55% of new deals come with the trade, but I don't think you were implying that 55% of your used inventory is sourced.

It's the source of our used cars. So 55% are sourced from customer trade-ins. People who bought a new car trade one in, and we try to sell that.

Here's our breakdown: 55% trade-in, 1% buying them off the service drive, 4% lease, 8% private party, and 2% through Driveway, totaling 70% from consumers. The remaining portion comes from service loaners, other dealers, wholesalers, rental companies, and auctions.

And then one last quick one. When you mentioned, Adam, that the SG&A benefits were fully realized. You were referring to just this quarter, right? You still have a couple more quarters to go where you're going to be running $50 million-plus through?

Yes. Great question. I think Bryan talked about that. For the quarter, the realized we still see opportunity in inventory floor plan as I talked about, $50 million, $70 million. And then as we grow top line revenue and growth, we see an opportunity, as Bryan said, to decrease sequentially across the coming years.

Our next question comes from the line of John Murphy with Bank of America.

Without the exact data in front of me, I think it's fair to say that you have been one of the largest acquirers in the market over the past few years. The comment you made about current multiples being a bit high and your stock being more attractive is significant for the entire market. So Bryan, I was wondering what you consider to be too high? You mentioned 15% to 30% of sales or 3 to 6 times EBITDA. How do you perceive the current market's valuations, and how do you believe these will normalize in the upcoming quarters?

Great question, John. I think you might have noticed some confidence in my voice 90 days ago when I mentioned that we thought pricing was softening a bit. Now, I have a slightly different viewpoint, as I've seen some significant prices being paid for transactions. The challenge we're facing, John, is that when we consider buying at a 3 to 6 times normalized earnings multiple, there are two factors at play. Many areas still have high multiples ranging from 6 to 10 times, primarily due to the abundance of cash available. Additionally, depending on the manufacturers, earnings levels can range from 15 to double what they were three years ago. This leads us to multiples and returns that fall into the low to mid-single digits, which doesn't align with our strategy. With our forward-looking multiple being around high single digits to low double digits, it doesn't make sense for us to invest under these conditions, especially since we know our ecosystem is solid. For instance, the $15 million we earned in DFC is projected to rise to $50 million to $60 million this year, with long-term expectations reaching $500 million at a 20% penetration rate. We are not fully capturing our potential earnings, so it makes more sense to buy back our shares. We are currently in a strong position, generating significant capital, so when the market is ready for acquisitions again, we can pivot back to that direction. I anticipate it may still be a few quarters before that happens, but I believe we can reach $2 billion in total revenue this year, with about 90% coming from the United States. We must carefully select opportunities that haven't unlocked their profit potential, which is where we can operate within that 3 to 6 times normalized earnings bracket. It might take a few more years for the market to stabilize fully since many have made more money than usual. We often inform sellers that they already have that money and we won't be paying twice when their earnings normalize. We typically request financial statements from the last few months to assess their trajectory, guiding them through the process so they can still monetize effectively. It's important to note that as Lithia, we've conducted about half of the transactions completed by public companies over the last 1.5 decades, with nearly every one of those closed except for two. In our 30 years of purchasing, only two transactions out of nearly 600 have fallen through. This is not typical for the industry, where approximately 40% of transactions typically get completed, meaning that 60% do not finalize.

That's helpful. And just one follow-up on one of the other comments you made. You said 95% success rate, which indicates 5% don't work out as well as expected. Does that mean that those stores eventually falling into divestiture? Or are they stores that get closed or fixed?

You nailed it. In the U.S., we haven't really had to close stores. In the U.K., we did because they were just so microscopic in size. But in that 95%, what makes up the 5%? Typically, what makes up the 5% is us not missing a target on an acquisition. It's us buying a group that may have had 1 or 2 underperforming stores in it. And then it's just a matter of trying it for 6 to 9 months. And if it doesn't meet our thresholds, then we typically divest it.

Got it. Just one last quick question about the outlook. When discussing the front-end gross of $4,100 to $4,300, you mentioned there could be some downside with a new GPU. However, it seems you're confident about the other two components being used and F&I. As we consider that front-end gross going forward, which of those four numbers is the most crucial since it's central to your business operations? Do you believe it will settle closer to $4,000, give or take? That's really the figure that drives the business. What do you see as the upside and downside for that? And what range do you think is typical?

