Greetings, and welcome to the Lithia Motors, Inc.'s 2025 third quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, it is now my pleasure to introduce your host, Jardon Jaramillo. Thank you. You may begin.

Good morning. Thank you for joining us for our third quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today's discussion may include statements about future events, financial projections, and expectations about the company's product, 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 that 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 reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, highlighting our third 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 third quarter earnings call. This quarter was all about execution at speed. We improved our same-store revenue across all business lines, focused on cost control, and deepened the integration of our adjacencies within store operations. The result is a high-quality earnings mix with more profits coming from recurring streams to create compounding cash flows. Quarterly revenue was $9.7 billion, up 4.9% year over year, and adjusted diluted EPS was $9.50, up 17%. These outcomes reflect the power of our ecosystem in combining local market leadership with a unique omnichannel platform. This quarter highlights an inflection in our performance with strong top-line growth across all business lines, highlighted by the accelerated growth in our highly profitable used vehicle and aftersales segments, demonstrating our focus on execution. We look to continue to capture market share and increase customer loyalty, finishing strong in 2025 and springboarding into 2026.

Our team is quickly converting our momentum into share gains, faster throughput, and sustained cost efficiency so earnings power builds from here. Our unique and diversified earnings engine is the industry while also being more durable, despite a mixed customer backdrop of normalized GPUs and customer affordability issues. The gross profit growth in our recurring aftersales department, resilient finance and insurance attachments, and a focus on increasing market share created strong top and bottom-line results. Combined with tight SG&A control and a focus on fast-turning used cars, we have multiple levers to expand margin and cash flow in any environment. Our results reflect our momentum in building value for customers through simple, empowered, and convenient solutions. As such, same-store revenues for the quarter increased 7.7%, driven by growth in every business line. Despite continued normalization of front-end GPUs, total gross profit also increased 3.2%. Total vehicle GPU was $4,109, down $216 year over year, consistent with industry trends. Note that all vehicle operation results are on a same-store basis from this point forward. New and used volumes both contributed nicely to top-line growth. New retail revenue grew 5.5% with units up 2.5%. New GPU was $2,867, down $348 sequentially. The past few quarters of lagging domestic brand performance shifted this quarter and drove most of our year-over-year improvement. Adversely, luxury brands performed the weakest year over year and import brands were relatively flat. Our used vehicle performance continues to improve nicely, now considerably outperforming the industry with used retail revenue increases of 11.8% over last year. This was driven by a 6.3% increase in unit growth and higher average selling prices. Our value segments continue to deliver high growth with a 22.3% unit increase year over year. Well done, team Lithia. Lastly, used front-end GPU was $1,767, declining by $90 sequentially. Our strategic focus on used vehicles provides another durable layer in any cycle and affordability level.

