Lithia Motors, Inc. (LAD) Q2 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to Lithia Motors & Driveway Second Quarter 2026 Results Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Jardon Jaramillo, Director of Finance. Thank you. You may begin.

Good morning. Thank you for joining us for our second quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance Corporation. 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 statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results today include references to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our second quarter results. With that, I would like to turn the call over to Bryan.

Thank you, Jardon. Good morning, and welcome to our quarterly earnings call. The second quarter was another record for Lithia & Driveway. We delivered revenues of $9.8 billion and adjusted diluted EPS of $10.03, up 9% from last year as our leaders continue to demonstrate the earnings power of our diversified model in a somewhat dynamic environment. The quality of these earnings is what really stands out to me. New vehicle margins continue to be stable. Used vehicle profitability strengthened considerably, and we drove meaningful sequential improvements in SG&A as a percentage of gross profit. Driveway Finance Corporation delivered another quarter of record originations, growing income more than 70% over last year. Our ecosystem is built so that each business line reinforces the others. And this quarter, every part of the engine contributed. Our growth is powered by our people and winning share in our local markets alongside improved pricing and cost efficiencies that flow straight to the bottom line. What's so special is that each of those relationships compounds, the customer we finance through DFC today becomes tomorrow's service visit and eventually the trade-ins for our used inventory. During the quarter, same-store revenues declined 1.6% and total gross profit declined 2.7%. This was quite resilient performance against our toughest comparison of the year as we lapped an exceptionally strong second quarter of 2025. Total vehicle GPUs rose to $4,119, up nearly $200 sequentially from the first quarter, giving us real momentum. As a reminder, all vehicle operations results from this point forward are on a same-store basis. Our diversified earnings mix again provided balance with used vehicle gross profit up 1.2% and aftersales gross profit up 3.1%, both on the strength of improved margins. New vehicle revenue declined 1.5% on 2.2% lower units, solid performance against a demanding comparison to last year's Q2 tariff pull-forward. New vehicle GPU of $2,718 was essentially flat with the first quarter, making it the third consecutive quarter of stability. Looking at brand mix, imports grew 5%, while domestic declined 7% and luxury declined 4%. We view these conditions as cyclical. And with the most difficult comparison now behind us, our teams carry the momentum into the second half of the year. In used vehicles, our profitability strategy is delivering and a real testament to our ecosystem, AI and people all working closely together. Used GPU of $2,019 improved $339 sequentially from the first quarter and total gross profit grew 1.2%. The work on dynamic pricing we discussed earlier this year is taking hold and used is one of the highest return areas of our business and a stable anchor through new vehicle cycles. It is also a key entry point into our ecosystem for all affordability levels and a feeder to grow F&I, aftersales and DFC over time. F&I was consistent at $1,811, showing strong product attachment and total financing penetration rising 140 basis points. Keep in mind that DFC's growing penetration intentionally moves a portion of the finance gross profit out of F&I and into our captive platform, where it converts into recurring countercyclical income that is 3x more profitable over the life of each loan. Adjusted for this shift, F&I continued to build momentum and grow. Aftersales continues to be a source of resiliency, high-quality earnings and substantial and predictable gross profit that converts into considerable operating profits. Gross profit grew 3.1% on revenue growth of 1% with margins expanding 120 basis points year-over-year to 59.2% and customer paid gross profit growing 2.6% and warranty up 5.4%. Aftersales earns its margin on every vehicle in operations, not just every vehicle sold by us, giving us a dependable earnings base through every phase of the cycle, creating consistency through intentional design. Aftersales continues to be our largest business line, contributing 42.2% of our gross profit with significantly lower SG&A than retail vehicles and driving the majority of our operating profit. Adjusted SG&A as a percentage of gross profit was 68.6%, a 290 basis point improvement from the first quarter. More importantly, the costs were completed thus far is now visible in absolute dollars with same-store SG&A declining year-over-year, led by nearly a 3% reduction in personnel costs, and June's SG&A percentage improved versus the prior year. This is exactly the exit rate we wanted heading into the