Lithia Motors, Inc. (NYSE:LAD) Q4 2023 Earnings Call Transcript

Lithia Motors, Inc. (NYSE:LAD) Q4 2023 Earnings Call Transcript February 14, 2024

Lithia Motors, Inc. beats earnings expectations. Reported EPS is $8.24, expectations were $8.11. Lithia Motors, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Lithia Motors Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Amit Marwaha, Director, Investor Relations. Thank you, Amit. You may begin.

Amit Marwaha: Thank you for joining us for our fourth quarter and full year 2023 earnings call. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; Chuck Lietz, Senior Vice President of Driveway Finance; and finally, Adam Chamberlain, Chief Customer Officer. 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 the reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website investors.lithiadriveway.com, highlighting our fourth quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Bryan DeBoer: Thank you, Amit. Good morning, and welcome to our fourth quarter and full year earnings call. In Q4, Lithia & Driveway grew revenues to $7.7 billion, up 11% from Q4 of last year and generated adjusted diluted earnings per share of $8.24. 2023 was a record year for us as we reached just over $31 billion in total full year revenues. Results in the quarter were driven by continued strength in new vehicle sales with same-store units up 10% and aftersales revenues up 3%. This was offset by lower new vehicle GPUs continuing to normalize, declining approximately $150 sequentially per month, in line with our expectations for new vehicles. Our manufacturer partners continue to replenish inventory at a steady pace. With manufacturer incentives, both lower subsidized rates and cash rebates continued to support consumer demand across a variety of brands and models.

Used GPUs came in near decade lows while F&I GPUs were essentially unchanged. With our unprecedented acquisition growth and the expansion into adjacencies with Driveway, GreenCars, Driveway Finance Corp, Pendragon Vehicle Management and a strategic partnership with Pinewood Technologies, our key strategic design elements are all now in place. This positions us perfectly for 2024 and beyond to focus our attentions on what we do best, execution. Our team remains acutely focused on delivering revenue growth and profitability across all business opportunities. The LAD strategy is built on our vast store network made up of the industry’s most talented people, highest demand inventory and a dense expansive physical network. This foundation is driven by our culture that challenges our teams to operate with autonomy and respond nimbly to local market dynamics to achieve industry-leading performance.

Expanding our store network and leveraging our many strategic adjacencies increases the touch points throughout the customer’s life cycle while also equipping our stores with the tools necessary to improve productivity, loyalty and ultimate profitability. The LAD ecosystem is designed to expand our total addressable market and market share through omnichannel solutions and adjacencies that are there for customers wherever, whenever and however they desire. This will drive us from approximately 1.9% market share today towards our previously stated target of 5% and more importantly, a ratio of EPS to $1 billion of revenue of 2:1. Moving on to our financing operations. Driveway Finance Corporation, or DFC, posted another strong quarter with a smaller-than-expected loss of $2.1 million while receivables grew to $3.2 billion.

The DFC team has demonstrated success navigating through the fluid interest rate environment while maturing its capital structure and liquidity position. We are excited to see this adjacency continue to mature as it looks to achieve breakeven later this year while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on operational results of both vehicle and financing later in the call. At the heart of our strategy is expanding customer solutions that are simple, convenient and transparent. Our network is being designed to be within 100 miles of consumers to provide an easy and convenient delivery solutions for our customers. Over time, the leveraging of this network with our omnichannel solutions will generate more attractive and diverse impressions, more memorable experiences, better returns on capital and a unique ecosystem that provides differentiated and deep value for our customers.

We exercised patience and discipline during the fourth quarter, bringing us to $3.8 billion in annualized revenues acquired in 2023. 2024 has also started off strong with our successful completion of the Pendragon transaction at the beginning of this month. This transaction forms a strategic partnership with Pinewood Technologies, adds a highly profitable fleet management business, both new adjacencies, and the U.K. motors business with 160 stores across the United Kingdom and over $4 billion in total revenue. This is an exciting new chapter of diversification and growth as we round out our presence in the United Kingdom. I’d like to personally welcome all our new Pendragon associates and Pinewood Partners to the Lithia family. Acquisitions are a core competency of LAD, and we remain disciplined and opportunistic as we look for accretive opportunities that can improve our business.