We will continue to prioritize high ROI used vehicles, keeping all price levels of our vehicles in our ecosystem, turning inventory efficiently, and increasing the finance and insurance and aftersales attachment to deliver more connected and repetitive ownership experiences with our customers. Finance and insurance also continues to grow with revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. Finance and insurance per retail unit reached $1,847, up $20 year over year, which includes the impact of lower finance and insurance from increasing penetration of electric vehicle leases and strengthening drive finance penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new day supply at 52 days, a decrease of 11 days sequentially. Used days sales outstanding was 46 days versus 48 in Q2. Floorplan interest expense declined $19 million year over year due to tailwinds from decreases in inventory balances and slightly lower interest rates. Aftersales continues to be the largest single driver of customer retention and earnings growth. Aftersales revenue increased 3.9% while gross profit rose a hefty 9.1%, with margins expanding to 58.4%, up 280 basis points year over year. We saw strength in all key aftersales categories with customer pay gross profit up 9.2% and warranty gross profit up 10.8%. The strong growth across both categories shows the resilience and opportunity of aftersales and illustrates the value of increasing the number and frequency of customers in our ecosystem. Cost discipline driven by productivity gains and managing performance through people is a key element of our earnings engine. North America's adjusted SG&A was flat sequentially at 64.8%, as we bent the cost curve even as GPUs continued to normalize. In the UK, our teams are responding to market conditions and regulatory labor costs that increased in the year by improving productivity and managing performance through people. Globally, we are increasing market share and growing our high-margin aftersales business as we simplify the tech stack with Pinewood AI, retire duplicative systems, and increase sales efficiency without compromising the customer experiences to drive incremental SG&A leverage. This leverage is amplified by our digital platforms, where we're unifying the customer experience across driveway.com, green cars, and our My Driveway owner portal to make shopping, financing, and service simpler and faster. The sale of our North American JV back to Pinewood AI streamlines the path to market for North America rollout, creating a single industry platform for stores and customers, reducing duplication, and increasing speed of delivery by empowering associates and customers. Together, these steps deepen retention, support SG&A leverage, and reinforce the power of our ecosystem. Driveway Finance continues to build a growing base of stable earnings, with healthy spreads and disciplined underwriting. The path to higher penetration is clear as our focus on growing market share provides us a larger funnel of high-quality loans as we move towards our long-term targets, converting retail demand into recurring stable earnings through any economic cycle. I'm happy to congratulate our Driveway Finance team and our store leaders for achieving our 15% penetration rate milestone a few quarters earlier than expected. Well done, team. Turning to capital strategy. We remain focused on investing where we can create the most shareholder value. With our stock trading at a meaningful discount, this quarter we prioritized repurchases, buying back 5.1% of our outstanding shares at prices that will drive significant long-term accretion. This quarter, we issued low-cost, well-priced bonds, increasing our flexibility without stretching risk. Looking ahead, we'll keep making incremental accretive decisions, buying back more when the discount is wide, funding selective acquisitions when returns are clear and more affordable, and continuing to invest in technology. Each element of our ecosystem is building traction and momentum. We're increasing market share and productivity, building stable earnings power in our service drives, accelerating high ROI, value autos, and scaling our adjacencies while improving SG&A leverage. Optionality in our free cash flows and expertise in M&A provides a strong foundation to grow durable EPS and cash flow in any environment. Strategic acquisitions remain a core pillar and key differentiator of our growth model. From $12.7 billion of revenue in 2019 to approaching $40 billion today, we've paired scale with consistent EPS compounding in one of the most unconsolidated retail sectors. This growth was accomplished while also building a much more diversified and profitable business model. Today, our cash engine and unique ecosystem give us the flexibility to both accelerate buybacks and continue to grow organically through exceptionally high return targeted acquisitions. We remain disciplined and U.S.-focused in our acquisitions, prioritizing stores that strengthen our network, especially in the Southeast and South Central regions, where population growth and operating profits are strongest. Alongside these additions to our network in the quarter, we reiterate our $2 billion acquisition revenue estimate for 2025, expecting a strong finish with some complementary acquisitions by year-end. Our acquisition financial hurdle rates are unchanged to acquire at 15 to 30% of revenue, or three to six times normalized EBITDA with a 15% minimum after-tax return. It is important to note that our track record over the past decade has yielded high rates of return, nearly doubling these hurdle rates. Over the long term, we continue to target $2 to $4 billion of acquired revenue annually, deploying capital where each incremental dollar compounds value per share the fastest. If seller expectations stay elevated, we'll lean harder into repurchases. When fit and value align, we move with speed to integrate accretive acquisitions. With the foundation set, and strategic design now providing meaningful tailwinds, Lithia Motors, Inc.'s differentiated model is delivering. Our long-term $2 of EPS per $1 billion of revenue targets are powered by a consistent set of levers. Lift store level productivity and throughput, expand our footprint and digital reach to grow U.S. and global market share, increase Driveway Finance penetration, reduce costs through scale efficiencies, SG&A discipline, and an optimized capital structure, and capture rising contributions from omnichannel adjacencies. Together, these levers will continue to convert momentum into durable EPS and cash flow growth. Our nationwide network of amazing people, paired with industry-leading digital tools, is driving engagement across the full ownership life cycle. Strengthening used vehicle aftersales in our captive finance business deepens customer economics and smooths out any economic cycles while inventory and network scale improve speed and choice. Operational leaders across the network are driving store and departmental performance towards potential, integrating adjacencies, leveraging our ecosystem, and elevating our customers' experiences. The result is a model with consistency, resilience, flexibility, and visible compounding power that will deliver accelerating shareholder value. With that, I'll turn the call over to Tina.

