Lithia Motors, Inc. Class A Aktie

Greetings, and welcome to Lithia Motors and Driveway First Quarter 2026 Results Conference Call.

[Operator Instructions]

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 as our leaders demonstrated 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 DSC originations, stronger after sales 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 compensate 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. After sales growth 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 or 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 of 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 after sales 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 reoccurring 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.

After sales continues to be highlighted with revenues up 3.8%, gross profit of 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 the 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 on a foundation for a stronger future. In the U.K., our teams delivered strong results with gross profit up 12.5% 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 and 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 in 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 target, DSC is delivering on its promise to convert more of our vehicle sales into reoccurring 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 positions 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 in 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 for $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 enabled 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 levers 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 protecting 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% and 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 onetime $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 and 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 5 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. Operator?

[Operator Instructions]

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, the SG&A costs 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. This is Brian. I think in that calculation, I think it's about $31 million, $32 million per dollar. So we are getting some pretty good traction on cost management. 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 there's -- that they need to reinvent themselves in terms of what the org design is in those departments where we've got 4 layers in many of those departments, and we think we can run with 2.

And I think a lot of our sales leaders are trying to figure out how to do that and combine jobs or oversee multiple departments or do things remotely. There's all kinds of fun actions that are happening. And I think that overlays the idea of acquired stores. I mean we have added over $27 billion in revenues over the last 6 years. So there's a lot of opportunity of people that maybe have never sold value auto cars in the past. They've 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 -- can you give any data points on like what you're looking at from a timing standpoint and one that could be across all stores. In addition, when that's completed, does it make that integration faster when you make acquisitions?

Yes, Mike, it's a great question. This is Tina. From Pinewood, I think 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 towards the end of this year is what that pilot is looking toward making great progress on that with the Pinewood team and the technology, which we see it as an easier experience for employees, puts customers in a similar to streamlined experience for -- with that technology there. 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 their DMS system, there's good strong progress as they work through that, and we're piloting here in the U.S. as well. So excited to see that great partnership with the Pinewood team as we continue to iterate through how that can make our processes simpler and faster and better experiences for the customers and employees.

Mike, maybe just to add on 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. And I mentioned those 3 or 4 things in redesigning sales departments, service departments and so on. Those are the things we're doing today. So this is an adjunct to that, that as that AI starts to help be a genetic and help 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 that SG&A cost.

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

I want to say on SG&A. -- there were some weather challenges from an industry just across the board earlier in the quarter. One of your peers yesterday said that quantified that the exit rate or trajectory on SG&A to gross profit was much improved at the end of the quarter. Curious if you guys saw that or if you're willing to comment kind of 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, I think that's a fair statement that we saw a softer January we hit forecast in February or we're 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 they've got the con and they can make the decisions as they see what happens in the market. There is a large variability across manufacturers and across geographic areas of the country that I think is important for them to respond to. Let alone the U.K., we're seeing some nice movement because we're able to actually add franchises and partnerships in stores and dual franchises, much different than what the U.K. or Canada is, and we're doing that with Chinese brands, which is helping in the mainstream revenue lines in some ways. So we're real pleased with what's happening. And I think SG&A, we're going to continue to drive towards that mid- to high 50 percentile 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, I mean, 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 the 20% and any reconsideration there?

Ryan, great question. This is Chuck. So yes, we were very pleased that we hit 18% for the quarter. And I do think that's getting us close to our 20%-plus target. But I think really, it kind of goes back from a forward-looking perspective to Lithia Driveway just leaning more into used cars. And we really see a lot of opportunity to grow used cars. That really plays in well to DFC's value proposition because historically, and I think going forward, we do better in used car penetration rate than new. And I think new is probably the area that holds us back versus some of the peers that you're probably referencing us. 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 JPMorgan.

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

Rajat, this is Bryan. I think this is our -- the secret sauce of Lithia. I mean, we hit 1.25% used to new ratio, which is the first time in a long darn time that we were able to do that. And it's coming off the back of a marketplace to some extent, it's a little tighter than it typically is. But values are still strong. And I think as we think about how do we drive performance in used cars, it's getting that $26 billion to $27 billion of revenue that had never really sold value auto cars 3 years ago, 4 years ago to understand that, that is where the profits are in the business. And that ability to procure those through trade-ins or through other or other sources is quite important. If you look sequentially quarter-over-quarter, including F&I, our used cars moved from $2,830 in Q4 and to $3,309. It was up $470. And I would attribute most of that to some repricing efforts on 2 key areas, and I may have spoke about that on the last call. It's primarily the value auto cars, okay?

And then secondarily, it's vehicles that are low mileage for their model or their vintage, okay? And those 2 areas where we're getting some pretty good traction fairly quickly. Also, remember that in our ecosystem, a lot of stores price things because that's what they can sell it for, okay? But in our ecosystem, because we have Driveway and Green Cars marketplaces, it reaches out beyond the 30 to 50-mile range that a typical stores reach can achieve. And we're now reaching 500 to 1,000, 2,000 across the entire country. So when stores are a little gun-shy because they don't have the ability to sell that car at that price, when you start to expand the ecosystem, you all of a sudden are able to expand your pricing model. And I think that's where I attribute a lot of that increase sequentially.

Understood. That's helpful color. And just on parts and service, second quarter a pretty good profit growth. despite some of the weather challenges you might have seen. Any way to just double click on that and give us a little more detail into what's driving that? I know maybe U.K. maybe had a bit of an FX benefit, but maybe if you want to break up U.S. versus U.K. as well, that would be helpful. And just any more detail within those regions and what's driving the growth?

Yes. Our growth globally, the U.K. is slightly better than North America. But North America is starting to gain traction. What we're finding again when we think about the customer experience and taking out layers and making it simpler, more transparent and more empowered by the customer, just creates better experiences. And I think when we think about going to market, it is about those frontline people making a difference each and every day to create memorable experiences.

And that happens through lots of different options, okay? And those options create what we would call individualized experiences for each customer, where one customer may want to sit on their accounts or they may want us to pick up their car from work and another might like to enjoy sitting in our living room and seeing the new product and so on and so on. So it's really giving our people the flexibility to think on their feet, okay? And then the ability to execute lots of different ways to create a more appealing experience and a more memorable experience so they continue to come back month after month during their ownership life cycle.

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

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

Sure, Alex. Brian again. I think we've got an exceptional group of leaders and an acceptable group of operators that over the last 2 years, we've been able to purge and then modify the network to adjust to the consumer demands in the United Kingdom, and that includes adding Chinese brands, eliminating some other brands, finding some underperforming stores and getting rid of those. But most importantly, this is coming from the United Kingdom and Neil, Richard and our vice presidents that are there, and their teams underneath them.

They are very good at structurally putting in plans and then executing to that plan. It's a real refreshing thing to be able to know that halfway through the month that they're going to hit forecast or they're going to be above forecast, a million or two, whatever it is, they're very definitive and they're very intentional in their actions, okay? We're really hoping that the example that they said as we start to roll out Pinewood AI into the United States and into Canada, what they're seeing over the last 2 years by being on Pinewood AI is an experience where their customers and their team members are sitting in the same environment.

In fact, many of the stores now have moved their service drives from the back of the dealership or back a house to write on the showroom floor where they're actually meeting and greeting customers, and some of those are even multiple tasks, meaning they may deal with sales, they may deal with service, they may deal with accessories or whatever else it may be, where they're truly thinking about a one-touch type of experience. And then this is all wrapped around the idea of the Pinewood AI is now starting to give them the ability to manage their expenses in an incremental way downward, okay? And I think, if I remember right, it was 447,000 hours that our CFO, there Richard had defined that service loans, AI will be able for them to capture that money within the next 4 quarters or so. So they're making pretty good progress on that, and we're pretty excited because that is the seeds to what's going to happen in North America, and we're really proud of their leadership over there.

That's incredibly helpful. And then just my follow-up question, I just wanted to ask if you had seen any impact from the current sort of geopolitical environment. any slowdown on the new vehicle side as you sort of look through April? Any change in mix seemed like you hit some of your targets through March, so that would sort of indicate that you haven't been seeing anything, but I just wanted to ask about that.

Yes. I think it appears that the quarter ended up strong. We feel pretty good about the start of Q2. I think that the geopolitical climate has been balanced with some higher tax returns. I mean, I really feel like it doesn't feel quite as good as March was in the United States. But I also know that if the war can come down and if tariffs can gain some clarity, and it's a matter of things can fall in the line that we can through this and hopefully have a decent second half of the year. So it's a little bit of a mix of things, but we're sure pleased with where the market's at, despite it only being a 15 8 SAAR as an industry.

We really believe that when affordability can get a grip on things and start to trend back down a little bit, then we should be able to start trickling up again towards that 17 million units a year number.

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

Congrats on a great quarter guys. Brian, I was wondering if we could dig into the used a little more DPU at $1,700-ish. First of all, could you remind us what percent you guys self-source versus any sourcing from auctions? And then I was just wondering, Bryan, if you could just kind of pontificate a little bit as we get into these lease returns and we'll probably have a little bit more of a higher level of supply in the summer that change the dynamic one way or another for you? I'm assuming it does. I'm just curious how that will change the dynamic for you guys and the...

Good insights, Jeff. Our customer-sourced vehicles our 2,483 a unit. And remember, without F&I, the numbers I gave previously were with F&I, okay? Our 24 83 on our customer acquired units, okay? The units that are acquired outside from the -- not from the customers like auction are around $700 to $800. So it's a big delta between those. At one time, you remember, we were $1,000 to $1,100 a difference. Now the difference is $1,500, okay? So it's hyper important of our ability to continue to acquire cars from trade-in.

And I think if you look at where we are, this is a big opportunity for Lithia. I mean, we acquired less cars year-over-year by about 3% from our customers. okay? But we also still drove up our margins. So that, I believe, is more of a pricing function than a cost function, okay? But I believe that we can attack both if we're properly valuing cars that are coming in off-trade in, making sure that any online pricing through Driveway or others, are met and matched to be able to ensure that those customers are creating a 2-part buying process, meaning they're giving us their trade and they're buying a car from us. So we're pretty pleased with what's happening there.

In terms of the off-lease vehicles, we do see a little bit of a bulge there. We're actually -- it's surprising when we try to push used cars and we talk value auto. Some stores get it. Others just go buy more lease vehicles. So off-lease vehicles and -- to be fair, that's okay, too. We were actually at 22% of our volume was from -- I may have that off. I'm sorry, 40% of our volume was CPO last quarter, okay? So that was a pretty big amount, okay? And I think that could be indicative that we've got lots of stores. That's natural, okay? I mean that's part of our staple diet in our business that you just automatically sell those CPO cars. So I think with more cars available, it will help us definitely. We just want to make sure that our teams are still focused on their core product between 4 and 8 years and most importantly, make sure they've got the affordable cars of $15,000 average price or so in our value auto cars.

And then just a quick follow-up. You had talked on the last call about some of the used car managers maybe being a little quick to break price and maybe not the greatest buyers. And so you kind of thought, hey, there was some room there on the spread at that $1,700. I'm just curious where you're at there and where you think you might be able to get that because previous presentation last year as potential of 1,800 to 2,100 [indiscernible]

Jeff, we're not -- we're going to be -- we want you to be conservative here in this response, but these numbers will probably shock a lot of people on the call, okay? Our price to market, okay? The price that we sell our vehicles for through both driveway because our stores price cars on Driveway and our stores is approximately 95% of what the 1 price used car retailers are selling the same Carrefour. That's an apples-to-apples comparison. If you then figure that your average price is somewhere between $25,000 and $30,000, you're talking about $1,250 that could come just from the pricing equation.

Why can't that happen overnight, okay? The reason is, is because most of our cars are still sold within 20 to 30 miles of the footprint of those cars. So the more that we can create visibility, you get more eyeballs on cars and to higher-demand cars, then will command the price that are needed, okay? Where we do pretty good and we sell cars about for market is certified, okay? That's where we sell cars for market. What we don't do is when it's the value auto car or it's a car that's less than its miles for its age. That's where we lose approximately 8% to 9% on pricing. And that makes up that entire 5%, okay? So that's our focus, is how do you convince your stores to look past the transaction that isn't getting them to market pricing on the deal.

And that is some underpricing or dropping your pricing too quickly. But most of the time, it's under pricing. It's they don't price the car right at the start. Why? They're salespeople, their service departments and their sales managers are convinced that, that car can't sell for that price. And they don't let it season long enough to be able to do that. I believe, and I think our team believes velocity can hurt your gross profit in used cars. Velocity can hurt your gross profit in used cars. Okay, your ideal time to sell in used cars is between 15 and 40 days, okay? And if you sell it before that, you probably sold it for too little, okay? So it's a function of both eyeballs, belief, end market pricing to be able to get that $1,200 approximate dollars that we know is sitting out there.

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

I wanted to discuss the rollout of Prime rod. So you're expecting to complete that by the end of -- can you discuss the impact that will have on expenses during the course of the rollout. I would expect that there would be some headwinds that you counter along the way as you're working through the process. Is there any way you could quantify those headwinds for us?

Sure, John. We're basically doing a rollout by manufacturers. And what we saw in the United Kingdom, and this is data that's, what, 3/4 to 5 quarters old. It took us about 2 quarters to complete the rollout on 150 businesses in the United Kingdom. It went extremely smoothly. We did not see additional costs in that rollout. It's truly a 2- to 3-week prep process and a 2- to 3-week climatization process where they get used to that work. We're also going to be preempting in the sales department, a CRM product. So they'll get used to the CRM product way before the Pinewood full DMS comes in and about 1/3 of our stores are already on that product in North America. So we're very cognitive of that.

There was a cost last quarter, if you remember, in CDK that we ended up buying out that contract. So that's been front loaded and is behind us. But beyond, once you get through the integration point, which is truly a 2-month period, okay, the true cost of Pinewood is lower and most importantly, the true benefit of Pinewood is it allows you to do things and have our -- the IT solutions because it puts the customer and the team member into the same environment, there's not redundancies, okay? And today, with multiple vendors, with CDK having all these attached vendors, there's massive amounts of redundancy. Those redundancies can come out almost immediately. Hopefully, that helps, John. A follow-up on that?

Yes. That makes sense. Actually, the timing of that is fast. But the it is going to take a long time to get there until 2028. And so I wanted to ask about like how does that impact the timing of the path to your medium-term targets. So to get SG&A as a percent of gross down to that 60% to 65% range. What are the primary initiatives or drivers are using to get there? Is there like a revenue per employee number that you have in mind? Or is there some other way of tracking that progress? And do you need Pinewood to be fully rolled out before you...

No we don't. No, we don't. I mean Pinewood is going to help us take it from mid-60s to mid-50s, okay? And I think that's how we think about it. So in the interim -- the single biggest thing that can help us get there is a marketplace that has stable GPUs and is a 17 million SAAR because we gain leverage as we gain volume, okay? Alongside that, what can we focus on, we focus on what we can control. And we basically built a 4-legged stool that's wrapped around a couple of things.

First and foremost, we call it the everyday plan. It came off the back of the 60-day plan a couple of years ago. That's vendor management, that's compensation management. And that's typical productivity and efficiency metrics that our people are pretty good at, okay? And they're pretty savvy at. The other 3 items are what I mentioned briefly. It's job combinations. It's re-architecting the sales departments and the service departments to remove layers and combine jobs, okay? It's managers and leadership overseeing multiple departments in multiple stores, which we've moved that quite nicely. We're up to almost 2.5 stores per office manager and about 1.4 stores for a general manager, big moves there.