second half of '26. These results reflect real structural changes, not onetime cuts. Our sales departments are rearchitecting how they operate with combined roles removing layers, remote functions and extending leaders across multiple stores and departments. Our back office continues to get leaner through automation and vendor consolidation as we prepare for a simpler technology future, led by the early contributions from AI tools in the U.K. Each quarter of this execution moves us closer to our sub-60% SG&A target. And as vehicle margins stabilize and volumes improve, that leverage flows straight to earnings. In the U.K., the momentum keeps building. Gross profit grew 12% and adjusted pretax income rose 78%, while SG&A as a percentage of gross improved 200 basis points year-over-year. Used vehicles led the way with gross profit up nearly 33% and new vehicle units grew 16%, driven by a strong execution and expanding Chinese OEM partnerships. The past few focused years of network optimization is translating into consistent and profitable growth globally. On the digital front, we keep making it simpler, faster and more transparent for our customers to shop finance and service with us in whatever channel they choose. The centerpieces today are Lithia, DFC, Driveway and GreenCars and beginning to be amplified by our partnership with Pinewood.AI. Its industry-leading DMS and AI solutions are in full swing in the United Kingdom with the North American rollout just around the corner later this year. The power of Pinewood's technology and AI bring a potential 10x scale multiplier to Lithia & Driveway's global cost savings. We are pleased that Ridgeview Partners is acquiring Pinewood.AI and our strategic alignment is unchanged. We continue to build an even stronger technology future on the same platform with the same shared priorities. Ridgeview arrives with the conviction to accelerate what Pinewood.AI has built, and we expect the transaction to generate a meaningful valuation gain on our investment. By moving our team members on to the same AI native environment, cost and complexity is taken out of the business, deepens retention and strengthens the connective tissue of our ecosystem, all while empowering both our team members and customers to create unique and trusted relationships. Driveway Finance Corporation continues to scale exponentially and profitably. Financing operations income reached $37 million for the quarter with DFC more than doubling its profitability. This growth was driven by record originations of $884 million, net interest margin expansion of 20 basis points to 4.8% and continued strong credit experience from a captive high-quality portfolio. With managed receivables now above $5 billion and penetration climbing towards our target of 20% or more, DFC is doing exactly what we built it to do, converting vehicle sales into recurring countercyclical income with considerably greater customer impressions and earnings power. Turning to capital allocation. Our philosophy is consistent and simple, deploy capital where it generates the highest returns for our shareholders. With our shares trading well below intrinsic value, repurchases remain our top priority. We bought back $242 million of stock in the quarter, retiring approximately 4% of our outstanding shares, and our share count is now 17% less than it was just 1 year ago. Our strong cash generation allows us to both return meaningful capital to shareholders and grow our network when the opportunity is right. In the first half of the year, we made strategic acquisitions of $765 million in revenue and divested $120 million of underperforming revenue that also generated extra capital to put to work more efficiently in other places. We continue to diversify our U.K. portfolio with emerging Chinese OEMs and expanding our presence with existing brands. These early Chinese OEM partnerships capture growth and position us to both learn and become larger partners if we choose as these manufacturers expand their presence internationally. This growth is always underwritten with discipline and consistent execution. We target purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA. This framework has delivered returns of more than 25% for more than a decade, well above our stated 15% after-tax hurdle rate. That's pretty good in an unconsolidated industry. Looking ahead, we will keep balancing share repurchases, acquisitions, organic investment and our balance sheet strength, strategically generating the highest returns for our shareholders. Our confidence is reinforced by this quarter's results all nicely coming together with sequential SG&A improvement, record DFC income, a used vehicle engine gaining momentum and strength in aftersales, all creating improved earnings quality. As these levers compound alongside opportunistic capital allocation, they keep us squarely on the path to our longer-term target of $2 of EPS for every $1 billion of revenue. Our teams are building that future one customer at a time as our differentiated and highly diversified model shifts into high gear. With that, I'll turn the call over to Tina.

