LITHIA MOTORS INC

Previous wording

•Our business strategy and plans, including our achieving our long-term EPS target

Current wording

•Our business strategy and plans, including our achieving our long-term financial targets

Previous wording

Lithia and Driveway (LAD) is one of the largest global automotive retailers providing an array of products and services throughout the vehicle ownership lifecycle. Simple, convenient and transparent experiences are offered through our comprehensive network of physical locations, e-commerce platforms, captive finance solutions and other synergistic adjacencies. We have delivered consistent profitable growth in a massive and unconsolidated industry. Our highly diversified and competitively differentiated design provides us the flexibility and scale to pursue our vision to modernize personal transportation solutions wherever, whenever and however consumers desire. As of March 31, 2024, we operated 482 locations representing 51 brands in three countries.

Current wording

Lithia and Driveway (LAD) is one of the largest global automotive retailers providing an array of products and services throughout the vehicle ownership lifecycle. Simple, convenient and transparent experiences are offered through our comprehensive network of physical locations, e-commerce platforms, captive finance solutions, fleet management offerings, and other synergistic adjacencies. We have delivered consistent profitable growth in a massive and unconsolidated industry. Our highly diversified and competitively differentiated design provides us the flexibility and scale to pursue our vision to modernize personal transportation solutions wherever, whenever and however consumers desire. As of June 30, 2024, we operated 470 locations representing 52 brands in the United States, the United Kingdom, and Canada.

Previous wording

We offer a wide array of products and services fulfilling the entire vehicle ownership lifecycle including new and used vehicles, financing and insurance products and automotive repair and maintenance. We strive for diversification in our products, services, brands and geographic locations to reduce dependence on any one manufacturer, reduce susceptibility to changing consumer preferences, manage market risk and maintain profitability. Our diversification, along with our operating structure, provides a resilient and nimble business model.

Current wording

We offer a wide array of products and services fulfilling the entire vehicle ownership lifecycle including new and used vehicles, financing and insurance products and automotive repair and maintenance. We strive for diversification in our products, services, brands and geographic locations to reduce dependence on any one

Previous wording

We seek to provide customers with a seamless, blended online and physical retail experience, broad selection and access to specialized expertise and knowledge. Our comprehensive network enables us to provide convenient touch points for customers and provides services throughout the vehicle life cycle. We seek to increase market share and optimize profitability by focusing on the consumer experience and applying proprietary performance measurement systems fueled by data science. Our Driveway and GreenCars brands complement our in-store experiences in the United States and provide convenient, simple and transparent platforms that serve as our e-commerce home solutions and allow us to deliver differentiated, proprietary digital experiences. Enhancing our business with Driveway Finance Corporation (DFC), our captive auto finance division, allows us to provide financing solutions for customers and diversify our business model with an adjacent product.

Current wording

We seek to provide customers with a seamless, blended online and physical retail experience, broad selection and access to specialized expertise and knowledge. Our comprehensive network enables us to provide convenient touch points for customers and provides services throughout the vehicle life cycle. We seek to increase market share and optimize profitability by focusing on the consumer experience and applying proprietary performance measurement systems fueled by data science. Our Driveway and GreenCars brands complement our in-store experiences in the United States and provide convenient, simple and transparent platforms that serve as our e-commerce home solutions and allow us to deliver differentiated, proprietary digital experiences. Enhancing our business, our captive auto financing division allows us to provide financing solutions for customers and diversify our business model with adjacent products.

Previous wording

LAD builds magnetic brand loyalty in our 482 stores and with Driveway, our e-commerce home delivery experience, and GreenCars, our electric vehicle learning resource and marketplace. Operational excellence is achieved by focusing the business on convenient and transparent consumer experiences supported by proprietary data science to improve market share, consumer loyalty, and profitability. By promoting an entrepreneurial model with our in-store experiences, we build strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we develop high-performing teams and foster manufacturer relationships.

Current wording

LAD builds magnetic brand loyalty in our 470 stores and with Driveway, our e-commerce home delivery experience, and GreenCars, our electric vehicle learning resource and marketplace. Operational excellence is achieved by focusing the business on convenient and transparent consumer experiences supported by proprietary data science to improve market share, consumer loyalty, and profitability. By promoting an entrepreneurial model with our in-store experiences, we build strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we develop high-performing teams and foster manufacturer relationships.

