Greetings, and welcome to Lithia Motors and Driveway First Quarter 2026 Results Conference Call. Please note that this conference is being recorded. I would now like to turn the conference over to Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our first 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 Corporation. 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 that are made as of the date of this release. Our results discussed today include reference to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Jardon. Good morning, and welcome to our first quarter earnings call. In the first quarter, we again achieved record revenues reaching $9.3 billion and adjusted diluted EPS of $7.34, and our results demonstrate the power of our differentiated and diversified model and the operational resilience that has defined our business across all cycles. Our teams executed well despite weather challenges and a dynamic macro backdrop, delivering solid revenue growth year-over-year. We also generated high-quality earnings as our aftersales business continued its steady climb. Used vehicle revenue grew nicely on a same-store basis, and Driveway Finance Corporation delivered another quarter of record originations. These results reflect the differentiated power of our ecosystem when one part of the business faces a little bit of pressure. Our omnichannel platform creates opportunities that sustain earnings and cash flow generation. Across our network, our store teams and department leaders are leaning into what they do best: winning customers, growing share and finding new ways to drive profitability through volume, pricing discipline and cost efficiency. Every incremental customer we bring into our ecosystem multiplies the opportunity ahead of us, creating more DFC originations, stronger aftersales retention and a deeper waterfall of future used vehicle trade-ins. During the quarter, our same-store revenues were down 1.7% and total gross profit was down 2.3%, reflecting resilient results against a very difficult year-over-year comparable comparison to the strong first quarter of 2025. Total vehicle GPU was $3,928, essentially flat sequentially from $3,946 in the fourth quarter, a positive signal heading into the seasonally stronger months ahead. Our diversified earnings mix continued to provide balance as used vehicle revenues grew 4.6% on a same-store basis. Aftersales growth was up 3.8% and gross profit grew 5.7%, and F&I per unit held steady at $18.13. Note that all vehicle operations results will be on a same-store basis from this point forward as well. New vehicle revenue declined 7.1% on a 7.1% decline in units, which reflected the challenging comparison to the first quarter of 2025 due to tariff avoidance pull forward last March. New vehicle GPU was $2,722, down $227 year-over-year, but down only modestly from $2,766 in the fourth quarter. Luxury brand revenue was down 10.2%, domestic down 8.7% and imports down 5.4% year-over-year. We continue to see these conditions as cyclical and our teams are focused on operational discipline as the market stabilizes. Our used retail performance continued its industry-leading trajectory with used revenue up 4.6% and unit growth up 0.6%. The used GPU was $1,680, down $115 year-over-year, but up meaningfully on a sequential basis from $1,575 in the fourth quarter. This reflects the early results of our efforts around more dynamic used vehicle pricing and finding higher-demand vehicles. Our focus on this high ROI area provides a stable anchor to offset new vehicle cycles and bring more customers into our ecosystem, leading to growth in our F&I, aftersales and DFC business lines over time. F&I per retail unit was $1,813, essentially flat year-over-year with solid underlying product attachment and pricing. As we have shared previously, record DFC penetration in the quarter intentionally shifted a portion of our finance gross profit from F&I to our captive finance platform where it generates recurring higher-quality and countercyclical earnings over the life of the loan. Adjusting for mix shift, our F&I performance was up nicely and continued to build momentum. Inventory levels improved during the quarter: the new vehicle day supply at 49 days, down from 54 days at the end of the fourth quarter, and used inventory was at 47 days compared to 48 days last quarter. Aftersales continues to be a highlight with revenues