Thank you, Bryan. Our second quarter showed strong sequential improvement in earnings with year-over-year comparisons reflecting the margin normalization and impact of prior year demand pull forward. Beneath these comps, the model performed exactly as designed. Resilient cash generation funded meaningful capital returns and continued growth, all while maintaining balance. This optionality to return capital, invest in the business and protect the balance sheet at the same time comes from our scale and our diversified earnings streams. These strengths run throughout the company where our leaders are focused on performance through our people. As Bryan mentioned, adjusted SG&A as a percentage of gross profit was 68.6% for the quarter on a same-store and consolidated basis. This year-over-year trend reflects the impact of top line pressure in the comparison. This quarter's results demonstrate our ability to maintain cost structure discipline while increasing top line profitability in GPUs and after sales. Importantly, personnel, our largest cost category, improved 30 basis points as a percentage of gross profit. And on a same-store basis, total SG&A dollars declined. Our stores, especially in the sales departments, are gaining momentum in rebalancing their cost structures, improving the comp plans to reward profitable growth, aligning staff with throughput and consolidating roles where technology allows, all while strengthening the customer experience. Beyond the sales departments, we continue to advance structural improvements across the business, lifting store and back-office productivity through performance management, consolidating our technology footprint as we retire legacy systems, improving vendor economics at our scale and removing manual work from the back office through automation. The early savings are visible in this quarter's results, and they build with each initiative we complete. Pinewood.AI is an important part of that trajectory, and we are deliberately pacing the rollout so that the gains we capture endure and never disrupt operational success. Moving on to financing operations. As Bryan mentioned, DFC delivered another exceptional quarter. Originations reached a record $884 million, and net interest margin was 4.8%, up 20 basis points from a year ago, reflecting a business that continues to mature and a cost of funds that improves as we scale. North American penetration reached 18%, continuing its steady climb toward our long-term target. Credit performance continues to reflect our disciplined underwriting. Origination FICO scores averaged 748. Front-end LTVs held steady at 96%, and our provisioning needs continue to decline as our conservative lending approach pays off. These results demonstrate the advantage of underwriting at the top of the funnel. Our portfolio crossed the $5 billion mark this quarter and scale is compounding our advantages, deeper access to the securitization markets, stronger funding execution and fixed costs spread across a larger earnings base. With penetration still below our 20% plus target, we have significant runway ahead and expect margins to keep building. DFC is delivering on its potential, adding a second engine of durable, high-quality earnings to our ecosystem. Next, I'll discuss the strength of our cash flows and balance sheet. We reported adjusted EBITDA of $445 million in the second quarter, down a modest 2% year-over-year. Adjusted cash flow from operations, our representation of free cash flow was $228 million for the quarter, up 76% from a year ago, bringing our first half total to $609 million after adjusting for the onetime benefit related to our used vehicle floor plan in Q1. This regenerative cash engine is what funds our flexibility. In the quarter, it supported our share repurchases and dividends, along with our continued investment in the network. Repurchases were executed at an average price of $284, a meaningful discount to our view of intrinsic value. We also raised our dividend 23% to $0.70 per share, a reflection of our confidence in the durability and trajectory of our cash generation. Through the first half of the year, we have returned more than $560 million to shareholders across buybacks and dividends. As we move through the second half of the year, our approach remains disciplined and opportunistic. With growing free cash flow and ample liquidity, we will keep directing capital to repurchases when relative valuations are attractive and to acquisitions that clear our return hurdles and further leverage our ecosystem, including DFC. That flexibility lets us create value through buybacks while strengthening and diversifying our network. Over the past several quarters, we have been laying the foundation for the growth ahead. Our share repurchases mean our share count now stands meaningfully below where it was a year ago, compounding earnings growth and improving cost structure, new vehicle margins finding their footing, strengthening used vehicle performance and DFC scaling means that as volumes build through the second half, the earnings leverage in our model flows through amplified. We are confident this combination of durable cash flow, prudent capital deployment and the compounding power of our ecosystem will continue creating long-term value for shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question is from Michael Ward with Citi Research.

Bryan, you mentioned 200 basis point improvement in SG&A in the U.K. To what extent and how much did Pinewood contribute to that? And is that what we can expect as you roll it out throughout the U.S.?