As a reminder, we target a minimum after-tax return of 15% or greater and acquire for 15% to 30% of revenue or 3x to 7x normalized EBITDA. Life-to-date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%. As GPUs normalize and liquidity tightens, we expect valuations to become more realistic as well. Our robust acquisition strategy has opened up new markets in mobility verticals, creating considerably more opportunities for us in the future. However, for the foreseeable future, we are fine-tuning our targets to focus 90% of our M&A dollars to automotive in the United States. In addition, now that we have realized the skills necessary to find, fund and operate new adjacencies, we will evaluate share repurchases with parity to acquisitions.

Past practices prioritized acquisitions as more beneficial strategically than buybacks, but at our current size and scale, we are now returning to a balanced deployment of free cash flows to drive the strongest possible returns. We continue to monitor valuations of both, being patient for strong assets priced within our acquisition hurdle rates. We expect pricing to take some time to normalize and now estimate annual acquired revenues, excluding the Pendragon acquisition, in the range of $2 billion to $4 billion a year. Our near-term target of $50 billion in revenue remains within our sights, and our team is confident in our ability to achieve this while doing so in the most prudent fashion possible. Our team is experienced in executing and integrating acquisitions, and we remain committed to achieving strong returns as we build out our network.

Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and have now acquired over $22 billion in revenue. In addition, the strategic partnership with Pinewood Technologies allows us to leverage technology to stitch together our strategic adjacencies, modernize the customer experience and someday realize considerable cost savings in our technology stack. We are excited to begin the journey with the implementation of the Pinewood Dealer Management System, or DMS, in our U.K. operations this year. Beyond the U.K. and next year, we are excited to be part of the North American partnership with Pinewood Technologies, continuing to grow our own Driveway customer experiences and creating simple, transparent and aligned customer and associate experiences.

Shifting to our omnichannel platform. Our MUVs across our digital channels were up 16%, reaching 13 million per month. Digital transactions, including Driveway, grew to nearly 38,000 in the fourth quarter, up 27% compared to last year. GreenCars, the leading sustainability vehicle education channel, continues to grow as a lead generation channel and contributed over 1 million MUVs, up 102% over last year. Sustainable vehicle sales now account for 16% of our new vehicles in Q4, up from 11% in the same period last year. With our customers at the center of our design, join me in welcoming Adam Chamberlain to the call and congratulating him on his expanding role as our Chief Customer Officer. His decades of experience and proven track record driving results will lead our continued transformation of the customer experience, combining our foundational elements to create deeper customer loyalty and increasing market share and profitability.

Now that all the foundation elements of our plan are in position, attentions turn to improving margins and lowering our SG&A through a combination of growth, efficiency, diversification and scale. These elements are now well underway. And when combined with our newest adjacencies of fleet management and a strategic technology partnership, we are well positioned for both further growth and realizing the profit potential of a more holistic life cycle relationship with our customers. Weaving these elements together and assuming a normalized SAAR and GPU environment, we now can clearly see a pathway to $1 billion in revenue, ultimately generating $2 in EPS. Key factors underlying our future steady state and now totally within our control are as follows: first, continuing to improve our network by realizing the considerable revenue and profit potential within our existing stores by increasing our share of wallet through greater customer life cycle interactions, leveraging our cost structures, personnel productivity gains and growing each store’s new, used, and aftersales market share.

The result is to achieve an SG&A as a percentage of gross profit in store operations that’s below 55% in a normalized GPU environment. Second, continue focusing on acquiring larger automotive stores in the higher profitability regions of the South Central, Southeast and Midwestern United States. Combined with further growth in our digital channels, we expect to reach a blended U.S. market share of 5%. Third, financing of up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves. As a reminder, our first adjacency DFC remains on track to achieve profitability during the latter half of this year. Next, maturing contributions from our horizontals, including fleet management, DMS software, charging infrastructure and captive insurance.