up 3.8%, gross profit up 5.7%, and we saw margins expand again year-over-year to 58.7%. The growth was consistent across key categories with customer pay gross profit up 6.5% and warranty gross profit up 5%. This stable broad-based growth demonstrates the underlying strength of our aftersales business and its ability to generate predictable, high-margin earnings through every part of the cycle. Adjusted SG&A as a percentage of gross was 71.5%. And while we historically see this metric increase in the first quarter, this year we held essentially flat sequentially, a sign that cost discipline is gaining traction. Our sales departments are responding to the challenge we set for them, finding ways to operate more efficiently while continuing to grow volume and serve our customers. The structural improvements we are making across our network—from technology investments to vendor consolidation to back-office automation—will continue to build a foundation for a stronger future. In the U.K., our teams delivered strong results with gross profit up 12.5% and SG&A as a percentage of gross profit improving 440 basis points year-over-year. Adjusted pretax income for the quarter grew 78%, building on the momentum we saw in 2025 as we continue to optimize our international platforms. Our digital platforms also continue to increase our reach and enhance our customer experiences, making shopping, financing and service simpler and faster. Our partnership with Pinewood AI continues to support our strategic vision to transform the customer experience, and we are jointly working to bring the Pinewood AI platform to all of the North American stores. Pinewood AI will reduce complexity and place team members in the same platform as our customers, increasing retention, supporting operational efficiency and reinforcing the power of our integrated ecosystem. Driveway Finance Corporation continued to scale profitably with financing operation income of $21 million for the quarter, up 71% year-over-year driven by record originations and improving loss provisions. With a steadily growing portfolio now at $5 billion, increasingly efficient securitization and clear runway for penetration growth towards our long-term 20-plus percent target, DFC is delivering on its promise to convert more of our vehicle sales into recurring countercyclical income. Now turning to capital allocation. Our philosophy remains very consistent: deploy capital where it generates the highest returns for shareholders. With our shares continuing to trade at a significant discount to our intrinsic value, we maintained our aggressive repurchase pace, retiring approximately 4% of our outstanding shares in the quarter with total repurchases of $259 million. Our strong cash generation and integrated ecosystem position us to continue returning meaningful capital to shareholders while simultaneously growing through acquisitions when it makes sense. In the first quarter, we were disciplined and strategic in our acquisition activity, adding import and luxury franchises in attractive U.S. markets while continuing to diversify our U.K. portfolio with the addition of emerging Chinese OEM brands. This helps us establish broader relationships to capture growth as these manufacturers expand their presence internationally. Our acquisition results over the past decade have yielded high rates of return, consistently exceeding our 15% after-tax hurdle rates through consistent and disciplined underwriting, targeting purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA. As we look ahead, we also stay disciplined in balancing repurchases, acquisitions, organic investments and balance sheet strength with a continued bias towards repurchasing while our shares are trading at a discount. Our confidence in the path ahead is grounded in the same strategic pillars that have driven our growth as follows: lifting store-level productivity, expanding our footprint and digital reach, scaling DFC penetration, improving cost efficiencies through scale, and growing contributions from our omnichannel adjacencies. Each of these levers builds momentum. And as they compound together, they reinforce our conviction in the long-term target of $2 of EPS and $1 billion of revenue. The work our teams are doing today lays the groundwork for durable EPS and cash flow growth in the quarters and years ahead. With that, I'll turn the call over to Tina.