Thank you, Bryan. Our third quarter momentum is clear. Year-over-year EPS improved, financing operations delivered continued growth on solid credit and healthy spreads, and we made progress on SG&A efficiency. Strong free cash flow generation supported meaningful share repurchases, and our balance sheet remains flexible with ample liquidity to fund growth and returns. These outcomes reflect disciplined cost actions, a maturing captive finance platform, and balanced capital deployment. Taken together, they position us to continue compounding value per share. Adjusted SG&A as a percentage of gross profit was 67.9% versus 66% a year ago. On a same-store basis, SG&A was 67.1% compared with 65.1%. As Bryan mentioned, sequential SG&A in North America was essentially flat at 64.8%, which reflects the cost discipline of our teams considering the sequential decrease in total vehicle GPU of $315. Our teams continue to focus on managing costs through growing market share and gross profit as we start to lap prior comps that reflect our sixty-day cost saving last year. In the UK, macro and mixed headwinds pressured margins and labor costs, we are focused on actions to increase gross profit, including increasing market share in used autos and aftersales and reducing SG&A through efficiency and cost control. We've seen solid SG&A results as we bend the cost curve in North America, we're making improvements across our network. Particularly in the UK with specific levers raising productivity through performance management and technology, simplifying the tech stack, and retiring duplicative systems, renegotiating national vendor contracts, and automating back-office workflows. These actions should build benefits each quarter, containing the SG&A trend even if front-end GPUs continue to normalize. Driveway Finance Corporation continues to scale profitably, underscoring the differentiation of our model. Financing operations income was $19 million in the quarter, with portfolio growth offsetting seasonal trends and profitability. We achieved $52 million in financing operations for the year to date, hitting the low end of our full-year expectations a quarter early. Net interest margin of 4.6% was up 70 basis points year over year, while North America penetration reached 14.5%, up 290 basis points year over year. Our disciplined underwriting and credit management practices resulted in strong provision experience, and we have not seen meaningful changes in consumer credit trends within our portfolio. Our position at the top of the demand funnel and high-quality originations keep credit risk low and capital efficient, managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that reflects our earnings trajectory with steady, consistent growth. Strong origination flow, improving margins, and a clear runway to increase retail penetration rates gives us confidence in the path of our long-term Driveway Finance profitability targets. Now moving on to our cash flow and balance sheet health. We reported adjusted EBITDA of $438 million in the third quarter, a 7.7% increase year over year, primarily driven by lower flooring interest. We generated $174 million of free cash flow, converting operating momentum into liquidity, that lets us both return capital and invest for growth while maintaining a strong balance sheet. This steady self-funded cash engine keeps us nimble and focused on deploying dollars where they compound value fastest. This quarter, we strengthened our capital allocation commitment to focus on share buybacks. With our share price significantly lower than intrinsic value, we allocated approximately 60% of capital deployment to share repurchases, buying back 5.1% outstanding shares at an average price of $312. So far in 2025, we have repurchased 8% of outstanding shares at an average price of $313. Slightly less than one-third of capital was deployed to high-quality acquisitions in targeted regions and the remainder to store capital expenditures, customer experience, and efficiency initiatives. Our capital allocation philosophy is to act opportunistically and with leverage in our target range and ample liquidity, accelerated share repurchases to capitalize on the meaningful disconnect between our stock price and the fundamental value of our business. This quarter, higher buyback pace allows us to compound returns for shareholders while still preserving capacity for high-return strategic acquisitions. Our strategy remains consistent while we continue to grow. Generating differentiated stable earnings from an omnichannel platform that serves the full ownership cycle. With talented teams, class-leading digital and financing capabilities, and a strong flexible balance sheet, we're scaling core operations and high-margin adjacencies with measured discipline. Our omnichannel model creates durability and flexibility as business conditions evolve. Preserving capital flexibility to deploy where returns are highest. As we move into 2026 and beyond, we will continue our focus on translating share gains and throughput into cash flows compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, while we poll for questions.

Hey. Good morning, Bryan. Tina. Nice to see the operational improvements. I want to start with EVs. EVs were impacted by the tax credit expiration. But it seems like Lithia Motors, Inc. cleared through most of their EV inventory or refreshed a lot of it anyways. But can you talk through what you saw in the quarter, what that meant from a sales standpoint and then also GPU standpoint, and then how you think about that category going forward?