Fifth, through size and scale, we continue to drive down vendor pricing, improve corporate efficiencies to save costs and lower borrowing costs as we path towards an investment-grade rating. Combining both store operational improvements with higher-margin adjacencies and the other design advantages discussed, ultimate SG&A as a percentage of gross profit will fall below 50%. And finally, ongoing return on capital to shareholders through dividends and opportunistic share buybacks. Please refer to the LAD investor presentation for further details and reconciliations. As we approach the middle of the decade, we are well positioned to maximize our unique and unreplicable mobility ecosystem that is ready to deliver more frequent and richer customer experiences throughout the ownership life cycle at global scale.

Our strategy, combined with our experienced and focused team will continue to expand market share, leverage our size and scale and grow our complementary adjacencies to produce an ultimate long-term profit to revenue ratio of $2 of EPS. All elements of our original design are now securely in place, and we look forward to focusing all of our attentions on execution to establish new levels of performance for our industry. With that, I’d like to turn the call over to Chris.

Chris Holzshu: Thank you, Bryan. I’d like to begin by congratulating our 2023 class of Lithia & Driveway Partners Group winners, better known internally as LPG. These leaders and their teams achieved the highest performance levels among their peers in 2023 with outsized market share, exceptional customer service, strategic innovation and best-in-class execution. Our LPG group is the North Star for all of our retail locations to learn from and replicate as we continue to deliver operational excellence and attainment of profitability potential at each location. We now have 160 LPG partners, meaning over 40% of our eligible store leaders have attained this coveted status, and we look forward to all of our teams achieving LPG status in the future.

Executing on our vision to build out a vast automotive ecosystem across three of the largest English-speaking countries in the world is well underway. We remain committed to our mission of Growth Powered by People and a high-performance culture led by entrepreneurial leadership at the local market level, which has been a differentiator in our strategy for over a decade. Empowering our teams to serve their customers and deliver best-in-class services wherever, whenever or however they desire continues to be keys to our success. Moving on to the fourth quarter results. We continue to see resilience in the auto retail consumer as they pivot their buying needs in new and used vehicles in lockstep with OEM incentives, the recovery of new vehicle inventory, credit availability, scarcity of later-model used vehicles and the demand for aftersales as the vehicle car bar continues to age.

On a same-store basis, new vehicle revenues were up 10%. This was driven by unit volumes increasing 10% and nominal changes in ASPs. New vehicle GPUs, including F&I, were $6,215 per unit, down $1,510 or 20% year-over-year as we expected this and discussed throughout 2023. We anticipate the downward trend in GPUs to continue through 2024, eventually resulting in total GPUs including F&I at $4,500, which is near our historic levels. The main driver behind the GPU trend is driven by new vehicle SAAR continuing to normalize, which is expected to end 2024 near 16 million units in the U.S. Same-store volumes are positively highlighted by large improvements in import and domestic brands, which were up 12%, while domestic volumes improved just over 4%.

We’re also constructive on SAAR normalizing in the United Kingdom and Canada eventually getting back to 2019 levels, which leaves 20% and 15% in expected recovery, respectively. New vehicle inventory day supplies rose to 65 days compared to 55 days at the end of Q3, and 47 days at the end of Q4 2022. Moving on to used vehicles. Revenue was down 11% and units were down 6%. ASPs continued to decline, down 5% to $28,000 versus $29,400 in the prior year. Used vehicle pricing continues to moderate in line with the recovering supply of new vehicles. Sales of certified vehicles were up nearly 2%, while our core vehicle segment, which accounts for more than half of our used vehicle sales, was down 10% as the impact of COVID production constraints is working through the supply chain.