Thank you, Brian. Our first quarter results showed sequential improvement in earnings with year-over-year comparisons, reflecting pressure from margin compression and demand pull forward in the prior year. The strength of our business model continued to generate solid free cash flow, support meaningful share repurchases and enable top-line growth while maintaining balance. The design of our business and our disciplined approach provides optionality through our resilient cash engine, and the long-run efficiency generated by our size and scale will continue to compound value over time. Our talented leaders drive the financial discipline and execution that allow us to return capital to shareholders while funding our growth. Adjusted SG&A as a percentage of gross profit was 71.5% for the quarter, compared to 68.2% a year ago; while year-over-year pressure reflects the impact of lower new vehicle volumes and normalizing GPUs on our sales department, we held essentially flat sequentially. Our teams continue to focus on managing costs through growing market share and gross profit, which remains our most durable lever for SG&A improvement over time. Our sales departments are actively rebalancing cost structures against current volumes and gross profit conditions, tightening variable compensation, aligning staffing to drive throughput and finding new ways to operate and protect productivity while continuing to provide exceptional customer experiences. We're making steady progress on a set of structural initiatives that will compound across the business: lifting store and back-office productivity through performance management and emerging AI tools, including chatbots and customer service automation; consolidating our technology footprint and retiring legacy systems; improving our vendor economics at scale; and removing manual work from our back office through automation. We're already seeing early savings flow through our results and the contribution is expected to build as adoption broadens. Pinewood AI remains an important piece of this work, and we're pacing the rollout with intention so that the efficiency gains we capture are durable. Ultimately, growing market share and volume is our most powerful lever for SG&A improvement. Combined with our unique ecosystem, every incremental customer compounds profitability across our adjacencies and as vehicle margins stabilize, that volume flows through to meaningful operating leverage. Moving on to financing operations. Driveway Finance Corp delivered another quarter of high-quality growth with financing operations income growing 71%, as Brian mentioned. We originated a record $840 million of loans and increased net interest margin to 4.8%, up 20 basis points. North American penetration reached 18% for the quarter, also another record. Credit performance continues to be exceptional, with an annualized provision rate of 3%, an average origination FICO score of 750 and 95% LTV in the first quarter. Our unique position at the top of the demand funnel creates a fundamental advantage in credit selection, minimizing credit risk. This quarter, our portfolio reached $5 billion, powered by record originations and increasingly efficient securitization. As we continue to build toward our 20-plus percent penetration target, we anticipate steadily improving margins supported by efficient capital structures. DFC is delivering on its potential, empowering the profitability of our unique ecosystem. Next, I'll discuss the strength of our cash flow and balance sheet. We reported adjusted EBITDA of $374.6 million in the first quarter, a 9% decrease year-over-year, primarily driven by lower net income. Adjusted cash flow from operations, a representation of free cash flow, was $381 million for the quarter after adjusting for a one-time $1.1 billion benefit related to our conversion to a VIN-specific used vehicle floor plan line. This cash flow paired with our strong balance sheet allowed us to opportunistically deploy capital to share repurchases while completing strategic acquisitions of new stores in key markets and brands. We remain committed to share repurchases, and our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder return. This quarter, we continued our commitment to focus on share buybacks while shares trade significantly below intrinsic value, and we allocated nearly $300 million to share repurchases, buying back 4% of outstanding shares at an average price of $275. As we move through 2026, our capital allocation philosophy remains disciplined and opportunistic. With a strong balance sheet, regenerative free cash flows and ample liquidity available, we will continue allocating capital to repurchases while relative valuations are attractive and investing in accretive acquisitions at the right price. This flexible deployment allows us to compound returns for shareholders through buybacks while enhancing our network through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio. The investments we have made over the past five years in our platform, our network and our people are now positioned to deliver increasing returns. As vehicle margins stabilize and our structural cost initiatives gain traction, the earnings leverage inherent in our model will increasingly flow to the bottom line. Our diversified omnichannel platform and disciplined share repurchases at attractive valuations are compounding together to build a stronger, more predictable earnings base that translates into durable free cash flow growth and long-term value creation for shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions.