And lastly, and not least, is this idea of remote F&I or remote desking or possibly even remote service advisers, okay? Meaning when you're maybe a half a person short, you don't add a full person. And that makes massive -- and that's probably the easiest example, but that's our push each and every day in our organization over the last few quarters.

If I could maybe push back just a little bit on that. You've had relatively stable GPUs for the last 2 or 3 quarters now. And the long-term trend on SAAR is around $16 million, not $17 million. So is it realistic to sustainably have SG&A as a percent of GP below 60%, given those long-term trends?

Yes, John, we -- our GPU decrease each of the last 4 quarters has been around $150 to $200 a unit. So -- and that on a base of 100,000, 150,000 units, it's a big number, okay? And that's something that we have to manage. So that is something. I do believe that the volumes, for some reason, each and every quarter, there's something that's semi-soft and again, this quarter, you're seeing it with the 3 people that have reported so far. We had 1 person that was double-digit declines in new vehicle sales, and that all has implications on your SG&A costs.

So I really believe that a 17 million SAAR is out there. It may not be coming off the back of tariffs and in a war, but I hope things can settle down because I think there's a world where that can happen, okay? If it doesn't, we're still managing on those 4 legs of our stool and we'll continue to drive down costs. And I think in the quarter, it appears that we're right in step in stride in terms of year-over-year SG&A, and should be able to exacerbate that, relative to our peers. The other thing to remember is we also have the tailwind of [ D&C. ] And that's on track to hit somewhere around $100 million in profitability on its way to $0.5 billion profitability. So that's not in SG&A, okay?

So let's not focus as much on SG&A because we are an industry that has costs, but that also gives us the opportunity to drive them down. And I think as an organization, we typically -- if you equalize for the companies that have the United business, U.K. business, we're typically either second or third lowest in terms of SG&A cost as a company, okay? Important to remember.

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

The first one is, can you elaborate on the $20 million contract buyout. Is that a DMS or what does that implicate for future cost savings?

Yes. It's just the planned vendor termination here with part of it, there was a buyout of the contract.

Okay. And then wanted to ask, you mentioned the importance of marketplace to get in your targeted GP stability. Just hoping to get an update on Driveway. And then it seems that you made a change to the Chief Technology Officer earlier in the quarter. Just kind of curious if you can give some update on the road map for technology and like what are some of the initiatives that have to be done? What's gone right? What's gone wrong? Just an overall update on all that would be helpful.

You bet, Chris. This is Bryan again. It's neat that the management team really wanted because the ecosystem is so integrated, they wanted to take IT themselves. The after sales team wanted to integrate that. The sales teams wanted to integrate everything across the DFC driveway and green cars. So they were the ones that basically built structure to allow George to be able to go on to bigger and better things, which is exciting. George is a class act and we'll end up in a good space, doing coding and other things that he is amazing at.

But as an organization, we just felt it was an impediment, having it as an independent department and then it needed to be integrated into operations. Fundamentally to be able to respond quicker and to be able to capture that marketplace. So Driveway as a whole, it was up 8% in volume across its platform, which was a nice number. And more importantly than that, we've started to gain some traction in new vehicles. New vehicles was up almost 500% in Driveway business. So a big number there. It's still there. I don't know that we dedicate enough resources to it, but we also believe that there will be a time in place where that marketplace disconnects again because we think the market -- e-commerce market is being pushed somewhat fictitiously in regards to one of the competitors out there.

And once their financing changes, it should change and possibly open us an opportunity to turn the accelerator back on and driveway. So real successful. We're still sitting at of all customers that come into Driveway are still new to the ecosystem entirely. So pretty cool to be able to have that still out there.

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

I guess just first on the M&A market. Could you talk about how that looks right now? And then as a tag on to that, you obviously have typically divested a couple of stores each year and I just want to get a sense, recognizing future acquisitions may add to that. How much of your footprint do you think you still have to turn over. So in other words, maybe it's underperforming or for some other reason, you want to divest it. So any color you could provide on that would be useful.

Great, John. As you can tell, we've been -- we've always remained disciplined on acquisitions. We typically pay somewhere between 10% and 30% of revenues and there's deals including 1 large deal out there that's sold for 120% of revenue. We don't see how those returns can make sense. And obviously, with our stock price at where we're at, that's what we reinforce. In terms of what have we done and what does our network look like in terms of cleanliness, we've done almost $500 million so far in revenue this year. That's net of divestitures.

We've got, let's see, 1, 2. We've got 3 stores under contract and 2 stores that are close to being LOI and outside of that, I've got one more store that we would consider not part of our network strategy and will be divested. Those are all in North America. The United Kingdom is fully clean. They're really now iterating on which brands are best to put into their facilities. And outside of that, we shouldn't have many other problems other than there's an occasional time where someone offers us some stupid amount of money in the stores always kind of performed mediocre. In those times, we do redeploy the capital into buybacks or to finding other acquisitions that are more attractive pricing wise. Our focus again is in the -- or the Southeast and the South Central, okay? And again, that is where stores are a little bit pricier okay? We have been able to find some pretty nice acquisitions at appropriate pricing, but the market is still quite frothy.

Okay. And now just shifting gears to parts and service. Could you break down your growth this last quarter across customer pay and warranty?

Our gross mix? Are you looking for mix?

So growth in revenue.

Growth. I think it was 7% on customer paying 5% on warranty. They were virtually -- they were real close.

Yes, they were really close. Those are gross profit numbers that he's quoting in terms of the growth, but they were both pretty close to each other.

And revenue was 5 and 4 million customer and warranty, okay?

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

Could you talk about the impact of negative equity, I guess, on recent volumes. It's obviously getting some press. But is the conversion being impacted as customers come in and realize that their car is going to require a check as opposed to generating a return on the trade.

Yes. Great question, Bret. It's funny. That was what we were discussing prior to the call. So negative equity has climbed a little bit. It started to subside, which is nice to see. But remember, this is the advantage of being as far up funnel as you possibly can be as a retailer. As a new car retailer and is a certified used car retailers, those are the cars that have the most margin which means the most incentives, right, which allows us to absorb the disequity in their future financing of their new vehicle, okay? So that's really why you want to be up funnel is to be able to transfer disequity so then someone doesn't have to write a check.

Now most customers still are writing a check. It's around $2,000 is the true amount that they write a check for. but this is where our stores and the traditional network of automotive retail is pretty darn good, okay? Our average disequity that we're focused on in the stores is $2,000 higher than what our AI and Driveway technology approves in the e-commerce platform of driveway.com. So that $2,000 is the benefit of what we get or having some level of negotiation and experts in our stores that are financing cars each and every day. So really, though, does it impact our business? It impacts affordability I think it's important to remember that our manufacturers still don't have tons of incentives out there. I think we're averaging just under $4,000 a unit, okay? At one time, it was as high as $6, 000 or $7,000. So that's a big number that then can be applied to this equity and allow customers to have a little less down payment and still be able to finance their vehicles.

Now anything I talk about is equity don't apply that directly to our DFC explanations, because we have extremely disciplined strategies on that. We only have about a 96% check, 96% LTV on our DFC loans, and we're way over 100 as a company as a whole -- way over 100. So we're financing everything we can, but most of that is going to our captive partners, our manufacturer captives or other bank relationships. Hopefully, that helps, Bret.

Yes. And just real quick on the geopolitical impact in the U.K. I think you sort of talked about the U.S., but -- and maybe it requires sort of looking into April. But given the spike in energy costs over there, you sounded like U.K. beat expectations in the first quarter, but was there any deterioration of the consumer standpoint as the quarter has progressed?

No. What we've actually found and I would say that Neil and the team have done a nice job. The U.K. is built differently. It basically is built off March and September and those months are massive. What they've done a nice job is diversification. They now sell used cars at different times. Those places don't get reregistered, even though you get spikes in those 2 months in use. They're trying to sell those at all times, which is a good thing. Also in their after sales business, that somehow gets spikes.

So now they're starting to balance their portfolio we're pretty confident on where the U.K. looks short term, okay? They're able to see out a good 60 to 90 days because 80% of their business is orders. Okay. So they're feeling pretty good about Q2. I got off the phone with Neil yesterday and then the rest of the team the day before. So all things are looking pretty good there and our ability to adjust franchises to be fair, within a 90-day period, 69-day period and do it at about a $50,000 entry price, basically signage for these brands in the store, it's pretty easy to be able to balance your volumes on the new car side and still maintain your units and operations with some dual brand on the aftersales side. So hopefully, that gives you a little bit of color, Bret.

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

Just one quick one. We've covered a lot of the core businesses here, but more strategically thinking about the influx of Chinese EVs taking share in Europe. How are the unit economics at your BI stores relative to your 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, Daniela. I think it's critical that everyone hears this, okay. Our relationships with the Chinese manufacturers are growing in the United Kingdom, and we cherish those relationships. However, we need to not apply the economics that are happening in Western Europe over Canada or the United States, okay? And here's the reason why. You heard me talk about this idea the Chinese manufacturers are coming into the United Kingdom. They now have about 12% market share, okay? It's not happening from EVs. It's happening from ICE engines and hybrid engines.

The EVs that were brought in by BYD and MG, 2.5, 3 years ago, they virtually sold no cars. It was less than 0.5% market share. It wasn't until about a year ago that they started to bring in plug-ins and hybrids and ICE engines until they gain market share, okay? And that's because of affordability.So important to remember that. Remember this also, in Canada, they've now decided that they're going to bring 50,000 vehicles into Canada as well. That authorization by the federal government is authorized for all electrified vehicles, not just BEVs, okay? So remember that as well. In those areas, they do have the ability to take some market share if pricing allows it and if tariffs keep that in an advantageous spot. Here's the problem. The Chinese manufacturers in Canada, which is the most likely scenario of how they're going to look at things in the United States have decided to use a dealer network in Canada.

They've also decided that the network is going to be fairly lean initially, and that it's going to be exclusive stores. Hear that, exclusive stores, okay? In the United Kingdom, our Chinese brands, 14 out of 15 are not exclusive, okay? They're sitting on the same showroom with Ford stores and [ Stellantis ] stores and Renault stores that have a unit in operation base, in after sales that allows those stores to have incremental gross profit that helps the stores profitably. If we were to have to have opened stores independently, even in the United Kingdom, those stores would not be profitable. Why? Because 60% of our profits come from after sales. And there is no units and operations built for the next 5 to 10 years, okay? So when you think about Canada or the United States, you've got to think about the dealer network and how is it going to be designed.

Also remember that in Canada, real estate is -expensive. We may have some facilities that have some vacancy and it may make sense to create some partnerships in Canada. We may have the same thing in the United States. We'll have to see what their strategies are. But if we're talking about 50% to 100% tariffs in Canada, the price advantage on like-for-like cars in the United Kingdom is somewhere around 7% to 8%, okay? And on the BEV, there is 0 price advantage at this stage in the United Kingdom, okay? So I don't -- it's difficult to overlay. And I think that for us, it was easy to be a pioneer in the United Kingdom.

But being a pioneer in the United States or in Canada, when you're opening an exclusive facility and that facility could cost up $10 million or $15 million, pioneers are probably going to get shot and the settlers are going to be the ones that get rich, and we may take a little bit of a wait-and-see approach on that. Hopefully, that helps. Oh, you asked about margins as well. The margins on those vehicles are very similar to our mainstream margins in the United Kingdom.

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

I'll just do one quick one on used retail. Looking through the slide deck here, it looks like the average selling prices for core and value auto has increased nicely both year-over-year and quarter-over-quarter. But prices for CPO vehicles decline. Can you talk about what drove the decline there? Maybe was it a mix or something else that drove that?

Sure, Mark. I actually think it's what one of the other analysts had asked about, which is the availability of those cars is becoming easier, especially remember, those vehicles were driven off of 13 million, 14 million SAAR during COVID. So we're starting to get some units back into operation and availability of those. So we're excited to see that happen. The other thing that can drive ASPs on certified vehicles is incentives, okay? So I think when you start to see incentives come up, that drive to late-model vehicles, down accordingly.

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.

Greetings, and welcome to the Lithia & Driveway's 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our fourth quarter earnings call. With me today are Bryan DeBoer, President and CEO; 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 products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties and 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 a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Thank you, Jardon. Good morning, and welcome to our fourth quarter earnings call. In the fourth quarter, we achieved record revenues driven by impressive used vehicle sales that greatly outpaced the market. Quarterly revenue was $9.2 billion, setting a new record for full year revenue of $37.6 billion, up 4% from 2024. Adjusted diluted EPS was $6.74 for the quarter, with full year adjusted EPS of $33.46 up 16% from 2024. Our operational leaders leaned into growing our top line and flexing their muscles across all aspects of our ecosystem, including DFC, which saw a $19 million year-over-year increase in pretax income and delivered a 16.7% penetration rate in December, exemplifying [ Auto-done-easy ].

I'd like to commend our ops leaders for leaning into used cars, especially value autos, focusing on the customer experience and earning considerably more share in positioning us again at the top of our peer group. Together, we're challenging our store and sales department leaders to reinvent their profit equation through more dynamic pricing and reducing SG&A while outperforming in volume. Growing our market share and increasing volume is a turbo boost to our ecosystem's future profitability as we increase DFC penetration after sales retention and benefit from the waterfall of used vehicle trade-ins.

During the quarter, our same-store revenues were essentially flat and gross profit was down 1.2%, reflecting strong execution relative to the market. Total vehicle GPU was $39.46 and down $258 year-over-year, in line with industry-wide compression in both new and used vehicle margins. Despite these headwinds, our diversified earnings mix and focus on market share, delivered double-digit growth in aftersales and stable F&I performance to help offset front-end pressures. Note that all vehicle operation results will be on a same-store basis from this point forward. New vehicle revenue declined 6.6% on an 8.3% unit decline as industry demand softened and supply normalized. New vehicle GPU was $27.66 down $300 over last year.

Performance varied by brand with luxury brand revenue down 12.7% year-over-year, partially due to the difficult prior year comp. Domestic and import brands were also soft, particularly late in the quarter when sales promotions didn't materialize. Our used retail performance has returned to our historical industry-leading mid-single-digit growth levels with used revenue up 6.1% and driven by 4.7% unit growth. Our value auto platform continued its strong momentum with 10.9% unit growth, demonstrating our growth at the most affordable price points. Used GPU was $1,575, down $151 year-over-year as we increased market share considerably while now turning to the opportunity to improve unit profitability as well.

Our focus on this high ROI area provides a stable anchor to new vehicle cycles and allows us to increase the number of customers in our ecosystem while growing our F&I and after sales profitability. F&I per unit was $18.74 up $10, demonstrating the resilience of this high-margin business. This steady growth came despite our record DFC penetration where we intentionally shift finance gross profit from F&I to our captive finance platform. Adjusting for these mix shifts, underlying F&I product attachments and pricing was healthy, reflecting strong execution across our network. Inventory levels remain consistent with new vehicle day supply at 54 days, essentially flat from 52 days last quarter and used inventory at 40 days compared to 46 days in Q3.

