Good morning. Thank you for joining us for our second quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Charles Lietz, Senior Vice President at Driveway Finance. Today's discussion may include statements about future events, financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our second quarter results. With that, I'd like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Jardon. Good morning, and welcome to our second quarter earnings call. The first half of 2025 reaffirms the strength of our strategy with a 29% increase in EPS on a year-over-year basis, vastly outpacing the industry's profitability growth. Lithia & Driveway's strong earnings growth is enabled by an operational focus powered by our people and the profitability of our ecosystem and adjacencies. Our integrated physical and digital network services customers while scaling a platform designed to compound value and earnings power with a diverse and resilient ecosystem. In the second quarter, we delivered record revenue of $9.6 billion and 4% year-over-year same-store revenue increase, reflecting our continued ability to grow share and enhance the profitability of our platform. In addition, diluted earnings per share for the quarter was $9.87 and $10.24 on an adjusted basis, an increase of 25% and 30% year-over-year, respectively. We saw strength across the business with record profitability in financing operations, expanding aftersales margins, and flat SG&A despite pressures from lower GPUs. We're encouraged by our adjacencies that are now contributing meaningfully to both earnings and consumer engagement. These businesses are not just supporting core operations; they are expanding unit economics, reinforcing loyalty, and widening the profit gap between Lithia and the marketplace. As we look to the second half of 2025 and beyond, our focus remains on store performance, scaling high-margin adjacencies, deepening customer relationships across the ecosystem, and deploying capital in a way that is most valuable to our shareholders. Our combination of local execution, integrated technology, and capital discipline positions us to grow profitably, take share, and advance to our long-term targets while continuing to lead the industry in innovation. We're pleased to see increasing momentum in our high-margin business lines, including financing operations and aftersales, which expands our unit economics and adds consistency to our earnings profile. Our stores are adapting in real-time to demand shifts supported by their understanding of customer needs and OEM dynamics. We continue to monitor and respond to the evolving tariff landscape and broader consumer trends. We have diversified our earnings stream. And as a reminder, over 60% of our net profit comes from the aftersales operations. Our OEM partners have responded nicely, maintaining affordability and price stability. With a broad product mix, we are well-positioned to serve customers across all segments and affordability levels while continuing to build upon the customer life cycle with high-margin adjacencies to further improve the profit equation. What differentiates us is how our components work together: A national footprint with local autonomy, integrated digital tools, high-margin adjacencies that scale earnings across the ownership life cycle, while also being the preferred acquirer of businesses in the industry. In a fragmented sector, our ability to acquire, integrate, and operate at scale remains a key focus and competitive advantage. This quarter, we added stores and targeted high-return markets, continued optimizing our existing portfolio, and embedded adjacencies more deeply into our daily operations. Our omnichannel platform is expanding both engagement and reach. Tools like the My Driveway portal are strengthening customer retention in digital brands like Driveway and GreenCars as they continue attracting new customers into the ecosystem, all while improving the customer experience and driving margin. In July, we completed a transaction to transfer our North American joint venture back to Pinewood.AI, paving the way for Pinewood's full rollout of the industry's Pinnacle cloud-based solution across North America. In addition to our high-margin adjacencies, we have a set of operational levers that tighten costs and lift throughput at the store level. Today, My Driveway's customer portal reduces service costs and drives higher retention. Soon, Pinewood.AI will allow us to replace multiple legacy and third-party solutions, allowing both customers and our team members to operate in the same environment. This will improve the sales experience, streamline workflows, and further reduce our cost structure. Layer on to that scale-driven advantageous pricing as we unlock meaningful SG&A leverage while freeing store teams to focus on selling and servicing vehicles. Together, these abilities give Lithia a structural edge that supports sustained margin consistency and growth. This strategy is producing results and creates a foundation of tremendous potential and a more resilient, rewarding earnings model. This enables us to grow through volatility, allocate capital with confidence, and advance towards our long-term targets with clarity. Strategic acquisitions remain a core pillar of our growth model and a proven differentiator of Lithia & Driveway. Our history of sustainable high return and virtually risk-free growth has grown our revenue from $13 billion in 2019 to become the largest global auto retailer quickly approaching $40 billion in revenue. EPS has grown at a similar rate, and we remain excited to operate and grow in one of the most unconsolidated sectors in the country. Our scale, diverse strategy, and cash engine now have the flexibility to not only accelerate share buybacks but also continue to grow both organically and through acquisitions. With a disciplined approach, we continue to target high-quality assets in the U.S. that strengthen our network, especially in the Southeast and South Central, where population growth and operational profits are the highest. We aim to acquire at 15% to 30% of revenue or 3x to 6x normalized EBITDA with a 15% minimum after-tax hurdle rate. Our track record reflects a 95% success rate of above-target returns. Today, we are in a position of strength. Our growing capital engine and consistent free cash flow give us the flexibility to allocate where returns are most attractive. While waiting for market valuations on acquisitions to reset, the relative value of our own shares supports a more aggressive buyback strategy, which Tina will be discussing further. In the first half of the year, we repurchased 3% of our outstanding shares. Over the long term, we continue to target acquiring $2 billion to $4 billion in revenue annually, and we'll continue to deploy capital where it compounds value most effectively. We have a clear line of sight to our long-term revenue and EPS growth targets, powered by 5 strategic levers: improving store-level performance; expanding our footprint and digital reach to grow U.S. market share from 1.1% to 5%; financing up to 20% of units through scaling DFC; reducing costs through scale efficiencies and SG&A discipline and capital structure; and finally, capturing growing contributions from omnichannel adjacencies like e-commerce, fleet, software, and insurance. Let's turn to our key operating results and how the performance is being driven at the store and department level. This quarter marked another meaningful step forward in the consistency of our performance. We delivered year-over-year growth, particularly in aftersales, and continue to see sequential improvements in used autos, especially in the value auto segment. While the June 2024 outage contributed to softer comps in the prior year, this quarter's results reflect operational progress, yielding organic revenue growth through each month of the quarter, supported by disciplined SG&A control and strong execution across our stores. As we move through the rest of 2025, our focus remains on the fundamentals: Expanding market share, improving throughput, maintaining cost efficiency to reach our potential. Turning to same-store sales performance. Total revenues and gross profit both increased by just over 4% due to sequential strength across all business lines that are partially offset by declining GPUs. Total vehicle gross profit of $4,318 was down $128 compared to the same period last year. New vehicle units increased 2% year-over-year, with front-end GPUs at $3,175, up slightly sequentially. Used vehicle units increased 4% year-over-year. Our value auto sales continued to trend impressively with a 50% same-store sales improvement versus last year. Front-end GPUs for used vehicles were flat year-over-year at $1,900. We saw a slight increase in new vehicle inventory day supply of 63 at quarter end. This compares to an unusually strong sales month in March with absolute inventory increasing by only 5% sequentially. Used vehicle DSO increased slightly to 48 days from 45 days in Q1. Flooring interest savings were significant this quarter, with a 28% decline year-over-year. F&I delivered 4.5% year-over-year growth in same-store sales gross profit and $1,841 on a per unit basis, a $25 year-over-year increase reflecting the continued steady growth of this high profitability area. Aftersales was once again a key earnings driver. Same-store aftersales gross profit grew 8.5% year-over-year, helped by solid momentum in both customer pay and warranty work. Gross profit expanded even faster at 11.9% as the segment's gross profit margin widened to 57.8%, a 188 basis point increase from last year reflecting stronger mix and operating efficiency. Warranty remains a standout with gross profit of 21.9% on elevated OEM service activity and higher technician productivity. With aftersales now contributing more than 60% of the net income of our company, we see continued headroom to compound growth and earnings stability in 2025 and beyond. With the foundation of our strategy now in place, Lithia & Driveway's differentiated model is delivering results. Leveraging our national physical network throughout the customer life cycle with inventory and network scale advantages, industry-leading digital customer solutions, and deepening customer economics through captive finance and expanding aftersales all underscore the consistency, resiliency, flexibility, and potential of our model. Our leaders are executing across the network by driving towards store potential, integrating adjacencies, and creating memorable customer engagements across the ownership journey. Our integrated ecosystem is delivering tangible results, and we are confident in our ability to lead the industry in consistency, profitability, and long-term value creation. Before turning things over to Tina, I would like to thank and congratulate Gary Glandon, our Chief People Officer, on his upcoming retirement. His leadership is leveraging Lithia & Driveway's greatest strength, our people, and is a perfect exclamation point on an illustrious 25-year career, as Head of People Functions in his 5 years here at Lithia & Driveway. We look forward to seeing our people and culture teams that Gary has built, led by Katie Macaddino, continue to flourish and drive our mission of Growth Powered by People. With that, I'll turn the call over to Tina.