Our first questions come from the line of Michael Ward with Citi Research.

Good morning, everyone. I wonder, Bryan, in the past, you would talk about how some of your acquired stores had SG&A costs that were higher on a relative basis to the more mature stores. Can you give any update on where that is? And then the reason why I ask is, if I'm doing the math right, every 100 basis point improvement in SG&A is about $2 a share. And it seems to me that we have 5, 6, 7 points of improvement that could get there getting the acquired stores in line with historical? And then also what Tina was talking about with Pinewood and some of the benefits you have. Am I on the right track? Is that the way you're looking at it?

You are, Mike. I think in that calculation, it's about $31 million, $32 million per dollar. So we are getting some pretty good traction on cost management. It's a little different than last quarter, which is quite nice. It took us a little while to get everyone's attention. But our sales departments are starting to understand a little better that they need to reinvent themselves in terms of org design in those departments where we've got four layers in many of those departments, and we think we can run with two. I think a lot of our sales leaders are figuring out how to do that and combine jobs or oversee multiple departments or do things remotely. There's all kinds of actions that are happening. And I think that overlays the idea of acquired stores. We have added over $27 billion in revenues over the last six years. So there's a lot of opportunity from people that maybe have never sold value cars in the past, who have never really thought about doing more with less, and now they're really starting to hit their stride.

And Tina, you mentioned the rollout of some of the Pinewood technology. Do you have any data points on timing and whether that could be across all stores? In addition, when that's completed, does it make integration faster when you make acquisitions?

Yes, Mike, it's a great question. From Pinewood, right now what we're tracking toward is piloting a couple of the stores on that DMS system here in the U.S. later this year. So it would be toward the end of this year that the pilot is looking to go live. We're making great progress on that with the Pinewood team and the technology, which we see as an easier experience for employees and puts customers into a similarly streamlined experience. We also are piloting and trying some of the AI technology that Pinewood has, both in the U.S. and the U.K. So I think good progress there in the U.K.; obviously with Pinewood out there on their DMS system there's strong progress as they work through that, and we're piloting here in the U.S. as well. So excited to see that partnership with the Pinewood team as we continue to iterate through how that can make our processes simpler, faster and better experiences for customers and employees.

Mike, maybe just to add a little bit. In terms of integrating a store, I don't know that it would help integrate a store faster during a purchase. What it's mainly intended to do is put the customers and our team members into the same environment to help with productivity. I mentioned redesigning sales departments, service departments and so on. Those are the things we're doing today. This is an adjunct to that: as AI starts to help be generative and make that process simpler and more unified between the customer and our team members, that's what we're really looking for. That's why we invested in Pinewood AI, and it's a big part of our future and being able to drive down SG&A cost.

Our next questions come from the line of Ryan Sigdahl with Craig-Hallum.

I want to ask on SG&A—there were some weather challenges industry-wide earlier in the quarter. One of your peers yesterday said the exit rate or trajectory on SG&A to gross profit was much improved at the end of the quarter. Curious if you saw that or if you're willing to comment month by month what that looked like? And then any guidepost you're willing to put on SG&A to gross profit ratio for the year?

Ryan, that's a fair statement that we saw a softer January, we hit forecast in February or were real close to it in North America. The U.K. exceeded forecast. And in March, the U.K. exceeded forecast and so did the United States.

Willing to put any guidepost around the year or what SG&A to gross profit will be?

I would probably say this more, Ryan, that I think our teams got the attention. They're responsive, they're dynamic, and they've got the conviction and they can make decisions as they see what happens in the market. There is large variability across manufacturers and across geographic areas of the country that they need to respond to, let alone the U.K. We're seeing nice movement there because we're able to add franchises and partnerships in stores and dual franchises, much different than Canada, and we're doing that with Chinese brands, which is helping mainstream revenue lines in some ways. So we're real pleased with what's happening. I think SG&A, we're going to continue to drive towards that mid- to high-50 percent range in the long term.

Then just on DFC: your penetration rate is near kind of your long-term target. Curious, as you think about the longer term, some of your peers are on orders of magnitude higher than where you guys are targeting. Any reason why that can't go higher than 20% and any reconsideration there?

Ryan, great question. Yes, we were very pleased that we hit 18% for the quarter. I do think that's getting us close to our 20%-plus target. But I think it really goes back to Lithia Driveway leaning more into used cars. We see a lot of opportunity to grow used cars, and that plays well to DFC's value proposition because historically—and I think going forward—we do better in used car penetration than new. New is probably the area that holds us back versus some of the peers you're referencing. But we definitely see positive upside to the 20%-plus that we're targeting.

Our next questions come from the line of Rajat Gupta with J.P. Morgan.