Flat inventory plus lower interest costs drove $6.5 million in year-over-year floor plan interest. After sales was also up nicely with 10.9% growth in revenue and 9.8% growth in gross profit while delivering 57.3% gross margin. We saw consistent growth across all categories, with customer pay gross profit up 10.9% and warranty gross profit up 10.1%. This stable broad-based growth demonstrates the underlying strength of our aftersales business model and its power to create customer loyalty.

Our sales departments have been challenged and are responding to improved SG&A leverage and ensuring more of our gross profit is realized on the bottom line. This quarter, GPU compression outpaced our cost reduction efforts which Tina will talk to in just a moment. As we look ahead into 2026, we flattened the organization, continue to focus on efficient customer experiences, and are making technology investments that will drive efficiency. In the U.K., our teams delivered a 10% increase in same-store gross profit while navigating challenging market conditions as well as regulatory labor cost increases. We're capturing market share in our high-margin aftersales business across the U.K. network while focusing on sales throughput, particularly in used vehicles.

Adjusted pretax income for the U.K. increased 53% for the full year compared to 2024, and we see continued opportunities to strengthen our results in 2026, well done Neil and well done U.K. team. Our digital platforms continue increasing our reach and enhancing the customer experiences to make shopping financing and servicing simpler and faster. Our partnership with Pinewood AI has delivered exceptional returns, and we're excited to pilot the Pinewood dealer management system in our first North American store soon creating a single modern platform and reducing complexity, accelerating workflows and placing our team members in the same systems as our customers to deliver faster, more seamless customer experiences.

Together, these technology investments deepen customer retention, support operational efficiency and reinforce the power of our integrated ecosystem. Driveway Finance Corporation continues to scale profitably with record income, healthy net interest margins and disciplined credit quality. Our expanding market share creates a larger origination funnel and a path to our long-term 20% penetration target that will convert more sales into reoccurring countercyclical income.

As DFC continues to scale, this platformer will differentiate our customer offerings, while driving higher quality, more diversified earnings streams. Now on to capital allocation, where we remain focused on maximizing shareholder return through disciplined deployment, with our shares trading at a deeply discounted valuation, we accelerated repurchases this year, returning 3.8% of our shares in the quarter and 11.4% of our shares in 2025 and at prices that we should drive meaningful accretion with. We also strengthened our balance sheet through opportunistic refinancing while preserving capacity for our growth investments.

Going forward, we'll maintain this balanced capital strategy between buybacks, selective M&A, organic investments and balance sheet strength. Our integrated ecosystem continues to strengthen, growing aftersales profitability, accelerating used vehicle growth, expanding DFC penetration and ongoing operational improvements in our sales departments will create a stronger earnings base. With improving operational efficiency, robust free cash flow generation and disciplined capital deployment, we're well positioned to deliver compounding earnings growth in 2026 as industry conditions normalize by doing what we do best, growing through the power of our people.

Strategic acquisitions remain a core pillar and key differentiator. And in the past 6 years, we've more than tripled our revenue while pairing scale with consistent EPS growth. This growth was accomplished while also building a 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 through high-return acquisitions. We remain disciplined and strategically focused on prioritizing stores that strengthen our network density and elevate our brand mix in high opportunity markets. In the fourth quarter, we added iconic luxury stores, improved our import mix and expanded a little bit with our Canadian footprint.

For the full year, we acquired $2.4 billion in expected annualized revenues, diversing our portfolio and expanding our reach. Our results over the past decade have yielded high rates of return. We achieved nearly double our 15% after-tax hurdle rate through consistent and disciplined acquisitions targeting purchase prices of 15% to 30% of revenue or 3x to 6x normalized EBITDA. Looking ahead in 2026 and over the long term, we continue to target $2 billion to $4 billion of acquired revenue annually, balancing our share valuation and acquisition prices to strategically accelerate shareholder return. With a half a decade of tremendous results behind us, we are looking ahead to 2026.

Our strategic design is showing durable results as the industry normalizes. The elements that support our long-term $2 of EPS per $1 billion of revenue targets continue to build momentum as we lift store-level productivity and throughput, expand our footprint and digital reach to grow U.S. and global share, increased DFC penetration, reduce costs through scale efficiencies and optimize our capital structure; and finally, capture rising contributions from omnichannel adjacencies. The continued development of these levers will convert momentum into durable EPS and cash flow growth. Our network and digital platform create engagement across the entire ownership life cycle, while our strengthening used vehicle after sales in DFC businesses deepened customer relationships throughout economic cycles.

Leaders across our organization are unlocking store potential, integrating adjacencies and enhancing customer experiences. These capabilities demonstrate resilience operational flexibility and the compounding momentum that will drive sustained shareholder value creation. With that, I'll turn the call over to Tina.

Thank you, Bryan. Our fourth quarter results reflect the more challenging environment with year-over-year earnings pressure driven by margin compression and SG&A deleverage. At the same time, our results and financing operations continue to demonstrate the strength of our diversified model and our solid free cash flow generation supported meaningful share repurchases while maintaining balance sheet discipline.

Our leverage remains comfortably below target levels with ample liquidity to opportunistically fund acquisitions and return capital to shareholders. It's important to note that prior quarter results included the benefit of a large insurance recovery related to the CDK outage. Adjusting for this $0.53 prior year impact provides better year-over-year comparison. Our year-over-year results reflect class-leading top line and gross profit trends and as we have historically seen, responding to quickly declining vehicle margins occurs on a lag as our sales departments work to rebalance their cost structures.

The benefit of the design of our business and disciplined approach is the optionality provided by our resilient cash engine and the long-run operational efficiency generated by our size and scale that will compound value over time. Adjusted SG&A as a percentage of gross profit was 71.4% versus 66.3% a year ago, with top quartile SG&A performance of 67.9% in North America, these increases reflect the pressure of normalizing GPUs on our sales department.

Our teams continue to focus on managing costs through growing market share and gross profit. More specifically, our sales departments are navigating volume, gross profit pressures and productivity to meet market conditions and manage efficiency while effectively serving our customers. Beyond near-term cost management, we're executing structural improvements across our network that will compound over time, raising productivity through performance management and technology solutions including early investments in AI-powered chatbots and customer service automation, simplifying the tech stack and retiring redundant systems, renegotiating vendor contracts at scale and automating back-office workflows.

These efforts are building momentum quarter-by-quarter with benefits from our Pinewood AI investments expected to materialize over time as we scale deployment and realize efficiency gains. As Brian mentioned, the most effective strategy to improve future SG&A leverage is to improve market share and volume. Combined with our unique ecosystem, we accelerate profitability as we build customer loyalty and increase the value of our adjacencies.

Driveway Finance Corporation delivered strong profitable growth in Q4 with financing operations income of $23 million, bringing full year 2025 income to $75 million an increase of $67 million from the prior year. Our managed receivables portfolio grew to $4.8 billion, up 23% year-over-year, while net interest margin expanded to 4.8%, up 55 basis points. North American penetration reached 15% for the quarter, up 650 basis points. Credit performance remains exceptionally strong with an annualized provision rate of 3%, supported by an average origination FICO score of 751 and 95% LTV in the fourth quarter.

Our ability to originate loans at the top of the demand funnel creates a fundamental advantage in credit selection and keeps capital requirements efficient. With a steadily growing portfolio approaching $5 billion and increasingly efficient securitization steadily improving margins and clear runway for penetration growth, DFC is delivering on its significant promise as we scale toward our long-term profitability target.

Now moving on to cash flow and balance sheet health. We reported adjusted EBITDA of $364.1 million in the fourth quarter, an 8.9% decrease year-over-year, primarily driven by lower net income. We generated $97 million of free cash flow during the quarter, and our strong balance sheet allows us the ability to repurchase shares and acquire stores in strategic markets while diversifying our brand mix. We are committed to maintaining investment-grade discipline with our leverage ratio targeted to remain below 3x. Our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder returns. This quarter, we continued our commitment to focus on share buybacks while balancing accretive acquisitions.

Our shares continue to trade significantly below intrinsic value, and we allocated approximately 40% of capital deployed to share repurchases. And buying back 3.8% of outstanding shares at an average price of $314. In 2025, we repurchased 11.4% of our float at an average price of $314. We remain committed to allocating capital to opportunistic share repurchases while our shares trade at a discount to intrinsic value. Approximately 40% of capital was deployed to high-quality acquisitions and the remainder to store capital expenditures, customer experience and efficiency initiatives.

As we look ahead to 2026, our capital allocation philosophy will remain disciplined and opportunistic with leverage below our 3x target regenerative cash flows and ample liquidity available, we will maintain our balanced approach, allocating free cash flows to repurchases when relative valuations are attractive and investing in accretive acquisitions at the right price. This balanced deployment allows us to compound returns for shareholders through buybacks while simultaneously expanding our footprint through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio.

Our resilient model generates differentiated earnings and cash flows from an omnichannel platform that serves the full ownership life cycle. With talented teams, class-leading digital and financing capabilities and a strong balance sheet, we're executing with the same discipline that's powered the growth of our business over the last 10 years. Our diversified model responds with agility as macroeconomic conditions evolve while preserving capital flexibility to deploy where returns are highest. As we move into 2026, we'll continue focusing on increasing profitability scaling high-margin adjacencies like DFC and translating share gains into cash flows and compounding value per share. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Michael Ward with Citi.

Good morning, everyone. On Page 19 of your slide deck, you have an interesting chart that shows the retention levels on the aftersales business. And it seems like you've had some pretty big increases, particularly in some of the older vehicles. That's just last year. How much of that growth is tied into the extended service contracts that you're dealing with F&I? And I don't know if you can share with us any details on what the take rate is for the extended service contracts.

Mike, this is Bryan. Thanks for joining us today. When we think about retention, we're up slightly as a percentage relative to a state average okay, over last year, where we sit typically around 8% or 9% better than average, okay? And it's up slightly year-over-year. When we think about the take rates and how much of our business is driven off of after sales and customer pay, it's less than 25% of our business in customer pay. Now when people buy cars from us, I think we were sitting at 37% penetration on service contracts. And then somewhere just under 20% penetration in lifetime oil. And that obviously still includes the denominator of that still includes full electrified vehicles that we don't sell lifetime oil on.

Okay. If anything, it looks like with the shifting priorities, you're really generating a lot of cash and returning it to shareholders. Any reason that's going to shift in any direction over the next couple of years?

There is one big reason. If our stock price increased in value relative to acquisitions, then it may make sense. But we really believe that at these prices, it's quite a value and Tina and myself and the rest of our capital allocations team are quite focused on it and imagine we'll continue to back up the truck and buy shares because that's an easy return to each of you as well as ourselves.

And so -- and there's less cash needed to grow private finance, and so that's freeing up more capital to do this?

Great point. I mean, we hit max cash outlay a couple of quarters ago, which was just under $1 billion, around $900 million. And because our overcollateralizations are now so efficient, where we're only over collateralizing mid-single digits typically. When we started, we were over collateralizing upwards of 25%. That obviously is where the capital comes back in and as those loans begin to age, the 25% turns into 3% or 4%, and we get 22% back. So we really believe that the $15 billion to $17 billion mature portfolio at a 20% penetration rate. really takes about 3% to 5% to be able to manage that, which means we could probably continue to grow and still recapture a couple of hundred million dollars over the next 4 or 5 years.

Our next question comes from the line of John Sager with Evercore ISI.

In Q4, SG&A as a percentage of GP came in a bit higher than we were expecting. So I wonder if there was anything specific that drove that number during the quarter? And maybe could you explain how much of Q4 SG&A is dilution from the M&A activity?

Sure, John. This is Bryan. Maybe I'll take a shot at the first part of the question. I'll let Tina deal with the dilution. We would classify the quarter as such. It continually weakened where typically, in the fourth quarter, you get a good close at the end of November, at the end of December. And we saw a mediocre close at the end of November, but we did not see sales materialize like we typically do in the last 10 days of December. And we were pushing marketing budgets and so on to be able to drive volume and what it doesn't materialize or GPUs don't materialize, the two combined created a bit of an uptick in SG&A.

The knee part is our stores are trying to find that nice balance between volume and net because what we do know is that, that volume is what drives the future of our entire ecosystem. Specifically referring to that waterfall effect of used car trade in is a big part of that. That drives the reconditioning of service and parts. And all of those drive sales, which generates after sales business and DFC business. So we believe it's the right model to go after volume. I think we just got -- I think the market was a little softer than our teams expected.

Yes. When we look -- this is Tina. When we look at the same-store SG&A as a percentage of gross profit, it's relatively similar to our total company at 71.2%. The big differentiator really is the U.K. versus North America. And as we talked about in the prepared remarks, our North America SG&A as a percentage of gross profit continues to be in the top performing quartile when you look at us versus our peers. So good strength there, as Brian mentioned, a lot of it's driven by that top line movement that we're seeing.

Okay. And then taking a broader view of staying focused on that SG&A as a percent of GP. You ended up the year at 68.8%, up I think, 130 bps versus 20 would you be willing to take a claim for where SG&A can get to in 2026 in route to your longer-term targets of 60% to 65% overall.

John, we can take that question offline, too, but I think most importantly, SG&A is primarily a function of what your GPUs look like and what your volume looks like. and then the response that you take of that. So it is difficult, especially when we're starting to feel some pressures in terms of volumes, and I think you saw that across the entire sector. We were very fortunate that we look top of the heat in terms of revenue growth, obviously, looked real good in used car growth and after sales growth. But generally speaking, everyone is softening on new cars, and that has major implications of SG&A. But One thing I know is that our team has the ability to adjust their cost structures, and we're out there challenging them. And I know my operational presidents and vice presidents are actively working on that to be able to do the best that we possibly can.

next question comes from the line of Ryan Sigal with Craig Hallum.

Want to stay a little bit on those topics. But you mentioned kind of weakening sequential trends in Q4, a little bit of a lagged marketing strategy change, I guess, to align. But Q1, we've thus far any demand trends that you're willing to call out. And then we've heard kind of some weather impact in January, March has an impossibly high comp. But I guess had those trends continued into Q1 is ultimately my question. And then what are you doing from a spend standpoint to align to that.

Sure, Ryan. And you are correct. I mean, we do have some Northeast business, it is affected a little bit by weather. But overall, the trends are very similar to what we saw in the latter 2 months of Q4, assuming that -- we're hoping that once the thaw happens, that march sales return, and I think when you think about Lithia and Driveway, we are -- we do look at Q4 as our softest quarter, and a lot of that is because the United Kingdom doesn't have that big month like a September and March in it. So the variation now between Q4 and Q1 can be quite large, which is a nice wind in our -- at our tail. And as we mentioned, I mean, the U.K. was up 50-some percent year-over-year in net profit. So that's a nice number. So we've got that advantage coming in the month of March, and they had a decent January. So we always have that little benefit now where Q1 and Q4 used to be relatively both our softest quarter. So nice little boost there, hopefully.

Yes. Nice to see the U.K. turning to a nice tailwind, given the challenges in the market. DFC for my second question, if I look at Slide 12, 62 million nice 2025 finish for the year, that medium term $150 million to $200 million, given you're getting closer to that 16% penetration kind of all the assumptions and everything is normalizing. I guess, is that medium term kind of within the next couple of years or any time frame to get there? And then any commentary to kind of bridge 2026 into that medium term?