Thank you, Bryan. Our momentum in the second quarter translates into improving financial leverage with continued year-over-year EPS improvement, the highest quarterly income to date for financing operations powered by strong fundamentals and a focus on identifying ways to generate SG&A efficiency and free cash flow generation that funded the repurchase of 1.5% of shares in the quarter. These results underscore how ongoing cost control actions, a maturing captive finance platform, and balanced capital deployment are accelerating value creation. Adjusted SG&A as a percentage of gross profit was 67.7%, down from 67.9% a year ago. On a same-store basis, SG&A ticked up to 67.4% from 66.4%, reflecting cost pressures as we navigate declining front-end GPUs. We're pushing levers to reclaim operating margin by increasing productivity through performance management and technology, optimizing our tech stack and retiring duplicate systems, renegotiating national vendor contracts, and automating back-office workflows. These actions, combined with ongoing U.K. network rationalization, are designed to bend the SG&A curve lower again while giving store teams more time with customers. We expect the benefits to build each quarter, controlling SG&A even if front-end GPUs continue to normalize. DFC continues to scale profitably, demonstrating the differentiation of our model. Financing operating income more than doubled year-over-year from $7 million to $20 million, supported by a 50 basis point expansion in net interest margin to 4.6%. Disciplined underwriting remains the cornerstone with second quarter originations of $731 million, carrying an average FICO score of 747. This was achieved while increasing U.S. penetration to 15%, up 240 basis points versus last year. The optimization of risk and reward in recent vintages is driving improved performance, passing more of that spread through to earnings. Our market position at the top of the consumer funnel and high-quality originations keeps credit risk low and preserves balance sheet capacity for continued growth. With managed receivables now above $4 billion, our mature portfolio can continue to deliver outsized profitability relative to indirect lending, reinforcing our earnings growth trajectory. Strong origination flow, improving margins, and runway to increase retail penetration demonstrate a clear path to our long-term profitability targets for DFC. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $489 million for the second quarter, a 20% increase year-over-year, driven by increased earnings. During the quarter, we generated free cash flows of $269 million. Our business continues to convert operating momentum into healthy free cash flow, giving us the flexibility to pursue a balanced strategy of buying back shares, funding accretive store acquisitions, and investing in the customer experience, all while preserving a strong balance sheet profile. This steady, self-funded cash engine lets us stay nimble in challenging markets and deploy capital where it will compound shareholder value fastest. This quarter, we continued our balanced approach to capital allocation. We deployed approximately one-third of cash flows to share buybacks at an average price of $306, representing 1.5% of outstanding shares, one-third was allocated to acquisitions of high-quality stores in targeted geographic regions, with the remaining capital invested in store CapEx, the customer experience, and opportunities to improve operating efficiency. Our capital allocation philosophy is to act opportunistically, and with leverage comfortably below our target and ample liquidity, we are accelerating our share repurchases to target up to 50% of free cash flow and capitalize on what we view as a meaningful disconnect between our stock price and intrinsic value. This stepped-up buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. The last strategy remains anchored in consistent differentiated profitable growth powered by an omnichannel platform that now delivers tangible earnings at every step of the ownership journey. Our passionate teams, differentiated digital and financial capabilities, and sound balance sheet provide the foundation to scale both core operations and high-margin adjacencies, unlocking the next chapter of value creation in 2025 and beyond. As we continue our progress to creating $2 of EPS per $1 billion in revenue. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions.