Just a couple on parts and service. In the past, you've typically given more weight to growing volumes in that business. It seems like there was some reprioritization in the first quarter given the performance on GPUs. I'm curious, was there any change in how you're approaching profitability there? Or was it just a supply issue that led to the flat-ish volume number in the first quarter? And how should we think about used car growth versus GPUs for the remainder of the year?

Rajat, I think this is the secret sauce of Lithia. We hit a 1.25 used-to-new ratio, which is the first time in a long time that we were able to do that. It's coming off the back of a marketplace that is a little tighter than typical, but values are still strong. When we think about driving performance in used cars, it's getting stores that had never really sold value cars three or four years ago to understand that that is where the profits are in the business. The ability to procure those through trade-ins or other sources is important. Sequentially, including F&I, our used per-unit contribution moved from $2,830 in Q4 to $3,309 in Q1—up $470. I would attribute most of that to repricing efforts in two key areas: value cars and vehicles that are low mileage for their model or vintage. Those two areas are getting good traction quickly. Also, in our ecosystem, stores price things because that's what they can sell it for. But because we have Driveway and GreenCars marketplaces, we reach beyond the 30- to 50-mile range a typical store reaches; we're reaching 500 to 2,000 miles across the country. So when stores are hesitant because they don't have the ability to sell a car at a higher price locally, expanding the ecosystem creates more visibility and supports higher pricing. I attribute a lot of that sequential increase to those factors.

Understood. That's helpful color. And on parts and service, you had pretty good profit growth in the second quarter despite some weather challenges. Any way to double click on what drove that? I know the U.K. may have had a bit of an FX benefit; if you can break up U.S. versus U.K. and give more detail, that would be helpful.

Our growth globally: the U.K. is slightly better than North America, but North America is starting to gain traction. When we think about the customer experience and removing layers and making it simpler and more transparent, you create better experiences. Frontline people making a difference each day create memorable experiences. That happens through lots of different options and individualized experiences—some customers want pickup, others want in-person service, and others want different touchpoints. Giving people the flexibility to think on their feet and execute in different ways creates a more appealing experience so customers continue to return during their ownership lifecycle.

Our next questions come from the line of Alex Perry with Bank of America.

I wanted to ask a little more about your outlook for the U.K. It seems performance there is improving. Can you talk about what specifically is driving that? And would you expect that to continue?

Sure, Alex. We have an exceptional group of leaders and operators in the U.K. Over the last two years we've been able to restructure the network to adjust to consumer demand there, including adding Chinese brands, eliminating some other brands and removing underperforming stores. The team—Neil, Richard and our vice presidents there—are very good at structurally putting in plans and executing them. It's refreshing to be able to know halfway through the month that they're going to hit forecast or be above forecast. We're hoping that as we roll out Pinewood AI into the U.S. and Canada, we'll capture similar benefits that they've seen over the last two years being on Pinewood: customers and team members in the same environment. Many U.K. stores have moved service drives closer to the showroom floor to meet and greet customers; some associates now handle sales, service and accessories in a more one-touch experience. Pinewood AI is starting to give them the ability to manage expenses downward incrementally. If I remember correctly, it was 447,000 hours that our CFO in the U.K. estimated Pinewood could capture within the next four quarters or so. They're making good progress, and we're excited because those are the seeds for what will happen in North America.

That's helpful. My follow-up: have you seen any impact from the current geopolitical environment—any slowdown on the new vehicle side as you look through April? Any change in mix? It seems you hit some targets through March, which suggests you haven't seen much, but I wanted to ask.

Yes. The quarter ended up strong and we feel pretty good about the start of Q2. The geopolitical climate has been balanced with some higher tax returns. March felt strong in the U.S., and if the war eases and tariffs gain clarity, things could stabilize and we could have a decent second half. It's a mix, but we're pleased with the market despite it being around a 15.8 million SAAR industry. We believe when affordability improves and starts to trend down a bit, we should see the industry move back toward a 17 million units per year level.

Our next questions come from the line of Jeff Lick with Stephens.