As a reminder, around 10 million vehicles were lost in production in 2020 to 2023 due to COVID-impacted factory shutdowns and supply chain issues. Value autos, which are higher-mileage vehicles and generally over nine years old, were down 3%. Our top-of-funnel OEM new car status gives us significantly more access to inventory than used-only dealers, which coupled with Driveway and our omnichannel selling arm, will continue to be a significant advantage for years to come. Used vehicle GPUs, including F&I, were $3,789, down 7% from last year and well below our historic average. Our teams are reacting to a volatile used car marketplace in response to the massive rebound in new car inventory that continues to add new vehicle supply. As the average APR and used vehicle loan is almost 11.7%, the outlook for lower consumer borrowing rates will eventually serve as a tailwind for consumers and relief in their monthly payments.

Used vehicle inventory day supply rose to 64 days compared to 58 days last quarter and 58 days in the prior year. Our aftersales business, which makes up 42% of our gross profit rose by 3% and gross margins were 55%. Customer pay, which accounts for 60% of the aftersales business was up 3%, while warranty sales, which made up 30% of the business rose by 6%. The average age and size of the vehicle car park is at record levels. And with the advancement in technology and product offerings for consumers, we can expect greater complexity and higher cost for repairs. We continue to meet this high-margin demand by finding innovative ways to attract and grow talent while offering state-of-the-art facilities for our technicians to confidently call their professional home.

Finally, adjusted SG&A as a percentage of gross profit, excluding Driveway’s cost, was 62.8% versus 65.1% on a consolidated basis, which was similar to the prior year. Over the past 10 years, we have managed to extract nearly 500 basis points from our total SG&A. As we look to the future and work to find ways to gain additional leverage and benefits from our 460-plus locations across the globe, we are confident on our ability to create a high-performance omnichannel network that is truly best-in-class in operating leverage. As we started, our LPG group has set the bar for our organization of what is expected and, in simple terms, moving our non-LPG to LPG performance levels has a massive impact on profitability. Specifically, moving non-LPG stores up one segment of performance will add 500 to 800 basis points of incremental leverage in the model.

This would equate to approximately $250 million to $400 million in additional profitability or $7 to $10 in EPS on today’s performance and is a key to unlocking the $2 in EPS for every $1 billion in revenue that Bryan has discussed. In summary, our plan is well underway to build an international ecosystem in personal transportation that provides a variety of products and services that meet a broad set of consumers’ mobility needs wherever, whenever and however they desire. Our tenured and experienced team is set up to achieve high-performing results in a lean operating model while continuing to execute our plan that will deliver best-in-class returns to our shareholders. With that, I’d like to turn the call over to Chuck.

Chuck Lietz: Thanks, Chris. The financing operations segment continued to move towards profitability, narrowing our quarterly operating loss to $2.1 million, down from $4.4 million last quarter while our portfolio ended the year at just over $3.2 billion. As we prioritize increasing yields and managing risk through our underwriting, we saw a sequential decline in origination volume to $429 million. Shifting to our operating metrics. The weighted average APR on loans originated increased to 10.3%, up 30 basis points from the prior quarter and 210 basis points from a year ago. As a captive lender sitting at the top of the funnel, we were able to achieve this without impacting credit quality. The weighted average FICO score of 734 on loans originated in the quarter was 2 points higher than the prior quarter while front-end LTV was essentially flat at 95%.

DFC’s penetration rate during the quarter was 9%, primarily due to the negative impact on LAD’s growth in retail units overseas. If we consider only retail units sold in the U.S., the only market DFC currently operates in, our penetration rate increases to 10%. Now that our yield is aligned with the market, we expect penetration will increase in 2024 and beyond as we look to scale. Our future growth has endless possibilities, including launching a new vehicle leasing product as well as exploring supporting LAD’s expansion into other geographies and mobility verticals. In the fourth quarter, net interest margin increased to $33.2 million, driven by increasing portfolio APR and relatively flat funding costs. In Q4, we closed our sixth ABS offering, and we now have 86% of our portfolio funded through ABS term issuance and warehouse facilities, and later today, we are closing a very successful seventh ABS term offering.

