Greetings. Welcome to Lithium Motor and Driveway Third Quarter 2026 Results 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, please press star zero on your telephone keypad. Please note this conference is being recorded. I will 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 third quarter earnings call. With me today are Bryan DeBoer, Chairman and CEO, Tina Miller, Senior Vice President and CFO, Chuck Lietz, Senior Vice President, and Scott Cook, Driveway Finance Corporation and Southeast Region Operations President. 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 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'll turn the call over to Bryan.

Thank you, Jardon. Good morning and welcome to our quarterly earnings call. Our third quarter again demonstrated what makes Lithia and Driveway different. We delivered revenues just shy of $10 billion and adjusted diluted EPS of $10.34, up 9% from last year, growing earnings in a mixed retail environment. Our leaders continued to capture the profitability of our diversified and durable model, delivering quality results in any environment. During the quarter, same-store revenues declined 1.4%, are resilient result as we lap revenue growth of nearly 8% in the third quarter of 2025. Our gross profit comparison was the best of 2026, and we exited the quarter with good momentum. Total vehicle GPU of 39.58 was down only $63 year over year, reflecting strong pricing discipline. Our teams responded dynamically to the market and our progress puts us in position to accelerate our growth, diversification and results going forward. As a reminder, all vehicle operations results from this point forward are on a same store basis. Used vehicle profitability was strong with GPU up 13% or $234 year over year. In North America, same store SG&A as a percentage of gross profit improved 50 basis points sequentially reflecting our ongoing focus on cost controls. Driveway Finance Corporation continues to grow, delivering finance operations income of $32 million, an increase of nearly 70% over last year, as average managed receivables grew 22% and provision expenses also improved. Our model is designed so each business line reinforces the others, and this quarter demonstrated that dynamic. Our growth starts with our people who are pricing smarter and running leaner stores across our ecosystem. Every customer relationship creates reoccurring value after the first sale, and the vehicle we sell today brings that customer back to our service drive tomorrow and eventually returns as a trade-in, all accelerating our DSC and driveway platforms. I want to personally thank our store and support team members for the results they delivered this quarter and the care that they show our customers each and every day. Our diversified mix continued to drive stable earnings with used vehicle gross profit up 9.3% and after sales gross profit up 2.4% offsetting a modest quarter of new vehicles. New vehicle revenues declined 2.6% on 2.7% fewer units against a demanding comparison to last year's third quarter when new vehicle revenue grew 5.5%. By category, import units grew 0.8%, domestic declined 8.8%, and luxury declined 2.9%. We view these conditions as cyclical. and as comparisons ease in the fourth quarter, our team carry a strong trajectory into year end and the following year. In used vehicles, our pricing strategy continues to deliver and it's a great example of our ecosystem, technology and people all working together as one. Total used gross profit grew 9.3% year over year and used GPU was 1993, led by our core three to eight year old vehicle category where GPUs rose 44%. Our work on dynamic AI pricing supports improved profitability and used vehicles remain one of our highest return businesses providing an entry point to our ecosystem for customers at every affordability level. F&I per unit was 1736, a 4.7% decline year over year. As a reminder, DSC's growth shifts a portion of our F&I into captive platform where each loan earns reoccurring countercyclical income that is three times more profitable over its lifetime. Our growing remote F&I program is demonstrating the opportunity to improve F&I attachment and customer experiences at a greatly reduced cost. After Sales continues to anchor our resiliency with gross profit Growing in each of the last eight quarters and margins expanding 100 basis points this quarter to 59.5%. After sales earns on every vehicle and operations, not only the ones we sell, and it is where the relationship we build at each sale keeps paying off. Lifetime oil contracts are an example of how we are building customer retention through higher attachment. with nearly one in every four North American customers now choosing to subscribe, up more than 200 basis points over last year. We're building on that improved retention in our service lanes, reaching customers before their next service is due and getting the most value out of each of them on each visit. Adjusted SG&A as a percentage of gross profit was 68.5% in line with the second quarter. In North America, same store SG&A was 65.7%, likely sector leading performance that demonstrates how our scale diversification and store leadership is transforming our operations. In our sales departments, we've combined roles, removed layers, and given our strongest leaders responsibilities across multiple stores and departments. Behind the scenes automation, More efficient vendor relationship and AI tools are also contributing. Every quarter of progress gets us closer to our global SG&A target of below 60% of gross profit, and as volumes recover, a larger share of each gross profit dollar will drop to earnings. The UK delivered another standout quarter with gross profit up 7%. After sales led the way, growing profit 13.6%. New vehicle units grew 10.6% and new vehicle gross profit rose 8.5%, helped by our expanding partnership with some Chinese OEMs. In used vehicles, retail units grew 4.6% and GPUs grew 4.9%. These results reflect strong execution by our UK teams and the potential of our international platform. Before we jump into finance operations, I'd like to welcome Scott Cook who joined us in August as our operations president after more than 25 years at Toyota Financial Services, most recently as their president and CEO. He brings deep global leadership, industry experience running one of the largest captive finance companies in the world and is a wonderful cultural fit to Lithian Driveway. Welcome, Scott. Driveway Finance Corporation continues to scale profitably. With managed receivables now at $5 billion in penetration climbing towards our target of 20% or more, DSC is doing exactly what we built it to do, turning each vehicle sale into durable, stable income, a deeper, longer relationship with our customers and a clear differentiated advantage. We keep making it easier for customers to shop, finance and service their vehicles with us, whether in stores or online. Our stores, DFC, driveway and green cars, let us serve customers however, whenever and wherever they choose. And Pinewood AI gives us a customer first platform to truly deliver that experience. Ridgeview Partners' acquisition of Pinewood AI, completed earlier this month, delivers a meaningful valuation gain on the investment this quarter while leaving our strategic alignment unchanged and providing an even brighter future for our growth. Moving team members onto one AI-native system will take cost and complexity out of the business while freeing up our teams to do what they do best, bond, build trust, and create memorable experiences with each and every customer. Now, turning to capital allocation, our approach remains the same. We put capital where it earns the best returns for our shareholders. After a very active first half, we took a more balanced approach in the third quarter, repurchasing $85 million worth of stock while funding acquisitions and maintaining balance sheet strength. Our share count is 11% lower than a year ago, and that benefit to earnings per share carries forward every quarter. Our regenerative cash flows also gives us room to strategically grow our network. A few days ago, we acquired four Gossett, Hyundai, and Kia stores in Memphis, Tennessee, adding $250 million in expected annualized revenues and strengthening our presence in the Southeast region. So far this year, we've acquired $1.2 billion in annualized revenue of high-quality stores while divesting a quarter billion dollars of underperforming revenue, freeing up capital to be more efficiently used. These actions make our network more diversified across brands and regions, increases efficiency, provides growth for our people, and better utilizes our capital. This growth is always underwritten with discipline and consistent execution. We target purchase prices of 15 to 30% of revenue or 3 to 6 times normalized EBITDA. For more than a decade, this framework has delivered returns above 25%, which is well ahead of our 15% after-tax hurdle rate. These returns create a compelling growth opportunity in an unconsolidated industry and the skill necessary to continue to differentiate and leverage our considerable size and scale advantages. That same discipline guides how we deploy cash across the business, whether through share repurchases, acquisitions or investments in our own operations, always building on our strong balance sheet. We head into the final quarter of the year with confidence and a higher quality diversified outcome. Our results came together nicely with North America SG&A improving sequentially, record third quarter DFC income, double digit growth in used vehicle GPU, and continued after sales growth, all adding up to high quality earnings. These gains build on each other as we continue allocating capital prudently and we remain on track to achieving our long-term target of $2 of VPS for every $1 billion of revenue. Our teams are delivering Auto Done Easy every day, demonstrating what makes Lithia and driveway different. With that, I'll turn the call over to Tina.