Previous wording

In response to evolving consumer preferences, we invest in modernization that supports and expands our core business. These digital strategies combine our experienced, knowledgeable workforce with our owned inventory and physical network of stores, enabling us to be agile and adapt to consumer preferences and market specific conditions. Additionally, we systematically explore transformative adjacencies, which are identified to be synergistic and complementary to our existing business such as DFC, our captive auto loan portfolio.

Current wording

In response to evolving consumer preferences, we invest in modernization that supports and expands our core business. These digital strategies combine our experienced, knowledgeable workforce with our owned inventory and physical network of stores, enabling us to be agile and adapt to consumer preferences and market specific conditions. Additionally, we systematically explore transformative adjacencies, which are identified to be synergistic and complementary to our existing business, such as our captive auto finance division and our fleet funding and management division.

Previous wording

As we focus on expanding our physical network of stores, one of the criteria we evaluate is a valuation multiple between 3x to 6x of investment in intangibles to estimated annualized adjusted EBITDA, with various factors

Current wording

As we focus on expanding our physical network of stores, one of the criteria we evaluate is a valuation multiple between 3x to 6x of investment in intangibles to estimated annualized adjusted EBITDA, with various factors including location, ability to expand our network and talent considered in determining value. We also target an investment in intangibles as a percentage of annualized revenues in the range of 15% to 30%.

Previous wording

We manage our liquidity and available cash to support our long-term plan focused on growth through acquisitions and investments in our existing business, technology and adjacencies that expand and diversify our business model. In the current market of elevated acquisition pricing, we have adjusted our free cash flow deployment strategy. Under current conditions, including recent trends in our stock price, we may consider repurchases as a more attractive use of funds than acquisitions. Our current free cash flow deployment strategy has shifted to an allocation of 50 to 60% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification and 15 to 25% in shareholder return in the form of dividends and share repurchases. During the first three months of 2024, we utilized $79.6 million for capital expenditures investing in our existing business and paid $13.8 million in dividends. As of March 31, 2024, we had available liquidity of approximately $1.3 billion, which was comprised of $264.4 million in unrestricted cash, $49.9 million in marketable securities, and $1.0 billion availability on our credit facilities. In addition, our unfinanced real estate could provide additional liquidity of approximately $0.3 billion.

Current wording

We manage our liquidity and available cash to support our long-term plan focused on growth through acquisitions and investments in our existing business, technology and adjacencies that expand and diversify our business model. In the current market of elevated acquisition pricing, we have adjusted our free cash flow deployment strategy. Under current conditions, including recent trends in our stock price, we may consider repurchases as a more attractive use of funds than acquisitions. Our current free cash flow deployment strategy has shifted to an allocation of 50 to 60% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification and 15 to 25% in shareholder return in the form of dividends and share repurchases. During the first six months of 2024, we utilized $209.7 million for capital expenditures investing in our existing business and paid $28.2 million in dividends and $217.2 million in share repurchases. As of June 30, 2024, we had available liquidity of approximately $1.3 billion, which was comprised of $516.4 million in unrestricted cash, $51.4 million in marketable securities, and $0.8 billion availability on our credit facilities. In addition, our unfinanced real estate could provide additional liquidity of approximately $0.3 billion.

Previous wording

We experienced growth of revenue in 2024 compared to 2023, primarily driven by increases in volume related to acquisitions, complemented by organic growth in new vehicle retail sales and service, body and parts sales. Gross profit on new and used vehicle retail sales declined compared to 2023 due to continued normalization of margins. Net income decline was primarily driven by this margin normalization, increased interest expense, and increased SG&A as a percentage of gross profit.

Current wording

We experienced growth of revenue in 2024 compared to 2023, primarily driven by increases in volume related to acquisitions. Gross profit on new and used vehicle retail sales declined compared to 2023 due to continued normalization of margins. Net income decline was primarily driven by this margin normalization, increased interest expense, and increased SG&A as a percentage of gross profit.

Previous wording

Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in February 2023 would be included in same store operating data beginning in March 2024, after its first complete comparable month of operation. The first quarter operating results for the same store comparisons would include results for that store in only the month of March for both comparable periods.