Mike, this is Bryan. The 200 basis points that we mentioned in the U.K. is about half driven off of the new Pinewood.AI solutions. I'm very happy to report that the integration of that product a couple of years ago into the entire 150-store platform in the United Kingdom was extremely smooth and is the pathway into the United States. The AI solutions that we've talked about now for the last few quarters, a couple of quarters ago, we had almost 150 different edits that needed to be completed to be able to get the agentics to work properly, the other benefits of the AI to work properly. And I'm proud to report that it's less than a dozen today and that the teams in the U.K. are ecstatic about what's happening and can see the pathway to the original numbers that we provided, which I believe was 447,000 hours on an annualized basis, which they should be able to realize at least half of those through the end of the year. So big numbers. And I think the important part to remember, Mike, and you obviously know this is the read-through into the United States of having 10x the expense and cost structure means that, that those benefits from the progress that we're making in the U.K. are pretty easy readthroughs into the United States, which will be one of the catalysts and the engines to drive us to a sub-60% SG&A.

That's what it sounds like. Chuck, on the DFC side, that was stronger than expected. Are we at a new level just because of some of the things Tina pointed out as far as scale, cost, those sorts of things. What type -- is this the new benchmark for a quarter, this $35 million to $40 million?

Mike, this is Chuck. Thanks for your question. I would say we're very pleased with the DFC results. And yes, this was definitely an improvement and really just validated a lot of what we've been talking about in prior quarters about the strength of being top of funnel and getting preferential selection from a credit quality performance and just some of the economies of scale that you brought out. With regards to your question or your point about is this sort of the new normal, I would say the second half, while we still are very optimistic that we can achieve similar types of profitability, I would say that there is seasonality that we will have to deal with that just happens as a normal matter, of course, in the second half of the year. But again, we still very confident about our forward-looking growth trajectory for DFC, and we're well on our way toward our path towards our long-term goals.

Our next question is from Ryan Sigdahl with Craig-Hallum Capital Group.

Kudos on the conviction and timing of your buybacks with the stock at all-time highs today. GPUs on the used side, really strong, I guess, incrementally relative to expectations and kind of that build with the dynamic pricing starting to layer in. I guess how do you think about the strategy? How do you think about the second half of the year? Help us kind of with the cadence of that GPU improvement this quarter relative to go forward?

Sure, Ryan, this is Bryan again. I think on the past few calls, we've talked about our looking at price to market and knowing that those value auto vehicles, we've been selling them for way under market value as well as the low miles for the vintage of the model. We've been selling for under. And I think our AI is alongside our people in the field are repricing cars at the appropriate level. And I think -- when we think about moving forward, I think this quarter really highlights how we're thinking about it looking forward that we are finding the balance between volume and margins to ensure that we realize our '26 goal, which we've made very clear within our global store footprint that it's about nothing but net, okay? And that nothing but net is becoming a reality because that net is what shows the benefits of the entire ecosystem that we've built and the differentiation between other models. So I'm pretty excited about it. I'm really proud of our team, and I'd like to congratulate our general managers and each of them for finding that balance between both volume and margin.

And just following up on DFC. You raised the midterm target for, remind us what that time -- midterm time frame is? And then secondly, just on the Q2 specifically, there was a much lower provision. Was there a onetime benefit from a reserve release? Or I guess, is there a structural change in the underlying credit profile go-forward assumptions as you go forward with that business?

Yes, Ryan, this is Chuck again. So with regards to the provision, this is just a testament to DFC's credit performance, and I'll give you some further stats. Our 30-plus delinquency up and down the credit bucket actually improved on a year-over-year basis. And that improvement was from between 12% and 20-plus percent. Now if you look at what Equifax provided for year-over-year performance, it was essentially flat. So we feel very confident that our provision expense, there was a small fairly immaterial adjustment on that, but we feel very confident that our portfolio is strong, that our credit quality underwriting is disciplined and consistent. And all of that will continue to allow us to see consistent, predictable and repeatable earnings as we go forward for DFC. With regards to the midterm target, I think we're getting much closer to line of sight to that. It's still probably a couple of years out, but a lot of that has to do with how quickly we look to grow the portfolio and get to that 20% pen rate because we will have that front-end loaded CECL reserves. So to some extent, we see that's very achievable in the near term. But how much and when we choose to grow the portfolio could be a headwind towards that, Ryan.