Thank you, Bryan. Our third quarter showed continued progress, with earnings growing year over year and improving from the second quarter. Our cash generation remained strong, letting us invest in growth, return capital to shareholders, and maintain a healthy balance sheet all in the same quarter. This optionality comes from our scale and the diversity of our earnings and positions us to act on opportunities in the quarters ahead. Behind all of it are leaders across our stores who stay focused on performance and on developing their people while building durable customer loyalty with each experience. As Brian mentioned, our cost discipline is holding and on a same store basis adjusted SG&A with 68.5% of gross profit. The year over year increase primarily reflects lower gross profits in the comparison and the structural changes underway across our stores and back office positions us to capture meaningful operating leverage as gross profit strengthens. In our stores, the sales departments are leading the way. Our leaders are aligning compensation with profitable growth, matching staffing to each store's volume and combining roles where technology allows. Together, these changes make our teams more efficient while strengthening the experience for our customers. The same focus on efficiency is reshaping how the rest of our business runs. Our back office is getting simpler with fewer systems, fewer vendors, and less manual work. The continued rollout of Pinewood AI marks the next phase of this transformation. We're bringing it to our North American stores deliberately at a pace that protects the experience our customers and team members count on So the improvements we make become part of our long-term cost structure. Moving on to financing operations. As Brian mentioned, DFC delivered another excellent quarter. Originations reached $937 million, with net interest margin of 4.7%, up 10 basis points from a year ago, as our funding costs continue to improve with scale. North American penetration reached 18.3%, continuing its steady climb. Credit performance continues to reflect our disciplined underwriting. Origination FICO scores averaged 752 and front-end LTVs held at 94.6%. Our allowance for loan losses now stand at 2.8% of receivables, down from 3.1% as the conservative approach built into DFC from the start continues to pay off. Our ability to originate at the top of the funnel is building a high-quality portfolio and as it grows, we gain deeper access to the securitization markets, more efficient funding and fixed costs spread across a larger earning base. With penetration still growing toward our long-term target, we see significant runway ahead and expect continued year-over-year growth in profitability. DFC is delivering on its promise, adding durable earnings that build with every loan. Next, I'll discuss the strength of our cash flow and balance sheet. reported adjusted EBITDA of $443.5 million in the third quarter, up a modest 1.3% year-over-year. Adjusted cash flow from operations, our representation of free cash flow, was $377 million for the quarter, up 12% from a year ago, bringing our year-to-date total to $987 million after adjusting for the one-time benefit related to our used vehicle floor plan in the first quarter. Cash generation from every part of our business continues to provide flexibility. In the third quarter, it supported our share repurchases, our dividend, and continued investment in our network while maintaining the strength of our balance sheet. We repurchased 246,317 shares at an average price of $345, which remains well below our view of intrinsic value. Year to date, we have returned more than $627 million to shareholders through buybacks and dividends. We ended the quarter with net leverage of 3.1 times, down from 3.2 times at the end of the second quarter, moving back toward our long-term target of below 3 and well under our bank covenant limit of 5.75 times. This measure excludes floor plan debt, which is secured by our vehicle inventory, unique to our industry, and integral to how we operate. Consistent with industry practice, we treat floor plan interest expense as an operating expense, an EBITDA, and leave the related debt out of our leverage calculations. We also exclude the ABS warehouse lines and term securitizations that fund DSC. As we finish the year and look ahead to 2027, we maintain a balanced approach to capital allocation. This means we can repurchase shares when undervalued, pursue acquisitions that meet our return hurdles and extend the reach of our ecosystem and keep the balance sheet ready for opportunity. Our opportunistic strategy lets us create value in any market while continuing to strengthen and diversify our network. And with our shares continuing to trade at a deep discount, buybacks remain attractive. Our progress this quarter reflects the continued evolution of our business. Changes in the way our stores operate are increasingly reflected in our cost structure, and as Pinewood AI comes to North America, the path to our long-term SG&A targets gets clearer. Our ecosystem keeps doing what we designed it to do, strengthen the relationship with our customers at every touchpoint. And our capital allocation stays disciplined, directing every dollar to its highest return while protecting the strength of our balance sheet. We're confident our teams keep turning this momentum into lasting value for our shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question. Our first question is from Michael Ward with Citi. Please proceed. Thanks very much. Good morning, everyone.

