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.

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, President and CEO.

Delivered strong results and continue to charge towards the potential of our integrated ecosystem, powered by the strength of our talented people. During the first quarter, we 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 reflecting disciplined execution and growing contributions from our high-margin adjacencies. We are pleased to see our first quarterly year-over-year adjusted earnings increase since the fourth quarter of 2022. Notably, we saw year-over-year increases each month in the first quarter, demonstrating that these improvements were not just a result of tariffs. While the full earnings power of our design is still ahead, these results underscore the effectiveness of our strategy serving customers seamlessly across digital and physical channels, while building a more profitable, diversified, and scalable platform. Adjacencies are now contributing meaningfully to our earnings and delivering measurable gains in engagement and unit volume, now exposing the distinct competitive differentiation of our design and our strategy. Our focus in 2025 is to continue to execute, doubling down on our commitment to building customer loyalty, potential, and growth for LPG. We are confident in our unique ability to deliver sustainable performance, capture market share, and accelerate the profitability of our ecosystem through the fat power of our people and regenerative cash flows. Our foundational strengths enable us to continue our growth as the world's largest auto retailer as we build momentum and continue our pathway to achieving $2 in EPS per $1 billion in revenue. In the first quarter, Lithia Driveway grew revenues to a record $9.2 billion, a 7% increase from Q1 of last year. This growth is a result of our continued focus on improving market share and operational effectiveness. The team's commitment to realizing our is also reflected in our same-store performance…

Strengthening the speed of our operations elevating our reflects the strength of our partnership with Mercedes Benz, we're proud to see him step into this important role and we look forward I'm excited to continue working closely with our operational leaders and execute at a high level advancing our mission growth powered by people. Thank you, Adam. We're really gonna miss you. Onto our operating results and how we're driving performance at the store and departmental levels. Our performance this quarter marked another meaningful step forward. We delivered year-over-year growth in new vehicles and aftersales and experienced continued sequential improvements in used autos, particularly in the value auto segment. These improvements were all supported by continued strength in SG and A execution coming off the back of our sixty-day plan. on our core drivers of profitability. As we continue the year, we remain focused Delivering customer optionality to grow market share, and maintaining disciplined cost control. Our operational success is guided and inspired by our Lithia Partners Group or LPG, And for 2025, I'm happy to announce and include our store departmental leaders in this recognition as well. Again, congratulations to all 2024 winners as well. Turning to our same-store sales performance. Total revenues increased by 2.5%, and gross profit increased 1.8%, primarily due to sequential strength across all business lines that was partially offset by a of GPUs. Total unit sales increased by 1.5% year over year, while total gross profit per unit of $43.00 1 was down a hundred and $44 compared to the same period last year. New vehicle units increased 3.6% year over year with continued strength in import manufacturers. Our front-end GPUs were 3,046 consistent sequentially. Used vehicles were down slightly at point 4% year over year with a considerable quarter over quarter sequential improvement.…

Thank you, Brian. The momentum across our operations is creating a strong foundation to accelerate our value, particularly through our SG and A execution, increasingly profitable financing operations, disciplined capital allocation, and continued focus on balance sheet strength. We're encouraged by our SG and A performance to start the year, building on the improvements we promised and delivered as part of the sixty-day plan in the second half of 2024. Our adjusted SG and A as a percentage of gross profit was 68.2% during the quarter, a 120 basis point decline from the prior year. And 67% on a same-store basis. A 150 basis decline. While we are pleased to see continued progress, we remain focused on disciplined cost management every day. We continue to see opportunities to enhance efficiencies across the business with targeted efforts underway in both North America and The UK. As we move through the year, we believe we're on track to achieve same-store SG and A in the range of 65.5 And driving performance through people was on full display this quarter. We are proud of the progress we've made to start 2025 with strong execution across operations, clear momentum in key areas of the business. As we look ahead, we remain focused on deepening customer loyalty, unlocking store and departmental potential, and scaling growth across our ecosystem. Starting with our financing ops segment led by DS we delivered another quarter of profitability with income of 12,500,000.0 compared to a loss of 1,700,000.0 in the same period last year. This performance reflects the continued maturity of our portfolio, improved capital efficiency and continued maturing in our securitization performance. Following a full year of profitability in 2024, we expect a consistent earnings trajectory in 2025 as we balance yields, growth, and risk. DSC originated 623,000,000 in…

Thank you. At this time, we'll be conducting a question and answer session. You may press 2 if you like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset. Before pressing the star key. One moment please while we poll for questions. Our first question comes from Ryan Sigdahl with Craig Hallum Group. Please proceed with your question.

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?

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.