And our first question is from Ryan Sigdahl from Craig-Hallum.

I want to start with SG&A to gross profit. So certainly making good progress on the adjacencies on the operating efficiencies. I hear you from an operational standpoint. But when I look at the numbers, I guess, a little bit worse than we were expecting from an SG&A to gross profit leverage despite better GPUs. So I guess, can you talk through kind of the operational improvements and then kind of the financial implications and maybe some guardrails as to help the Street and myself kind of think about how this layers into the income statement of the model as it relates to the second half of this year and then 2026?

Sure, Ryan, this is Tina. I'll start with that question. I mean, I think when we think about SG&A, as we've talked about before, a lot of it is driven by volume on the top line and making sure we're really driving that growth in terms of units and where that's happening in our stores. That continues to be the focus as we look at our leaders that we have in our stores or department managers, and making sure they're really driving to get that market share and that growth that's available in their market. And then looking at productivity and cost controls on that line as we look at SG&A. So I think it's a combined effort in both. We continue to pay a lot of attention to it and drive discipline through it and making sure we have the right leaders who are able to look at that. As we look at the rest of the year, we did increase the outlook slightly as we think about SG&A, just sort of balancing what's already occurred in the first half with continued discipline in the second half. And as we've talked about, that continued pace that we see, it needs to be that glide path down to getting towards that long-term target of 55% SG&A as a percentage of gross profit, but it's a diligence on it that we need to do every quarter.

Very good. I don't believe you commented on the U.K. specifically, so I'll ask it here, but very challenging conditions from an industry standpoint, changing EV mandates, et cetera, et cetera. But how do you feel about the U.K. from an industry overall and then where your business stands from whether it be cost or operational standpoint?