Yes. Great. Ryan, this is Chuck. Thanks for your question. In terms of kind of last year, we were pretty pleased that we were sort of guiding that kind of $50 million to $60 million for our total financing income and delivered $75 million, which is a great result for last year. But kind of looking forward, we would certainly kind of expect that to be consistent, predictable and repeatable in terms of our growth. And so we see kind of a 20% plus kind of growth rate of our financing income operations. And that kind of does align pretty well with your -- within a year or 2 or a couple of years, I should say of hitting sort of that midterm kind of growth targets that we're showing there.

Chuck, don't be shy to talk to them about our penetration rate in January.

Yes. Great. Thanks, Bryan. January penetration rates were record for DFC at about 17.5%. And we really see clear line of sight to getting to that 20% pen rate a little faster now that is going to put pressure on financing income projections as we continue to accelerate the growth due to the [indiscernible] reserves. But we think that's the right strategy to continue to make those investments in DFC and continue to partner with our stores and deliver better outcomes for our investors.

Chuck, if I may, just a quick follow-up there. You mentioned kind of the 25% CAGR on the financing income but also higher penetration kind of as a near-term negative. So I guess, is that 25% longer term? Or can we assume that for 2026 when things kind of normalize from a penetration standpoint throughout the year?

Just a slight correction. I said 20% plus CAGR. So 25% is obviously the goal. But I think to your point of the question, yes, as we continue to accelerate growth, that could be a headwind. But we think 20% would be on the low side of that range and if for some reason, our growth rates were in the slide that would obviously put pressure on the top end of that range, which is why sort of at 20% plus. But we're still very confident that we can hit long term, that $500 million of pretax income for our financing operations within a very achievable time frame.

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

Great. I had a quick question on the use of GPUs. It's been under pressure for quite a few quarters now. I mean, obviously, nice performance on the unit side. I'm curious, like, are we at a new run rate on used car or GPUs. Anything you would call out that's causing some pressure there would be helpful. And I have a follow-up.

Sure, Raj. This is Bryan. This is the fun part of the business for me. And I think there's a stage and an evolution that occurs in selling used cars that I think we've got the right formula now that our stores are keeping the older cars. What we're also starting to realize and two of my operational vice presidents have been doing some heavy lifting on what does our pricing models look like. And they did uncover some pretty healthy pricing gains primarily in two areas, and it's -- we basically do these studies that is priced to market of what we believe cars sell for and then what we sell those cars were and the big deltas -- the biggest single delta was in our value auto cars, which is over 9-year-old cars that we had a 12% to 13% delta between what the marketplace was selling the cars for.

So even though I'm motivated by the fact that we're up low single digit -- low double digits in value auto, we're still having tendencies to give them away or think that there's a more sensitive pricing on those scarce older cars, and there's not, okay? So what we're trying to do is reeducate store leaders to inflate the pricing on those cars and understand that, it's not necessary that the velocity of that car turns within 4 days. It's okay if it turns in 24 days, okay? Because that scarce car will bring in additional traffic. And then ultimately, if our average value auto car is around $16,000, $17,000 an extra 12% is an extra $2,000 a deal, okay? So that's a big number.

The other soft spot that we have in pricing is what we would call scarcer late-model used cars, which is basically lower mileage cars than what their model year is, meaning they are driving 4,000 or 5,000 miles a year instead of 10,000 to 12,000 miles a year that we're underpricing those cars by almost 8%, okay? And those cars are a $30,000 average. So again, it's a pretty darn big number that we've just got to get better at pricing, okay? And this is where some of our data is starting to be used, but it's finally getting disseminated into the field. So we hope in the first few quarters of 2026 that we see some of the lift on pricing. And that's what I would say is most of the GPU dilemma, okay? Is that sacrifice of volume and then not understanding what the pricing is because a lot of those stores, they're still afraid in thinking that an old car, they don't have customers for, they shouldn't maybe be selling quite yet because we've never done it in the past and then they cheap sell it, and that's something that will help guide them and they'll mature as they do it more often.

Got it. That's helpful color. And just a follow-up on aftersales parts and service, we pretty remarkable growth there in the fourth quarter. I know it looks like some of the initiatives are coming through, but would you be able to double-click I mean why don't 2 areas that are driving that kind of growth? And what's a good ballpark assumption that we should bake in for 2026 in that side?

Sure, Rajat. I think when we think about what drives same-store sales growth in our aftersales department, it's all about relationships with customers, okay? And I think -- many of our stores now are understanding that the relationship is built off doing things their way other than our way. And I think that's been a lot of our opportunity is coming from -- we have processes. We want customers to fall within those processes. But the MyDriveway portal of what we do today allows customers to schedule their own appointments which makes it easier and makes it more collaborative, okay?

And then when they come in, we know who they are a little bit better, okay? And hopefully, we can focus our attentions on opening our ears and having our heads up rather than texting or thinking about our processes and really delighting and creating memorable experiences. So I would say that if we look forward at after sales growth, I believe that a mid-single-digit number is a realistic number for the near term, okay? We do have some harder comps coming up because of some big recalls, okay? But those, as we all know, don't just end okay? They kind of have tails to them, and there's always laggards of people that haven't done those recalls that you'll get.

And then the next recall comes in. In fact, I was mentioning that Tina and Jardon and I got three cars in service right now that all have recalls and then say, oh my God, one of them had three so anyway. So lots of opportunities in after sales, but I think for our team, it's about focusing on the individual needs of each and every customer.

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

You've normally had some pretty in-depth points of view on the path of travel with new GPUs. You finished at 278, 29.58 for the year, which was at the high end of your guys' kind of guidance of 2,800 to 3,000. Just curious, as we go into next year, I mean, some of your peers have said, hey, look, it feels like things are bottoming maybe a couple of others have thought, hey, there's maybe some give back with some of the brands that haven't given back such as Toyota. Just curious your thoughts on where you see GPUs going in 2026.

Yes. Sure, Jeff. I think the neat part is, I think our manufacturer partners have figured out how to throttle up and down inventory a little more effectively than they've done in the past, whether it's whether it is through production capacity issues or whether it's just, hey, we're going to control our inventory. So both our gross profit and our dealers' gross profits are stabilizing. We're quite proud of our to partners and our other partners for trying to control inventory and because it does matter. It does feel, and I'd probably agree with the rest of our peers that it feels like it's bottoming out okay, which is nice.

We are still seeing some weakness when it comes to BEVs. But again, I think that's just the -- that's the backlash of the incentives being gone and us needing to continue to push volume for the lessen CAFE standards and those type of things. But all in all, we -- things look pretty good. And I think most importantly, our focus is a lot on that used cars and hopefully, getting the GPUs out of that in the event that the GPUs on new that are kind of dictated by the marketplace and supply that maybe we're not able to control those quite as much as we can on use. We'll just make sure that we figure out how to balance that.

And then just a quick follow-up on just doubling back on the SG&A and I was wondering like back in the day, one of the big talking points for the dealers was always a very variable cost expense structure. Just curious just more on -- in the [ weeds ] level when volume doesn't pan out, I get advertising is what it is. So if you advertise for thinking, hey, we're going to do 100 units per month at a store and end of doing 80 and advertising is what it is. What are some of the other expenses that you get caught with when volume drops?

The biggest typically is personnel costs, okay? And you think that they would be volume based. But Unfortunately, there's still guarantees, and there's other factors in play. We're being pretty diligent on modifying compensation plans with what's something that we call X Y pay plans. It's basically a a grid type of pay plan that's really trying to motivate both volume and ecosystem effectiveness, we call it, as well as net profit. And some of our leaders have really asked for those type of play plans to drive their performance. Jeff, I'd say this, okay? We, as an industry, do spend a lot of money on personnel and marketing to drive things that we probably would be able to sell without a lot of that marketing and personnel.

So I think as we think about our future, we think about leveraging our best people to be able to do more with less. And as we think about the future and we think about Pinewood AI and the ideas of placing our customers and our team members into the same IT ecosystem, there's massive amounts of savings that should be able to be realized over time. And we're really in the infancy of putting our numbers on that and the U.K. teams are a little bit further ahead than us. But we still see a nice pathway to that mid- to high 50% range despite being a little higher this quarter in our weekly typical quarter of the year. So nice improvements, but we've got our pulse on this and know that, that's where the money can be made in the industry. And ultimately, that's where the relationships with the customers can be leveraged to create more wallet share, more or less getting their wallet share out.

Real quick, can you define what you mean by medium term in the SG&A slide? In terms of time?

That's typically 3 to 4 years.

Our next question comes from the line of John Babcock with Barclays.

Just firstly, I think you mentioned earlier, and obviously, correct me if I'm wrong, but I think you were saying that you're seeing trends similar to the last 2 months. So currently, similar to the last 2 months of the fourth quarter. Out of curiosity, does that apply to the used market? And also just broadly, it does seem like the used vehicle market is at least showing some decently positive indicators. I mean, it seems like pricing was up pretty decently in January, and everything we're hearing on the wholesale side, sounds like that's pretty strong. So I guess just overall, if you could talk about the used vehicle market and what you're seeing there, that would be helpful.

That's accurate. The trends that I mentioned are similar in use, new and after sales. So we're real pleased with that. We do have two less days and after sales in January, so it's a little bit hard to extrapolate, which implies that there's an extra -- there's 8% less days to be able to turn wrenches. But that's usually will get made up in February and March in any given quarter, it usually doesn't have that big a difference. When we think about the used car market, this is the typical time that it does begin to strengthen. We are a little surprised that it showed the strength that it did.

And to be fair, that's not really how we think about our used car business. I mean, we typically look at our inventories and then look at our turn rates and see which segments are moving quickly and then go target our buying habits on those areas and elaborate and buy in the areas that things are turning quickly, okay? I mentioned that idea of how do we make sure our used cars are turning and how do we capture all parts of the marketplace. That's how we think about the used car business. It's about affordability. So as long as I've got a broad range of 1- to 10-year-old cars, whatever happens with pricing, we cleared out in less than 2 months anyway. So it doesn't affect us as retailers as much other than we do think about affordability and making sure that we touch every possible affordability level in used cars.

Okay. And then just my last question. On the affordability point, there was some discussion at NADA about offering Chinese brands in the U.S. I'm just kind of curious, I mean, have you been approached by Chinese brands to offer their products? And then also, what is your interest level in doing that?

Sure. Good question, John. I think let me start with we have growing relationships with the Chinese -- with three Chinese manufacturers in the United Kingdom. We now have a double-digit store count, and they are taking some market share there. I think it's important to remember that with our Chinese partners, that the market share gains that they're making in Western Europe isn't coming from electrification. Their initial flurries into the Western European markets, came on the back of electrified vehicles, and it didn't go very well.

There wasn't very much traction, and it wasn't until they brought in ICE engines until they basically connect their sales. So we're quite excited that we've got that opportunity in the United Kingdom, but there's a big fundamental difference. In the United Kingdom, we're allowed to do what's called dualing of franchises, meaning that if I have a certain brand, and that brand is not performing as well as another brand, meaning that if the Chinese brand, let's use Chery, for example, is conquesting market share from Stellantis. It's typical that Stellantis will allow us to put the Cherry brand right next to them in the same showroom with somewhere less than $100,000 in capital expenditure to do it, okay? Why is that important?

Because it gives us additional new cars and maybe used car sales, here's the problem. There's no units in operation when you're opening these Chinese brands, okay? So I think we're we would probably not be early adopters when it comes to the United States or possibly even Canada, primarily because we're usually not in a dual franchise situation, meaning that I can have my Stellantis brand that has this great units in operations, even though their new car volumes are dropping, okay, that offsets the fact that the Chinese brands are now selling cars, new cars maybe a few used cars or you follow me, and no service and parts business.

So it's a balancing act. And I think when we extrapolate that over the North American footprint, I think it would have to be a broader relationship than a dealer, okay, where we would have more influence over the aftersales and the life cycle experiences that you would have with that. possibly even more control over pricing, which would mean we'd need market control to some extent to be able to make it make sense that you're going to be opening points with out of service and parts space to start with it.

And Remember, we do get 50%, 60% of our profits from service and parts. So it's quite a difficult venture. But we'll approach that. We do have building relationships with a number of different Chinese brands and have a pretty good Chinese contingency operationally with Brian Lamb, who's done some work with that. And we'll keep our minds open and look at what the opportunities that present us in the future. Hopefully, that answers your question, John.

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

Could you give us a little more color on luxury, I guess, you mentioned that there was some timing issues. But I think on the third quarter call, you talked about seeing some softening amongst that high-end consumer. How much is product versus pull forward versus more of a macro consumer sentiment issue?

It's a little of both, Bret. Our luxury was down somewhere in the 11% range. But what we're feeling is that we're fortunate that their service and parts business is still fairly strong, which helps balance some of those things out. I do have mean I do have some specific numbers. It looks like BMW and Porta were probably the hardest hit. But they're all within percentage points of each other in terms of same-store sales. And when you start to get down into net profit, there's some more punitive numbers if you get into some of the lesser German brands.

So -- but we're working on that, and we still got -- we announced last week, we had our LPG or our Lithia and Driveway Partners Group announcements, our #1 store in the company, and this will tell you the power of people. Our #1 store that won our Founders Cup is an Infinity store, okay? So if you give -- that's about as hard a brand as you could have last year and somehow that person managed to turn lemons and eliminate and we're quite proud of the accomplishment of all our LPG winners and clearing some of those sales departments and service departments that really found ways to buck the trends with certain manufacturers.

Okay. And then one follow-up question on used. Obviously, the margin rate on used is well below where it was sort of pre-pandemic. And when you think about that between mix of value versus core and all, but -- where do you see the margin rate coming back to? Are we structurally less profitable because you've got better Internet price transparency? Or is it a supply issue? And if off-lease cars come back, you can see real margin recovery in that category?

Bret, I want to believe this is just a maturity thing. We've added 2/3 of our businesses haven't really ever got into these businesses. okay? So I think that we will get that knowledge into those stores, and they'll start to understand and be more dynamic in their pricing, that if they do have scarce cars, they've got to price those differently than less scarce cars. And we've got certain tools that the stores use at times that are there for reference rather than as a bible and they have tendencies to look at it all as a viable, and those tools don't always delineate between a low mileage car in a average mile car, and they don't delineate between a 9-year-old car versus a 9-month old car. And there are massive differences.

And that's where we're relying on our general managers, our general sales manager and used car managers to watch what's happening on their lots, okay, and be sensitive to that and established pricing that is appropriate for the marketplace and not give the cars away because they happen to be able to steal its rate in. And that's really the underpinnings of this is they're able to negotiate trade-ins at a one-to-one negotiations that are less than market conditions, and we still are able to buy our cars 5% to 7% below what our competitors typically do that aren't new car dealers. Why?

Because of that one-to-one negotiation. And then sadly, we pass it along to the next customer rather than sit and wait for the right customer and spread the visibility of that car through driveway.com or green cars where you get enough eyes on it that you finally find a customer that will pay you the true market value of that car. So I believe, Bret, that this is all about maturity and you're starting to see the -- I think last year, this time, we were minus 6% or 7% used car same-store sales, and we're the exact inverse of that this year. So that's the sign we want to see first. Now we're going to start constructively working on pricing and maturity and finding these cars and being able to turn them.

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

Just switching gears a little bit to a more strategic question. We're seeing this big inflection point this year and next few years in autonomous driving. And as legacy OEMs are also emphasizing their push into these passenger vehicles, L2 and L3 ADAS, they're embedding more advanced sensor suites, radars, LiDARs, essentially, what I want to understand is what is Lithia's capabilities in servicing these advanced sensor suites and EVs with sensor telemetry for autonomy.

