LITHIA MOTORS INC Q1 FY2025 earnings call

• Bryan DeBoer mentioned strong first quarter results, adjusted earnings increase since Q4 2022, and adjacencies contributing meaningfully. Adam Chamberlain will transition to CEO of Mercedes Benz USA. - Tina Miller discussed SG&A performance improvement, adjusted SG&A as a percentage of gross profit declined. Financing operations delivered profitability, DSC originated more loans, net interest margin expanded. Cash flow and balance sheet: Adjusted EBITDA increased, free cash flows generated, share repurchases completed with $146 million spent on repurchasing shares.

In the first quarter, Lithia Motors generated diluted earnings per share of $7.94, a 34.8% increase, and adjusted diluted earnings of $7.66, a 25.4% year-over-year increase. Lithia Driveway grew revenues to a record $9.2 billion, a 7% increase from Q1 of last year. Total revenues in same-store sales increased by 2.5%, and gross profit increased 1.8%. New vehicle units increased 3.6% year over year. Used vehicles were down slightly at 0.4% year over year with value auto sales up 38.8% from last year. F and I growth was 3.4% year over year in same store gross profit. After sales performance was at 4% with after sales gross profit increase of 7.5%, and warranty work gross profits increased 19.7% year over year. New vehicle DSO decreased from 59 days in Q4 to 43 days, used vehicle DSOs decreased from 53 days to 45 days. Absolute inventory balance decreased by $163 million, and floor plan expense decreased 6% year over year. Revenue contribution: Adjacencies are contributing meaningfully to earnings, and after-sales business represents approximately 40% of gross profit.

• Continue to execute strategy to achieve $2 in EPS per $1 billion in revenue. - Target $2 to $4 billion in annualized acquired revenues in coming years. - Financing operations aim for 20% penetration. - SG&A target in mid-50% range of gross profit. - Balanced capital allocation between share buybacks and acquisitions. - Focus on operational execution to elevate performance.

• Need to closely monitor potential tariff impacts and broader shifts in consumer sentiment. - Market competition and acquisition pricing at historical highs pose risks.

Q: Greetings, and welcome to Lithia Motors First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Jardon Jaramillo. Thank you. You may begin.

A: Good morning. Thank you for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Adam Chamberlain, Chief Operating Officer; Tina Miller, Senior Vice President and CFO; and finally, 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 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.

Q: Hey. Good morning, guys. Wanna start just at a higher level kinda what you're seeing from a current tariff environment. If you wanna talk monthly trends throughout the quarter and then into April, that might be helpful. Both from a demand in GPU And then kinda second part to that, how you view your higher inventory levels relative to some of your peers, how that positioned you in this environment, again, kind of more into April from that question standpoint?

A: Sure, Ryan. Good morning. This is Brian. I think we're very fortunate that with tariffs, we sit quite nicely We have, over 45% of our inventory that that's going to be where the current tariffs are sitting, obviously, we know that they're still a little bit in limbo. But where the current tariffs are sitting, we have about 45 of our inventory that's not impacted. Okay, which is I believe in in most of the major retailers, that's probably the most diversified and the least impacted, which we're pretty excited about that. I I think more recently, as we think about moving forward, our inventories have come down a lot. I mean, we we dropped our inventory in both new and used almost ten day supply. Quarter over quarter, which is a which is a a good step forward. And I think when we think about go forward, it's more about store leadership staying dynamic and specifically focusing on their on their brand and their market Okay? And we've been pretty successful that way. You also had asked a question about what happened sequentially in the quarter. Okay? We were we were actually motivated by a strong January, a strong February, and then early March is when the tariff discussion started, and it came out strong as well. So it was consistent throughout the quarter, and we're pretty confident that you know, that, looking into Q2, we've got good foresight into what our inventories and our costs are, and most manufacturers have stabilized pricing. For some level at least through the 2025 model year and and we'll see what happens beyond. And, hopefully, there's some relief to the current situation given.

Q: Good morning, everybody. Hey. Hey. This is Brian. Just to stay on tariffs just for for a second from two different prongs. You know, first, you know, what kind of communication have you received from your factory partners? And have you seen any impact to the M and A environment as a result of the uncertainty around tariffs?

A: Maybe start with the latter. We haven't seen a big impact in the m and m and a environment. However, it does it has appeared to be softening over the last, I would say, three to four months. But specific to the March, we haven't seen any major changes. In terms of communications from our manufacturers, I might let Adam jump in on that real quickly.