Thanks for the question, Ryan. I think the U.K. for us has been performing as expected. We were actually up profitability-wise by about 3% year-over-year, which was a nice number relative to what's happening in the marketplace. Neil and his teams there understand that top line is most critical, and they're obviously growing their businesses and doing a nice job at cost management and so on. So we're pretty pleased with where we sit today. And I think it took a year to get the network fairly well cleaned up, and they sit with a nice clean portfolio with a lot of really great people that understand the consumers and understand the competition and should continue to flourish in the future.

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

The next question is from the line of Michael Ward with Citi Research.

Maybe just following up on the SG&A side. With the addition of Pendragon, it kind of distorts some of the comps in Q2, in particular. How does the U.S. alone look on SG&A?

Our U.S. business remains strong regarding SG&A. As you know, the SG&A costs in the U.K. are higher. When we consider our overall figures, both teams continue to prioritize SG&A, and we believe there is significant long-term potential to reduce those costs over time. However, our U.S. business is performing well in this area.

I believe it’s important to recognize that while it's easy to focus on specific numbers, there are numerous factors that influence how we view and grow our business. It's tempting to concentrate on quarterly or yearly changes, but Lithia & Driveway has developed an organization that emphasizes various aspects of the customer life cycle to increase consumer wallet share and prolong engagement within our ecosystem. It's surprising that the market is taking such a narrow view of our achievements, considering we have tripled our revenue and earnings, and possess the necessary resources and strategies to sustain that growth. Our approach to mergers and acquisitions is consistent and methodical; we did not base our purchases on pandemic-era earnings and do not face write-offs like some competitors. Yet, these points are often overlooked. As we continue to establish ourselves as the largest auto retailer in the nation, the focus on minor details like SG&A being slightly elevated or same-store sales being less than expected distracts from the fact that our used car sales growth is leading the sector. In recent quarters, we have begun to bridge some performance gaps, and while our business is more heavily concentrated in regions with lower population growth compared to the more robust Southeast and South Central areas, we have successfully adapted our strategy. We are more optimistic than ever about our achievements and future potential. I appreciate the opportunity to express my thoughts, but it’s frustrating for our management team to witness the penalties of our efforts. When a single number from a set of seventeen stands out, it overshadows our collective accomplishments and the solid foundation we have built for future growth.

Well, my point was is it was better than it looks because the U.K. kind of distorts it. So the performance is actually better than it looks in 2Q. To that end, it looks like Driveway Finance has turned the corner. Tina, is $20 million, $30 million, the new run rate per quarter, is that what we're looking at? So $100 million-plus contribution, like '26?

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

Chuck's being very humble. Because I think the $20 million that we did was 3x what we did in the previous year. The spreads are there. Our delinquency rates continue to strengthen, okay, and become better, which is great. And I think it's easy to forget that though we made $20 million in the quarter, and I think we're targeting 60 or something, 70 for the year, ultimately, at the current revenue base where we finance vehicles, which is in the U.S., were about $32 billion in revenue, which is about $320 million in profitability at scale at just that revenue base. And we've continued to say that at a $50 billion domestic revenue base, we're going to make $0.5 billion, okay? That's real money that our competitors at this stage don't have, okay? And it's important to clarify that we're not getting valued on that, okay? And in fact, for the last 2 years, we've been penalized for it, okay? And I think there's a lot of confusion out there that it takes a lot of capital and a lot of courage and bold planning to be able to execute on the things that we're executing on to be able to bring you what is now a company that has the ability to compete in acquisitions, in consolidation, and then the bottom line profitability in ways others can't.

Yes. It's a marathon, not a sprint.

The next question is from the line of Rajat Gupta with JPMorgan.

I'm sorry, I need to apologize in advance. I want to follow up on Mike's question and your response. It seems like, Bryan, you've made a lot of acquisitions since the pandemic and grown your company threefold, as you've mentioned. However, it has been a couple of years since those changes were implemented, and it's been 10 quarters since the same-store metrics have lagged behind your peers. I'm curious if 1.5 years is sufficient time for recovery, or if we need to wait longer to see improvements. Can you provide some insight on when we might expect to see better organic performance? I appreciate the adjacencies, and I think DFC is promising, but I'm specifically asking about the store performance metrics and when we can expect them to align or outperform peers. Additionally, I have a quick follow-up.