Our next question is from Rajat Gupta with JPMorgan.

Congrats on the good execution. I wanted to double click a little bit on the SG&A performance just broadly for the company overall in the second quarter. Obviously, used car GPUs were strong. U.K. had some progress. But you also saw a pretty nice seasonal lift in the volumes 1Q to 2Q. I think in the past, when you haven't seen like a good enough volume lift quarter-to-quarter, SG&A has typically underperformed. I'm curious if you could unpack some of the sequential pickup between how much was it driven by volume leverage? How much was it GPUs, just so that we can get comfortable with the sustainability of these levels in the back half? And I have a quick follow-up.

Great, Raja. Let me dig into SG&A just a little bit deeper. I think we've spoke about our ability to drive down costs, whether it's through U.K. AI and the future of North American AI, but the most important driver is driving performance through people. And that's coming through reductions in a lot of different areas. We talked about job combinations in the past. That's starting to take hold. We've talked about multifunctions where you may have a service manager and a parts manager that now is a combined position. You may have used car managers and new car managers that's now a combined position. And then lastly, our remote F&I is gaining traction in about a dozen of our stores. That's a big cost savings in the future. And again, it's a massive time savings and convenience to not only our customers, but allows our F&I people to be doing F&I wherever they really choose. Alongside that, our procurement at a high level is starting to gain traction with contract renegotiations. We haven't done a ton on that and the scale that we've now reached, there's some pretty big cost savings that we're looking at there. The last thing that I would say is that it appears, and though we haven't seen the rest of the peer group results, our North American SG&A was 66.2%. And that, we believe, will be the first time that Lithia & Driveway returns to the #1 position in prominence as the lowest SG&A in North America. It's been almost a decade gain. So it's a lot of heavy lifting and a lot of hard work. And I'm proud to also report that June, we had our first year-over-year quarter with lower SG&A in the month by almost 60 basis points. And just to look at the trends, if you remember 2 quarters ago, we were almost 500 basis points up year-over-year. Last quarter, we were 330-ish basis points. This quarter at 140 basis points, that's massive sequential improvement, also knowing that SG&A in June was actually down. So we're pretty excited about that. In terms of the volume that you mentioned, Rajat, our volumes are actually down, okay, slightly in both new and used on a same-store basis. And ultimately, that is what drives the volume. So it is truly cost savings combined with the $339 increase in used car GPU. This is truly finding the balance between volume and margin, while most importantly, balancing and finding the benefits of everything that we've done in the ecosystem, whether it's DFC that Chuck talked about or whether it's utilizing the driveway.com and the MyDriveway consumer portal or whether it's GreenCars or whether it's our investments in Pinewood.AI or Wheels Fleet Management. These are all things that are really defining a difference in a diversified model of who Lithia & Driveway really are.

Understood. Yes, the volume comment I was making was more like on a sequential basis, but I would appreciate like all that details on the cost. And just a follow-up on the used car side. Very strong GPUs. Obviously, U.K. looks like was a benefit to that number. Typically, when we see like new car volumes on a same-store basis being down, we see that flowing through in the used car business as well. It was a bit more disconnected this quarter in terms of the same-store volume weakness on the used car side. And I'm curious if there were some sort of strategic shift in prioritizing GPU over volume this quarter? And if that is how we should think about how you're going to manage in the near term?

Great, Raja. I think it is important that we find the balance between volume and gross profit because that is an easier and more predictable way to look at your SG&A and cost structure. And you'll see us continue to do that, and that is the message that our operational leaders and myself are promoting. I think on top of that, on a year-to-date basis, it's important to note that retail SAAR as a country is down 4%. We're down 1% year-to-date, okay? So we were 3% better, meaning we picked up about 3% market share on new cars. On the used car side, on that same number, the market was down about 1%. We were actually flat, which means we were up 1% in market share. So the fact that we still gained a touch of market share on used. But most importantly, we gained sequentially a massive amount in GPU, and that's easy flow-through and helps us be able to manage our cost structures a little bit better. Thanks for the question.