Good morning, Mike.

Brian, I wonder if you could provide some of the gives and takes as you've evaluated the PHE transaction and how it relates to Lithia.

Great question, Mike. It's neat to see that the valuation that they were receiving prior to going private was starting to look respectable at 12 to 13 times earnings. I mean, I think one of the big things is I think that, and I don't mean to speak for Roger by any means, but I imagine when you look at the marketplace and look outside the public companies and then look at yourself when you're looking at your actual goodwill multiples of somewhere around three to six times earnings once you strip out all the equity in the companies. that he bought that company for somewhere much less than what the marketplace's actual goodwill is relative to what typical car guys buy stores for. And obviously with a lot of nice luxury stores and diversification, it looks pretty good. I would also comment that Lithium Motors is quite diversified as well. We obviously are sizably larger than what PAG was. and obviously at seven and a half times multiple, there's a lot of growth for us and gives, I think, a lot of our shareholders some confidence that there's a lot of room for our stock to run. Yeah, that's certainly what it seems like.

Switching to the business at hand, you kind of alluded to the Pinewood integration would be by the end of 28. Is that kind of a gradual process? And when I looked at that chart on page nine, in your chart deck, as you get to the 65 and even 60% essence G&A levels, is that type of thing we'll see the progress as Pinewood gets integrated? And is that the right timing that it goes gradual through the next two years with the full integration throughout the North American market?

Great question, Mike, as well. The Pinewood integration is being rolled out pretty much by manufacturer because the APIs are developed by manufacturer. and should happen by the end of 2028. We're pretty good at that transition, but we would also say that the lowering of SGA that's driven by AI or by the Pinewood solutions and customers and team members being in the same environment will typically follow that, okay? The United Kingdom currently is doing a nice job reducing their cost structures, especially in their service departments, and gaining some really nice efficiencies, and it's starting to become pretty effective. They've been on that technology for about six to nine months, and we're just now starting to see some of those nice gains that I mentioned in the script. All in all, I would say that the drive to a sub-60% SG&A will trail the rollout of the Pinewood stores probably by 12 to 24 months.

Okay, but that's the direction that we'll see over the next couple of years, and the Pinewood is a big part of that. It sure is. Thank you, Bryan.

Thank you very much. Thanks, Mike.

Our next question is from Ryan Signal with Craig Hallam Capital Group. Please proceed.

Hey, good morning, Bryan, Tina. Hi, Ryan. Good morning. I want to start on the new GPU side. Heard from one of your peers intra-quarter. They expected a much more significant step down in GPUs sequentially, looking at your numbers much less of a moderation. Curious how you saw regional performance stack up, company-specific performance stack up, and then anything else to call out?

Sure, Ryan. I mean, we've had pretty resilient new car GPU, and obviously... Part of the reflection of that can also be seen on the used car GPU because you're taking a trade on those new cars and it's reflective on the other side. So we're pretty pleased about our ability to price vehicles and create demand top of funnel to be able to find the right customers that can pay us the appropriate prices for the cars that we're looking at. The market feels pretty good. In terms of regional differences, it could be that That greater exposure to the higher doc fee states that some of our peers have may influence their GPUs a little bit more. But ultimately, we're seeing pretty good results across the company, and hopefully that will continue.

Good segue into my next question on doc fees, Brian. But FTC enforcement actions, more discussion there, specifically doc fees. Just Clear the air on what you guys are hearing. And then you mentioned it, but primarily West Coast, but a lot of Lithia's footprint are in lower dock fee states. Just talk through how that flows through GPUs and from a financial standpoint.

Yeah, dock fees are part of GPU. They're just embedded in GPU. And I think the important thing to note is the FTC's enforcement rules that were clarified in, I believe it was February and March. Lithium driveway was obviously in compliance way before that, years before that, and have typically always disclosed those dock fees across the country. So anything that you saw with us, if there was changes in a few stores, they happened in Q2. I'd be surprised if there's big differences between Q2 and Q3 because the enforcement action and if there was changes, it had to be there. The biggest thing that it does is with competitors that are a little less transparent on their pricing and how they get to their ultimate pricing, it should make those that were fully transparent and were disclosing a hypothetical $500 to $1,000 dock fee It should allow them to be more competitive in the long run. In fact, and it should have been shown even in Q2.