Rajat, if you look back over the last three quarters, we've made significant progress in our performance. In used cars, we ranked first in revenue growth, and in service, we were in the middle of the pack. It's important to note that our service figures are based on a smaller number of units in operation compared to others. We estimate a 3% to 3.5% difference purely from the number of units in operation, and we were about 1.5% to 2% below our peer group. Regarding new car sales, Stellantis is still facing challenges, and we hold a substantial share similar to AutoNation, while the rest remains uncertain. You can view things that way if you like, but it's just one aspect of our organization, and our ecosystem is starting to improve. Our same-store sales growth is addressing the existing gaps. I can't change our presence overnight; remember that we were 80% based on the West Coast before acquiring DCH and almost 75% of our business was with domestic manufacturers. Currently, less than 30% of our mix consists of domestic vehicles, and we have over 40% of our mix in the Southeast and South Central regions. This shift automatically leads to operating margins that are more than double those in the Western regions. So, if you want to compare fairly, it's crucial to dive deeper into the market dynamics, population growth, and how operational profits and dock fees affect our operations.

Understood. If you have visibility on these gaps closing and improving over the next few years, could we expect a more aggressive approach towards stock buybacks, especially considering that you are significantly undervalued compared to your peers, at least temporarily until the market recognizes this?

Sure, Rajat. That's a good point. I think when we are trading at a 20% to 30% discount compared to our peers and have the potential for 20% to 40% upside from our adjacent markets that are not fully tapped, it's clear that we have a strong trajectory. As Tina mentioned, we are now dedicating 50% of our capital to buybacks. We're actively purchasing shares and will keep doing so until the market recognizes the unique value we've built. While there are various performance metrics, it's crucial to consider the overall achievements, as our focus is on total shareholder return and growing the company in both revenue and profits. We believe we will eventually be rewarded for our efforts. However, it can be frustrating for the management team to realize that the bold steps we've taken to innovate in our industry have led to penalties in the past 2.5 years. This situation presents a great buying opportunity, and given those substantial discounts, we are committed to repurchasing shares.

Understood. Thanks for the answers and good luck.

Next question is from the line of Daniela Haigian with Morgan Stanley.

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

Great question, Daniela. And I think as we think about our mix, what we're seeing and part of the reason for the outperformance in used vehicles on same-store is because we're growing our over 9-year-old bucket quite nicely. It was up 50% year-over-year, okay? That obviously means that the other buckets didn't grow quite as fast, but that's because the supply in those buckets really aren't there. We are purchasing over 2/3 of our vehicles directly from consumers. Those are yielding almost a $1,700 price difference between those vehicles purchased from options that are on the street, okay? And that's a massive competitive advantage over used-only retailers that are not a funnel quite as much. One of the other notes that I think is important to understand is that in our ecosystem, Driveway actually purchased over double the amount of vehicles through our AI valuations and those purchasing metrics. So quite a difference year-over-year, and that's starting to impact our ability to find the vehicles to be able to meet our consumers' demand at the right affordability levels.

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

We've achieved just over $0.5 billion this year and have a significant amount under contract. However, I want to emphasize that we do not adjust our pricing. We let the market come to us and take action when opportunities arise that offer a good return on investment. In my prepared remarks, I mentioned that our acquisition success rate is 95%, and it has now improved to 99% after removing some smaller stores, contributing to that increase. This strategy is straightforward, and we believe the market will return to us as profits stabilize, which they have been doing, but we need that stability for a couple of years since it influences pricing. Furthermore, having a lower stock price can be beneficial; if M&A becomes more expensive, we can consider buying back our shares. In summary, I believe we can achieve the lower end of the $2 billion to $4 billion target by year-end, and we have had a number of developments over the past few months.

The next question is from the line of Mark Jordan with Goldman Sachs.

For the aftersales segment, how much of the stronger same-store sales growth can you attribute to lapping last year's CDK issues? And is there any additional color you can provide regarding how the different channels performed?

Really, really good question. I would say that the lapsing of performance in same-store sales was driven by a little better than 50% by the easy lapse of comp, okay? I don't know what the other peers had communicated that, with the rest coming from outperformance, where a lot of it is being driven by customer pay and some by warranty.

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

Mark, I would say that there are slight impacts from tariffs, but most manufacturers have managed their pricing on parts effectively. Looking ahead, there may be implications, but we did not observe any significant impact from tariffs. Additionally, we experienced a 1.5% increase in margin in aftersales, which typically indicates a higher mix of labor, a higher margin business compared to parts. Therefore, without specific data related to tariffs, I would conclude that their impact has been minimal.

The next question is from the line of Ron Jewsikow with Guggenheim Securities.