Yes. John, that's a great question. And I think I'm going to answer this from a Lithia & Driveway standpoint, not from an industry standpoint because it's imperative to remember that Lithia pre-COVID had a lot of its business in the western states and a lot of small stores that didn't generate GPU, okay? So we not only purchased a lot of luxury stores and doubled our mix percentage of luxury, we also purchased stores in the southeast and south-central that have about $1,000 higher GPUs than the rest of the country. So our lift in GPUs is different than what the industry's lift is. So we're not looking at what the industry is doing. We're looking at what we're doing when we say $4,200 to $4,500, okay? Now where does the variation come from? We believe that we've already troughed on used, and there's a lot of upside on used vehicle GPU that should come back over time, okay? So in our modeling, we're assuming that there's $200 to $400 of improvement in front-end gross profit on used vehicles that will offset some of the reductions in new vehicles because we are still sitting at about $1,000 higher as an industry. We think because of our mix, we're only sitting about $500 to $600 higher, okay? And then, obviously, add back in the F&I lift of another couple of hundred dollars, and you get to the $4,200 to $4,500.

And that's you think the 'normalized range' for you probably over time? We'll see how the market...

We do. Correct. Based on our new and growing footprint, the mix and the footprint are the main reasons why we moved from $3,700, which was our pre-COVID level, to almost $500 to $800 higher. In F&I, we typically grew about $60 to $70 over the past five years, totaling $300. There isn't a significant lift here. Our goal as leaders is to change the mindset of our department and store leaders. We need to help our store leaders envision how to find their next level of performance because we seem to be stuck in the belief that the market is still soft. We know that it's not; the SAAR is going to return, and GPUs are still strong, particularly with potential upside in the used vehicle sector. F&I continues to be an area that can be optimized through better people and performance.

That's great. And thanks for saying 18 million units in the next couple of years because that's what our forecast is, and everybody thinks we're way too high. But I'm certainly of the same mindset. I think we're going to get there in '27, '28...

All right. Well, let me know when that happens, okay? Hopefully, it's within the next 4 or 5 quarters.

Our next question comes from the line of Colin Langan with Wells Fargo.

I wanted to ask if you could clarify why the new GPUs saw a sequential decline. Other companies have reported flat to increasing numbers. Is there a specific factor in the U.K. contributing to this, or why aren't we seeing the seasonal support that others have experienced?

It could be a little bit of GPU, Colin, but I think it might be mix differences of manufacturers. But you know what, I'll own it, Adam will own it. It's us, okay? There's opportunities, and we've got to get out of our mind that somehow the market is soft when the market is quite robust, okay? So that's just something that I think after reflecting on the peers, it gives us upside as the largest retailer in the world that you know what, if we can figure that out and we can change the mindset of our people and inspire them to find the next gear, and we're going to be able to exceed. So I don't want to really assign a reason, but I would say that it's probably more us than anything else, and let's own that and move forward and capture that.

I wanted to follow up on a previous question regarding the 2025 outlook for used vehicles in F&I. When I look at the consolidated same-store base, the figure for used vehicles in Q4 is around $1,700, while the guidance is between $1,800 and $2,100. The previous explanation indicated a potential downturn, but this guidance suggests an improvement. I'm trying to understand the factors driving used vehicle performance and F&I, as even at the midpoint, the F&I figures would be an improvement. What is contributing to this better performance compared to the current Q4 rate?

So really quickly on F&I, it's truly people performance, okay? It's managing the performance of the people. When it comes to the used car market, Colin, we do have seasonality in used vehicles on GPUs. And as we all know, it's been quite volatile over the last few years, driven off of the inventory demand or lack of demand on supply of new vehicles. So I really believe that, that's going to normalize. We've got Q2, Q3 coming, which usually means strengthening of used cars. And I believe that we've got a lot of opportunity internally to be able to improve and find scarce vehicles and effectively use our AI and our reporting tools to look at price to market and cost to market to be able to grow our performance. And that's really where our opportunities lie. And why we believe $1,700 isn't an appropriate level on a normalized basis. I think that's a depressed level still that's troughed out now for almost, what, 6, 8 quarters, okay? And it's time to capture the opportunity that's there and respect that we've got the scarcest cars in the country, and they should command more money. And let's let the world see those through Driveway and GreenCars. And find those 50x more customers to help drive price to market up.

Our next question comes from the line of Ron Josey with Citi.

Bryan, I wanted to ask just a little bit more about the online approach that you all have. I know we pulled back some in '24. So any insights on the vision here would be helpful in terms of how you're thinking online can grow, particularly from a used perspective, just given the importance of used with trade, with profitability, after service. And then do you think we'll get to online growing as a channel here in '25? Or is that more of a '26 and beyond?