Helpful. Thanks, Bryan. Good luck, guys.

You bet, Ryan. Thanks.

Our next question is from Raja Gupta with JP Morgan. Please proceed.

Hey, good morning. Thanks for taking the questions. Just wanted to start with parks and services. If I heard correctly, I think you mentioned UK was up 14%, which would imply US after sales probably flat, maybe slightly up. I'm curious to get your thoughts on what driving some of the sluggishness there, not just for you guys, but also hearing the same from some of your peers as well. And when can we expect the U.S. after-sales business to start recovering again? Any outlook comments you can give would be helpful and have a quick follow-up.

Sure, Raj. I think that the United Kingdom, and I'll start with that at the low teens, we're seeing that our AI in the United Kingdom is generating additional business. and it's coming from, and I was on the phone with Neil and Richard and their teams earlier this week and they shared that the idea of a pre-sale is something that is making a difference in their revenue base, meaning when the customer books the appointment with the AI, the AI is consistently asking for additional service things to be done, like windshield wipers, like Oh yeah, I probably need my fluids changed. Oh yeah, I need this. We're getting around 10% to 11% additional pre-sales on every AI. And if I had to guess, before the AI went in, I'll bet we had close to zero. Because most of our upselling is done once we do an inspection. And that's a big difference. So they are getting some pretty good lift, and it's something that we're trying to figure out how to accelerate some of that AI in America even before all the stores have the Pinewood acquisition. So we'll see how that goes. In terms of, and I think you're probably right Rajat that in the U.S. we were probably up slightly in terms of gross profit in after sales. I think relatively speaking that's probably a pretty solid number knowing that we're compounding two years Pretty good same-store sales increases that were mainly driven off some pretty large recalls with a few of the Korean manufacturers and a few of the other Japanese manufacturers. So I think all in all, with what was dealt us, it's a pretty good number, relatively speaking. But again, Raja, I'll sit here and say that when I look at our business and I look at the opportunities that are afforded us, it's the single biggest area in our business that we have lots of opportunity to delight customers okay and we need to do that through creating personalized experience the way each customer individually wants to be treated okay and we've got good transparency we've got great people out there we just need to open up our ears and our eyes and figure out what they're really asking for and give it to them quicker and and less costly than what others can and I think that's when we look forward and look at the My Driveway portal or look at the network that we've built that that's still our big opportunity and we'll continue to push on that.

Understood. That's helpful, Culler. And then maybe, you know, one on just capital allocation, you know, given where you are from leverage standpoint, a little above three times and, you know, potentially entering a rate hike cycle here. You know, is it safe to assume that the focus would be on de-levering in the near term, you know, to get to below three times and staying there? Just curious, you know, how we should think about, you know, buybacks or M&A in the near term.

Sure, Rajat. I think, I mean, we do produce almost a billion five in free cash flows a year, and we did de-lever from 3.2 to 3.1 in the quarter. we do like the number of less than three times because obviously that helps us pathway towards towards IG and gives us the flexibility to scale if we need to so we'll continue to balance capital with a focus still probably on buybacks knowing that acquisitions are quite costly especially in North America and that's really the balancing act that we're always doing is looking at the crazy trading or PE that we trade at relative to and, you know, what other transactions are at. So, you know, we'll stay focused, we'll stay disciplined and we'll continue to deploy capital in the right manner and feel comfortable in that 3x leverage range.

Understood. Great. Thanks for the questions. Bye-bye. Thank you. Thanks, Raja.

Our next question is from Jeff Lick with Stevens, Inc. Please proceed.

Good morning. Thanks for taking my question. Bryan, I was just curious, you know, you use the term demanding compares for 3Q, it actually kind of flips in 4Q where it compares, you know, it has the appearance of being a little easier. I was wondering if you could address, you know, how we should think about 4Q, maybe caution us about kind of overreacting and then, you know, maybe building into that, you know, GPUs obviously were, new GPUs were, you know, a little weaker sequentially than we've seen in the past. One of the things we've heard is that, you know, potentially the changeover inventory maybe got pushed out a little bit, meaning that there was, you know, there's going to be more 2026s on the lot this far into the quarter. You know, any thoughts on where GPU trends on the new site could go because of that dynamic?

Yeah, sure. Jeff, was that first part of the question related to after sales? That Q4 looks a little like... No, I mean, well, it's interesting.

You know, you're... New comp was down 8.3 in Q4 last year, which you completely bucked the trend because your used comp was up 4.7. So there's an interesting dynamic there as well.

I understand the question. I think when we think about Q4, we've basically adjusted our company with diversification of driveway, of driveway financing. of Green Cars, as well as a global footprint that changes how we look at our business. We used to have a Q1 and a Q4 that were our softest quarters by a large amount, like 20%, 25% lower than Q2, Q3. We're fortunate that in the United Kingdom, Q1 is typically a pretty strong quarter for us just because there's such a disproportionate earnings that occurs in March in the United Kingdom that it helped balance out Q1. Unfortunately, Q4, and I mentioned this last quarter as well, Q4 is our toughest quarter. We not only have Snow Belt, but we have the United Kingdom that doesn't have a big registration month in it, and we're still looking for ways to be able to strengthen Q4. Now, the good news is that Q4 does have December in it. and a lot of times on year-end product or model changeovers, October can be a decent month. It's really November that can be a little bit tougher than normal. The exciting thing for us is when we look at this Q4 versus last Q4, we're starting the quarter with a nicer day supply. And if you remember, even though we were up 5 plus percent in used cars last year, We also had pretty good degradation in GPUs, and I think that focus on GPUs going into Q4 can help us knowing that our day supply is looking a little better than last year. So with that, I'd urge everyone to just look at our relativity of Q4 to Q3, and then you can apply that looking back last year and then looking forward to this year and maybe get some indication of what Q4 could turn out to be.