A: Hey, John. Good morning. I think we've seen great as far as far as the manufacturers know exactly what they're dealing with because it obviously, it's an extremely volatile situation, John. I think we've seen clear communication. We had some early early communications around guaranteeing holding prices through certainly for most OEMs, it's through May. That really really takes care of the 2025 model years. And and, obviously, you know, in that context, we're also kind of bottom of the funnel. Right? So the OEMs got to deal with with with with their support and help if we can. But ultimately, they've got to deal deal with the administration and how they allocate their resources and that and that investments to to to to manage tariff situation. So we sit we sit kind of a ways below that. But but we've had really good clarity and leadership from from the majority of our OEM partners as it relates to that. I think I think the other point is our job, as Brian said, is just to be disciplined moving forward. So our stores are being disciplined in terms of the way that they manage their operations. And I think we demonstrated last year we can we can adapt and flex pretty good when we need to. So so that's how I think about it, John. Thank you.

Q: Good morning. This is Mark Jordan on for Kate McShane. Just thinking about the tariff on imported parts, how do you see that impacting your after sales business? I guess, with respect to margins? And then you know, would you expect to see some level of deferred maintenance as customers avoid some noncritical repairs?

A: Mark, thanks for your your questions. I think we're really we've we've thought through the after sales repercussions of of higher tariffs we're fortunate that most customers do need to repair their cars. And whether it's maintenance or whether it's hardline repair, that's a positive thing for us. So I think when you think about the parts versus labor equation, did have a pretty good lift this quarter in terms of labor, and we're up over 57% margin, which was quite nice and a little higher than what we typically expected in our forecast running 55 to 56 over the last few quarters. But I really believe there is no there is no big option to defer. Okay, especially when we in our after sales businesses, deal with affordability. So we're the same price as the Jiffy Lubes of the world and the AutoZones of the world. And we sell aftermarket parts, and we sell OEM parts. And as such, we wanna keep those customers in the ecosystem. So I think the impact in the aftersales business, from tariffs, whatever they may end up being, is pretty minimal.

Q: Morning, everyone. Maybe just going down the value chain here. With USR at nearly 18,000,000 you know, units on an annualized basis over March and now into April, How are your dealers in in know, your general managers dealing with with the prebuying from consumers? You know, as they're gonna need to prepare for a a potential hangover if the tariff situation extends into June or July or August. You know, what is what's the guidance there on some of the lumpiness that we might see, after the sugar rush here?

A: Yeah. Yeah. I To to be fair, I mean, remember, we had a 17,000,000 SAR four months ago too. So a little extra lift is not a massive amount. I believe that we will have eighteen million SARS consistently. And if I believe I believe I said that last quarter on this call that we could see a year where we have an eighteen million SAR. Now I do agree that if the tariffs stick at where they're sticking, we could see some lumpiness. Okay? But I think it's more of lumpiness in fall, not really lumpiness as we go through the summer season. I would also remind you of this. Okay? We have 50% of our cars that aren't affected by tariffs. Okay? Now if you're European heavy, you may have a bigger problem. Okay? Because Europeans don't have the same competitive pressures across their product line. Most of their specific products are are are are pretty high demand, whether it's a M class or an AMG or GTS in Porsche. They're high demand. Are you following me? So I think that they've got price flexibility but their main product lines are what's gonna be impacted the most. The import manufacturers, from Asia I believe, are hypercompetitive, and they're talking about how to freeze pricing, or how to decontent cars. But I believe affordability will be there. So I believe whatever pull forward there may have been in the March, it's light. Okay, and shouldn't impact the future going forward on any relative scale.

Q: Yeah. Good morning, and thanks for taking my questions. Maybe following up on on Rajat's SG and A question. You mentioned in the back half you expect to drive seven basis basis points of monthly savings. Guess, first, is that all in SG and A and interest? And then what is like some of the low hanging fruit or maybe it's not that low hanging, but what are you pushing your managers on really to to drive those improvements?