Congrats on a great quarter, guys. Brian, could we dig into used a little more—DPU at roughly $1,700. First, could you remind us what percent you self-source versus sourcing from auctions? And then, as we get into lease returns and more supply in the summer, how might that change the dynamics for you?

Good insights, Jeff. Our customer-sourced vehicles are about $2,483 per unit. Vehicles acquired outside from auctions are around $700 to $800 per unit, so there's a big delta between those. At one time the difference was $1,000 to $1,100; now the difference is about $1,500. It's critical to continue to acquire cars from trade-ins. We acquired about 3% fewer cars year-over-year from our customers but still drove up margins, which I believe is more of a pricing function than a cost function. We can attack both by properly valuing trade-ins and ensuring online pricing through Driveway or others is met and matched so customers both trade and buy from us. Regarding off-lease vehicles, we do see a bulge there. Some stores focus on pushing used cars and value inventory, others buy more lease vehicles—both are part of our business. Last quarter, 40% of our volume was CPO, which is significant, and that will be a staple in our business. More cars available should help, and we want to make sure stores remain focused on core product in the 4–8-year range and maintain affordable cars around a $15,000 average price in our value inventory.

Quick follow-up: you talked on the last call about some used car managers being quick to break price or not being the greatest buyers, and thought there was room in the spread at $1,700. Where are you on that and where could you get that given previous presentations last year suggested potential of $1,800 to $2,100 per unit?

Jeff, be conservative with expectations, but these numbers may surprise some people. Our price-to-market—the price we sell our vehicles for through Driveway and our stores—is approximately 95% of what direct online used car retailers sell the same car for, apples-to-apples. If the average price is $25,000 to $30,000, that's about $1,250 that could come just from pricing. Why can't that happen overnight? Because most of our cars are still sold within 20 to 30 miles of the store footprint. The more visibility we create, the more eyeballs on higher-demand cars, and the more price you can command. We do well with certified vehicles; they sell at market. The challenges are value cars or cars that are low mileage for their age, where we lose about 8% to 9% on pricing and that accounts for the 5% delta. The focus is convincing stores to price correctly at the start and let cars season long enough. Velocity can hurt used-car gross profit; ideal time to sell is between 15 and 40 days. Sell before that and you likely sold for too little. It's a function of eyeballs, belief and market pricing to capture that roughly $1,200 opportunity.

Our next questions come from the line of John Saager with Evercore.

I wanted to discuss the rollout of Pinewood. You're expecting to pilot in the U.S. later this year—can you discuss the impact that will have on expenses during the rollout? I'd expect some headwinds as you're working through the process. Is there any way to quantify those headwinds?

Sure, John. We're doing a rollout by manufacturer. In the U.K., it took about two quarters to complete the rollout on 150 businesses and it went extremely smoothly. We did not see additional costs in that rollout. It's truly a two- to three-week prep process and a two- to three-week acclimation process where teams get used to the work. We're also preempting with a CRM product so teams will get used to the CRM before the full Pinewood DMS arrives; about one-third of our stores are already on that CRM product in North America. We're conscious of integration costs. There was a cost last quarter when we bought out a CDK contract, and that's behind us. Beyond integration, Pinewood's true cost is lower and the true benefit is that it lets you remove redundancies and put customers and team members in the same environment. Today, with multiple vendors and attached vendors to legacy DMS providers, there's massive redundancy; those redundancies can come out almost immediately. Hopefully that helps, John.

That makes sense. The timing of that rollout is fast but the full effect will take time. How does that impact the timing of your path to medium-term targets—getting SG&A as a percent of gross down to the 60%–65% range? What are the primary initiatives or drivers to get there? Do you need Pinewood fully rolled out before you can achieve that?