And then any thoughts on the GPU dynamics with 2026s and 2027s? Is that going to have any impact on Q4 GPU?

I would not expect so, because our inventory looks pretty clean. I think we're sitting at close to 60 days, OK? And it's sitting in the right places. So I don't expect any abnormalities there.

And then a quick follow up on the used unit comp down three, but you used GPU dollars up nine. So you guys have been talking in the last few calls about trying to find that balance of units versus profitability. It appears like you're doing a pretty good job on profitability. Any more thoughts on just kind of the fine-tuning and where this is going to settle out?

Sure, Jeff. I think it's important to remember we're at the infancy of this, and though we're getting traction, we're getting a couple hundred bucks in GPU, many of our stores are still not adapting to that because I think we think about it as a micro funnel as a store and then the macro funnel is driveway and Lithia. A lot of our micro funnels still haven't figured out that they don't need to sell the car to the first person that walks in because their funnel is small and they flinch and sell it to the first person. So if we can help the macro funnel feed into the micro funnel better, they get more customers sooner and hopefully can hold on price to be able to drive that. We're really seeing it grow in our core product. So we try to teach our stores about scarcity and scarcity starts in that core product. We were up $500 in GPU year over year on core product, which is three to eight year old vehicles. Now on the opposite side of that, we were down three, 400 on certified. you know they're balancing some of those things out but ultimately the two together get you a lot more trade-ins and ultimately that GPU is what helps us lever our cost structure okay and that's how we were able we were able to maintain our SG&A about the same as last quarter and it should be sector leading I would imagine okay which is where we should be as the largest auto retailer in the world and and maybe more importantly that a great team of people that is powered by them and they know what they're doing and I trust that they'll continue to do that and find the GPU and bring it to the bottom line.

One relationship just real quick that you've brought up in the past was, and I think it only pertains to the driveway business, was that you were priced at one point 10% below Carvana and CarMax and you've been closing that gap and you kind of highlighted that as kind of like a, almost like a GPU reserve that as you get, and so on. So, you know, we're getting closer and closer to parity. You get back. Can you maybe elaborate on that and explain kind of where you're at in that process?

Sure. We're still five percent below them. The double digit number was relative to what we call value auto product, which is our lowest priced cars. Those were we were selling them for about 12 percent on their market. It's improved slightly. OK, where we've really improved is on the core product. Relativity to Market, but I'm going to guess we're 97, 98% now on core product. But you are correct that that 5% as an aggregate on a $30,000 car is $1,500. I mean, that is the prize of why Lithia built a bigger funnel, okay? And why green cars and driveway exist is to bring more people in so our stores have greater options. to be able to stabilize pricing at something closer to what market conditions are. Generally speaking, most new car dealers sell their used cars for way less than what the one price used only retailers are selling cars for. And that's because they focus on new cars and they're not quite as savvy and don't have as big a top of funnel to be able to find the right customers that are willing to pay or be able to finance that car at a higher price.

Thanks very much and best of luck in Q4. Thanks.

Our next question is from Alex Perry with Bank of America. Please proceed.

Hi. Thanks for taking our questions here. I guess maybe as a follow-up to that question and more as it pertains with some of the FTC enforcement actions. How much did you have to raise sort of the advertised price to the consumer in order to comply? And how is it impacting the used vehicle comps and maybe sort of the price competitiveness with the CarMaxes and Carvanos out there?

Good question, Alex. At Lithian Driveway, we were in compliance with virtually every store. there wasn't any price adjustments and we were fully disclosing any additional fees that were charged that were charged to customers online and then when they come into the store they actually match okay and i think a lot of the game is had been in in florida is a lot of dealers had tendencies to price low and then have a big dock fee when you came into the store that's not how our dealers ever did it okay we've always been full disclosure in every state across the country. So a little bit different. You may ask some of the others, and I think the biggest offenders are typically the private guys and the guys that aren't groups, that don't have legal departments and don't play by the same rules. Okay, but outside of that, I'm going to guess that most of the publics were in compliance back in March when this got announced, and I'm imagining most of the private larger groups were in compliance.

Really helpful. And then I just wanted to follow up on the after sales business. Could you just maybe talk to us about, you know, pricing there? Are you seeing increased work deferrals with where, you know, sort of pricing has gone and given those sort of affordability issues out there? And then do you think some of the softness is related to share loss to some of the cheaper independents? Do you think pricing needs to come in at all in after sales?

