LITHIA MOTORS INC Q3 FY2024 earnings call

• The team demonstrated strong focus and execution, achieving adjusted diluted earnings per share of $8.21.
• Adjusted SG&A decreased from 67.9% of gross profit in Q2 to 66% in Q3, with $200 million in annualized cost savings mainly from personnel-related reductions.
• The LAD strategy leverages a vast physical network, talented people, high-demand inventory, and dense store footprint, with expansion through new locations, adjacency development, and strategic partnerships.
• The LAD digital ecosystem had 12 million monthly unique visitors, with Driveway and GreenCars contributing 3 million MUVs, and 25,000 digital units in the third quarter.
• Acquisitions continued, with 2024 seeing nearly $6 billion in annual revenues acquired, and the Southeast U.S. stores weathered storms with minimal impact.
• The capital allocation strategy balances acquisitions and share buybacks, with $54 million worth of shares repurchased during the quarter.

Lithia & Driveway grew revenues to a record $9.2 billion in the third quarter, an 11% increase from Q3 of last year. Adjusted diluted earnings per share were $8.21. New vehicles, aftersales, and value autos contributed to the revenue growth. The financing operations segment was profitable, with Driveway and GreenCars' burn rates down nearly 40% year-over-year. The aftersales business performed well, with aftersales revenues up 5.1% compared to the prior year. The financing operations portfolio balance grew to over $3.8 billion, and DFC originated $518 million during the quarter. In terms of revenue contribution, Lithia & Driveway's various segments contributed to the overall record revenue, with the integrated mobility ecosystem driving growth across different areas.

• Expect annual acquisition revenues to be in the range of $2 billion to $4 billion per year.
• Plan to deploy 30% to 40% of free cash flows to share buybacks in the near term.
• Anticipate combined vehicle GPUs to normalize in the coming quarters to between $4,200 and $4,500, including F&I.
• The financing operations business is expected to continue strong long-term earnings growth with a fully scaled and seasoned portfolio.
• There is an expectation to achieve SG&A as a percentage of gross profit in the mid-50% range through improving operational performance in existing stores.

• Uncertainties in the industry normalization process, which could impact financial results.
• Inventory days supply and seasonality, particularly in snowbelt regions, can affect financial performance.
• Potential risks in the financing operations portfolio, such as delinquencies in the subprime segment.
• M&A market dynamics, including the need to adjust to normalized earnings expectations for acquisitions.

Q: Ryan Sigdahl asked about used vehicle inventory and DFC.

A: Adam Chamberlain said used inventory was affected by sourcing core models, and Bryan DeBoer added on acquisitions from customers. Chuck Lietz discussed DFC's provision and delinquency concerns in the prime portfolio.

Q: John Murphy inquired about cost cutting and Stellantis incentives.

A: Bryan DeBoer talked about cost reduction progress and Adam Chamberlain provided insights on Stellantis incentives and the general new car incentive environment.

Q: Rajat Gupta asked about SG&A and buybacks.

A: Bryan DeBoer discussed SG&A seasonality and the balance between share buybacks and M&A, while Rajat Gupta sought clarity on the flexibility of the 30%-40% free cash flow allocation to buybacks.

Q: Chris Bottiglieri asked about wholesale and used GPUs.

A: Bryan DeBoer addressed wholesale as normal seasonality and discussed used GPU normalization with supply return and mix change.

Q: Jeff Lick asked about new GPUs and stop sales.

A: Bryan DeBoer explained that new GPU stabilization is positive, and stop sales are a catalyst for aftersales growth.

Q: Michael Ward asked about interest rates and Pendragon integration.

A: Bryan DeBoer discussed interest rate sensitivities and the integration opportunities and progress with Pendragon.

Q: Brett Jordan asked about regional and brand dispersion.

A: Adam Chamberlain provided insights on regional performance and brand dispersion, mentioning Stellantis underperformance and import strength.

Q: Colin Langan asked about aftersales margins.

A: Bryan DeBoer explained the expected decline in aftersales margins due to mix change and the tailwinds from new propulsion systems.

Q: Unidentified Analyst asked about e-commerce strategy and competitive landscape.

A: Bryan DeBoer discussed the e-commerce platform's progress, burn rate, and competitive landscape impact on Driveway and GreenCars.