Net provision expense increased slightly from the prior quarter to $23.8 million as we saw seasonally higher charge-offs in the fourth quarter. The allowance for loan losses as a percentage of loans receivables stayed flat at 3.2%. 30-day delinquency rates increased 50 basis points from the prior quarter to 4.6%, consistent with seasonal expectations and down 80 basis points year-over-year. This reflects strong performance from our servicing team as well as increasing our overall portfolio credit quality. As we prepare to transition from the start-up period, I am very proud of all DFC has accomplished since we launched this initiative in May of 2020. DFC will quickly start to prove the financial benefits of this adjacency as well as show a clear path to realizing the full scope of DFC’s contribution to Lithia & Driveway.

Beyond stand-alone profitability, we can see how a mature DFC support LAD’s long-term objectives to reimagine the vehicle sales and ownership experience and make meaningful connections with the consumer throughout their entire vehicle ownership life cycle. DFC has been built to be successful in the full range of market conditions regardless of short-term volatility. We remain confident in DFC’s ability to deliver long-term earnings growth to LAD and achieving our end-state financial goals with a fully scaled and seasoned portfolio. With that, I’d like to turn the call over to Tina.

Tina Miller: Thanks, Chuck, and thank you for all those joining us today. In the fourth quarter, we reported adjusted EBITDA of $400 million and nearly $1.8 billion for the full year 2023. Results in the quarter were driven by continued strength in new vehicle sales and aftersales, offset by lower new vehicle GPUs with returning supply and higher floor plan interest expense. Our focus on maturing our adjacencies resulted in improved profitability at Driveway and DFC. Although early, we are well positioned to see positive contributions this year. We ended the quarter with net leverage, excluding floor plan and debt tied to DFC, of approximately 1.8x, relatively flat from the prior quarter. We continue to maintain our financial discipline even with planned growth and target leverage below 3x.

During the quarter, we generated free cash flows of $242 million, an increase of 10% compared to the previous year. We define free cash flows as EBITDA adding back stock-based compensation plus the following items paid in cash, interest, income taxes, CapEx and dividends. We managed to generate another year of strong cash flows and balanced with consistent capital allocation, we can preserve the quality of our balance sheet while supporting our growth initiatives and navigating various cross currents in today’s environment. Our capital allocation strategy of 65% toward acquisitions, 25% toward internal investments, which includes capital expenditures and the balance of 10% toward shareholder return remains relatively unchanged. However, with nearly $22 billion in acquisitions completed since 2020, we are making some tactical shifts to be responsive to the market environment.

As Bryan outlined earlier, we will continue to assess valuation trends and balance our M&A expectations in the near-term but being opportunistic in our share repurchases. In the fourth quarter, we repurchased nearly 143,000 shares for a weighted average price of $241 per share. We have approximately $467 million available under our current authorization. We remain nimble and will look to deploy capital in ways that drive strong returns. Our vision and ability to deliver on synergies through acquisitive growth remains unchanged, and our strategy is flexible with the consistent cash flow generation of our vehicle operations business, coupled with measured investments in adjacencies. The team has the necessary infrastructure and tools to drive revenues and margins toward our long-term target of achieving $2 in EPS per $1 billion in revenue and are focused on execution and divesting the acquisitions we’ve completed over the past few years.

Our culture and business, is designed to grow and deliver consistent strong performance. Coupled with the diverse and talented members of our team, this gives us the necessary foundation, to achieve our plan and to continue driving value for our shareholders. This concludes our prepared remarks. With that, I’ll turn the call over to the audience for questions. Operator?

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Q&A Session

Operator: Thank you [Operator Instructions] Our first question is from John Murphy with Bank of America. Please proceed with your question.

John Murphy: Good morning everybody. Bryan, I just want to ask a first question on Pinewood. We’re hearing a lot of folks transitioning to Tekion. You’re talking about Pinewood. It seems like we’re finally getting this evolution or maybe revolution in DMS across the industry. As you think about the implementation of Pinewood throughout your entire platform, is this more sort of a cost and efficiency focus change? Or is this the kind of system that is going to help you leverage and get into these lifetime revenue streams and adjacencies in addition to this cost-cutting? I’m just trying to understand where this is going.