Great question, Alex. It's easy to get over our skis and raise prices when inflation was going up so much and everyone was doing it. We really encourage our stores to stay affordable as they can, but the simplest way that we do it is we do it with aftermarket parts and non-OEM parts post warranty period. Now, if a customer doesn't seem to show resistance, we'll continue to replace their parts with OEM parts. But if they show pricing resistance, we're pretty good at being able to detect that and move them to an after sales part and be able to compete in terms of what our pricing is on both labor and parts. I will say though, Alex, not all of our stores behave the same. It's really easy to get into the mode that we're warranty shops and we're not customer-focused shops. And again, when I talk about auto done easy or optionality with our customers, I'd encourage many of our team members to think a little broader that we've got to keep our prices in line. We've got to be able to offer the great service and the great optionality for home pickup or in-store work at affordable prices, and we're very acutely aware of how to do that. Alex, the last thing I would remind everyone, we now have 156,000 users on the My Driveway portal. and that's an area that creates transparency, simplicity and empowers our customers to be able to choose those things and communicate with their service advisors or their salespeople immediately the way that they want, okay? And I know that we're still in our infancy knowing that we have almost 10 million customers. We've got a long ways to go to get full adoption on that and that's an area that customers will be able to opt for affordability a little bit more if they choose to. And hopefully we'll be able to detect a little quicker as to if they're defecting or they're thinking about defecting and come back to them with some offers that fit their budgets. Great question, Alex. It's a real opportunity for us as well. Perfect. That's incredibly helpful.

Best of luck going forward. Thank you.

Our next question is from John Sager with Evercore ISI. Please proceed.

Hey guys, thanks for taking my call. I just wanted to follow up about the sustainability of used GPUs. I think this is, you know, obviously strong progress. You've talked about this for a while now. Second quarter in a row, around $2,000. Is this kind of a new floor of what investors can expect? Because I think even with sort of changing macro, the initiatives that you've taken on should be applicable. You know, you're buying and selling in sort of the same market. So as we look out into the 2027. Are you thinking about $2,000 as roughly a new floor?

I would say, looking into 2027, that is absolutely accurate. I would remind everyone that the used car market typically does soften in Q4. So we could see a little bit of sequential decline. But overall, we should see a trajectory that GPUs continue to climb above the $2,000 GPU level. And again, the prize and why we designed the entire ecosystem including DFC and wheels and all the other componentry that Lithia is a party to was designed to be able to capture that $1,500 a unit and you extrapolate that over 350,000 vehicles and it's a pretty big number of about $500 million I think is the possibility if we can capture that just to get to what the average is for the marketplace of the one price retailers.

Makes sense. Okay. And then how should we think about the sort of the percentage of stores that are already at target relative to the whole group? Like, is that a way that we can think about the amount of progress that you've made so far towards your end goal here?

John, let me get back to you on that because this is going to be a total swag. I'm going to guess it's less than a quarter of our stores that have a micro funnel that is efficient enough to be able to sell their average car at market. Okay. It's a small amount, and a lot of those are the traditional lithium stores that have been with us for years and understand how to build the right top of funnel and how to finance every type of customer that walks in the door and to be able to do it in that 15 to 45 days of age rather than in the 0 to 15 days of age, which is what many of our stores, they underprice vehicles too soon. and they don't let the car season in the marketplace to be able to find the right customer for that seat and they just turn it. I don't mind doing that if it's a certified car that I can replace real easy but I think all of us would say that if it's a scarce car or it's a core product, if you can't replace it, let it sit through three or four customers and generate additional business before you actually spin it and sell it to someone. So there's a lot of opportunity here, and I think we'll be able to see it in the coming quarters.

Okay, thanks so much.

Thanks, John.

Our next question is from John Babcock with Barclays. Please proceed.

All right. Good morning. Thanks for taking my questions. Just first one on, you know, you've been working with the Chinese OEMs in the UK, and they're going to be expanding into Canada over the next year. So just kind of curious to the extent that you're doing work with them in Canada and any sort of discussions you have ongoing.

Sure, John. I think in Canada, I think we're pleased to see that they're choosing to partner with dealers when they move into the marketplace. That's a real positive thing. They are looking for exclusivity in Canada, which is much different than how it is in the United Kingdom where we're spending $50,000 to $100,000 by buying a small image program and a sign and having the cars on our lot in 60 days. In Canada, they're looking for exclusive franchises and exclusive locations. I would also note that the real estate costs in Canada are about 30% higher than the United States as a whole, which makes it even more cost ineffective to be able to do that. Our numbers are showing somewhere between a six- and an eight-year break-even because of the lack of service and parts business going into that market. The United Kingdom, remember, most of our franchises in the United Kingdom, they're duals. with American manufacturers or French manufacturers or German manufacturers, not obviously the luxury manufacturers. And that's really easy because then I have an after-sales base, and any business that I get on the new car side is plus business. So if we circle back now to Canada, I think we probably will be an early adopter, maybe a couple franchises in Canada. But ultimately, we're probably at a take-wait-and-see approach, just so we've got our foot in the pond to be able to see what happens in the United States in the event that they eventually come to the United States.

Okay, that's helpful. And then separately on F&I, there was a little bit of a pullback there in terms of the F&I PVR. Could you just talk about that a little bit, how much of that is driven by consumers pulling back on spending. And if that is the case, if you could talk about, you know, maybe what products they're deciding to hold off on purchasing nowadays.

Sure. Sure, John. I think on F&I, I think it's important to note that our F&I is also affected by our DFC penetration, which was pushing 20%, which is great. Good job, Chuck. Good job, Scott. It's nice to see that because that's the main pathway to achieve Well, today we're, what, $31 billion in revenue domestically, and we say that you should be able to convert that into a .1 in terms of profitability, so that's $310 million in profit from driveway. That does affect our F&I average in the short term, though in the long term it gets us three to four times more profitability on each transaction that we do. Now, back to F&I. I would say, John, that I think affordability does... create a little bit of drag on the optionality of buying service contracts or lifetime oil products are those types of things, and we are seeing a little bit of that. Outside of that, we've got lots of opportunities to continue to grow F&I, and I imagine that downward trend should be able to be curbed pretty quickly.