This is Great, Daniela. Nice to hear from you. It's pretty cool to be able to see these cars have these type of skills. But with that comes massive amounts of technology and massive cost to that technology. I think an average aftermarket LiDAR is around $45,000 and has so many different parts. And I imagine as our cars become more so that way, what you find is that proprietary technology that we need to fix those things brings customers back into our dealerships okay, which is beneficial. So we are downstream to ultimately all of this.

So whatever our manufacturers decide to upfit the cars with and whatever consumers are really demanding, we get the benefits of it. So this technology creates a lot higher breakage rates. And I think -- that's why it's fairly easy to contend at a mid-single-digit same-store sales growth rate for the next 5 to 10 years, probably a pretty nice number. In terms of what can Lithia do differently, I think the single biggest thing that we can do is create optionality and go into people's homes to make a difference, okay, make it convenient, make it simple and make it transparent and that's how we try to differentiate ourselves. With alongside the brand names that are on our buildings.

And then shifting to auto credit. We've gotten a lot of questions. You've seen rising delinquencies in both prime and subprime in January. Obviously, DFC is skewed much higher on the credit quality curve. But any color you can share on how you've adjusted underwriting standards, if at all, to address the risk there? Have you seen any change in consumer behavior starting in 2026?

Yes, Daniela, this is Chuck. First, I'd just like to say that every year for the last 4 years, DFC, we have improved our credit quality on our 3 key metrics. Our average FICO has increased our payment-to-income percentage has declined and our front-end LTV percentages has declined. That speaks to the consistency of our underwriting standards. And while we tighten up kind of our credit standards in that 2021 kind of time period where we could see a lot of choppiness in the market, we have been incredibly disciplined, incredibly focused on maintaining our credit discipline and that really is bearing fruit today.

And that when we look at kind of our year-over-year delinquency trends, we're down 36 basis points in the 31-plus bucket that's bucking the trends of the market right now. And that, again, really just proves out the overall DFC hypothesis of being top of funnel. That really gives us a leg up in terms of our credit quality, and we see those trends continuing as we go forward.

Our next question comes from the line of Mark Jordan with Goldman Sachs.

Just one quick one for me on M&A. I picked up here in 4Q and understand the capital allocation going forward will be more opportunistic with respect to share repurchases, but can we expect this year to be kind of a normal year in the $2 billion to $4 billion of acquired revenue?

Mark, it's Bryan. That's definitely what we're seeing today. And obviously, we're starting to drop off some pretty good profitability years, which helps pricing on M&A. But right now, the market is kind of static. I mean we're definitely finding some deals. We announced those nice deals in Beverly Hills. We found a small little deal up in Canada and a few others under contract. So I think that that's a pretty good pace for us. And again, depending on what our stock price is versus what those acquisitions are out there for helps dictate how much we'll end up doing.

We have reached the end of the question-and-answer session. Mr. DeBoer, I'd like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you, everyone, for joining us today. We look forward to talking to everyone again on our call in April, all the best.

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

Greetings, and welcome to the Lithia & Driveway's 2025 Third Quarter Earnings Call. [Operator Instructions] It is my 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 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 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 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 where we improved our same-store revenue across all business lines, focused on cost control and [ deepen ] the integration of our adjacencies within store operations. The result is a high-quality earnings mix, with more profits coming from reoccurring 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 and 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 [indiscernible] focus on execution.

We look to continue to capture market share and increase customer loyalty, producing strong in 2025 and spring boarding into 2026. Our team is quickly converting our momentum into share gains, faster throughput and sustained cost efficiencies, so earnings power builds from here. Our unique and diversified earnings engine is outpacing the industry while also being more durable despite a mixed customer backdrop of normalized GPUs and customer [indiscernible].

The gross profit growth in our reoccurring aftersales department, resilient F&I attachments and to 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 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 F&I and after sales attachment to deliver more connected and repetitive ownership experiences with our customers.

F&I also continues to grow with F&I revenue up 5.7%, reflecting our continued focus and opportunity in this high throughput area. F&I per retail unit reached $1,847, up $20 year-over-year, which includes the impact of lower F&I from increasing penetration of EV leases and strengthening DFC penetration in the quarter. Vehicle inventory and carrying costs improved nicely with new days supply at 52 days, a decrease of 11 days sequentially. Used DSO was 46 days versus 48 in Q2.

Floor plan interest expense declined $19 million year-over-year due to tailwinds from decreases in inventory balances and slightly lower interest rates. After sales continues to be the largest single driver of customer retention and earnings growth. After sales 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 after sales 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 after sales 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 continue to normalize. In the U.K., 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 MyDriveway on our 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 reoccurring, stable earnings through any economic cycle.

I'm happy to congratulate our DFC 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 by 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 in 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 3 to 6x 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 billion 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 & Driveway'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 DFC 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 after sales and our captive finance business deepens customer economics and smooth out any economic cycles while inventory and network scale improves speed and choice.

Operational leaders across the network are driving store and departmental 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 return. 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 managing costs through growing market share and gross profit as we start to lap prior comps that reflect our 60-day cost-saving efforts last year.

In the U.K., macro and mix headwinds pressured margins and labor costs and 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've bent the cost curve in North America, and we're making improvements across our network, particularly in the U.K. 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 in 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 have 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 with managed receivables now above $4.5 billion, the maturing portfolio is delivering profitability that supports 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 DFC 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 [indiscernible] operating momentum into liquidity that lets us build 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% of 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 1/3 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. We've 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 while 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 and compounding value per share. This concludes our prepared remarks.

With that, I'll turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Ryan Sigdahl With Craig-Hallum Capital Group.

Nice to see the operational improvements. I want to start with EVs were given the tax credit expiration. But it seems like, let's get cleared through most of their EV inventory or refresh a lot of it anyways. But can you talk through kind of what you saw in the quarter? What that meant from a sales standpoint and 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 quarter were back to 43% of our total new car mix, which was a nice number. We actually started the month of September, and this is close to correct, okay? I think we had 6,000 electrified vehicles that qualified for the $7,500 federal credit going into the month and then we ended at just under 2,000 with really the only product that's remaining is a little bit of the higher-price stuff, which we spoke to in the past. .

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 they're basically replacing the $7,500 credit on top of that to be able to keep that volume hopefully, somewhat static. I imagine it's going to drop a little bit, and I don't have the preliminary October results, but I would imagine it has dropped a little bit. But the important thing to remember is that the way that they push those units out the door and what the impact is of the $7,500 is basically an affordability issue because most of those vehicles were leased. So our lease penetration, I think, was the highest we've ever had on a blended basis. We were almost lease penetration on new vehicles, which was quite nice, which means most of those customers are coming back in the next 24 to 30 months or whatever the length of those terms are.

So kind of need to see that we can move the market when we need to. And I think what I would take away from it is those vehicles, those 4,000 vehicles or so that we pushed out in September were really first-generation BEVs, a lot of first-generation BEVs, Hondas, Tata, [indiscernible] and some of the domestic products that now second-generation cars are coming either in the '26 model cycle by the end of the year or early in 2026. So we're going to have rather than a 200-mile range car, we're going to have a 300 to 400-mile range car for about the same price.

That's great color. And not just consumers coming back, but like you said, the first [indiscernible] refusal for that inventory on the used side coming in the door for you guys. I want to switch over to the U.K., I appreciate the disclosure on kind of North America SG&A to gross. If I back into it, I think it implies to the U.K. with something in the high 80%-ish range, understanding kind of the margin challenges there, the labor challenges, et cetera. But it sounds like a lot of company-specific initiatives from cost efficiencies, focusing on parts and service and used and things that the U.S. did a decade ago. But do you see any kind of line of sight to improved market conditions there? Or is it really kind of a self-help do what you can do given the Chinese mix and kind of the constraints in the market?

No, Ryan, great questions. And I think the insights on the labor market really happened in January and it was twofold. One was the minimum wage and then one was a payroll tax and the actual impact to the organization was $20 million for us, okay? And they curved about $11 million of it in the first 6 months sheerly through head count reductions and productivity gains. They've now earmarked another $8 million or $9 million, which will get them beyond what the impact was. But there's another $3 million [indiscernible] in '26. So they're really working on how to do that.

And I think even though our SG&A is higher than last year and the market has shifted, our team is doing a pretty nice job relatively speaking, of how to respond to that. And a lot of the increases, I think we were up $10 million approximately in operational net profit in parts and service. So a big improvement there. Our used cars are beating the market by a little bit, and our new cars are basically in line with the marketplace.

And I would say this, last year, we had -- let's see, we had 3 BYD stores and an MG store, which are Chinese brands. This year, right now, we have 7 total Chinese stores with, I believe, 5 more that open in the next 60 days. So unlike the United States, where you have to go buy and pay goodwill to be able to shift your manufacturing mix in the U.K. if you've got a facility and you've got good relationships with manufacturers, you have the ability to add and respond pretty quickly to the marketplace.

So we're pretty pleased about what we're seeing there and our team there is doing a really nice job responding. So we should exit the year with almost a dozen Chinese brands, which are up a pretty nice amount. Now some brands like Ford and stuff are up quite nicely as well. So I think we're able to respond to the market. But like you said, it's our response. It's not necessarily coming from strength in the marketplace right now.

Our next question comes from the line of Federico Merendi with Bank of America.

We have seen some turmoil in the subprime market and to deliver more news on that front. So my question is, Bryan, could you give us an overview of the used market and how sub-prime can impact it? I understand that your higher credit quality, but what are the ramifications for Lithia's credit portfolio?

Would love to, Federico. And I think let me speak directly to the used car market as a whole and as a whole for Lithia & Driveway, not specifically to our DFC part of our organization, okay, because their buying behaviors are different in the marketplace of more of a prime type of lender.

What we're seeing in the marketplace, in the used car marketplace is a lot of opportunity. This is from a Lithia's standpoint in the value auto segment, okay? And the value auto segment is our most affordable cars. And I think there's a general belief in the industry that value autos are driven off of low-quality credit. It's the exact inverse of what you think, okay?

Lower-priced vehicles are only financed about 50% of the time, okay? Whereas a certified vehicle is typically financed 90% of the time. The reason why is that lower-priced vehicles or what we call value auto, are typically quite scarce, okay? They take money to recondition. So your price to book value is typically quite high, meaning it's difficult to finance. Okay. And I got Chuck sitting next to me here shaking his head that those are really hard cars to finance because at a $15,000 car, if you've got $3,000 in this equity, you're now financing 20% over LTV without profitability and without down payment.

So you've got some big anomalies that remember that value autos are driven off a higher credit quality customer that typically saves their money or has the ability to finance at a fairly high LTV, loan-to-value, okay? So really interesting dynamic, and this is what we teach our stores and why our value autos were up 22% on a unit basis in the quarter and a lot of our real strong tailwinds.

Other market dynamics that are important to remember, we actually achieved 74% of our used car sourcing in the quarter was bought directly from consumers. Okay? And that's trade in, obviously, or buying them directly off the street from consumers or off-lease vehicles, so on and so on. That's the highest we've had all year. okay, meaning that our teams are keeping pretty much every vehicle that they can make stop, steer and go. So you're selling a safe vehicle, but you're digging into the affordability landscape of these high-quality customers that ultimately make pretty good money on because the vehicle is scarce. Okay?

Some other little tidbits of information. Our margins on used vehicles, and I believe this is more of a Lithia thing because we now have Driveway and Green Cars to be able to spread our wings and get more eyes in front of every type of car. And this is a little better than what we've been in the past. We made 5.1%, 5.2% margins on both certified and core product, okay, as a percentage, right? Our value auto this quarter was almost 16%, okay? And remember, that's a lot lower price car.

So our actual annual return on our value auto is 130% cash-on-cash return, okay, massive improvement relative to certified and core that's under 50%, okay? So nice improvements. We're pretty excited about what's happening in that space. To finish that thought, Federico, remember that the mix in the market nationally in North America, only 11% of used vehicles sold are 1- to 3-year-old vehicles, okay, only 11%. Okay? So we spend very little of our time and it only makes up about 1/5 of our total sales, selling those. We do it because we've got the off-lease returns, and it's easy. People expect us to have those certified cars. Another 1/4 of the market comes from Corrado's or 3- to 8-year-old vehicles. okay? And we were about -- that makes up 26% of the market, which leaves over 9-year-old vehicles makes up 63% of the marketplace, okay? That's a huge amount, okay? That's a number that's bigger than new cars are, okay?

So remember, that's where the big money is in the business and as a new car retailer, we're top of funnel to get the first waterfall effect of trade-in and then the second waterfall effect and ultimately, that second and third trade-in, which is really that value auto that brings those nice returns that we're looking at. Hopefully, that helped Federico. Thanks for your question.

It was super helpful. The second question I have is on the U.K. and the regulatory environment. I mean, we have seen that in the U.S., the EV regulatory environment has changed. And Continental Europe is it seems that they're moving into that direction. What do you think is going to happen in the U.K. over the next, I don't know, 18 months in the regard of EV?

So Federico, let me just reiterate for everyone that U.K. makes up a little over 10% of our revenue and makes up about 5% to 6% of our net profit. So we don't have a ton of impact coming from the U.K. But what we're seeing is growth of the Chinese brand but it's not coming from the electrified segment. It's coming from their introduction of ICE vehicles into the marketplace. So -- and I think when BYD when MG and those others first came into the market, they were electrified vehicles, okay?

Today, the reason why they're gaining market shares, they're selling ICE vehicles and plug-ins. Okay? And I was there 4 weeks ago, okay, and traveled the marketplace. We now have a Cherry franchise there as well looking at the product and what I see in the electrified vehicles at the price point that they're selling them for in the U.K., they have 0 ability to compete in North America, okay? And that may change and they may have margin that they can still take out of the formula, but I looked at a Cherry vehicle that was GBP 37,000, which is an equivalent to almost USD 48,000 to USD 50,000 okay? It was an electrified vehicle that had about 256, 257-mile range, okay? And wouldn't hold a candle to any of the imports or the domestic cars at about $10,000 less, okay?

So we're actually not as concerned, and it's great to be able to see what's happening in the U.K. Remember this also in China and U.K., they've plateaued in terms of electrified vehicle sales. They both sit at about 55% penetration rates, okay? And that's the same as it was last year. okay? So really, the impact that's happening is coming from the ICE vehicles that I don't think that message gets out there. I do believe that the Labor Party in the United Kingdom is definitely into sustainable vehicles. At times, I wish we were a little bit more into that as well, but that's probably now 5 to 7 years out in the United States, but it is making it hard expense-wise in the United Kingdom. And I imagine they'll embellish that further with more quotas on electrified vehicles.

Our next question comes from the line of Mike Ward with Citi Research.

Two things. On the U.S. BEV sales, you mentioned there about 4,000 units I believe what I hear in the industry, the margin on those is very light. So if you take that out, you probably -- your overall gross -- new vehicle growth has been relatively flat, if I'm doing the math right, over the last couple of quarters. Is that correct?

I believe you're correct. Tina, have you got any insights there? I'm looking here real quickly. I think that 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 other higher-demand cars at the current time.

Better cars. It's a much higher repeat buyer, too, right? The EVs, people buy them, they love them.