Helpful. Staying on the tariff topic, any way to put kinda guardrails? And you did this. Several years ago. Kind of with the SAAR just the levers you can pull and kind of the earnings power and, up down from a leverage standpoint. But if ultimately, of in the back half of this year and next year, we go to a 14 or 15,000,000 SAAR, prices stay higher, affordability, etcetera, etcetera. I guess any way to help us kinda from an earnings power standpoint and and what that might mean for you guys?

Ryan, I think it's important to remember where where our product mix is and that we've designed our entire ecosystem around a affordability. Having twenty year old cars and you saw that we had a 39% increase in our value auto sales year year over year. That's that's a big increase, and it shows the strength of the model that you know, we're a little less concerned about what the specific tariff is so as they stay within the ecosystem. So create affordable products top and you know, from top to bottom, whether it's an after sales, new cars, or used cars. And stay focused on what we can control. Because, ultimately, we do have a fairly adaptable model okay, because of that affordability range. And remember this, I mean, Driveway.com, green cars, and DFC help massively in terms of how we think about diversification. And now that DSC is turning some pretty good profits, you know, that takes out some of the volatility as we look at things. I would note one other thing for everyone. It's important to note that the Pinewood market, valuation change was 27¢. So we were at $7.93. Which is which was considerably ahead of of of consensus. Okay? And that's something that to some extent, is outside of our control.

Helpful. Thanks, Brian. Estimates also walked higher over the last week or two. Would have beat stale ones. So thanks. Good luck, guys.

Okay. Thanks.

Our next question comes from John Murphy with Bank of America. Please proceed with your question.

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?

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.

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 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.

That's helpful. And, Brian, just a a second question. When we think about sort of the adjacencies, particularly DFC, and then the benefits you'll get on SG and A over time, You know, is there kind of a a notion that you might lower your expectation for front end gross to take more market share over time in kind of how do you balance that out? I mean, know, getting UIOs is is, you know, is mission critical for parts and service. So just curious, you know, how you think about that full circle equation. Does this allow you to take more market share and then feed the beast at the back end and and grow earnings even stronger? And just kinda how do you balance that all out?

Great question, John. And I think that our original thesis on the design was that if we're able to create transparent, simple experiences for our consumers, then there's actually a price inflection upward, not downward. Okay? We already buy cars, and our cost of vehicles are at a cost advantage of about 5 to $700 over the used only retailers. Important to note, But we also give away that 5 to $700 in terms of price to market of what we sell cars for because we negotiate a way that gross profit in lieu of getting more customers financed. Okay? So I would say if anything and today, we're looking at a 41 to $4,300 total vehicle gross profit. Okay? That's, that's down a couple hundred bucks primarily because of the mix change in Pendragon that rolled in this quarter. You remember, it was 43 to 4,500 prior. We also did elevate our new vehicle gross profit because our mix is so much better and has so much more luxury as well as Southeast exposure, which is higher gross profits. So we raised, our expectations internally. To 26 to $2,800 on new vehicle gross profit. So I would say if we're looking out four to five years, I believe that there's opportunity to grow our used vehicle gross profit which is the biggest impact of the Driveway ecosystem or green cars sales, and it's primarily because you're getting more eyeballs on each and every car in that price inflection point. That today, we don't have all those eyeballs.

Okay. Let me sneak in one last one. That's helpful. Tina, on the ABS your deals are doing with DFC. I'm just curious what kind of receptivity you're seeing in the market what market conditions are currently like and over time, is there opportunity to do larger and larger deals? You get more seasoned in the market? successful, ABS, issuance in the first quarter, and that went, really well with a number of our tranches that were subscribed. Hey, John. This is Chuck. You know, right now, we had a very Right now, though, the the mar ABS term mark

is rather frothy and choppy. That's just a reflection of where the overall capital markets are going. We do expect that to to stabilize, though, going forward. And we'll be very diligent on making sure that when we do launch our next issuance, it'll be at a point in time that is optimal for our business. So we don't see any long term impact on our capital structure for DFC.

But fair to say there's plenty of room in the warehouse facility?

Oh, absolutely. Plenty of room on the warehouse facility to absorb that if there is choppiness in the term market.

Thanks so much, guys. Congrats, Adam. Thank you, guys.

Thanks, John. Thanks, John.

Our next question comes from Rajat Gupta with JPMorgan. Please proceed with your question.