Sure, Ryan. This is Bryan. Thanks for joining us today. Believe it or not, our electrified vehicles in the quarters were back to 43% of our total new car mix, which was a nice number. We actually started the month of September with around 6,000 electrified vehicles that qualified for the $7,500 federal credit. By the end of the month, we ended at just under 2,000. With really the only product that's remaining being a little bit of the higher priced models. The other thing that's pretty important to remember is manufacturers incentivized those cars quite nicely as well. Many of the manufacturers are carrying over those incentives plus the $7,500 credit on top of that to maintain volume. I'm not sure how it will trend in October but I anticipate it might drop a bit. Importantly, most of those vehicles were leased. Our lease penetration for new vehicles was almost 40%, the highest we've ever seen. This means most customers will return in the next twenty-four to thirty months. We can definitely move the market when we need to. I think what I take away is that those vehicles, the 4,000 units we pushed out in September, were mainly first-generation BEVs with second-generation cars set to come in early 2026.

Yeah. It's great color, and not just consumers coming back, but like you said, the first right of refusal for that inventory on the used side coming in the door for you guys. I want to switch over to The UK. I appreciate the disclosure on North America SG&A to gross. If I back into it, I think it implies The UK was something in the high 80 range. Understanding the margin challenges there, the labor challenges, etcetera. It sounds like a lot of company-specific initiatives from cost efficiencies focusing on parts and service and used and things that the US did a decade ago. But do you see any kind of line of sight to improve market conditions there, or is it really a self-help do what you can do given the Chinese mix and constraints in the market?

No, Ryan. Great questions. The labor market really shifted in January due to changes in the minimum wage and payroll tax. The actual impact to our organization was around $20 million. We curbed about $11 million of it in the first six months through headcount reductions and productivity gains. They have earmarked another 8 or 9 million, but it still doesn't fully address the impact, and there's another 3 million expected in 2026. They are really working on how to navigate this. Although our SG&A is higher than last year, and the market has shifted, our team is responding quite well relatively. We improved operational net profit in parts and service by around $1 million. Our used cars are performing slightly better than the market and our new cars are in line with the market. We currently have almost a dozen Chinese brands and this market expansion is helping us respond better. Overall, we see the opportunity to improve market share.

Good morning, everybody. We've seen some turmoil in the supply market, and today, there were more news on that front. So what my question is, Bryan, could you give us an overview of the used market and how subprime can impact it? I understand that your higher credit quality, but what are the ramifications for this the credit portfolio?

I would love to, Federico. Let's speak directly to the used car market as a whole, not specifically to our Driveway Finance part of our organization. In the used car marketplace, there is a lot of opportunity, especially within value auto segments. Contrary to industry beliefs anecdotally, lower-priced vehicles are financed about 50% of the time, while certified vehicles are financed 90% of the time. This is because value autos are often scarce and take money to recondition, making them harder to finance. We achieved 74% of our used car sourcing in this quarter from direct purchases from consumers, meaning a higher-quality customer who typically has better credit is buying cars. Our margins on used vehicles are also notable; we made more than 5% margins on certified and core vehicle sales, but our value auto this quarter saw margins near 16%. So, we are quite optimistic about the dynamics we saw in this space.

Thank you, Bryan. It was super helpful. And the second question I have is on The UK and the regulatory environment. We have seen that in The US, the EV regulatory environment has changed. And Continental Europe seems to be moving in that direction. What do you think is going to happen in The UK over the next 18 months regarding EVs?

In The UK, EVs make up over 10% of our revenue and represent about 5% of our net profit. The growth in our brands is mainly from the introduction of ICE vehicles into the marketplace. When they initially entered, they focused heavily on electrified vehicles, but now companies like BYD and MG are seeing growth from ICE and plug-in hybrids. While the price points of these electrified vehicles do not compete with U.S. pricing, they are still built to make headway. Currently, UK sales for electrified vehicles have plateaued at around 55% penetration rates. That said, there will likely be increased regulations surrounding electrification in The UK. However, we are focusing on selling ICE vehicles, where we are seeing growth.

Good morning, Bryan. How are you, sir?

Good. Did you have two questions? On the USB EV sales, you mentioned there are about 4,000 units. If I believe what I hear of the industry, the margin on those is very light. So if you take that out, you probably your overall gross new vehicle gross has been relatively flat. Am I correct?

Yeah. I think that's a fair assumption, Mike, that the BEVs are a little bit lighter, and we're pushing those out the doors. Our manufacturers are asking us to help them meet their CAFE standards so they can ultimately continue to build higher demand units.

And, yeah. Now we need better cars. It is. What kind of plan? It's a much higher repeat buyer too. Right? The EVs? Like, once people buy them, they love them.