Okay, thanks. And if you don't mind, just one more question. Just back to parts and service, I know people have already asked about this to some extent, but I was wondering if you could break out the performance across warranty and customer pay in the quarter and then also just generally, how were volumes in the quarter and how were they last quarter?

Sure. Volumes on service as well? Parts and service? Okay. Here, I'll just give you the quick revenue numbers. Customer pay was flat. Warranty was up Okay, my glasses need a fine-tuning here. Up 6.1, parts wholesale was down 4.3, which means do-it-yourselfers, and collision was down 1.5. Okay, on gross, customer pay was flat, warranty was up 10, parts wholesale was flat, and collision center was flat. Okay, the warranty is being driven, and I mentioned this last quarter. There's some franchise laws changes that are allowing us to get the full hours that we typically need to pay our mechanics. Manufacturers in Florida, New Jersey, and I believe Virginia now are required to pay that. A lot of the lift in gross profit, the differential is coming from that 4% difference. It's coming from just those three states alone.

Okay, and then just from a unit perspective, like overall are you, I assume with this relatively flattish growth on the same store sales basis,

I don't have my, it's technically called repair orders, and I think it was down slightly. Okay. I think it was down slightly. All right. Appreciate all the detail. Thank you. You bet. Thanks.

Our next question is from Brett Jordan with Jefferies. Please proceed.

But I guess when you think about, hey, good morning, when you think about Customer pay, price, and it would seem like car counts were down a little bit. What do you think price inflation year-to-date has been sort of on an average repair order?

Oh, which would ultimately be the cost of our technician? Technician parts, yeah. I would probably say 4% to 5%. It's a total swag, Brett, but I'm going to guess it's something like that.

All right, great. And then I guess on the UK, you called out the Chinese success story over there. How was the legacy business? I mean, what's the Chinese contribution to that north of 10% growth in the UK? And is there an opportunity to sort of keep that above-trend growth by adding more Chinese to the footprint?

So about half of that success is coming from the Chinese. Fortunately, our market share in our luxury brands have been really good. We've been able to continue to grow our BMW, Porsche, Mercedes, and Jag Land Rover franchises, and that makes up a lot of our business over there. The other thing is we've got a pretty good footprint in our mainstream brands as well that have done a pretty good job. If you look a little deeper into that, our used car successes in our non-luxury is exceptional. Our leader, Gary, over there that runs our mainstream brands, he's exceptional about filling every single parking spot on those lots and then turning those quickly at the right prices that we think that there's still a lot of opportunity there. Now, is there more opportunities to be able to add Chinese? I think was the second part of the question, Brett. We're actually seeing pretty good saturation of the first seven that came in three, four years ago. They continue to add points in the United Kingdom. So even though there's growth of the Chinese now pushing 14, 15% of the entire marketplace, it's starting to taper off. And the brands that are growing, we're starting to see that the number of stores they're adding is outpacing the growth rate by units of those brands. The other thing that I would layer in, there's five more new Chinese that have entered the market this year. They're the ones that are actually growing at the faster rate. So there's some adoption that we're looking at adding a few of those in some of the opportune areas. What we basically end up doing is we end up substituting or swapping out like a Renault or a Citroen or a Stellantis or something like that that's just not able to compete and perform at the same level where you end up just swapping those brands out, okay? And many of those stores already have two or three brands sitting in them.

Hopefully that gives you a little bit of color on that, Brett. Thanks. Does the underlying consumer in the UK feel better than they did? I mean, it seemed like the end of last year sort of felt like a soft backdrop. Are you seeing that the market feels a little healthier?

I think that if Neil was answering this question, I think they would indicate that it's neutral to positive, but not vastly different. The one thing that the Chinese were able to do was to drop into an affordability bucket, and that's where we've really done a nice job, because if the new cars are more affordable, it basically takes away the sale of a used car, and we have been bucking that trend. which is great to be able to see. I think a lot of the confidence is coming from the fact that there is a little bit more affordability in what's coming to marketplace. I would also caveat this since we got so deep into the United Kingdom market. It's a fallacy to think that the Chinese are taking market share because of BEV. Remember, the first manufacturers that went into Western Europe, that went into the United Kingdom, came with just BEVs. They had less than 1% market share and they were stagnant for over a year. Okay, it wasn't until they started to introduce their other products of plug-in hybrids and even ICE engines that they began to get traction in market share. Meaning that the whole formula is about solving for affordability, not solving for sustainability. Okay, so just a little bit of a caveat and I think it's the same will hold true in many other parts of the world.

Great. Appreciate it.

Thank you.

Our next question is from Daniela Hagen with Morgan Stanley. Please proceed.

Great. Thank you and good morning. So my first question is on the DFC which had another excellent result. I just wanted to get a sense of I know it's a very high quality book. Average FICO is quite high. but have you seen any changes in consumer behavior in the past six weeks or so with the higher rate or oil environment?

Hi, Daniela. This is Chuck. Thanks for your question. Yes, in terms of looking at the consumer and any changes in behavior, for us, in our portfolio, we have not seen any change in behavior. If anything, our book continues to maintain its high credit quality and our delinquency rates are actually 20% better up and down the credit stack on a year-over-year sequential basis. So our consumers are performing well and continue to perform well, and that really leans into our stated strategy of really getting preferential selection on a risk-adjusted return basis, and we expect that to continue as we move forward with EFC.