I wanted to start by discussing the DFC growth this quarter. After another strong quarter for DFC, it seems that the guidance for the second half suggests a significant reduction compared to what you achieved this quarter. I'm trying to understand what factors are influencing that, as both net interest margins and credit performance appear robust. I'm not sure if this is simply a cautious approach. It seems like you still aim to grow the portfolio quite actively, but it's challenging for us to reconcile that with the lower end of the guidance range.

Yes, Ron, this is Chuck. That was a great question. I believe you touched on some important points. One of the strengths of DFC is that we've been increasing our penetration rates and are approaching a consistent 15% rate, with hopes of reaching 20% in the future. As we ramp up our originations, it may impact our near-term profitability due to the need to set aside CECL reserves upfront. Additionally, there is some seasonality in our figures; during the summer months, consumers typically do not pay their auto loans, which might lead to an increase in delinquency rates as reflected in some reports. However, after the summer, we anticipate a decrease in those rates and hope they won’t lead to significant charge-offs. Some of the current situation is attributed to our growth rates, while another part is due to seasonal factors.

Our 3.1% loss ratio includes and assumes that seasonality, but it does change the profit equation. So if you look at the first quarter, you can't just take it times 4 and say...

Exactly, Bryan.

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

Sure, Ron. The key point regarding SG&A costs is our focus on growing our top line, as it is essential for generating net profit. A significant portion of our net profit comes from aftersales, which is 62%. Therefore, to enhance our aftersales, we need to invest in it. Our SG&A primarily consists of personnel expenses in the sales department, where investments will yield returns in aftersales. It’s crucial to keep this in mind. We are also working on reducing our cost structures in sales and service. Adviser pay, although a small part of SG&A personnel costs, is related to productivity roles. We are excited about our partnership with Pinewood.AI. In the near future, we expect to hold about a one-third ownership in that company. This AI technology will facilitate collaboration between our customers and sales associates in service and sales departments, leading to reduced personnel costs. Many of the 700 basis points we aim to achieve will come from AI enhancements and optimizing our staffing strategies. The remaining cost reductions will stem from vendor relations and scaling efforts. We are focused on increasing productivity in both sales and service roles, and while some AI benefits are already evident, the integration of these systems that we are developing with Pinewood will be even more impactful in the long run.

Yes, that's super helpful. And I appreciate the detail on the AI sourcing of vehicles as well. It's interesting anecdotes.

The next question is from the line of Jeff Lick with Stephens.

Congratulations on a great quarter. Bryan, I wanted to tap into your extensive knowledge and experience. Assuming we end up with a 15% tariff across the board, particularly affecting high-cost goods like cars, which have a cost of goods sold around 85% to 87%, the necessary price increase at the OEM invoice level would be quite significant. At some point, discussions will need to take place regarding the units that are affected by the tariffs. I'm interested in your perspective on how you think these discussions will unfold and what the mechanism will be. Eventually, OEMs will have to approach dealers and indicate that they need to share the burden. How do you envision this playing out?

Sure, Jeff. Let me address your question directly and then expand on our mitigation strategy. The key point is that all our manufacturers are competing to sell cars, which is crucial. About half of the vehicles we sell aren't affected by tariffs. For the remaining half, manufacturers are either reducing features or not charging for upgrades, allowing consumers to save money. When considering the 15% increase, consumers are likely to save on fuel because a significant portion of our vehicle sales are fuel-efficient. Additionally, financing options are improving, with manufacturers providing subsidies and the government allowing interest write-offs on auto loans. So, while tariffs might affect half our inventory, they are just one factor among many, and our stores will adapt accordingly. Regarding Lithia Motors and Driveway's response, our profit equation shows that over 60% of our net profits come from aftersales, with less than 20% from new vehicle sales, including financing and insurance. As we move forward, the share from aftersales will likely increase, while new car sales will serve as a gateway to higher-margin financing and service operations. It's an exciting time in the industry, and we are well-equipped to navigate these challenges. Companies with more cash and the ability to provide customer-friendly solutions will likely gain market share and be better positioned against tariff impacts and other industry changes.

And one follow-up while I've got you in this kind of big picture mode here. For the first time, we heard regarding the U.K. that Chinese OEMs, which none of the public companies have any Chinese OEM franchises in the U.K., may be starting to represent some significant competitive pressures and could complicate things for other OEMs or brands. I'm curious about your perspective on the Chinese OEMs and, if you want to go a step further, what the implications are. Do you think they will eventually enter the U.S. market? I would love to hear your thoughts on that.

