Lithia Motors' Q1 2025 Earnings Call: Full Transcript Revealed

Lithia Motors, Inc. (NYSE: LAD Q1 2025 Earnings Call Transcript - April 23, 2025

Lithia Motors, Inc. falls short of earning predictions. The reported earnings per share (EPS) came in at $7.66, compared to an expected figure of $7.77.

Operator: Hello and welcome to the Lithia Motors First Quarter 2025 Earnings Conference Call. Currently, all attendees are in listen-only mode. Following the official presentation, we'll have a Q&A session. Should you need operator support at any point during the meeting, please know that this call is being recorded for archival purposes. Now, let me introduce our host for today’s event: Jardon Jaramillo. Over to you, Jardon. Go ahead with your introduction.

Jardon Jaramillo: Good morning everyone. I appreciate your attendance at our first-quarter earnings conference call. Joining me today are Bryan DeBoer, who serves as both President and CEO; Adam Chamberlain, COO; Tina Miller, SVP and CFO; and lastly, Chuck Lietz, the senior vice president overseeing Driveway Finance operations. During this session, we might touch upon potential future occurrences, project financial outcomes, and share insights regarding product developments, market positions, and expansion plans within the company. Please bear in mind that such forecasts come with inherent risks and uncertainties which can lead to significant discrepancies between anticipated and real-world results. For more details on identified risk factors, please refer to our reports submitted to the Securities and Exchange Commission. Kindly approach these forward-looking remarks thoughtfully without placing excessive faith solely on them.

We do not assume any obligation to update these forward-looking statements, which were prepared as of the date of this announcement. The discussion today includes certain non-GAAP financial metrics. For details on reconciling these with their corresponding GAAP measures, please consult the full text of today’s press release. Additionally, we've uploaded an enhanced investor presentation on our site at investors.lithiadriveway.com, featuring highlights from our first-quarter performance. Now, let me introduce Bryan DeBoer, who serves as both President and Chief Executive Officer.

Bryan DeBoer: We delivered robust performance and continued to move toward the full potential of our integrated ecosystem, driven by the talent within our team. In the initial three months, we achieved diluted earnings per share at $7.94, marking a rise of 34.8%, alongside adjusted diluted earnings reaching $7.66—a growth of 25.4% compared with last year—indicating well-disciplined implementation along with expanding contributions from higher-profit areas. It’s worth noting that this marks our first time seeing an annualized upturn in adjusted earnings for a single quarter since Q4 2022. Importantly, every month during this period showed yearly improvement, showing these enhancements weren’t solely due to tariff changes. Although realizing all aspects of our strategic objectives remains forward-looking, these outcomes highlight how effectively our approach serves clients through both online and offline platforms, fostering a business model that is increasingly lucrative, varied, and capable of scaling efficiently.

Currently, adjacencies are significantly boosting our profits and enhancing user engagement and sales volumes, highlighting the clear competitive edge of both our design and strategic approach. In 2025, our priority will be to maintain this executional excellence, reinforcing our dedication to fostering customer loyalty, unlocking new potentials, and driving expansion for LPG. We firmly believe in our distinctive capability to achieve consistent performance improvements, gain greater market shares, and expedite the financial success within our operational environment via the collective strength of our workforce and recurring positive cash flow. Leveraging these core competencies allows us to sustain our upward trajectory as the global leader in automotive retailing, propelling ourselves towards attaining an earning per share ratio of $2 for every $1 billion increase in revenue.

During the initial quarter, Lithia Driveway saw revenues surge to an all-time high of $9.2 billion, marking a 7% rise compared to the same period last year. This progress stems from our ongoing efforts to boost market presence and enhance operational efficiency. Our workforce’s dedication towards achieving these goals can be seen through both consistent sales figures at established locations and gradual enhancements in profit margins over successive periods. Following this strong beginning to the fiscal year, we remain optimistic about expanding our customer base even more, increasing financial returns within related sectors, and enhancing overall output as we progressively tap into every aspect of our business network. Such outcomes highlight the prowess of our branch managers who have demonstrated exceptional capability in driving success by deeply comprehending consumer needs alongside adapting swiftly to variations in supplier availability and cost structures specific to each region they operate in.

We remain vigilant in tracking possible effects of tariffs and larger trends in how consumers feel about spending. We're pleased by how our Original Equipment Manufacturer (OEM) partners are adapting to changing tariff conditions, prioritizing affordable options for their customers as they aim to steady prices. Our wide-ranging multi-channel system covers sales through physical stores, online platforms, and vehicle fleets throughout North America and the UK. Whether people want brand-new cars or older models worth two decades, we can cater to all levels of budgetary needs thanks to our varied inventory alignment with current market demands. In addition to unit sales at retail locations, our post-sale services account for around 40% of total profits and stand ready to thrive under tariff-induced economic adjustments. Furthermore, both our financial service provisions and fleet administration activities are structured to ensure stable income gains even when faced with unpredictable swings in direct car sales.