Bryan DeBoer: Hi John, this is Bryan. Thanks for the question today. I’d start with that Pinewood system is what we would consider the top of the heap in global DMS systems, that its functionality is far and above what we see here in the United States. I think it’s also imperative to point out that Pinewood’s user base is the same size as Tekion today, okay? And that’s before they begin to develop additional uses and move into the largest market in the world, which is North America. So, we look at it as three key elements, okay? First and foremost, we’re just a partner in the parent, so keep that in mind. This is Pinewood’s business. It’s a savvy business that’s ready and primed to grow. So, we look at their ability to grow user base outside of North America as priority number one, and they obviously look at that the same.

Secondarily, we do look at that the idea of it coming into the United States opens up additional user base for them as well. But for us, there’s two big advantages. One is it allows us the ability to glue our multiple adjacencies together the way that we see fit, okay, and as that ecosystem begins to develop, okay? So that’s pretty crucial knowing that the two major players in the United States, are truly more behind the scenes type of functionality, where really, we’re looking for an environment where customers and associates coexist, and work to reduce productivity with our associates, because the consumers typically want to do that stuff themselves. So yes, on trying to glue together the ecosystem. And then lastly, if we assume a 25% inflation in the cost per user that Pinewood currently charges and apply it to our data stack today, we save about 50% on our tech stack, okay, about 50%.

So it is a large cost savings while still adding greater functionality, to the system. And it is priority number one of why the Pendragon acquisition was so meaningful. And so, strategically targeted by us.

John Murphy: And then if I could just sneak in a second question. I know this has given you a little bit of a hard time even though SG&A performance has been good. In the quarter, SG&A was up about a little over $83 million, and gross profit was up just shy of $52 billion. So SG&A growth is outstripping the growth in gross profit, and it was kind of a similar dynamic for the year. As we think about incremental gross over time, how should we think about sort of the flow-through of SG&A to gross incrementally? Because it seems like it’s growing faster than gross is. So I think that’s something we want to slowdown obviously over time.

Chris Holzshu: Yes, John, it’s Chris. I think the biggest impact that we have right now that we’re dealing with is used cars. I mean, used car gross is right now significantly below historic levels. And right now, trying to really procure and get the core product that we need, which is kind of those three to seven-year old vehicles, it’s a firefight. The benefit we have as being a top-of-funnel new car dealer is 70% of our trades are coming in from consumers. But we still have to fill our pipeline in used car operators with vehicles that are outside of our customer channel, which creates pressure on gross, and we compensate our teams selling a lot of vehicle right now that just are lower on gross profit contribution. So, I think when things normalize and you go back to the overall structure that we have.

And we have a slide that kind of represents kind of what our top tier is able to accomplish right now in that SG&A closer to 50%. We’ve got to do the work now with our operations team, and move kind of the lower bucket of stores that aren’t getting that kind of leverage up. And that’s where we really believe, we can continue to maintain, an outlook of getting to 55% SG&A to gross, somewhere near term, midterm, but that’s an execution opportunity for us.

Operator: Thank you. Our next question is from Daniel Imbro with Stephens Inc. Please proceed with your question.

Joe Enderlin: Hi guys. This is Joe Enderlin on for Daniel. Thanks for taking the questions.

Bryan DeBoer: Hi Joe.

Joe Enderlin: Hi. In the slides, it looks like you removed the time frame from your 2025 targets. How should we be thinking about the time frame here now? And what changed in your thinking?

Bryan DeBoer: I would start with it, obviously, we’re less than a year out from the start of ’25. So, we would be inferring specific guidance and it’s not something – it’s not typical practices of our company to provide guidance. But maybe more importantly than that, the goals that we’ve established for ourselves, are to build an ecosystem that is unreplicable, and that foundation is now solidly built, okay? So the idea of trying to achieve $50 billion in revenue isn’t really the target. The target has now moved to be, more about what can that ecosystem produce in terms of customer experiences, and ultimate touch points throughout the life cycle, with the consumer to create $2 of EPS, for every $1 billion of revenue. So the $50 billion is obviously – in our sights.