We need to see how the tariff situation evolves. U.S. consumer sentiment may differ from the U.K. Moreover, it's important to note that we have a presence in the U.K. with BYD and MG, totaling five stores, which allows us to observe trends there. The market dynamics have been quite volatile. Initially, we had a strong start with BYD, but growth slowed significantly after about one and a half quarters. Recently, there's been another upswing that's affecting the market. However, adapting to changes in the U.K. has been relatively straightforward. From a profitability standpoint, this remains a small factor for us. I would also point out that even with 110% tariffs on Chinese products, BYD's pricing in the U.K. is not substantially lower than that of BMW or Mercedes for similar vehicles and propulsion systems. We will continue to diversify our strategies and monitor developments in the U.S. regarding these models, especially since there have been three unsuccessful attempts by major Chinese manufacturers to enter the U.S. market, which have not mirrored successes seen elsewhere globally.

Our next questions are from the line of Federico Merendi with Bank of America.

Earlier, you mentioned that the 55% SG&A target long term, and I appreciate the commentary on the actions to reduce the SG&A, but it seems to me that an important part of the equation is also this footprint. That's your size. And I was wondering how much larger has to Lithia become to enable that target reach?

Federico, congratulations, too, on taking over the research, and welcome to the space. I think when we think about our trajectory and our timing of SG&A, we're looking out a half a decade to be able to accomplish it because it's easy for us to say that we can reduce our personnel expenses, which makes up the most of the SG&A cost. But ultimately, if we're not competitive in terms of salaries and compensation with what the industry is, you ultimately can lose your people. Now if we can provide solutions that allow our people to be more productive and ultimately make more money than the industry, okay, then ultimately, the throughput that we gain from that can create the disconnect in profitability. So we can move a little bit ahead of where the industry is out, but not massively ahead of the industry, okay? And I think when we think about the trajectory on that, about half of the improvements do need to come from personnel costs, and they are focused on the sales and service departments on the support staff, okay? And that's something that I think I challenge my stores to be thinking about what do we have for BDCs, 20 years ago, we didn't have BDCs, and they're great in certain locations where you have massive amounts of volumes and the department leaders have figured out ways to get productivity out of both. But in many situations, we added business development centers and service and sales that are basically doing the same job that our advisers and our sales associates are doing. So lots of opportunities to be able to attack that. The remaining portion of that is coming from scale, and it's coming from the adjacencies of what they provide with lower marketing costs, more efficient inventory, and so on.

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

Sure. While I can't say everyone measures the same way, I do have some insights regarding our performance. We sold more than 25.5% of our vehicles through omnichannel sources with digital support, amounting to 45,000 vehicles in the quarter, which is a significant increase from our past figures. Our Driveway channel continues to bring in over 97% new customers, demonstrating its effectiveness, and we are focused on expanding that channel. Importantly, having an omnichannel solution in our stores is vital; it highlights why a Business Development Center was created, as salespeople weren't as prepared to handle internet leads 15 to 20 years ago, but now they are equipped to do so. Our IT solutions leverage AI to manage leads and communications for us, facilitating changes that help reduce costs. When it comes to digital solutions, they align well with our SG&A strategies. We are thrilled with our progress in developing Driveway, and currently, the My Driveway portal has around 137,000 users, having launched in December last year. We're about 7 to 8 months in, and usage is increasing, with consumers taking on more tasks themselves in a straightforward and transparent manner.

Thank you, guys, and I look forward to working with you.

Thanks, Federico.

Our next questions are from the line of Chris Bottiglieri with BNP Paribas.

I want to follow up on the increase of the GPU value by about $200 a unit at the midpoint, considering there's been some strength year-to-date. How do you view the impact of tariffs on that outlook? What do you anticipate the industry will do regarding inventory levels, brand mix, and incentive levels as it trends toward 2025 and 2026? Do you have any insights on the factors driving those changes?

Sure, Chris. I think when we think about the impacts of tariffs, we got to go back to affordability because I think we still have the ability to order cars. We still have the ability to guide and support manufacturers on decontenting cars and to be able to keep affordability front and center. It's easy to get lost in that these increases are going to create this higher price level. We make 5% to 7% on the new vehicles that we sell and have varying costs and so on and so on. So there is structural support within the industry and across competition that we're not here to kill each other, and there's only so much margin in cars and 5% to 7% is pretty small. So manufacturers are going to have to respond. We continue to believe that incentives are going to have to grow again. And I think as we think about how that shakes out, each of the manufacturers in each of the segments are going to have to think about how they go to market to be able to respond to that. As a side note for the quarter, incentives were only up about 0.5%. They went to 6.5% of the price of a vehicle from 6% in the previous quarter. So I think there's still a lot of room there as manufacturers think about their own P&L and think about the market share in the future of where they want to sit and how they capture customers to be able to sell another car 4 to 5 years from now. So we think we're pretty insulated from the impacts of tariffs, and it's easy for us to get confused with what manufacturers have to do versus what a retailer has to do. We're quite diversified. And you can see as we think about our model, just move downstream. Whether it's decontented new cars or whether it's more mainstream new cars or whether it's selling more value auto cars, retailers are pretty adaptable.