The adaptability and robustness at the heart of our approach are central to maintaining long-term financial resilience, driving us toward superior industry-wide profit margins. Our connected business areas keep contributing significantly within this unified framework. In the initial quarter, finance activities sustained impressive gains due to enhanced net margins alongside persistent reductions in expenses. Additionally, advancements were achieved in fine-tuning our online sales tactics through initiatives led by Driveway and Green Cars, which have been instrumental in attracting fresh clientele and boosting participation levels. Initial feedback from investments in Wills has remained encouraging, and we’re steadily amplifying the benefits generated via collaborative efforts among various sectors underpinning both wholesale and consumer markets.

Looking forward, we remain focused solely on our objectives. Our aim is to enhance profit throughout the customer journey by fostering loyalty, realizing full potential, and driving expansion through effective execution of our core competencies. Shifting focus now to our distinctive and hard-to-copy approach—our LAD omnichannel strategy remains anchored in an extensive store footprint coupled with top-tier team performance. In 2025, this strategic momentum will extend across North America and the UK during Q1; bolstered by robust complementary offerings, we not only boosted profits but also inaugurated additional outlets while integrating essential supplementary services seamlessly into daily processes. Operating within one of the most substantial yet fragmented sectors presents both challenges and opportunities for us.

Being the top contender for acquisitions along with being a savvy operator forms the backbone of our strategy, positioning us for profitable growth. We have designed our approach to adjust seamlessly, addressing all client requirements throughout their vehicle ownership journey transparently, conveniently, reliably, and supportively. Expanding via multiple channels enhances both our accessibility and how deeply we connect with consumers; tools such as the My Driveway platform put greater authority, clarity, and ease directly under consumer control. Websites including Driveway and GreenCars continue to serve as crucial gateways within our network, attracting fresh clients and ensuring long-term loyalty. This combination, paired with prudent financial stewardship and steady creation of free cash flow, keeps us flexible and future-oriented.

In 2025, as we progress within our evolving ecosystem, we aim to enhance operational efficiency across various channels and regions, thereby increasing customer loyalty, broadening our market presence, and achieving our enduring objective of steady profit expansion. Mergers and acquisitions continue to be central strengths for us, with an ongoing commitment to methodically seek out beneficial deals capable of strengthening our infrastructure, particularly within The United States. We aspire to secure a minimal post-tax yield of 15%, acquiring assets at between 15-30% of their revenue figures or valuing them from three to six times their adjusted EBITDA. Our historical successes show a commendable 95% achievement level surpassing targeted yields, underscoring the effectiveness of LAD’s growth plan based on meticulous implementation via carefully chosen mergers and acquisitions. Leveraging our escalating financial resources allows us to strategically allocate surplus cash flow towards ventures offering superior returns while staying adaptive to fluctuating economic climates.

We have implemented a revised strategy for allocating capital, ensuring an equal distribution between share buybacks and balancing measures. This decision reflects the appealing valuation of our stock. Currently, we maintain strict control over expenditures due to elevated acquisition costs returning to more typical levels. Nonetheless, we continually assess promising investment prospects. Our stock’s favorable value aids us in adopting a measured stance towards deploying resources effectively. During the initial quarter, we successfully bought back approximately $146 million worth of shares—close to 2% of those available—at advantageous prices. Going forward, we persistently review potential acquisitions alongside share repurchase options with the aim of sustaining adaptability across both areas. Over the next few years, we set our sights on achieving yearly gains through acquisitions ranging from $2 to $4 billion annually.

These components collectively outline a distinct route toward achieving our long-term objective of attaining $2 in earnings per share (EPS) for each $1 billion in revenue under normal conditions, as detailed in Slide 14 from our investor presentation. We now completely oversee the factors contributing to this stable state performance and they encompass several key areas. Firstly, enhance our operational efficiency by tapping into the significant untapped potential present in our current store locations. Secondly, refine our distribution network through strategic acquisitions and boosting productivity at bigger automobile retailers located primarily in the more profitable zones across the southeastern and south central parts of the U.S., alongside strengthening our online presence which should help us capture 5% of the American market; currently, we hold just slightly above a 1% share.