Current wording

Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in May 2023 would be included in same store operating data beginning in June 2024, after its first complete comparable month of operation. The second quarter operating results for the same store comparisons would include results for that store in only the month of June for both comparable periods.

Previous wording

New vehicle retail revenue for the three months ended March 31, 2024 increased 22.4% compared to the same period of 2023 primarily due to acquisition activity. Same store new vehicle retail revenue increased 2.3% due to an increase in unit volume of 3.6%, partially offset by a decrease in average selling prices of 1.3%.

Current wording

New vehicle retail revenue for the six months ended June 30, 2024 increased 15.4% compared to the same period of 2023 primarily due to acquisition activity. Same store new vehicle retail revenue decreased 1.0% due to a decrease in unit volume of 1.0%, which resulted primarily from the CDK Global cyber incident, however yielded no change to average selling price.

Previous wording

Same store new vehicle retail gross profit per unit decreased 29.7%, driven by a decrease in new vehicle retail gross profit margins of 290 bps. Total same store new vehicle retail gross profit per unit, which includes the finance and insurance revenue generated from the sales of new retail vehicles, decreased $1,640 to $5,771.

Current wording

Same store new vehicle retail gross profit per unit decreased 28.2%, driven by a decrease in new vehicle retail gross profit margins of 280 bps. Total same store new vehicle retail gross profit per unit, which includes the finance and insurance revenue generated from the sales of new retail vehicles, decreased $1,436 to $5,665.

Previous wording

Used vehicle retail revenue for the three months ended March 31, 2024 increased 25.7% compared to the same period of 2023 driven by acquisition activity. On a same store basis, used vehicle retail sales decreased 5.0% due to a decrease in average selling prices of 3.5% and a decrease in unit volume of 1.6%. Volume decreases were driven by decreasing volumes associated with core vehicles. Total same store used vehicle retail gross profit per unit, which includes the finance and insurance revenue generated from the sales of used retail vehicles, decreased $154 to $3,901.

Current wording

Used vehicle retail revenue for the six months ended June 30, 2024 increased 23.6% compared to the same period of 2023 driven by acquisition activity. On a same store basis, used vehicle retail sales decreased 5.9% due to a decrease in average selling prices of 4.6% and a decrease in unit volume of 1.4%. Volume decreases were driven by decreasing volumes associated with certified vehicles. Total same store used vehicle retail gross profit per unit, which includes the finance and insurance revenue generated from the sales of used retail vehicles, decreased $350 to $3,940.

Previous wording

Total finance and insurance income increased 7.0% in the three months ended March 31, 2024 compared to the same period of 2023, driven by acquisition activity. Same store finance and insurance revenues decreased 4.8%, driven by a decline in service contract penetration rates. On a same store basis, our finance and insurance revenue per retail unit decreased $123 to $2,080.

Current wording

Total finance and insurance income increased 6.9% in the six months ended June 30, 2024 compared to the same period of 2023, driven by acquisition activity. Same store finance and insurance revenues decreased 5.0%, driven by a decline in service contract penetration rates. On a same store basis, our finance and insurance revenue per retail unit decreased $83 to $2,039.

Previous wording

Same store service, body and parts gross profit increased 6.6%. This increase was primarily due to increased volumes of warranty and customer pay transactions. Overall same store service, body, and parts gross margins

Current wording

Same store service, body and parts gross profit increased 0.2%. This increase was primarily due to increased volumes of warranty transactions. Overall same store service, body, and parts gross margins increased 90 bps, primarily as a result of increased warranty gross margin. Same store customer pay gross margin decreased 200 bps.

Previous wording

Our service, body, and parts revenue increased 24.0% in the three months ended March 31, 2024 compared to the same period of 2023, driven by acquisitions, as well as an increase in warranty and customer pay revenues. Same store customer pay revenues was the largest contribution to our service, body and parts revenue at $414.8 million.

Current wording

Our service, body, and parts revenue increased 20.9% in the six months ended June 30, 2024 compared to the same period of 2023, driven by acquisitions, as well as an increase in same store warranty and customer pay revenues. Same store customer pay revenues was the largest contribution to our service, body and parts revenue at $857.6 million.

Previous wording

In the United States, Financing Operations is a captive lender, originating loans only from our stores and Driveway. In Canada, Financing Operations originates loans and leases from both our Canadian stores and third-party dealerships. In the United Kingdom, Financing Operations is related to our fleet management leasing operations. Financing Operations provides an opportunity to capture additional profits, cash flows, and sales while managing our reliance on third-party finance sources.