A: So yes, it includes the interest. And the primary areas that we're pushing are operational leaders is on personnel costs. Okay? In our model, when we look out five years, we're basically asking for a 10 to 15% total percentage reduction in terms of personnel costs. Today, it sits at about just under 40%, so we're looking at somewhere around a six a four to 6% reduction over the next five years. Okay? We don't wanna make it a heart attack. We don't believe that we could do it today because there's technology productivity increases, customer self-service, and many other things that need to come into play to be able to activate that amount of change. Okay? But we do know that they believe It's it's it's it's in bite size amounts that they're not fearful of it. And as such, we believe in the second half of the year, we can drive that start begin to drive that, that down. Okay? The that makes up about 50% of the improvement. The other 50% is truly leveraging our corporate costs as we don't need another Tina. We don't need another me at this stage. Right? Okay. But that's you know, you gain some scale on on those type of things, and obviously, there's some vendor contracts that we believe are beneficial. I mentioned the Pinewood thing in the future. And then, ultimately, as we bring vendors together as more preferred vendors where we have two or three vendors of each product rather than 20 or 30, we're able to negotiate volume discounts and other benefits as well. But that's where it comes from. We've got it all lined out to achieve the $2. We're pretty excited about that app operational part, which makes up 50% of the the dollar plus lift that needs to occur, Remember, the other 50% lift is coming from the ecosystem. Good capital allocation that Tina spoke to, a little bit of m and a, and some great adjacencies that are really starting to shine.

Q: Thanks. Brian, just to squeeze one in on parts and service. You and after sales, you spoke to room for uplift with relatively inelastic demand. What does capacity and tech availability there look like? And how does that continue to grow in the segment? Thanks.

A: Daniela, thanks for the question, and congratulations on taking us over now, which is great. We look forward to talking a little more deeply. In terms of after sales demand, we're we're quite fortunate that that even though there's not a lot of units in operation out there, we do price our products within within all ranges of the marketplace. So our affordability is is is is quite cheap. So when when we think about our aftersales business, it's truly about providing individual experiences that create optionality for each and every customer. And I think as an organization that has been able to do things the same way, okay, we are now starting to think about individuality. Why I'm talking about that is because when you think about what's coming into our shop, we can we can have a lot more consumers coming in. Today, our stall utilization is somewhere south of about 50%. Meaning in in theory, we could double our capacity by opening extended hours or moving to double shifts or triple shifts. Many of our stores have moved to. Okay? If we think about our our staffing levels of our technicians, we're sitting really nicely, in terms of that as well. We grow our own technicians most of the time. Okay? And, you know, today, I think the biggest mindset is we're filling our shops with warranty work, and we should be filling it with warranty and customer pay work. Okay? We can't do that. Okay? We need our aftersales leaders motivated to take the work and improve the productivity of their technicians. Okay? It's there today. That productivity level is there today. With people ready to turn wrenches. We just gotta open up the funnel. Okay? And it's it's it's starting to matriculate through, and Adam and our teams have been working on that, and I'll continue on that pathway over the over the coming quarters.

Q: Hey, good morning. Matt, a question on the tariffs. When you think about customer pay, obviously, and you've got the 25% auto bucket, but then you've got the metals and the reciprocals. Could you help us with the expected growth rate in the customer pay business just tied to inflation and parts pricing?

A: I I think this is Brian. I would I would indicate that we believe that customer pay should be able to grow at low to mid single digits in the short and midterm. And long term, it should be able to grow mid to high single digits. Okay? That's where we were pre COVID, and it's really just a matter of inspiring our our aftersales leaders to be able to do that. I don't know if you recall, but we haven't been the LPG that was expanded into the departmental leaders and they're fighting hard to be able to grow their their RO their RO count as well as their hour count to be able to you know, win the LPG award, which is our Lithia Partners group, which instills loyalty, potential, and growth. So I mean, with that, outside that, we've gotta be more competitive than what our you know, than what our peers are. And ultimately providing that optionality and that individualistic experience to our consumers will get us there.

Q: Oh, thanks for taking my question. Just to clarify, I mean, the the guidance still is for mid single growth in new vehicle. Is that incorporating any tax? It it doesn't sound like it. I mean, is that assuming that the the tariffs does that assume tariffs sort of moderate as we get into the second half of the year? And and if if they don't, what what kind of downside risk should we be thinking about?

A: It we're pretty comfortable with the the the low to mid single digits as our target throughout the year. And we believe that because of our exposure, we should sit pretty nicely in returns in in terms of what happens with tariffs. I mean, no matter what happens, you still have a competitive market that has to deal with affordability and has to deal with their production schedule. So with that, we we believe that we're sitting quite nicely in terms of being able to respond to the market and continue to grow our new car business.