Third, funding for up to 20% of units via the Development Finance Corporation (DFC). Fourth, by increasing our scale, we are reducing supplier prices using initiatives such as Pinewood, optimizing corporate efficiency, and decreasing loan expenses as we move toward attaining an investment-grade credit rating. By integrating these strategies alongside expanded market presence, we foresee a route to achieve selling, general, and administrative (SG&A) expenses at around half of gross profits. Fifth, advancing contribution levels and expanding synergies from our multi-channel platforms, which include fleet administration, digital management systems (DMS), charging facilities, and proprietary insurance services. Lastly, providing continuous shareholder value through enhanced stock repurchases and dividend payouts. Our distinctive position allows us to expand our mobility network and offer customers more significant engagement throughout their vehicle ownership experience.

With the foundational elements of our strategy in place, our focus is centered on operational execution. Confident in our ability to elevate performance, and continue setting the standard for the industry. Before I walk through our key financial highlights, I want to take a moment to recognize Adam Chamberlain, who will be transitioning from his role as our Chief Operating Officer to become CEO of Mercedes Benz USA. Adam has made a lasting impact on our organization.

Bryan DeBoer: Boosting our operation speeds highlights the robustness of our collaboration with Mercedes-Benz. It’s gratifying to witness his transition into this crucial position; we’re enthusiastic about continuing close cooperation with our leadership team and maintaining top-tier performance as we advance our mission-driven expansion propelled by talented individuals. Thanks, Adam. His departure will leave quite an absence behind. Now onto our operating outcomes and how we're enhancing efficiency across stores and departments. This quarter saw significant progress for us. Year-on-year growth was achieved in both new vehicle sales and after-sales services, along with ongoing positive trends in used car segments—especially within the value automobile sector. These enhancements were underpinned by sustained excellence in selling, general, and administrative functions following through from our recent 60-day strategy initiative.

As we progress through the year, our focus remains on delivering customer flexibility to expand our market share and adhering to strict expense management practices. The Operational Excellence Initiative led by our Lithia Partners Group (LPG) continues to guide us. For 2025, I am pleased to extend this acknowledgment to also encompass our dealership department heads. Once again, congratulationsto all 2024 awardees. Regarding our comparable stores' revenue performance: overall income rose by 2.5%, with gross profits increasing by 1.8%. This growth can be attributed mainly to consistent improvements across every sector within our operations; however, these gains were somewhat mitigated by GPU shortages. Year-over-year, total units sold climbed by 1.5%; yet, each-unit gross profit dropped from $44 to $43 compared to the corresponding timeframe previously.

Vehicle unit sales rose by 3.6% compared to the previous year, driven largely by robust performance among imported brands. Sequentially, our front-end GPU numbers remained steady at 3,046. The sale of used vehicles dipped marginally by 0.4% annually but showed significant quarterly improvement when measured against the preceding period. Notably, value automobile sales surged dramatically with an increase of 38.8% relative to the prior year. There was a decline of 9.3 cores in core components availability; however, efforts remain focused on improving this aspect. Certified pre-owned cars saw a slight uptick of 0.7%, whereas front-end GPUs associated with these models held firm year-over-year at 1,877 instances. Looking forward, we anticipate sustained favorable market dynamics across upcoming quarters as well. Additionally, financing and insurance services experienced pronounced expansion during Q1. This resulted in a yearly rise of 3.4% in like-store gross profits alongside a per-unit gain reaching $1,881.

This serves as a reminder that during the initial quarter, Penn Dragon faced relatively lower figures influenced by factors affecting their sequentially comparable same-store sales outcomes. Nonetheless, despite these challenges, they experienced a rise of $35 compared to last year’s numbers, highlighting potential growth within this highly active sector. Additionally, post-sales performance stood at 4%, contributing to an uptick in after-sales gross profitability by 7.5%. When adjusted for differences in selling days, post-sale revenues were observed to have increased more than 4%. The warranty segment delivered yet another robust period, witnessing a surge in gross margins by 19.7% from the previous year. Our group remains committed to fostering enduring client loyalty via customized interactions and adeptly handling sustained demands for such lucrative projects. In terms of stock management, notable advancements were made toward achieving target inventory benchmarks under our sixty-day strategy throughout the opening quarter.

The new vehicle Days Sales Outstanding (DSO) has dropped from fifty-nine days in Q4 to forty-three days by the close of this quarter, whereas for used vehicles, DSO fell from fifty-three days to forty-five days. The absolute inventory balance declined by $163 million, and we're optimistic about the reductions in our floor plan expenses, which have fallen by 6% compared to last year. A robust beginning to the fiscal year underscores the strength of our ecosystem along with the dedication of our team members. Moving forward with our strategic execution, we anticipate significant opportunities for unprecedented expansion and lasting value creation. Now, let me hand over to Tina, who will provide further details regarding our financial outcomes.