Current wording

In the United States, Financing Operations is a captive lender, originating loans only from our stores and Driveway. In Canada, Financing Operations originates loans and leases from both our Canadian stores and third-party dealerships. In the United Kingdom, Financing Operations is related to our fleet funding and management division. Financing Operations provides an opportunity to capture additional profits, cash flows, and sales while managing our reliance on third-party finance sources.

Previous wording

Financing operations loss decreased in the three months ended March 31, 2024 compared to the same period of 2023 primarily due to the addition of the UK Financing Operations business and increased contract rates to borrowers, resulting in an expansion of total interest margin to 3.5%.

Current wording

Financing operations recorded income in the six months ended June 30, 2024 compared to a loss in the same period of 2023 primarily due to increased contract rates to borrowers, resulting in an expansion of total interest margin to 3.8%, a decrease in provision expense, and the addition of the UK Financing Operations business.

Previous wording

The weighted average contract rate on loans originated in the three months ended March 31, 2024 increased to 10.2%, compared with 9.0% in the same period of 2023. The decrease in provision expense compared to the year ago quarter reflected the increased credit quality of the portfolio and strong performance of our operational teams. The decrease in selling, general and administrative expenses as a percentage of receivables compared to the year ago quarter reflected improved operational performance and economies of scale.

Current wording

The weighted average contract rate on loans originated in the six months ended June 30, 2024 increased to 10.0%, compared with 9.2% in the same period of 2023. The decrease in provision expense compared to the prior year reflected a release of the allowances for credit losses driven by the increased credit quality of the portfolio and tightening of underwriting standards. The decrease in selling, general and administrative expenses as a percentage of receivables compared to the prior year reflected improved operational performance and economies of scale.

Previous wording

SG&A as a percentage of gross profit was 70.0% for the three months ended March 31, 2024 compared to 63.1% for the same period of 2023. Total SG&A expense increased 22.2%, driven by increases in all areas, primarily as a result of our growth in the United Kingdom.

Current wording

SG&A as a percentage of gross profit was 68.5% for the three months ended June 30, 2024 compared to 60.8% for the same period of 2023. SG&A expense increased 15.8%, driven by increases in all areas, primarily as a result of our growth in the United Kingdom.

Previous wording

On a same store basis and excluding non-core charges, SG&A as a percentage of gross profit was 66.9% compared to 62.8% for the same period of 2023. The increase was primarily related to the decrease in gross profit exceeding the decrease in same store SG&A costs.

Current wording

On a same store basis and excluding non-core charges, SG&A as a percentage of gross profit was 66.9% compared to 61.2% for the same period of 2023. The increase was primarily related to the decrease in gross profit exceeding the decrease in same store SG&A costs.

Previous wording

Adjusted SG&A for the three months ended March 31, 2023 excludes $10.1 million in one-time contract buyouts, $1.3 million in acquisition-related expenses and $0.1 million in storm insurance charges, offset by a $7.2 million net gain on store disposals.

Current wording

Adjusted SG&A for the six months ended June 30, 2023 excludes $10.1 million in one-time contract buyouts, $5.7 million in acquisition-related expenses and $2.5 million in storm insurance charges, offset by a $8.2 million net gain on store disposals.

Previous wording

Floor plan interest expense increased $33.0 million in the three months ended March 31, 2024 compared to the same period of 2023 due to rising interest rates and increased inventory levels.

Current wording

Floor plan interest expense increased $41.9 million in the three months ended June 30, 2024 compared to the same period of 2023 due to rising interest rates and increased inventory levels.

Previous wording

Acquisition activity contributed to the increase in depreciation and amortization in 2024 compared to 2023. We acquired $1.0 billion of depreciable property as part of our acquisition activity over the twelve months ended March 31, 2024. For the three months ended March 31, 2024, we invested $79.6 million in capital expenditures. These investments increased the amount of depreciation expense in the three months ended March 31, 2024. See the discussion under “Liquidity and Capital Resources” for additional information.