Thanks, Ron, and it's a big part of our ecosystem of how we thought about the design and that idea that you have the potential of 50x more customers. I think what we've done is we've relaxed the pushing of our physical network to actively involve. If they don't get it, they're going to fall behind because our internal and our external approaches to our online business are growing, okay? We're quite excited to see what's happening in GreenCars and Driveway. It is an integrated model that is integrated now fully into the stores. We developed some new reporting on what we call ecosystem effectiveness. It includes some loyalty metrics in sales and service. It includes some online functionality. It includes now the MyDriveway portal, okay, and this idea that customers are going to be able to now easily access our online services. And we didn't talk a lot about the MyDriveway portal, but we're going to be dumping almost 70,000 customers into that portal come March, which are all of our DFC customer base. So they're going to be making all payments through there. They're going to be doing all payoffs through there. They can get their valuations through there. Customers can already book service appointments, they can attach themselves to any store through there. They can have different cars attached to different stores. It's quite functional and really empowering. So we really believe that the snowball effect that will occur from the MyDriveway portal will help integrate everything together to make those customer experiences more seamless. We are targeting some pretty good lift in Driveway and GreenCars this year to the tune of about 50% lift, okay? And we're starting to see that in the early part of the year through just figuring out efficiencies and again, managing performance through people too fully improve. We've also changed compensation plans within our e-commerce businesses to help motivate people to do more with less, okay? We're also looking at how do we align our stores' compensation plans with the ideas of loyalty, potential, and growth, okay? And those are things that over the next coming years, we'll be working on with new departmental leaders and new store leaders as they come into the organization to align that top line growth as well and make sure that it follows through with SG&A cost improvements. So hopefully, that gives you a little bit of color, Ron, on where we sit on the online approach, but we're pretty excited about reaching this point where the ecosystem is built. Now it's a matter of leveraging it.

Our next question comes from the line of David Whiston with Morningstar.

Bryan, you've talked a couple of times about a mindset change being needed such as warranty crowding out customer pay and having customer pay underperform, like can you be a little more specific as to what you mean by that? Like what actual action items do you want to see happen to have this change take place?

I believe it begins with having faith in our main objective, which is potential. We undertook a potential evaluation in November and December, and we are establishing lower benchmarks when we have units and operations in those stores. When I refer to a mindset shift, I mean our regional vice presidents, group leaders, and regional presidents must collaborate with general and departmental managers to identify opportunities and develop actionable plans to capture market share. This includes smaller aspects such as aftersales, like tracking the percentage of vehicles that are repaired in a customer's driveway or those we pick up from driveways to bring to the store for repairs. If they're not engaged in these activities, they’re not part of the current automotive service retail environment. There are likely around 30 essential tasks across key departments that need to be addressed, starting with our ability to motivate leaders to notice elements they currently overlook. We have a system of store visits, and our performance scorecards outline what high performance entails. Complementing this are our detailed reports from in-store visits that guide leaders in the right direction. We need to change the mindset above the stores to recognize that if there isn’t progress within 60 to 90 days after these meetings, that individual in the departmental or store role may not be on board, prompting us to reconsider their position or help them transition to a different role in the company, if necessary. Management has been too lenient, and mere words won’t suffice if performance doesn’t improve swiftly. Our new standard is 60 to 90 days, just as it was 5 to 7 years ago. I’m confident Adam and the regional presidents and vice presidents support this approach and now need to implement it again. Our store leaders must grasp that change management is a mentality focused on assisting people in recognizing what they cannot see themselves. It's about helping them shift into a higher gear and continuously strive for improvement within our organization. If you'd like to discuss this further at a departmental level, I’d be happy to go over the key drivers we will be focusing on.

I really appreciate you fleshing it out. That's helpful. Just to be clear then, you're not really short techs and short service base?

No, that's more of a symptom in certain locations, but it is not the primary issue. We don't face tech shortages because we develop our technology internally. Yes, there may be some areas where technology is lacking, but that's not the main reason. The real issue lies in the mindset of the staff in the stores, who believe they can't achieve more with less resources, but they can. We just need to help them realize that.

Mr. DeBoer, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Well, thanks, Christine. Thank you, everyone, for joining us today. We look forward to seeing you on the Lithia & Driveway first quarter call in April? In April. All the best. Thanks, everyone, for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.