Tina Miller: Thanks, Brian. Across our various operations, we’re establishing a solid base for enhancing our overall value—especially through robust sales, general, and administrative (SG&A) execution, more lucrative financing activities, prudent capital deployment, and an ongoing emphasis on bolstering our balance sheet health. We’ve started the year with encouraging SG&A outcomes, reinforcing the advancements pledged and achieved under the sixty-day strategy implemented later last year. For this period, our adjusted SG&A stood at 68.2% of gross profits, marking a drop of 120 basis points compared to the previous year’s figures; similarly, when viewed on a same-store level, it declined by 150 basis points to reach 67%. Despite these positive strides, we continue to prioritize stringent control over costs each day.

Throughout the year, we anticipate further improvements in efficiency across various parts of our organization, particularly in North America and the UK. This quarter highlighted how focusing on personnel can significantly boost overall performance. It’s evident from our robust operational achievements at the beginning of 2025 that we’re making substantial headway in critical sectors within our company. Looking forward, strengthening client allegiance remains paramount along with maximizing the capabilities of individual stores and departments as part of an overarching expansion strategy throughout our network. Our finance operation unit spearheaded by DS has once again demonstrated success for the current term, reporting earnings totaling $12,500,000—a stark contrast to the deficit of $1,700,000 noted during the corresponding timeframe previously.

This performance showcases the ongoing development of our investment mix, enhanced capital effectiveness, and better outcomes from asset-backed securities. After achieving a full year of profit in 2024, we anticipate steady earnings progress in 2025 as we manage returns, expansion, and potential risks. During this period, DSC generated $623 million in loan origination, marking a 24% rise compared to the previous term and pushing the overall portfolio value above $4 billion. Our portfolio maintained high standards due to stringent approval processes and an emphasis on top-tier credits; projected new FICO scores for 2025 suggest they will average around 730. Additionally, the net interest margin has broadened further, rising by 17 basis points annually and seven basis points quarterly. This enhancement not only boosts profitability but also provides flexibility to expand operations as we advance towards hitting our target market share of 20%.

These findings highlight the robustness of our finance platform and its expanding role in enhancing our long-term earning capabilities. Collectively, our financing activities have shown remarkable growth and stand as an essential component of achieving our objective to attain $2 in EPS for every billion dollars of revenue generated. Each loan issued by DFC generates approximately triple the return compared to conventional indirect loans. This gives us confidence in the sustained profit expansion within this sector, anticipating higher profitability with greater market entry and improved historical success rates. Shifting focus now towards our liquidity position and financial standing; during the initial quarter, we recorded an adjusted EBITDA totaling $402,100,000—a significant rise of 17.1% from the previous year—owing primarily to heightened profits alongside reduced floor plan costs.

In this quarter, we produced free cash flows totaling $276 million. We adhere to a capital deployment strategy aimed at efficiently allocating business-generated cash flow, maintaining the strength of our balance sheet, fostering growth efforts, and enabling strategic responses amid unpredictable conditions. During this period, we concluded several acquisition deals and utilized stock buybacks as part of an opportunistic stance towards shifting markets. Earlier in the year, we bought back approximately 1.7% of our outstanding shares for a total cost averaging around $329.687 million; currently, about $875.313 million can still be used according to our authorized share repurchase program. Moving forward, we plan to stay flexible in redirecting funds toward areas offering maximum return rates. Anticipate setting aside between 30-40% of future free cash flows for further share purchases while keeping up a careful evaluation process regarding mergers and acquisitions opportunities.

Moreover, capital spending has become more controlled and is mainly being used for improving the network and fulfilling original equipment manufacturer (OEM) factory specifications. By the end of the period, our net leverage stood at 2.5 times, aligning perfectly with our targeted range between two to three times over the longer term, significantly under our banking covenants set at 5.75 times. It’s important to consider these figures after adjusting them based on floor plan debt secured through car stock—a distinctive aspect within our sector—integral to how we operate daily. Within this field, the connected interest costs are classified as operational expenses rather than finance charges; hence, they do not factor into computations regarding balance-sheet leverage. Likewise, when determining leverage ratios, we also leave out money borrowed via asset-backed securities (ABS) facilities designed to fund dealership financing corporation (DFC). Despite strategically allocating resources throughout the quarter where opportunities arose, we upheld our commitment to disciplined fiscal management aimed at backing anticipated expansion plans.

Our approach continues to emphasize steady and significant development alongside premier returns for shareholders via the ongoing enhancement of our multi-channel framework. Equipped with an adept workforce, advanced resources, and a sturdy economic base, we’re set to expand profitability within our primary business areas as well as related sectors. Looking forward, our varied and competent staff shares a dedication to outstanding client interactions and is ready to drive the subsequent stage of growth starting in 2025 and extending into the future. That wraps up our planned comments. Now, I’ll hand things over to the operator for question time. Over to you, Operator.

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