Got you. That's really helpful. And then on the credit side, I mean, your own credit performance has been pretty spectacular, but you've grown the portfolio a lot. Just curious what you're seeing to peel the onion back. Like, are you noticing any differences between the '21, '22 vintages and the '23, '24s, do you see any differences between borrowers that have student debt and those that don't? It just seems like the broader credit environment is a little bit choppier, but yours look great, let's see what we can learn from you.

Yes, Chris, this is Chuck. Great question. Yes, that 2021 vintage both for us as well as the market really was one that's not performing as well as we all, I think, would hope in the industry and the segment. But that really led for us to take that major shift for us to move up market and really try to derisk our portfolio. And as you said, we're really starting to see that start to flow through in our '23, '24 and even into our '25 vintages. We really feel strongly that we are starting to see separation on preferential selection from some of the key metrics like delinquency and some of the default rates. So we expect that preferential selection to continue as we go forward and hopefully see the results of that as we go forward in the market in our financial.

I love how Chuck is so humble on things. I think it's important to note that when you think about the different vintages of our portfolio, remember this, okay? At a 15% penetration rate, that was our mid- and long-term goal, okay? And we accomplished that by lowering our LTV by 1% to less than 95%, okay? Our original targets were 100% to 105% LTVs, okay? More importantly than that, our average FICO score on our incoming business this quarter was 746, okay? That's 36 points higher than what our original forecast had established at 710, okay? We were also 15 points higher FICO this year over last year, okay? So when we think about our loss ratios, we're able to skin better and better paper from our stores, and they're doing an excellent job at giving us first look, and we're going to continue the pathway towards the 20%, which is our super long-term goal. So we're pretty excited of what we see, and we're bucking the trends 2 years ago. We bucked the trend last year, and we're bucking the trend this year, and we're not seeing any softness across our portfolio, and it's continuing to add value to our ecosystem and to our customers' relationships.

The next question is from the line of Doug Dutton with Evercore ISI.

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

Yes, Doug, this is Chuck. Our financing income is actually our segments. We do have a couple of other businesses that are included in that. Notably, we do have a finance company in Canada as well as a fleet management company in the U.K. that also does financing that does get consolidated into that. So I think if you were to peel back, sometimes we do refer just to the DFC, which is the U.S. portion of our business for some of our numbers. But the $20 million and the $7 million that Bryan referenced was for our financing income segment. So hopefully, that clears up that question.

Remember, Chuck talked about the seasonality. And when we talk about improvement, its year-over-year improvements. I mean, we made $10 million last year. And DFC as a whole, we're going to make $60 million to $70 million this year.

Our final question is from the line of Mike Albanese with The Benchmark.

Really appreciate all the great commentary on this call. I just had a quick one on new vehicle volumes, obviously, pulled back your guide from mid-single digits on the year to low single digits. Is this just a reflection of updated Q2 results, essentially a change in the base going forward? Is it more company-specific? Obviously, regional and brand mix play a role here. Or macro-related, obviously, thinking tariffs and pricing implications on the consumer in the second half? If you could just comment on your rationale there, that would be helpful.

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

Got it. That's helpful. Switching gears to Pinewood, it's currently positioned for growth. Could you outline your expectations or timeline regarding the rollout across your base and beyond? A better way to ask this might be, how should analysts like us be measuring success in that rollout?

Sure. I want to give a lot of credit to Pinewood. They excel at coding and capturing market share, currently holding almost one-third of the market share in the United Kingdom. They're expanding globally, which is quite exciting. This growth provides them with the resources needed for their plans in North America. Our schedule includes a couple of stores opening by the end of the year with two specific manufacturers, and we expect to launch another 15 to 25 stores next year, aiming for full rollout in 2027 and 2028. The Pinewood teams are prepared and supportive of this initiative, and we are looking forward to it. Additionally, there was a mark-to-market adjustment, but we still exceeded expectations by nearly one dollar, which is significant considering our current position. It’s also important to note that we have not yet recorded the North American joint venture equity, so that number will reflect in future quarters. This represents a crucial investment within our ecosystem. While not all of our stores are using it yet, the U.K. operations are performing exceptionally well. Significant improvements in SG&A can be achieved through the utilization of Pinewood.AI solutions, which will help elevate our efforts in North America for a successful future with our larger platform and portfolio.

Awesome. Really helpful. Nice quarter.

Thanks, Mike.

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

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

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