I think you're right about that. The big thing is we're conquesting second and third-generation Tesla customers, massively conquesting them. So that's a positive thing, especially in the West where Tesla penetration is high, and our, I would say, our managers and store leaders are not as opinionated of whether they should sell an electric car, plug-in hybrid or an ICE engine, they seem pretty savvy on being able to convert customers. And I think what a customer gets is a wonderful service and aftersales experience.

So the life cycle of the ownership is a much different experience than maybe their first 1 or 2 experiences with the Teslas. And to be fair, most manufacturers now have competitive product in price, in range and in speed, which is something that a lot of consumers are looking at that the performance elements of the car are quite excited. And we're really excited about the next-gen of the Japanese and Korean imports that are hitting in the next couple of months, okay, to really be able to start to push those vehicles out to the consumers a really affordable levels.

And it sounds like the profitability aspect probably bottomed with the 3Q with the rush to buy. So maybe...

That's probably a fair assumption.

The second thing is, you kind of alluded to that you have about it sounds like about $1 billion in acquisitions that could close by year-end. Is that what you're seeing? And is -- have the multiples come back into check? And it looks like -- it sounds like you have a lot of opportunity there.

Yes, you know us. I mean, we don't use these stretch on deals. We're fortunate that we've got great relationships with our manufacturer partners, which allows us to [ fish ] in every possible pond. And I think in North America, we've been real fortunate to be able to find a few deals in the first 3 quarters of the year, but we've got some really nice deals coming in Q4 and are pretty excited that you can find them in this type of market, especially the quality of the deals.

And it's those long-term relationships that may take 3 to 5 years to get into that point where certain things start to drive the decisioning of these sellers. And we're fortunate that they chose us to be able to be their suiters and their successors at what we would look at is well within our 15% hurdle rate on ROI and 3 to 6x EBITDA and so on and so on.

So you're keeping that allocation plan tight. It's nice to see.

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

Great. I just wanted to dig in a little bit more on the U.S. versus the U.K. performance. Anything more you can share in terms of how the GPUs were in U.S. versus U.K.? How is the services growth? I appreciate the SG&A comments, but just any more clarity around the profit performance would be helpful.

And then relatedly, any more color on the U.S. in terms of how you feel you're doing versus the marketplace now, particularly given like historically, you've had some tough exposure in terms of your regional mix. So curious like how that's doing versus the broader market? And I have a quick follow-up.

Yes. Sure, Raj. I think maybe I'll spend most of the time on what we think of our North American performance and where we sit in the marketplace. I mean it does look like that we massively beat on used cars. The market is showing flat, okay? So we think we sit quite nicely at 11.8% revenue increase and almost 7% unit increase. Also, if you reflect back on they used only retailers that have reported so far. Remember, they were down 6%. So it speaks to the strength of our model and ability to respond to the marketplace in a little bit tougher conditions. We're pretty excited about that.

Also, if you look at our aftersales business, we were up over 9% in gross profit, okay, which was a really really nice number as well, and that's driving a lot of the profitability in the United States, which is great. I mean really, the new car market was where maybe a little bit of weakness [ lied ], okay? Because ultimately, our GPUs did come down even though we were up 5% or 6%. That also looks better than what the marketplace was. So I'd say this, I think our team is responding. And to be fair, last quarter, our results were kind of middle of the pack. This quarter, I believe that we're going to be -- we're going to look nice in terms of top line revenue growth, and we'll see tomorrow and next week of where we sit. And no matter what, I believe that we've got lots of opportunity.

I think our team believes there's lots of opportunity, and they're really driving towards that 2:1 ratio. In terms of the U.K., the U.K.'s profitability was only -- was down 2.4% year-over-year. So it wasn't that much and it didn't affect things that much in terms of our overall numbers. So most of the $300 in GPU was truly North America, okay, which is the sound by. Now we did -- we have read some third-party information. It appears that the GPUs as a whole were down almost 16% on new vehicles, okay, for the nation, okay?

So if that's true, we probably beat by 5% to 7% in terms of GPUs. And obviously, on the top line side on new unit volume, we beat on a pretty good amount there as well. So all in all, I can tell you this, my team is looking forward to the challenge, and I think being back in operations and getting to know a lot of our operational middle leaders and top leaders a little bit better, we've got great people that understand the opportunity and now it's game on and are looking for how to show that Lithia is the best operator in the segment, and most importantly, how to leverage the ecosystem and the massive amounts of acquisitions that we've added over the last 5 years to really differentiate ourselves as operators.

Got it. Got it. That's helpful color. I just wanted to follow up on Mike's question around just M&A. Just a little more finer point on that, if possible. You reiterated your $2 billion target for the year, but you also noted like you're very return-focused. So I'm curious, like, is that like a hard target that you want to meet here in the fourth quarter? If not, like would we expect that excess cash flow to go into buybacks? Just curious like how much of I mean, is that something you're like you're forcefully working towards to achieve in the fourth quarter?

Yes. I think the return thresholds at any given time are balanced, but we -- that is a hard number we don't flex, okay? And we haven't had the flex even over the last 3 or 4 years where earnings were elevated. And as such, prices were elevated. We've always bought off normalized earnings. We have not put in the value creation that comes from the ecosystems in our return metrics still, okay, which gives us another 50% of lift when we think about where we stand there. So there's good opportunity out there. You just got to be able to fish in a bigger pond to find the opportunities that are great, okay?

And I think one thing that I know about how we think about our network is we do look at density, we are starting to gain market share and expand loyalty okay? And at about 188 miles from over 95% of the population in our -- in the United States, we sit in a nice place to be able to grow and push the market. I think our team spent the last 3 or 4 years getting to understand the benefits of what driveway.com can do, what the MyDriveway consumer portal can do and how DFC can help drive sales while still being extremely controlled in what we buy in DFC to be able to get there.

So we're pretty pleased. And you saw that we bought, what, 5.1% of our shares back in 1 quarter. okay? The implications of that, we buy the whole company back in 5 years, okay? That's 20 quarters, okay? So I don't believe that can happen. And if -- but if the world can't see what we built and can't see that we know what we're doing and that we had the courage and the boldness to be able to redesign our organization for a higher profit model that has lower costs okay, and can't see that the synergies that are coming from DFC and Driveway and fleet management businesses and Pinewood experiences and partnerships, I'm not sure what they're looking at, but this management team and our Board believe that we have a rocket launching in the space. And if people don't get it, we'll continue to buy our shares back.

Our next question comes from the line of Glenn Chin with Seaport Research Partners.

Can we just pull down a little more into your used performance? So as you pointed out, very promising 6.3% same-store unit growth I mean that's the best number you've put up in almost 4 years. Can you just tell us what drove that, Bryan? Was it a change in focus, change in process? It doesn't sound like it was a change in market.

Well, I can tell you this, Adam did a nice job kicking off used car focus. And to be fair, that's my love, okay? So everyone's getting the message, and it's very clear that we know what we're doing. It's a matter of keeping those. And remember this, Glenn, we bought $25 billion in revenue with not a lot of messaging to the stores over that first 3 or 4 years of ownership that we keep every car, okay? And we bring people into our ecosystem through affordability and then they eventually step up to buy better or newer cars and then eventually buy new cars, okay? And that is our model.

And I think I'm proud of that $25 billion that joined us to be able to clear their mind that they can actually sell these cars in a respectful way, and it's a higher-quality car then Joe's Garage down the street that doesn't have warranties on their cars, may not have a car that actually stops steers and goes for some period of time. And we've got the integrity and the support to be able to do that, and we've got digital channels that are putting more eyes on that cars to make that 16% profit margin on those value auto cars. We're going to continue to push though, in all 3 of the buckets, okay?

And I know that our team can do it, and it's truly a focus on being able to walk to gum and then eventually run at the same time. And I think our teams in the walk stage and we'll continue to get to jog and run on used cars, but it's the biggest area that we built the ecosystem for, okay? And even our sustainable vehicles and used cars is looking like a quite nice number at almost 20% of our sales were electrified in used cars as well.

And you've emphasized that messaging to me in the last several quarters that it was going to be a point of focus for you and the team. I mean, so was last quarter at the inflection point, meaning -- I mean, should we expect positive comps from here on out? Is that a safe assumption?

Absolutely. Okay. If you remember pre-COVID, Quinn, pre-COVID, the company basically for 8 years, had high single-digit, low double-digit increases in used cars quarter-over-quarter. I don't remember a quarter that we were ever below 7.5%, 8%, okay? I mean the market is there. Remember, we have less than 2% of the used car market, okay? And we're top of funnel, okay? We built our ecosystem to be able to grow used cars out by finding the best cars, reconditioning them closest to the consumer, meaning I don't got the fees to transport cars because I got 350 reconditioning locations in North America, okay? And on top of that, 75% of our cars or 3/4 of our cars are coming directly from consumers, so we don't have to pay auction fees. okay? It's about $1,000 advantage over used car retailers, okay? Important thing to remember, and we're just getting started.

Yes. And to your point, I mean, I'm looking at my model here, you have positive comps every quarter prior to COVID, I apologize for the noise. Back to as far as my model goes from -- so from 2012 through 2020, you had positive comps every quarter.

Great. Well, since I've got everyone on the call, in October, we're trending up 10% in unit sales, okay? And we've got tough comps, okay? We had tough comps last quarter because we had all the carryover units from CDK that gave us a bigger number last year in used car sales. So we're just getting started.

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

Two quick ones for me. The self-sourcing was 74% this quarter, the highest of the year. Can you just remind us what that looked like pre-COVID?

Actually, pre-COVID, we were low 70 percentile. The area that grew is what we procure directly private party, meaning what we buy directly from a consumer. They don't actually trade in the car and buy a car from us. And that was 3% or 4%, if I remember pre-COVID, and that's pushing 8% to 10% in most quarters now. A lot of that is driven off of the Driveway ability to be able to procure a couple of thousand cars a month, okay? And that Driveway procurement is really retraining a lot of our store leaders that cars are worth more than what they think.

And when they pay a little bit more on a trade-in, somehow they sell them for a little bit more. Because remember, our thesis on our design elements 10 years ago is that we buy cars for about $1,200 to $1,500 less than what they used only retailers, primarily driven off what I just spoke about of reconditioning closer to the customers and closer to what car sale, not having auction fees and having more of our cars come off trade-in, okay, that, that gives us a distinct advantage. But unfortunately, we pass it all through to the consumer, and we sell cars for about $1,000 to $1,500 less than what Carvana and CarMax selling for, okay? And that's purely because we believe because they've got more eyes on cars and it's a pretty nice transparent selling process that they have, much like what we have in Driveway.

Got you. I show that $2,000 $15 gap price surveys and whatever believes me, but anyway. My follow-up question would be, can you just elaborate more on the net losses as a percentage of managed receivables this quarter and then all the allowance for the end of the quarter as a percentage of ending receivables. Just want to get a sense, quarter last quarter. The allowance didn't really move much. Just wondering if that's conservatism or just you're a little bit spooked by maybe some of the fringe parts of the subprime market you guys don't really play there. But just kind of curious how you're thinking of that allowance going forward.

Yes, Chris, this is Chuck. I would say there's a lot of noise in the marketplace, but we're very happy with how our portfolio is performing. Just a couple of quick data points. Our first payment defaults, which is the biggest indicator of fraud and highly likely fraud is actually down year-over-year. Our delinquency rates are down year-over-year on a sequential basis. And our default rates, which leads to the provision that you're talking about are also at or below at each credit segments year-over-year after we adjust for seasonal adjustments.

So this really speaks to the power of our ecosystem of being top of funnel, Chris, and that this credit discipline, while still increasing our originations by 33% over last year, that's pretty much key to DFC's ability to drive and hit our long-term goals of $500 million of pretax profit. And as it relates back to the provision, we're very comfortable that keeping that app where we've got it, it should be more than enough to cover what our losses are on a go-forward basis. So thanks for your question.

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

Bryan, congrats on a great quarter and the rest of the team. Bryan, I was wondering if we could, if you wouldn't mind just drilling down a little more on the new GPUs as we go forward, I think we're going to be lapping a tougher Q4 than last year with the election bump, and I think the OEMs had some dealer incentives and then as we get into next year, there really hasn't been talking on this call of tariffs, which is amazing in itself. I'm just curious how you see the outlook for new GPUs as we go through Q4 and 2026.

I think that's a good insight, Jeff, that Q4 of last year did have some nice numbers in it. But to be fair, when we think about how we grow our business, it's taken us a year or so to get back to performance through people. And our store leaders out there are making good people decisions and a lot of those were made in the summer and are now taking hold. Now what happens in the quarter, we'll have to see. I would say this, when we look at tariffs and the impact of those tariffs on GPUs, I would say it's offset more by the competitive environment that manufacturers are all dealing with new entrants. They're dealing with new product lines. It feels like incentives are starting to creep even though they only show up slightly year-over-year.

We feel like there's a turn there. I just got from one of the Korean manufacturers this morning that dropped the drop their APR on their 2 highest moving products down to 0% again, on top of the big rebates that they already have on the table. So I'm feeling like that could help offset some of the comparative numbers that came from the election period last year.

So we're feeling pretty good. I would also say that the tariffs, though there is some pretty big implications and it does look like some of those may stick, I think the biggest sound bite as to whether we're at 50% or 150% tariffs on China, the North American market is not going to behave like Europe or the rest of the world, okay?

Knowing that those vehicles are selling for a certain price in the rest of the world and then adding on a doubling factor to the cost of that vehicle, there's no chance that I think that Chinese manufacturers are here in the next half decade or so at scale, okay? Some day, they may be able to do that and the product quality that I saw was pretty good. I mean it was up there with the Koreans and the Japanese, which are truly some nice high-quality vehicles. So we'll see what happens there.

The good news is, I believe that the Koreans and the Japanese are responding to the market nicely. They are not raising prices. I think our increase is in 2 of the main import Japanese brands. They're talking about $250 to $300 increases on their main product lines like CRBs, RAV4 and so on. And these cars are now full hybrids or they are plug-in hybrids that are just better and more economical cars. So on an affordability level for a consumer, I don't think tariffs -- I think tariffs can be overcome by better gas mileage and lower bills at the pump or electrification to be able to help with the affordability component and offset that or maybe even more than offset that.

And just a quick follow-up. -- any elaboration on the 300 basis point improvement in service and parts gross margin percent, that's obviously pretty impressive. Just curious what's driving that, how sustainable you view it? Any details would be great.

Yes. A lot of times, Jeff, that's driven off of the mix between the 30% margin inventory, our parts business and the 65% labor businesses. And our labor portion of our business was up a lot more. But we'll say this. We are retaining more growth and our manufacturer partners because of inflation, they are increasing our labor rates on warranty and corresponding, we will increase our customer pay labor rates. And as a competitive environment, we're able to maintain pretty good profit margins because generally speaking, inflation and our labor costs are going up, okay? And we're able to bring that to the bottom line. Go ahead, Tina.

I would add to that, Jeff, too, we had strong performance both in customer pay and warranty in the third quarter. and those are more heavily labor-based. And so that mix shift and that overall performance also drove the margin improvement. .

Yes, that outpaced by 7%, 6%. It's a good point.

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

As you build out the Chinese brand mix in the U.K., could you talk about the rooftop economics of BYD or an MG, the sort of seen as lower price point or lower ASP units, maybe in some cases. Are you getting similar GPUs and after sales and mix out of those brands as you do out of your legacy U.K. product? .