No, we don't need Pinewood fully rolled out. Pinewood will help take SG&A from the mid-60s to the mid-50s. In the interim, the single biggest thing that helps is a marketplace with stable GPUs and a 17 million SAAR because we gain leverage as we gain volume. Alongside that, we focus on what we can control: a four-legged stool. First is the everyday plan—vendor management, compensation management, productivity and efficiency metrics. Second and third are job combinations and re-architecting sales and service departments to remove layers and combine jobs, enabling managers to oversee multiple departments and stores. We're up to almost 2.5 stores per office manager and about 1.4 stores per general manager—big moves. Lastly is remote F&I or remote desking and possibly remote service advisors, so when you're short a half person you don't add a full person. Those are the pushes we've made over the last few quarters.

Pushing back a little: you've had relatively stable GPUs for a few quarters, and the long-term trend SAAR is around 16 million, not 17 million. Is it realistic to sustainably have SG&A as a percent of GP below 60% given those long-term trends?

Yes, John. Our GPU has decreased over the last four quarters by around $150–$200 per unit on a large unit base, so that's meaningful and something we manage. Volumes each quarter can be semi-soft, and SG&A has implications from that. I believe a 17 million SAAR is achievable; if not, we will manage on our four legs and continue to drive down costs. In the quarter it appears we're in step relative to year-over-year SG&A and should be able to outperform peers. Also remember we have the tailwind of Driveway contribution, which is on track to hit around $100 million in profitability on its way to $0.5 billion. That's not in SG&A, so focus on the broader picture. When equalized for companies with a U.K. business, we're typically second or third lowest in SG&A as a company, which is important to remember.

Our next questions come from the line of Christopher Bottiglieri with BNP Paribas.

First, can you elaborate on the $20 million contract buyout—was that a DMS contract or what does that implicate for future cost savings? And then, you mentioned the importance of the marketplace to get targeted GP stability. Can you give an update on Driveway? I also noticed a change to the Chief Technology Officer earlier in the quarter—curious about the technology roadmap and initiatives, what's gone right, what's gone wrong?

Yes. It was part of a planned vendor termination and included a buyout of that contract. That cost was planned.

Chris, the management team wanted to integrate IT into operations because the ecosystem is so integrated. The aftersales and sales teams wanted to integrate across DFC, Driveway and GreenCars. That was the reason for organizational change with the CTO role; George is a class act and will move to other roles, but we felt IT needed to be embedded in operations to respond quicker and capture marketplace opportunities. Driveway was up 8% in volume across its platform, which was a nice number, and new vehicle volume on Driveway was up almost 500%—a big number. It's still early and we may not have dedicated enough resources there, but we believe there will be an opportunity to accelerate Driveway again when market dynamics around competitors' financing change. Driveway customers are still largely new to our ecosystem, which is an important benefit.

Our next questions come from the line of John Babcock with Barclays.

Could you talk about the M&A market—how it looks right now? And relatedly, you typically divest a couple stores each year; how much of your footprint do you still have to turn over—i.e., underperforming stores you might divest?

Great, John. We've always remained disciplined on acquisitions. We typically pay between 10% and 30% of revenues; there are deals out there priced much higher that don't make sense for our returns. This year we've done almost $500 million in revenue net of divestitures. We have three stores under contract and two stores close to LOI, and one more store we consider not part of our network strategy that will be divested. Those are all in North America. The U.K. is fully cleaned up and now iterating on which brands to put in their facilities. Outside of occasional offers for mediocre performers, we redeploy capital to buybacks or better acquisitions. Our focus is the Southeast and South Central, where stores can be pricier, but we've found attractive acquisitions at disciplined prices. The market overall remains frothy.

Shifting to parts and service: could you break down growth this last quarter across customer pay and warranty?

The growth was similar across categories: customer pay gross profit growth was roughly 6.5% and warranty gross profit grew about 5%. In terms of revenue growth, customer pay and warranty were each up several million dollars; they were pretty close to each other.

Yes, those were gross profit numbers he was referencing for growth, and they were both pretty close.

Our next questions come from the line of Bret Jordan with Jefferies.

Could you talk about the impact of negative equity on recent volumes? Is conversion being impacted as customers come in and realize their car will require a check instead of generating return on the trade?