Great. Thanks for taking the And just wanted to, you know, convey my congrats to Adam as well. I had a first question just on SG and A. The sequential pickup on SG and A to gross was was a little higher than seasonality, you know, if we if we, you know, exclude The UK. Curious if you could unpack that for us a little bit because it looks like the SG and A dollars went up more than the gross profit dollars relative to the fourth quarter. If you could just, you know, elaborate on that a little bit would be helpful. And also just a clarification, the Pinewood 27¢ charge. That all of that was flowing to other income. Am I right? If not, you know, if you could clarify that as well would be helpful. And I have a quick follow-up.

Hi, Rajat. This is Tina. Just on your Pinewood question, yes, the impact of the fair market value adjustment on Pinewood does flow through others. You can capture that and see that in that line. It was a a pretty decent impact you adjust for that. Our overall EPS performance was really strong. From an SG and A perspective, you know, I think most of it is really driven by seasonality. When you look at the year over year performance on SG and A, I think we're really happy with it. Same store improved by 150 basis points on a consolidated 120 basis points, one of the first quarters where we're seeing that decline in SG and A as a percentage of gross profit. So really, the continued discipline from our sixty day execution last year, and continued flow through of that discipline by our stores It'll be something that we continue to watch, obviously, and and perform in throughout the 2025.

Got it. And and you think about the path from that 68% you know, within your guidance range, like, say, the midpoint, is there, like, more cost reduction to come, or is this just more about just leveraging the gross profit know, any areas within the gross profit bucket, you know, like marketing services or or other areas that there's some opportunity? That should be we should be making. And, obviously, we have the full year guidance ranges out there, but it just seems like a pretty decent size improvement baked in. For the remainder of the year to get to your to get to your SG and A guide. And, you know, especially with the new car GPUs, you know, expected to come down through the course of the year. Thanks.

Rajat, this is Brian. Maybe I could elaborate a little bit as well. I think when we think about the the the original sixty day plan that's now part of the everyday plan, our our field and our operational, leaders they understand that our goal is to drop about seven basis points out of the model each and every month starting in the second half of this year. So now that's that's on our pathway to the 50 the mid 50 SG and A range. Okay? So it's important to to to to remember about how we think about things. But, again, this isn't gonna happen overnight. I mean, we get benefits all over the ecosystem, including the eventual transition into the Pinewood software system, which is a 30 to $40,000,000 savings. You know, we took out another 30 to 40 millions out of our current tech. Stack with what George did and what the stores did with vendor pricing. And now we're starting to really impact, our interest costs. Which obviously isn't part of SG and A, but it's a big part of our cost structure. And it's the third largest cost in our in our vehicle department. So I think that that that where we ended up with the quarter, we're comfortable with. Our Q1 and Q4 typically is at the higher end of the range than our Q2. And Q3 are typically in the lower ends of the end of the range. It's primarily based on the fact that we have a fair amount of our businesses in the Snow Belt. Okay? So, hopefully, that that that helps you, Rajat.

Got it. No. Thank you. Appreciate it. I'll get back in queue.

Our next question comes from Kate Shane with Goldman Sachs. Please proceed with your question.

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?

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.

Great. And then one last follow-up. Just on capital allocation, share repurchase is obviously a bigger part of the mix in the quarter. It looks like it might be in the near term. But as we think about your acquired revenue targets, is the $2 billion to $4 billion still in the the cards for the year?

Mark, this is Brian again. I I think I think that we've we've specifically said that probably gonna be closer to $2 billion this year. And you can see it in our share buybacks at a hundred and $5,060,000,000 dollars, about 2% of our float. Just in the quarter. That's a big amount of buybacks, and, obviously, that brings it down. In the prepared remarks, I did mention that it's $2 to $4 billion going forward. And then, again, we're still looking for you know, that more major, meaningful acquisition at some point in our lives. And believe that, we've that the industry can be consolidated in one plus one can truly equal three.

Great. Thank you very much.

Thanks, Mark.

Our next question comes from Jeff Licht with Stephens. Please proceed with your question.

Congrats on a nice Q1. I was wondering if you could we could drill down a little bit on used specifically the you know, value used. Know, just starting off with, you know, GPU at seventeen sixty nine, which is below your guidance Was there some bit of just, you know, purging inventory? I know there's a lot of things you wanted to get right. If you could just talk about any of that, especially as we get into the tariff world. You know, my perception is that your heritage of doing the value autos will will actually maybe benefit a little bit. So any color there?