Thank you, Chuck. And then next one is for you, Bryan. I wanted to ask about agentic AI. There's been a lot of discussion around the potential for this technology to change how consumers shop for vehicles. How do you think about the impact on the traditional dealership model? Do you see this as an opportunity for Lithia to lean into scale inventory and this kind of full ecosystem that you've built out? Thank you.

Thanks, Danielle, for the question. It's an exciting time for our business and I'd like to speak to the investors about that just as much as I'd like to speak to our own team members because This is a fearful thing for them at times because they could look at it as making themselves obsolete, and I would encourage all of my team members and all of our team members to think about it as you get to do what you do best, and that's create memorable, trusting relationships with our customers. Let the agentics do the stuff that we either forget to do, don't like to do, or it's just too repetitive, okay? Let agentics do the boring stuff. That's what we're seeing in the United Kingdom. We have some of it in the United States, a lot of it in service in parts, and we're seeing early success. Now, how do I quantify it? We sit at a little bit of a sub-70% SG&A, and we've publicly disclosed that we believe that we can get to sub-60% SG&A. We believe that half of that improvement is going to come from agentics. and it will come through simple things like what I just spoke about, pre-sales and service. It's really easy to forget to ask people, do you want your windshield wipers done? Do you want me to check your tires? We get busy in our business and our people get busy. We don't want to lose business and lose serviceability of our customers because we're busy. Agentics can fill that gap in a nice way so we can spend the time creating attachments with our customers. So if we look at where is the other 500 basis points of that 1,000 point drop, that's from improvements in volumes and underperformance in our stores. It's new stores that have not yet adapted to the idea that I'm going to sell older used vehicles. They haven't adapted to the idea that post warranty period I'm going to sell non-OEM parts. And they haven't maybe adapted to the ideas that I don't mind going to people's homes to be able to do whatever they want. I think as retailers it's been really easy to be able to sit on our laurels and make a lot of money and I think those days are behind us and I would challenge my entire team and challenge the industry to get better at what we do by thinking about what our customers are wanting and giving it to them the way that they want it. Hopefully that gives you some color on how we see agentics in the future but That's probably the tip of the iceberg as to how it can help our teams do a better job.

Great. Thank you, Bryan.

Thanks, Daniela.

Our next question is from Mark Jordan with Goldman Sachs. Please proceed.

Hey, thank you very much for fitting me in here. Chuck, this might be a question for you, but it looks like the second quarter in a row here on the slide presentation where we have a higher midterm outlook for income from financing operations. Can you talk about what changed there? Is it just really the pull forward of some of the portfolio growth and the penetration nearing your 20% target, or is there something else?

So, Mark, great question. This is Chuck again. So we're really seeing two main things that are driving sort of our forward-looking profitability growth. The first one is, as you mentioned, just our consistent preferential selection of the quality of the portfolio and our outperformance in the market on our charge-off and delinquency metrics. And then the second is certainly the growth. We are closing in on almost doing a billion dollars in originations in the quarter. Bryan certainly mentioned the higher penetration rate. That's obviously flowing through to our bottom line. I think all of this points toward signs of achieving preferential selections from a risk-adjusted return basis, growing our portfolio. This business will continue to be consistent, predictable, and repeatable in terms of its growth, otherwise absent of seasonal adjustments for charge-offs. So, we're very bullish on DFC's forward-looking outlook.

Perfect. Thank you very much. And, Bryan, one for you, if I could. Just thinking about new vehicle affordability, obviously kind of been pressured for a while now, but are you seeing any changes in terms of customer behavior in the U.S., any noticeable shifts in behavior over the last few months?

We really haven't. The good news is there's a number of manufacturers that understand that they can gain market share if they can just get into that lower price point as well. We have seen, we haven't I should say incentives aren't getting much better. So I still believe that there's opportunities for our manufacturer partners to be able to provide a little bit better leases, which can affect affordability in big ways. And they haven't jumped back in on that fully. We were at 31% lease penetration. Hopefully, we can get back close to 40%. And that really keeps those customers in funnel and in lifecycle so we can get them back in two, three years. Anyway, outside of that, Mark, not big changes. Thank you very much.

Our final question is from Rob Sussman with UBS. Please proceed.

Hey, team. Thanks for squeezing me in here. Just a quick one on DFC. So with rates moving higher and funding costs for DFC likely moving higher with it, how do you think about the balance between passing through higher funding costs to customers and absorbing maybe some of that in order to drive sales. Talking about the balance of that would be the question.

Yeah, Rob, this is Chuck again. Obviously, there is a time lag between how quickly we can sequence through changes in our cost of funds rates as the markets move in an upward direction versus what the market will and our customers will bear. This is really part of our overall strategy where DFC, we're there to support our stores and help drive overall growth and meeting the needs of our customers in conjunction with our stores. However, having said that, we actually look at each contract on an individual basis on a fully risk-adjusted NPV basis to make sure that it is still profitable for Lithia and driveway. And taking that balance between supporting our stores and making sure we're meeting the needs of our customers and still being profitable on a risk-adjusted basis That's, I believe, how we'll continue to really balance those risks of the higher rates versus supporting our stores.

Thanks so much, guys. Really appreciate you squeezing me in here.

Thanks, Rob.

There are no further questions. I would like to turn the conference back over to Brian for closing remarks.

Thanks, Sherry. And thanks, everyone, for joining us today. We look forward to talking to you again for our fourth quarter and year-end earnings call in February. Bye-bye.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.