Great question, Bret. Negative equity has climbed a bit, but it started to subside, which is nice. Being high up funnel gives us an advantage as a retailer: new and certified used vehicles have the most margin and incentives, which allows us to absorb disequity in future financing of a new vehicle. That is why you want to be up funnel—to transfer disequity so a customer doesn't have to write a large check. Most customers still write a check—around $2,000 is the typical amount. Our stores and traditional retail network are adept at handling this: our average disequity in stores is about $2,000 higher than what our Driveway e-commerce platform approves. That $2,000 is the benefit of in-store negotiation and experts financing cars daily. Does it impact business? It impacts affordability. Manufacturer incentives remain modest—averaging just under $4,000 per unit versus as high as $6,000–$7,000 in the past—so that incentive pool affects equity and down payments. Regarding DFC loans, we remain disciplined: DFC LTVs are about 96% on origination, and across the company we're financing as much as we can, often through manufacturer captives and other bank relationships.

Quick follow-up on the geopolitical impact in the U.K.: given the spike in energy costs, you said the U.K. beat expectations in Q1—any deterioration in consumer demand as the quarter progressed?

No. Neil and the team have done a nice job. The U.K. sales cycle is built differently around March and September, which are big months. They've diversified and now sell used cars more consistently across the year so volumes don't just rely on those spikes. Their aftersales business can get spikes too, and they're balancing the portfolio. They're able to see out 60–90 days because about 80% of their business is orders. We feel confident on the short-term outlook in the U.K.; the team is managing franchises and adjusting within short time frames at relatively low cost to maintain volumes on the new-car side while managing aftersales.

Our next questions come from the line of Daniela Haigian with Morgan Stanley.

Strategically thinking about the influx of Chinese EVs taking share in Europe: how are unit economics at your Chinese-brand stores relative to other OEM stores in the U.K.? And what are your views on Chinese OEMs coming to the U.S. either directly or indirectly?

Great question, Daniela. Our relationships with Chinese manufacturers are growing in the U.K. and we value those relationships. But you can't directly apply U.K. economics to Canada or the U.S. In the U.K., Chinese manufacturers now have about 12% market share, and that didn't come from EVs alone—it came from ICE and hybrid offerings as well. When BYD and MG originally brought BEVs to the U.K., they sold very few cars; it wasn't until bringing plug-ins, hybrids and ICE models that they gained share, largely due to affordability. In Canada, the government authorized 50,000 electrified vehicles, which covers all electrified vehicles, not just BEVs. These manufacturers might use dealer networks in Canada and likely start with lean, exclusive stores. In the U.K., our Chinese brands are mostly not exclusive and share showrooms with other OEMs, which leverages aftersales operations. Opening exclusive facilities independently—especially in North America—would likely be unprofitable at first because 60% of profits come from aftersales and the servicing base takes time to develop. For Canada or the U.S., dealer network design and tariffs matter a lot. If there were 50%–100% tariffs, price advantages seen in the U.K. might disappear. For now, the margins on those vehicles in the U.K. are very similar to mainstream margins there. We will be measured and opportunistic in how we approach these brands in other markets.

We'll now turn to our final questions from the line of Mark Jordan with Goldman Sachs.

One quick one on used retail: looking through the slide deck, it looks like average selling prices for core and value auto increased nicely year-over-year and quarter-over-quarter, but prices for CPO vehicles declined. What drove the decline there—was it mix or something else?

Mark, I think it's related to availability. Many of those certified vehicles were driven off a period when SAAR was 13–14 million during COVID, so we're starting to see those units become more available again, which puts downward pressure on ASPs for CPO. Another driver is incentives: when incentives on late-model vehicles rise, certified ASPs can decline. So it's a mix of increased availability and incentive dynamics.

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

Thanks for your questions today. Thanks for joining us, and we look forward to seeing you on our Lithia Driveway second quarter call in July. Bye-bye, everyone.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.