And unfortunately, with where the market is pricing acquisitions today and where we’re trading, the acquisitions, are more costly than we can buy our own stock back. So, if you heard in the prepared remarks, we’re looking at buybacks versus M&A at parity. And in today’s environment, what we’re seeing is that these one – these single-point stores and even the smaller groups are bringing massive multiples like selling for as much as 10 to 20 times normalized earnings. When the lookback is a three-year lookback, that’s just not something that we’re going to chase, okay? And I think as such, we’re revising what our M&A targets are post Pendragon at $2 billion to $4 billion annually, which will get you into the – probably into the mid-$40 billion in revenue range in ’25.

We can probably get there in ’25, assuming that the marketplace softens up a little bit and looks past the three years of elevated earnings from GPUs.

Joe Enderlin: Got it. That’s super helpful. Thank you. As a follow-up, and you guys have pushed further into the U.K. market with the acquisition of Pendragon. Could you maybe provide some current thoughts on the U.K. market? Peer results have come in softer than our previous expectations. Are you seeing any headwinds there in the used market, or how has that market trended in recent quarters?

Chris Holzshu: Yes, Joe, it’s Chris. Yes I mean, I think typically, kind of the issues that we are contemplating in the U.S., are also impacting the U.K. Used car market has been adjusting pretty rapidly with the new car inventory recovery. And I think fourth quarter was difficult, I think, for used cars just, because you’re chasing a number that’s coming down. But I think there’s also a lot of synergies that the U.K. stores are seeing and what we do in the U.S. And the way that we think about, the different segments of vehicles and going after kind of value auto product, and figuring out how to get synergies across the brand. And I think with the size of the network that we’ve built there, lots of opportunity. And the last thing, is in my prepared remarks, I mentioned that there is a larger recovery than what you’re going to see in the U.S. getting back to a normalized SAAR in the U.K.

Bryan DeBoer: Hi Joe, one incremental piece of information. Chris and I were out there for a week, what, 10, 12 days ago now. And we spent time with Neil, our operational leader, both Pendragon and Jardine, as well as his key generals. It’s surprising that the Pendragon group, especially Evans Halshaw, that Gary, the leader of that, they have a good grasp of the used vehicle market. And I think it’s very clear that our ability to grow within that market is out there. And as a side note, we ended up walking through each and every store within the 160 locations and have a pretty good strategy on how to optimize their network as well, as well as retain and motivate those people to be able to reach higher in the United Kingdom. Lastly, I would say that our growth in the United Kingdom is pretty well accomplished, okay?

So, we’re nicely positioned in the United Kingdom with pretty close to 8% market share, or something with most of it being a luxury, which is quite nice. And obviously, our attentions now turn back to the United States with automotive, and 90% of our mergers and acquisition dollars will be going to that.

Joe Enderlin: Got it. Thank you, guys. That is all for us.

Operator: Our next question is from Rajat Gupta with JPMorgan. Please proceed with your question.

Rajat Gupta: Great. Thanks for taking the question. I just had a couple. Firstly, on the buyback strategy shift. In the event you ended doing more buybacks versus M&A, or similar amounts over the next couple of years, how much should we think you can take leverage to on the balance sheet versus 1.8 times adjusted you are at today? Is that a different benchmark that you will be looking at relative to when you were doing M&A? Just curious on your thoughts there. And I have a follow-up? Thanks.

Bryan DeBoer: Sure, Rajat. This is Bryan again. I think it’s important to define that just, because we put M&A and buybacks at parity, doesn’t mean we believe that we’ll be able to do buybacks or M&A. The market will dictate both of those. And we believe and we know definitively that M&A, is a core competency of Lithia Motors & Driveway and that we always are able to find acquisitions. As such, even though we have the Pendragon acquisition. We have other deals in the hopper that are going to make the year round out quite nicely, that are domestic deals in the United States with highly attractive franchises in areas that, we’ve targeted our growth that will be there. Now, when we think about buybacks, ultimately, it is still the last thing that we want to do with our money because the only reason we would be buying back.