Yeah. I I I don't think there's any there's any sub story to the 1769. I will say this. It takes us typically about six months to gain initial track on teaching our new new partners or new stores to sell and keep off brand cars, as well as keep the older cars or these value auto cars. So Adam and the teams and our presidential teams and vice teams and field teams have done a darn nice job. Understanding that we don't wholesale cars. Okay? We keep everything. To bring consumers into the ecosystem to lower price points or possibly as a cash buyer because as we know, value auto cars don't have a lot of financing. It's about 50% cash buyers. About 50% finance. Which has a certified car, it's about 90% finance and about 10% cash. Okay? So it's not that you're looking for buyers that aren't able to get financed or has poor credit. These are cash buyers that are very thrifty. With very high demand cars that move quite quickly through the system. And our stores are getting it. Okay? And I I I'd send the challenge out to everyone that if you're not at 40%, okay, or better in terms of value auto sales, it's the one bucket that does not have an impact from lower SARs. Okay? Lower SAR from previous years. Okay. And core is now just starting to trickle in the twenty one and twenty model years. Which is having a little bit of inventory impacts. On our on our three to three to nine year old vehicle. So important to remember that is important of who Lithia is. All affordability levels, and most importantly, these value and core products are where we really shine. Okay? And, Jeff, I I think you know this. The GPUs are somewhat similar. Okay? Important to remember But the really important thing to remember is our average ASP on a on a value auto car is about 14 and a half. Thousand dollars. Okay, versus a certified that's pushing 30. Okay? So you've got that. And on top of this, the value auto car turns it two to four times faster than a certified car. So when you're looking at utilization of capital, you're talking about a eight times better return. In an annual basis. So really important part of the model and I think most people are starting to figure figure that out. And it's we're fortunate that we're so far up funnel that we're able to continue to get those great cars. And deciding now not to wholesale them.

And just a quick follow-up on your comment about it taking six months to get initial traction. I'm just curious, is that the stores you've acquired, say, over the last four or five years that really haven't just gotten up to speed on the, you know, the Lithia heritage or were there some of your traditional were some of the Lithia Great clarification. So if you recall in our previous calls, we bought so much bulk and the list of GPUs made everyone think that we were doing wonderful So it's really hard to convince people that they should do more. So I really believe that it was about three to five quarters ago where people started to listen and go, wow. There's opportunities here. And it is mostly new cars and new businesses that are finally gaining the traction that we're we're we're really excited that we moved from a what, a minus 5% used car same store sales last quarter to basically flat. Okay? And those days of, you know, of mid to high single digits are in our future. And I mean, we're really looking at a 5% more longer term number or better in terms of used cars sales, especially when you've got green cars and driveways that are bringing in 97% new customers, and it's truly limitless in who we can touch and find.

Awesome. Congrats again, and look look forward to talk to you. In the next quarter. Thanks, Jeff.

Our next question comes from Douglas Dutton with Evercore. Please proceed with your question.

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?

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 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.

Awesome. Thank you. And then just a quick follow-up here on your thoughts around incentives and the discipline there. You know, has there maybe been an opportunity to take some of those dollars off the hood? On your sales to move where you were previously had them in there to move the metal. Just given the fact that that there was this sort of sudden surge of demand. Can you speak to that a little bit?

Sure. Sure, Doug. We did we did see a little bit of a increase in in, March in terms of GPU. But that is also pretty typical because we have quarter end money. It was a couple hundred bucks higher than what we would have expected. In terms of incentives, as a dealer, we just sell for net price and sell for payment. So it's not big impacts to us. I would say this, that incentives are still quite low. So the manufacturers have a lot of ability to absorb some of the those cost increases if they choose to. And we are seeing strengthening of that, especially when it comes to leasing. I think we're pushing almost 20% leasing again, which you know, on a pre COVID number, we were we were in the low 20 percentile. So nice nice gains. I think it was 17 and a half or something, but it was up a couple percentage points from last year, which is good indications of strength of of incentives, come in a form of lease and values or lease multiple factors, which is the equivalent interest rate on leases.

Thanks, team.

Thanks, Ted.

Our next question comes from Ron Dziedzko with Guggenheim. Please proceed with your question.

Yeah. Good morning, and thanks for taking my questions.

Hi, Ron. Hi, Brian.

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?

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.

Yeah. No. That that that's super helpful color. And maybe just following up on on one of those kind of ecosystem items. Pretty big step up in DFC originations this quarter. Anything that specifically changed because obviously your sales volumes weren't sequentially stronger than the fourth quarter, which was always seasonally strong. So just trying to get a sense of what drove the pre material step up in originations.

Now, Ron, this is Brian again, and I probably should just let Chuck handle this. But I listen really good to Chuck and Dina. Okay? And they've taught me well enough to know this. Our NIMs are increasing so nicely. That it allows us the flexibility to scale our penetration rates without sacrificing credit quality. Okay? In simple terms, we were at 13.7% for the quarter. We even had a a 14 pluser in there, which was great to see. April's looking pretty good as well. So it's really having that middle of the 400 to 600 basis points of NIM have the flexibility to scale when the credit opportunities are there. With an ultimate end of, end of year target exit rate of around 15% and an ultimate target of 20%.