I think you're right about that. The big thing is we're looking at conquesting second and third-generation Tesla customers. Our managers and store leaders are savvy in understanding whether they should sell an electric, plug-in hybrid, or an ICE engine. The customer experience is vastly improved as they enjoy a wonderful service and aftersales experience. We are excited about next-gen vehicles entering the market soon.

Great. Thanks for taking the questions. I just wanted to dig in a little bit more on the U.S. versus UK performance. Anything more you can share in terms of how the GPUs were in the US versus UK? And how was the services growth? I appreciate the SG&A comment, but just any more clarity around the profit performance would be helpful. And then, relatedly, any more color on the US in terms of how you feel you're doing versus the marketplace now?

In North America, we massively beat on used cars, as the market is showing flat growth. We sit quite nicely at an 11.8% revenue increase and almost 7% unit increase. Compared to used-only retailers down 6%. Therefore, our model's strength is evident. Additionally, we reported over 9% in aftersales gross profit, which is driving a lot of the profitability. In the UK, profits were only down 2.4% year over year, so it didn't significantly impact our overall numbers. Most of the total GPU decline is representative of North America. We also note that GPU for the nation is reportedly down almost 16% for new vehicles, so we believe we could beat that trend because our team continues to be proactive. We have read some third-party information that suggests GPU generation is down. However, I believe my team is implementing strategies to improve our metrics and leverage opportunities amid challenges. I believe there are countless operational opportunities for us as we leverage our knowledge and enhance our cohesive strategies.

As you build out the Chinese brand mix in The UK, could you talk about the rooftop economics of BYD or MG, which are seen as lower price point units? Are you getting similar GPUs and aftersales mix out of those brands as you do out of your legacy UK product?

Good question, Brett. The answer is yes, on GPUs. We are getting margins similar to what the mainstream brands are getting. Now, BYD is a bit different. They are a bit higher-priced Chinese brand, falling in between U.S. and Japanese brands. The other difficult aspect is that while our volumes are increasing well, we're still building our units in operation. Our business model is driven by our ability to sell used vehicles. As we build up those vehicles in operation, our aftersales business grows and we can sell more new cars as well; they all correlate.

Could you parse out the growth rate for aftersales between price and car count? How much is same service price inflation versus incremental traffic in the bay? Are you seeing tariff impact or labor inflation flowing through?

A little more than half of the increase is coming from price increases, with less than half from customer count. The goal is to grow the RO count, as these variables drive growth in profitability. Our top-performing stores seem to outperform expectations, driving both customer traffic and top-line growth, even as some areas market softness.

Thanks. Just squeezing one in here on forward demand. As we pass through the peak tariff fears from April and now seeing OEMs revise up their guidance, it kinda clears the bar. Just wanted to get your commentary on how you're seeing pricing on these new model year vehicles and how you're thinking about demand going into '26?

The last point on new model year vehicles is where we see pricing concerning new cars, it may be stabilizing. We've taken measures to increase our market position. We maintain a competitive retail advantage to ensure we can navigate these changes effectively. Less than a quarter of our profitability comes from new cars, and we aim to focus on fostering an environment supporting continued profitability across all sectors. Supply-demand dynamics are continually shifting, and thus we remain agile in our approach to the market.

Just circling back on used, specifically the value autos. Given what you said about the typical credit quality of a buyer, is the demand for value autos inversely correlated with consumer affordability? Or, if the gap between new and used pricing widens, where does value fit within that?

Value auto vehicles are largely insulated from new vehicle pricing changes. They cater to a different customer demographic. Certified vehicles and some from the one to five-year segment may correlate with new vehicle pricing fluctuations, but value autos operate downstream with resilient demand. We typically pick up most of our inventory due to trade-ins, and it's imperative that our sales strategy remains fluid to address various market conditions.

Just a quick one on M&A. Bryan, you mentioned you don't buy dealerships based on expected value creation. But can you talk about what the drivers of value creation are when you bring a dealer into your system?

Sure. When we bring a dealer into our system, we typically expect a two to three times lift in net profitability. This is driven by scale synergies, lower interest costs, and better vendor contracts. In the first 6 months following an acquisition, we consolidate various systems and start to see immediate results. Importantly, a large portion of our growth is attributed to the ability to sell late model conquest cars alongside maintained profitability across various brands. After sales are also crucial in driving overall performance.

Thank you, Bryan. That concludes our earnings call for today. Thank you all for joining us.