Good question, Brett. And the answer is yes, on GPUs are getting margins similar to what the mainstream brands are getting. Now BYD is a little bit different. They are a little bit higher priced Chinese brand. So they kind of fall in this area between the U.S. manufacturers and the Japanese and Korean and other European mainstream manufacturers and luxury cars, okay? So important to remember that. Here's the difficult thing.

So even though our volumes are increasing quite nicely with the Chinese brands, there's no units in operation, okay? So the way that we're making a difference is we're going out and doing what Lithia does best. And we've got this great mainstream leader, Gary, who knows how to sell used cars. In fact, I probably could learn some things from Gary because he's selling almost 3:1 used to new in the mainstream or Evans Halshaw brand in the United Kingdom.

So a lot of our business model when we think about adding Chinese or opening those points is, in the interim, why you build your units in operations, which is what drives your aftersales business, you've got to sell used cars. And he's doing a nice job being able to quickly get to those 2, 3 and 4:1 ratios. Keep it up, it's need to be able to see that and set the bar maybe even a little higher for our North American stores because ultimately, I'll tell you that we sit at 1.2 used to new ratio on -- in North America. The marketplace is at 2.5:1, okay? Just to put in reference to what we're looking at, that's what we believe the potential is okay?

In the U.K., it's a little bit better used to new ratio, and Gary gets all of it, okay, which tells us that we should be able to get that. So Gary and Neil in the U.K., a big shot out to you guys.

Okay. And then a question on after sales, the growth rate. Could you parse that out between price and car count? How much is just same service price inflation versus incremental traffic in the Bay -- and I guess, how do you see the price on a year-over-year basis in the fourth quarter on a same service basis? Are you seeing tariff impact or labor inflation flowing through? .

Good question. Brent, A little bit more than half is coming from price increases with a little less than half coming from customer count and RO.

Okay. And we continue to sort of see inflation being a comp driver at the end of the year or we've seen most of it play out already, I guess, what -- how long does the tailwind from price? .

I think that the way that we go to market and the way that my presidents and vice presidents are thinking about things is we've got to grow RO count, and our top-performing or what we call our Lithia Partners Group stores, they somehow seem to be able to do both, and they're carrying a lot of that 9.1% year-over-year same-store sales gross profit growth, but they're also carrying along with it most of the improvements in top line growth, okay? And that shouldn't be that way.

Our Northeast and Northwest regions are a little bit softer in terms of our RO count, but we're challenging them and I think they see the opportunity, and there could be some nice tailwinds there that come into play as we really start to help people see a more bright future on growing your customer base.

Our next question comes from the line of Daniela Haigian with Morgan Stanley.

Just squeezing one in here on forward demand, Bryan, as we pass through the peak tariff fears from April and now we're seeing OEMs revise up their guidance, it kind of clears the bar on this, and I appreciate the color on sales tracking 10% higher in October. Just wanted to get your commentary on how you're seeing pricing on these new model-year vehicles and how you're thinking about consumer demand going into '26. .

Sure, sure. Daniela, real quick, the 10% was used vehicle volume, okay. So just to clarify that to make sure that was clear, and that's [indiscernible] of there's the way through the month. In terms of peak tariff, I think when we think about the tariff impact, I think we're through most of the impact. I think that it's going to get better. I think the manufacturers need to know how stable the ground is that they stand on and then determine what their 3- to 5-year product cycle is going to look like to decide where they're going to ultimately build those cars, okay?

And I think we sit in a nice position as new car retailers, and we have to remember this, we're a new car retailer but less than 1/4 of our profitability is derived from new cars, okay? Remember that 61% of our profitability is coming from after sales business. And I think that's why we spend a lot of time in after sales. New cars is somewhat a function of your marketplace, okay, and what your manufacturers' incentives are. So as a retailer, I'd love to be able to say that I could take a bunch of market share in new we, to some extent, we can be plus or minus 10%. But outside of that, our manufacturers and our mix base is what dictates that on a geographic base. So hopefully, that helps you a little bit, Daniela. Do you have a follow-up on that?

No. That's all right. We went through a lot of topics here. .

Great. Thanks for your question.

Our next question comes from the line of Mike Albanese with Benchmark Company.

Hung with you to the end here. Just a quick one, circling back on used, specifically the value autos. Just given what you said about the typical credit quality buyer there? And generally, how much is financed? Are the value autos or value auto demand inversely or correlated with consumer affordability? Or maybe a better way to ask the question is if new you had a question -- GO ahead.

That's the yes on the first question. Go ahead,

To take that a step further, I guess, and maybe a better way I thought to ask you was if the gap between new and used pricing kind of widen and there is a trade down where does value fit within that? And is there a segment and within your mix CPO core value that generally sees a pickup in demand? Or does it depend on a host of different variables at any given time?

Yes. I would say that value auto vehicles have very little impact caused by new vehicles. It's too different of customer, okay? It's 2 different levels of affordability. So definitely certified vehicles and some of the I would say 1- to 5-year-old vehicles have an impact based on vehicle pricing, tariffs, so on and so on, but value auto is so far downstream. Remember this, Value Auto that 63% of the market that I told you is based off, what, 41 million units, okay? 42 million in units, something like that. You're talking about 24 million units or 160% of what your new car SAAR is in that segment. It is a bulletproof segment, okay?

It's where probably most of the money is made in used cars, okay? And it's something that everyone can do as a new car retailer or as a used car retailer. Keep the car that you take in on trade is the way to do it. I mean we get 80%, 90% of those cars from trade-in, okay? So it's a very stable thing. But again, we have 1/3 of our stores that probably don't keep those cars. We've got to help them understand that you're making 16% margin. And yes, I get it that you make a little bit less in F&I. But as a whole, the returns are massively better than any other segment.

So does it come down to essentially sourcing, being able to source these vehicles and hold on to them and right? Like what's driving the [indiscernible]

It's sourcing. But remember, the sourcing is right under your nose. It's a mindset of your sales department leaders and then a mindset of your service department leaders that they can make this car stop steer and go and that they can lower the expectations that I don't just sell new cars, okay? And then you've got a secondary problem. Once those 2 people decide, then your sales people and your technicians are going to convince you, you shouldn't do it. Why? Because they get comebacks, okay, meaning that there's a car that breaks 45 days later or 4 days later, and they're trying to keep a car deal together rather than just take the person out of the car, sell them another car, okay, and go fix that car, so it's an easy experience for your consumer, okay? So that sets you back.

So we've always said that it typically takes a couple of years to get people on that treadmill to be able to keep all different -- all 3 of our categories, okay? And I would say this, most of our growth was growing in value. It shouldn't. It should also be growing and certified. It should also be growing in late model conquest vehicles, and it should be growing in core product, okay? All 3 of those buckets have the potential to grow in a double-digit manner, and we'll get those there.

Do you generally see, if you have a customer in value over time move up into core CPO or...

You do. I think there's half of the customers that are always going to buy a car that's depreciated and that they can buy this a value, okay? And they don't care that the car is scarce and they don't really care what Kelly Blue Book says or what Black Book says. They just buy the car that's $10,000 because they're using it for transportation. They're not using it for status. The other half of the cars are using is the stepping stone. A lot of parents will pay cash for cars for their kids, and it's an entry-level car. And then hopefully, the next time they're buying a certified used car and maybe eventually, they buy new car. So the waterfall, believe it or not, goes both ways that as a new car retail of breadth, we look at affordability and how do we keep everyone in the Lithia & Driveway life cycle at every affordability level. And I think as you see us move through economic cycles. Affordability will shine and rain supreme at Lithia & Driveway because of our ability and the behavioral mindset of most of our stores today that understand that we can walk into them at the same time, meaning sell new cars, sell core product, sell value auto products and then sell a certified product.

Our next question comes from the line of Mark Jordan with Goldman Sachs.

Just a quick one on M&A. Brian, 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? Whether it be instituting best practices, putting inventory on the driveway platform or maybe just consolidating systems? What are the drivers there that you expect when you bring a new dealership on?

Sure. So typically, the way that we get the returns that we're expecting, and it's typically 2 to 3x lift in net profitability. About 1/4 of it comes automatically from scale synergies lower interest rate costs, better vendor contracts, getting consolidation of vendors where you've got duplication even within the store that you buy. And that comes in the first, I would say, 6 months. okay? The other 2 key drivers, and like I said, they support each other is used vehicles. I mean it's the ability to sell late model conquest cars, meaning if you're a Honda store, you sell Toyota and you sell Fords too, okay? Most new car dealers get spoiled off of selling the cars that they sell new, okay? I believe our current run rates on all the stores that we bought, it's somewhere north of 2/3 of the cars that they sell when we buy them, that they sell use are the same like model that they sell new, okay?

And for reference, when a store is mature at Lithia, it's a 60-40 split the other way, meaning we sell about 40% of the brand we sell new. We sell about 60% of conquest vehicles, okay? A lot of that comes from the ability to keep an over 5-year-old car, okay? Because of those -- that alignment of your consumer, your service advisers, your salespeople, your other personnel that it's just a mindset you have to get past. Okay?

Alongside that also is as new car retailers, it's really easy to get spoiled off of maintenance in service and off of warranty work. It makes great profit, okay? So why do warranty work after the sale, it's more difficult. It takes more time. You've got to do diagnostic, there's drivability issues, so on and so on. Okay. Well, we sell non-OEM parts for a reason, keep our customers at an affordable level post warranty period, okay? So that's the other big [ lift ] that we get.

Believe it or not, both of those things help embellish the life cycle of a customer, which helps us sell more new cars as well, okay? And then we can get into the gross profit part of the equation. And if you've got more eyeballs looking at cars when we've got 10 million eyeballs looking at an average car. And when we buy a dealership, they've got 10,000 eyeballs looking at a car. Are you following me? So there is a supply and demand issue that comes from selection okay, that helps us as well in terms of what our price to market is, is relatively better than what they're able to get on an individual basis. So hopefully, that gives you some color on how do we get that 2 to 3x improvement in profitability. That's how we get it.

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

If I look at your full year targets, most of them seem pretty wide, but SG&A to growth, it's actually been trending pretty close to the high end of that target. And usually, Q4 things tend to step up seasonally. So is the outlook that SG&A actually could even despite seasonality hold in Q4 or is it just a more muted increase sequentially that we should be looking at? And then how should we think about SG&A maybe longer term? .

Sure, Colin. Thanks for the question. I think when we think about SG&A or we most importantly, think about $2 of EPS for every $1 billion of revenue. We've given light guidance, I think it's on Slide 14, if I recall from the slide deck. Okay, as to where we believe it can be but this is not how we manage our business. We manage our business on a net profit basis year-over-year and a top line basis that will ultimately generate more net profit in aftersales and reciprocal trade-in values and our reciprocal businesses like DFC and our Wheels Fleet Management businesses and those type of things. So that's -- it is an important delineation, but we purely look at that our goal is to get to $2 of EPS for every $1 billion of revenue and the easiest way that I can get there is to have quarters like this where we grow top line at 7.5%, and we continue to grow used cars at double-digit numbers and grow our gross profit in the aftersales space.

So in terms of the quarter, we'll see where it comes out. A lot of that is dictated based off volume and GPUs as well. So hopefully, that gives you some insights. And remember, Slide 14 helps lay out our path [ weighted ] to $2 and I would say this, the entire foundation is built and like I said, we're just getting started.

Just one quick modeling follow-up. Tax is really low in the quarter. Is that -- what's driving that? And is that sustainable, I guess, as we [indiscernible] forward, should we put in the new rate? Or is that just a one-off? .

Colin, I think we got half an hour later together. We're running awfully -- we'll get you that information on our one-on-one.

We have reached the end of the question-and-answer session. And I'd like to turn the floor back to Bryan DeBoer for closing remarks.

Thank you, everyone, for joining us today. We look forward to seeing you on Lithia & Driveway's year-end results, believe it or not, February. With the last year, we're looking forward to continuing to delight you. Bye-bye.

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

Greetings. Welcome to Lithia & Driveway's 2025 Second Quarter Earnings Call. [Operator Instructions] Please note that today's conference is being recorded.

I'll now 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 second 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 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 MyDriveway 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, MyDriveway's customer portal reduces service costs and drives higher retention. Soon, the 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 more resilient in rewarding our earnings model. This enables us to grow through volatility, allocate capital with confidence in advance towards our long-term targets with clarity.

Strategic acquisitions remain a core pillar of our growth model and a proven differentiator of LAD. 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 gives 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 clear line of sight to our long-term revenue of 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 $43.18 was down $128 compared to the same period last year. New vehicle units increased 2% year-over-year, with front-end GPUs at $31.75, up slightly sequentially. Used vehicle units increased 4% year-over-year. Our value auto sales continued to trend impressively with 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 absolutely 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%, 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 LAD's greatest strength, our people, and is a perfect exclamation point on an illustrious 25-year career as Head of People Functions and his 5 years here at LAD. 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, [ 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 op 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 1/3 of cash flows to share buybacks at an average price of $306, representing 1.5% of outstanding shares. 1/3 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 provides 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. Operator?

[Operator Instructions] And our first question is from the line of 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 or 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 2Q, in particular. How does the U.S. alone look on SG&A?

Are you -- this is Tina. I mean, our U.S. business continues to be strong on the SG&A side. And as you know, the SG&A footprint in the U.K. is just higher. And so when we look at our blended number, I think both of the teams on both sides, I would say, continue to focus on SG&A, and it's an area that we see long-term continued opportunity to drive that down over time. But our U.S. business continues to do well on the SG&A front.

I think it's also important. It's easy to get caught up in one number or another, but there's a lot of factors that go into how you think about your business and how you grow your business. It's easy to get caught up of what's happening quarter-over-quarter or year-over-year or so on. But Lithia & Driveway has built an organization that is focused on multiple assets of the customer life cycle to expand the wallet share of a consumer and staying in our ecosystem for a longer period of time.

And it's shocking, the microscopic views that the market is taking on what we're doing when we've grown our organization threefold in revenue and threefold in earnings and have all of the levers and the dry powder in our adjacencies to continue to do the same thing. Let alone, in our M&A strategies of how we attack the marketplace, we don't have blips in terms of how we buy and how we operate because we didn't pay based off COVID-level earnings. We don't have write-offs, as 2 of our peers just had. But for some reason, everyone keeps discounting those type of things. And Lithia & Driveway as it continues to plod along is the largest now auto retailer in the country and continuing to separate ourselves in terms of scale and size. That we get into these microscopic views of SG&A was 0.5 point higher than it should have been, same-store sales might have been a little worse when our same-store sales revenue growth in used cars was the best in the sector so far, okay? Last quarter and the quarter before, it wasn't.

So the gaps that we're realizing because of the ecosystem are quite there. And it's -- Tina and the teams are working diligently on SG&A, and we're going to be able to deliver the performance. And this quarter, we felt that we picked up some of the gaps and where we stand. And there is no question that we have a greater portion of our business that's sitting in blue states where population growth is not as exorbitant or robust as what it is in the Southeast and South Central.

We've been very fortunate to be able to change our mix to be able to expand where we sit. And as such, we're more excited than ever about what we've built and the potential of what we have. So Mike, thanks for letting me get on my soapbox for a few minutes, but it's so frustrating as a management team that you build something and all you do is get the penalties of it. And then when there's 1 number out of 17 that seems to jump out, people forget of what we've accomplished as a management team and more importantly, what the foundational elements of what we built have the capacity to do in the future.