Okay. No. That that's super helpful. Thanks for taking my questions.

Our next question comes from Daniela Haizen with Morgan Stanley. Please proceed with your question.

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.

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 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? So there is a mindset in our shops that build their production plans and their production plan calls for twelve hundred hours and they got an extra hundred hours that's coming from warranty. And they take it out of customer pay. 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 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.

Thanks, Brian.

Thanks, Daniela.

Our next question is from Bret Jordan with Jefferies. Please proceed with your question.

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?

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.

Right. Wouldn't just the price of the part get you to a low to mid single digit growth if they say, chassis parts are in the auto part bucket? So that's 25 points of tariff. Wouldn't wouldn't just the price of the tariff alone get you growth? Was this, I guess, is the question. What what excess growth do we get out of Possibly.

Possibly. But, again, I mean, we're assuming that the content of the car, that's 50% of it is domestically made, so that's not gonna be impacted by tariffs. But, yeah, there could be two or 3%. Maybe we'll look little deeper into that. I think being downstream, we just try to respond to the environment and be proactive with our with our specific manufacturers or region.

Okay. And then I guess on regions, you'd you'd called out the South Central and Southeastern region being more profitable for a while now. Could you give us a feeling sort of what's a regional EBIT of the high profit region versus maybe a low profit region? What's the what's the spread?

Sure. And and I think it's interesting that when when we look at the regional performance today, we're we're encouraged that the gross profit in the Northwest and Southwest, which were the two weakest regions, over the last two years, are now the two strongest regions. Okay? So, you know, we're we're quite fortunate when we look at that. On a same store basis, though, despite despite that, the the Southeast and the South center are both quite strong. But it's not showing through in gross profit. So I don't know if that that that reads through to the marketplace. When we think about profitability, true net profitability, again, the Southeast and South Central are running at approximately double the net profit per per rep to revenue of what our Southwest and South and and Northwest regions are. Okay? And that is not a lithium anomaly. That is a fact of life. Okay? And it's primarily because of the regulatory environment and the fact that in the red states, you're able to have doc fees that are excessive that have no cost really attached to them. Other than the general manager. Okay, which is an automatic 500 to a thousand dollars additional profit that drops to the bottom line. Okay, creating that delta. Okay. Right?

Thank you. Yep. Great.

Our next question is from Colin Langan with Wells Fargo. Please proceed with your question.

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 sorry, 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?

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.

And and that would be based on, like, a SAR for the market would be in the $14.15 range if if tariffs stay all year, and you would just do significantly outperform that market? Is that what you're getting at?

I I don't believe that we'll see I don't believe it'll be in the 14 to 15 range. I believe it'll be in the 16 to 17 range. Somewhere in that range or high fifteens. You know, that's that's probably the low end of the marketplace. I mean, we just saw an 18 So you're gonna end up with a year if you get a couple months of $1,718,000,000 SARs even if you had a 14 or 15 in there, you're gonna end up in a 16 to 16 and a half million range.

Okay. Then if I look in the the sales performance in the quarter, I think same stores was 3.6 on new. I believe US sales were around five, and I think retail was even a little better than that. Is that geographic mix that's driving the the slight underperformance versus the market?

It is. It is. As I mentioned, the the South the the Southwest and Northwest were were on the lower end of the revenue. Same store sales growth. But it was also the strongest gross profit area. So you know, and that's affecting that's being affected by the fact that it's lower same store revenue. Okay? I mean, we were up let's see here. I'll give you some color. I'll blend these. Northwest, Southwest was around 8% in revenue growth. Okay? It was on a same store basis. It was at 3% gross profit growth. Okay? In comparison, in contrast, the Southeast Cell Centrals was about a 14 to 15%, revenue top line growth. Whereas let me look at this. Southeast, one two four twenty. The on a gross profit, it was down 10% in same store gross profit in the Southeast, South Central. Okay? So some different dynamics happening. I know if it's because we have a higher propensity of one brand, but it's a good sign that things are starting to balance out in the in the country and that our Western exposure that was a little weaker is now starting to strengthen.

Got it. Alright. Thanks for taking my questions.

You bet. Thanks, Colin.

Have reached the end of the question and answer session. I'd now like to turn the call back over to Bryan DeBoer. For closing comments.

Thanks, Rob, and thank you, everyone, for joining us today. Hey. We look forward to seeing, you all on the Lithium Driveway second quarter call in July. Have a great spring. Bye bye all.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.