Current wording

Acquisition activity contributed to the increase in depreciation and amortization in 2024 compared to 2023. We acquired $0.7 billion of depreciable property as part of our acquisition activity over the trailing twelve months ended June 30, 2024. For the six months ended June 30, 2024, we invested $209.7 million in capital expenditures. These investments increased the amount of depreciation expense in the six months ended June 30, 2024. See the discussion under “Liquidity and Capital Resources” for additional information.

Previous wording

Operating margin decreased 140 bps in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to increased SG&A of 22.2% and a 10.2% decrease in gross profit.

Current wording

Operating margin decreased 160 bps in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to increased SG&A of 15.8%, offset by increased gross profit of 2.8%.

Previous wording

Other interest expense for the three months ended March 31, 2024 increased $24.6 million related to increased borrowings and interest rates compared to the same period of 2023.

Current wording

Other interest expense for the three months ended ended June 30, 2024 increased $17.3 million related to increased borrowings and interest rates compared to the same period of 2023.

Previous wording

Our effective income tax rate for the three months ended March 31, 2024 compared to last year was positively affected by a reduction in the current and deferred state tax rate due to the impact of global network expansion on worldwide combined reporting states, filing elections and statutory rate changes. Our rate was also positively affected by an increase in tax benefit from stock awards vesting in the current period and an increase in general business credits. Excluding non-core charges, we estimate our annual effective income tax rate to be 26.0%.

Current wording

Our effective income tax rate for the six months ended June 30, 2024 compared to last year was positively affected by a reduction in the current and deferred state tax rate due to the impact of global network expansion on worldwide combined reporting states, filing elections, and statutory rate changes. Our rate was also positively affected by an increase in tax benefit from stock awards vesting in the current period and an increase in general business credits. Excluding non-core charges, we estimate our annual effective income tax rate to be 26.0%.

Previous wording

Cash provided by (used in) operating activities for the three months ended March 31, 2024 increased $341.4 million compared to the same period of 2023, primarily related to an increase in floor plan notes payable and finance receivables activity, partially offset by inventory activity and a decrease in net income compared to the same period of 2023.

Current wording

Cash provided by (used in) operating activities for the six months ended June 30, 2024 increased $442.7 million compared to the same period of 2023, primarily related to an increase in floor plan notes payable and finance receivables activity, partially offset by inventory activity and a decrease in net income compared to the same period of 2023.

Previous wording

Net cash used in investing activities totaled $1.3 billion and $0.4 billion, respectively, for the three months ended March 31, 2024 and 2023.

Current wording

Net cash used in investing activities totaled $1.5 billion and $1.0 billion, respectively, for the six months ended June 30, 2024 and 2023.

Previous wording

The increase in capital expenditures for the three months ended March 31, 2024, compared to the same period of 2023 related primarily to higher existing operations improvements.

Current wording

The increase in capital expenditures for the six months ended June 30, 2024, compared to the same period of 2023 was higher across nearly all categories, driven by higher existing operations improvements.

Previous wording

Our Board of Directors has authorized the repurchase of up to $1.2 billion of our Common Stock. We repurchased a total of 45,516 shares of our Common Stock at an average price of $329.21 in the first three months of 2024, all related to tax withholding on vesting RSUs, none related to our repurchase authorization. As of March 31, 2024, we had $467.0 million remaining available for repurchases and the authorization does not have an expiration date.

Current wording

Our Board of Directors has authorized the repurchase of up to $2.1 billion of our Common Stock. We repurchased a total of 834,386 shares of our Common Stock at an average price of $260.23 in the first six months of 2024, 45,817 related to tax withholding on vesting RSUs, and 788,569 related to our repurchase authorization. As of June 30, 2024, we had $614.9 million remaining available for repurchases and the authorization does not have an expiration date.

Previous wording

In the first three months of 2024, we declared and paid dividends on our Common Stock as follows:

Current wording

In the first six months of 2024, we declared and paid dividends on our Common Stock as follows:

Previous wording

1 As of March 31, 2024, we had a $2.9 billion new vehicle floor plan commitment as part of our US Bank syndicated credit facility, and a $500 million CAD wholesale floorplan commitment as part of our Bank of Nova Scotia syndicated credit facility.

Current wording

1 As of June 30, 2024, we had a $2.8 billion new vehicle floor plan commitment as part of our US Bank syndicated credit facility, and a $500 million CAD wholesale floorplan commitment as part of our Bank of Nova Scotia syndicated credit facility.