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.

Great. I'm sorry, I have to apologize in advance. I want to follow up on Mike's question and your response. I mean, it looks like -- I mean, Bryan, like you've obviously done a lot of acquisitions since the pandemic. You have grown your company threefold, as you've said. But I think it's been a couple of years since you've had those under the hood. And I think it's been 10 quarters now since the same-store metrics have underperformed your peer group. So I don't know if like 1.5 years is enough time or we need to see more time before that starts to recover. So could you give us some visibility on when we should see your organic performance? I understand the adjacencies, I think DFC is great. But just the store performance metrics, when should we see that recoupling or doing better than peers? And I have a quick follow-up.

Rajat, I think if you look back 3 quarters, our performance has bridged a lot of that gap. Like I said, in used cars, we were #1 in revenue growth, okay? Number one. So -- and in service, we were in the middle of the pack, okay? And remember, that service is based off of smaller units in operation growth than what others are. We believe it's somewhere between 3% and 3.5% difference just from units in operation. We were about 1.5% to 2% below what the peer group was, okay?

When it comes to new car sales, you know what, Stellantis is still struggling a little bit, and we still got a fairly large portion of that like AutoNation does, and the rest is yet to be seen. So if you want to view the world as that, go ahead, it's one part of who we are, okay, as an organization and the ecosystem is beginning to perform, okay? And the same-store sales growth is starting to bridge the gaps that are there. Okay?

I can't change overnight where our footprint is, okay? If you remember, we were 80% West Coast-based before acquisition of DCH, okay? At the same time, we were almost 75% domestic manufacturers. Okay? Today, we sit at less than 30% of our mix being domestic. We sit with over 40% of our mix being in the Southeast and South Central. That automatically yields over double the operating margins of what the Western 2 regions perform at, okay? So if you want to just compare apples to apples, then you need to do deeper dives into what the marketplace is doing, where population growth is and how operational profits and dock fees impact the operation -- those operating profits.

Understood. And I mean, if you are -- if you do have a line of sight on all of these gaps narrowing and getting better over the next few years, could we see a more aggressive pivot to -- and also given the fact that you're at a significant discount to your peer group -- or could we see a more aggressive pivot to stock buyback in -- at least in the interim before the market can give you credit?

Sure, Raj. I mean, good insight. I mean I think when we're trading at a 20% to 30% discount to the peer group and we've got somewhere between 20% and 40% upside just from our adjacencies that are not fully realizing their potential, and the trajectory is there, absolutely. I mean, as Tina mentioned, we're now allocating 50% of our capital to buybacks, okay? I'm imagining we're in the market today buying and we're going to continue to buy back until the world understands that what we built is something special. And that the performance on each of these side metrics that -- I get that there's metrics, okay? But you still have to look at the totality of what is being accomplished and not lose sight of -- that this is about TSR, okay? It's about shareholder return and the ability to grow a company, both top and bottom line.

We'll be rewarded for it. We're confident of that. But as a management team, it's easy to get frustrated that the boldness that we took and the steps that we took to reinvent basically the industry in our sector, we've been pretty much penalized for it the last 2.5 years. And this is a hell of a buying opportunity because at those kind of discounts, we're going to back up the truck and continue to buy shares back.

Understood.

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 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 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?

Sure. We've done just over $0.5 billion so far this year. We have a considerable amount under contract. But again, I would state this. We don't flex on pricing, okay? We watch the market come to us. We act when there's opportunities that make a good ROI sense. And I said in my prepared remarks that we're 95% successful on acquisitions. We're actually 99% successful now that we purged some of the smaller stores that were in groups, which created that extra 4%.

So this is a pretty easy roll-up strategy, and we believe the market will come back to us as profits begin to normalize, which they've done nicely, but we need that to happen for a couple of years because that's what determines pricing, okay? So we are -- there is an advantage to having a discounted stock price that in the event that M&A is a little pricier, then we can buy our shares back. So I think, Daniela, to summarize, we should be able to achieve the low end of that $2 billion to $4 billion range by year-end and have a fair amount of stuff that have come into play over the last 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, we don't -- I would say that there's slight impacts from tariffs, but most manufacturers have controlled their pricing on parts as well. Okay? Now going forward, there may be implications there, but we didn't see impact from tariffs at any scale, okay? And you can see that we were up, what, 1.5% in margin in aftersales, which usually is indicative that there was a higher mix of labor, which is a 60%, 65% margin business rather than a 30% to 35% margin business, which is parts. So I would -- without having the specific tariff-related data, I would say that it had minimal impact.

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

Wanted to start with kind of the DFC growth this quarter. And then especially after another strong quarter for DFC, I guess the back half guide does imply a pretty meaningful step down versus what you did this quarter. Trying to understand what's informing that because NIMs and credit performance both still look strong. So I don't know if this is just a lean towards conservatism? It looks like you still want to grow the book pretty aggressively, but it's tough for us to bridge to. Certainly the low end of the range at least.

Yes, Ron, this is Chuck. Great question. First, I think you actually hit on some of it. And that again, one of the great things about DFC is we've grown our penetration rates. We're getting very close to hitting that consistently that 15% penetration rate. And then hopefully, we can build on that to 20%. And as you know, as we continue to ramp up those originations, that can have a drag on some of our near-term profitability when we have to take that [ separate ] reserve upfront.

And then secondarily, there is some seasonality in our numbers. The summer months generally are those months that consumers don't necessarily pay their auto loans. So if you look at some of the published reports you are seeing delinquency rates tick up. But once you kind of get past the summer months, we hope that those start to tick down a little bit and don't start weighing us down with actual charge-offs. So somewhat of it is due to the growth rates. The other part would be seasonality.

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 [indiscernible].

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 curious.

I think most importantly, when you think about SG&A costs, we're obviously trying to grow our top line most importantly because that's what generates the net profit as an organization. Because if I grow top line in new and used vehicle sales, I get to 62% of my net profit that's generated from aftersales. Okay? So massive point to remember. And obviously, to be able to grow the aftersales, you got to spend money to do it.

Our SG&A is made up primarily of personnel expenses in the sales department. Okay? So anything that occurs there is going to pay later in aftersales. So important to remember that. As we think about driving down our cost structures in sales and in the service adviser pay, which makes up the small portion of SG&A personnel costs, okay? Those are productivity jobs, okay? And what we're pretty excited about is the Pinewood.AI that we have a partnership. And now I think in a couple of weeks or whatever, we'll have about 1/3 ownership in that company.

That AI technology is going to put our customers and our sales associates in both the service and sales departments into the same environment, which helps us to drive down personnel costs. So a lot of the 700 basis points that we're looking at achieving is coming from AI improvements and then skinning up how we look at staffing those departments. So a big part of that. The remaining couple of hundred basis points is coming from vendor and scale and other types of things.

So -- but we're really looking at gaining productivity in both sales and service, in those productive jobs. And hopefully, at some point, which -- some of the AI is helping us today, but ultimately, that's the stuff that's embedded in the Pinewood system that we're helping co-develop with them.

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

It's interesting, Ron, because when you think about AI, I think when we started on this journey 10 years ago, we thought technology was there to bring customers in and to be able to touch customers throughout their life cycle. Today, when we look at what technology and engineers and these partnerships with great companies like Pinewood can do, it's incremental simplification of simple things like scheduling appointments, okay? If we can have AI scheduled appointments, which is as simple as what we now have in our MyDriveway portal that allows consumers in all of our stores other than 3 to be able to schedule appointments, well, that takes off the load of the BDCs and the service advisers. What we have to do a better job of is looking at productivity metrics and then driving those cost reductions into the store. Okay?

Now the 60-day plan and the everyday plan started on that venture, but it's easy to get sloppy and it's easy to think that top line growth is going to also fix your SG&A costs when ultimately, you still have to force the cost savings, and we're encouraging our store leaders and our department leaders to do such and they get it, okay? And it's important that we lead the pack in all these categories, and we'll continue to be able to drive those costs down.

Yes. That's great color.

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

Congrats on a nice quarter. Bryan, I was wondering just if we could talk a little bit, tapping into your historic expertise and experience here. When we talked -- if we assume that a 15% tariff is probably going to be where we end up just across the board on a high cost of goods unit like a car at 85%, 87%, whatever cost of goods sold. The price increase required at the invoice level, the OEM invoice level is pretty substantial. So at some point, someone on the units that are tariffed, there's going to be -- have to be conversations. I'm just curious how you see those playing out? What will be the mechanism? I mean, at some point, like the OEMs have to go to the dealers and say, "Look, you've got to share the pain." I'm just kind of curious how you see that playing out?

Sure, Jeff. And I think -- let me answer the first -- your direct question, and then let me embellish a little bit on how we think about it as a mitigation strategy. The most important thing is our manufacturers are all competing to sell cars. So it's important to keep that in play. And only about half of the vehicles that we sell on a new car basis are being impacted by tariffs, okay? The rest are not.

So when we think about the remaining half, what happens, I believe that manufacturers have already begun to either [ decontent ] cars or not charge for other upgrades. I believe that consumers can save other dollars. So when you think about a 15% increase. They're thinking about that I don't have to pay for as much gas because we now have, what, 36% of our vehicle sales are sustainable vehicles that get better gas mileage. I think Chuck would sit here and argue that DFC has the ability to help with financing and manufacturers can subsidize in the financing capacities. We've now got our government that's allowing us to write off certain interest costs on auto [ lands ], and there's a lot of other moving parts. So a finite 15% increase when we think about the tariff on the 50% of our inventory that influences things is just another thing in our daily lives, and each of our stores will respond to that.

Now in terms of who is Lithia Motors and Driveway and how do we respond to it, I think if you look at our profit equation today, okay, and compare it to that of our peer group, we're already diversifying that portfolio with 60%-plus percent of our net profits being directly attributed to aftersales, okay, with less than 20% of our net profit currently being attributed to new vehicle sales, including F&I, okay? So as a retailer, we think about those equations. And I think as you look at going forward and you push through all the differences in the dry powder within the adjacencies. That 61%, 62% that's being derived from aftersales of our net profit starts to become even higher and new cars are just a pathway to be able to get to your high margin businesses of financing and servicing parts, cars and trucks.

So it's an interesting time in the industry. But to me, it's pretty exhilarating, okay? And our ability to deal with these situations, we've got all the levers to pull. And as the world moves on and as these things start to change the industry, those with more cash and more ability to code solutions for customers that make it easier or those that are going to be able to grow market share and be less impacted by whatever changes do come from tariffs or our model or franchise laws or whatever might else be there.

And one follow-up while I've got you in this kind of big picture mode here. For the first time, we heard, as it relates to the U.K., the notion that Chinese OEMs, which -- none of the publics have any Chinese OEM franchises in the U.K. -- that those are starting to maybe represent some formidable competitive pressures and maybe muck things up for the other OEMs or other brands. I'm just curious, your take on the Chinese OEMs? And if you wanted to go one step further and say, when do they -- what's the implications? Do they eventually wash up on U.S. shores? Happy to hear that.

Well, I mean, we'll have to see what happens in tariff. And I think U.S. consumer sentiment may be different than what the U.K. is. I think it's also important to remember that our presence in the United Kingdom does include BYD and MG with 5 total stores. So we are getting to see what's occurring there. It's still -- it's pretty bumpy, okay? If you remember, we started out pretty strong with BYD, but it came to a dull roar in about 1.5 quarters. And now there's another surge out there, and it's starting to impact the marketplace. But again, in the U.K., it's pretty easy to adapt, okay? And it's still not a material amount of our profitability equation as to how we think about it, and I'd still go back to it at 110% tariffs today with the Chinese. And BYD price competitive-wise in the United Kingdom isn't much less than what a BMW or Mercedes is for the same type of equipment and the same type of propulsion.

So we'll continue to be diversified and we'll continue to keep our pulse on what occurs in the United States and look to whether or not those models are including dealers or if they do even come to the United States, but there's been now 3 failed attempts by large Chinese manufacturers coming into the U.S. that have not really yielded the results the same as a lot of other places in the world.

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 in 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. I'm not sure that everyone counts the same. But some of the facts that I do know -- at least in terms of us, I'll try to avoid any direct comparisons. We sold over 25.5% of our vehicles through omnichannel sources with digital support, or 45,000 vehicles in the quarter, that's up considerably from where we've been in the past. Okay? Our Driveway channel continues to be over 97% new customers to the ecosystem, which is quite effective, and we continue to drive that channel. And I believe more importantly than ever, having an omnichannel solution within our stores is a lot of the reasons that a BDC was developed is because salespeople weren't as equipped to be able to deal with Internet leads 15, 20 years ago and today, they're equipped to be able to do it. Our IT solutions are able to use AI to be able to sort leads, to be able to do a lot of the communications and work for us, to be able to catalyze the change to be able to drive those costs down.

So in terms of digital solutions, it kind of goes hand-in-hand with our SG&A solutions. We're pretty excited at where we've been able to grow and build Driveway. And we sit here today with the -- MyDriveway portal that has -- I'm not 100% sure on this, but I believe it was 137,000 users. Remember, that went live in December of last year. So we're about 7, 8 months in, and that's growing and consumers are now doing more of the stuff themselves in a simple, transparent and empowered way.

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.

First one I want to follow up was on -- you raised the GPU value by about $200 a unit at the midpoint and there's been some strength kind of year-to-date, but how do you think about tariffs impacting that outlook? What do you expect the industry to do from inventory levels like brand mix and incentive levels as it was trending to [ 2.5 ], '25 and '26? Do you have any view on kind of the drivers of those?

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 [ hearing ] 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 have student debt and those that don't? It just seems like the broader credit environment is a little bit choppier, but your's [indiscernible], 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 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 ratio, 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 segment. 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, it's 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.

Okay. Okay. That's helpful. That was my only one.

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

And 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-tune it for you.

Got it. That's helpful. And then just another one here. Switching gears to Pinewood. Right now, that's positioned for growth, really. Could you just maybe kind of frame your expectations or time line in terms of the rollout across your base and beyond? I mean, maybe a better way to ask that would be, how should we be -- sitting in an analyst seat here, how should we be measuring success in that rollout?

Sure. I mean, it's -- I'll give lots of kudos to Pinewood. They're good at coding. They're good at capturing market share. They're now almost 1/3 of the market share in the United Kingdom. So they're growing globally. It's pretty exciting what they're doing. That gives them the capital to be able to do what they need to do in North America. Our rollout schedule is a couple of stores by the end of the year with 2 specific manufacturers. We should have another 15 to 25 stores next year with full rollout in '27 and '28.

I think the Pinewood teams are ready and supportive of that. We're pretty excited about it. One other thing to note as well as there was a mark-to-market adjustment. But we still beat the Street by almost $1, okay, after that, which is a pretty big number relative to where we sit today. The other thing is we have not recorded the North American JV equity, so that is not in that number. That's coming in future quarters, okay? And this is an exceptional investment that's embedded into our ecosystem. Even though our store -- not all of our stores are on it yet. The U.K. is doing absolutely phenomenally. And a lot of their improvements, a lot of the gains that they're going to be making in SG&A now can be pushed through the utilization of the Pinewood.AI solutions to be able to take them up a step while that helps pathway up in North America for the bigger platform and portfolio to be able to be successful in the upcoming years.

Awesome. Really helpful.

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.