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

Congrats on a strong quarter here. I guess just on the used side, more shifting towards volumes. How should we be thinking about sort of used unit comps in the back half, especially with some of the increased off-lease supply that the industry is talking about? And then maybe within used, can you maybe talk to us about the performance by sort of CPO core versus value auto and what your expectations are there?

Sure, Alex. I think when we look forward into the year, I think flat to up mid-single digits is where we're really forecasting things. I think the advantages of Driveway that are growing year-over-year at almost -- it's a high teens growth rate, which makes it really nice. So the stores, we're looking at a 3% to 5% growth rate in terms of used car volume. If we look at where our volume is coming from relative to the marketplace, let's remember that the over 9-year-old vehicles makes up 63% of the total used cars sold in our country. okay? Right now, we're only selling 17% of our mix is over 9 years old. So it's a huge opportunity for our stores and those younger stores that have been with us are now starting to continue to test and keep those cars and understand that you've got to get those cars through trade-in, and that means paying the money to be able to get those cars. So for us, our growth more recently has come from certified. Our certified breached over 40% in the quarter. And I think when we think about our profitability model, it doesn't help our profitability model a lot. But it helps us gain more customers because that's where we've taken our trade-ins, and that's usually a very -- an easy financiable car that's usually back-of-book and allows us to cover up disequity and those type of things that are big winners. So we're going to go wherever the market is to be able to increase our volume with a focus understanding that a lot of our GPU is in the value auto cars, and our team needs to continue to focus on those and price those vehicles at market to be able to realize that extra possible 10% that's sitting out there, okay? And that's about what it is today that we're still selling those vehicles for under market. We picked up about 3% from where we were last quarter, okay, which would imply on an average of about a $17,000 car that there's another $1,700 on that bulk of our business. So whatever we need to do to create that waterfall effect, our people in the stores are doing that and understand that this is a multifaceted business that allows you to continue to grow used cars.

Yes. That makes a lot of sense. Really helpful. I guess next, just shifting to new vehicle GPUs. So continue to compress a bit, not by much. But I guess what's sort of driving that? When do we find a floor in new GPUs? And then how should we think about new GPUs sort of into the back half of this year?

Great question, Alex. And I think I can confidently say that it feels like that new GPUs have stabilized. This is our third quarter in a row that things are sitting around $2,700, $2,800 without F&I on front-end on GPUs for new. This is the first time we've seen that in 6 years. So it feels like this is a new normal, which is wonderful. I would caveat it that I think the greater macro environment has influences on this more than anything. And I think it was only 2 quarters ago that we weren't sure what was going to happen this summer, and we're feeling a lot more confident with what's happening this summer than we did 4, 5 months ago when we went through November, December and January that were a little softer than expected. So I think the end result is good stability in front-end GPU on new vehicles.

Our next question is from Jeff Lick with Stephens Inc.

Congrats on a great quarter. Bryan, I was hoping can we break down a little bit more into service and parts. Same-store sales up 1%, but that was up against an 8.5% comp. So it's a nice 2-year -- comps get a little easier in Q3, a little harder in Q4. Can you just break that down how sustainable that is? And then maybe in terms of customer pay warranty dynamics and any other area that you're seeing benefits from? And then just building on that, gross margin percent up 160 bps to 59.3%. What's driving that? And how sustainable is that going forward?

Yes. Great. Maybe I'll start with the end there, Jeff, and I think that's the big highlight is as we as we start to have a more diversified mix of new vehicle propulsion systems, whether it's hybrids, whether it's plug-in hybrids or whether it's BEVs, we're finding that a lot of our service and parts work is a bigger portion of labor, okay? And again, our driving to over a 59% when we've been really giving guidance that it's more like a 56%, 57% is really driven off of that labor. Now we're very fortunate that our warranty periods are now longer, which is adding to our ability to continue to grow that business, okay? But when we look at the mix of customer pay to warranty, we're looking pretty good. Our customer pay was up 2.6% in gross profit. Our warranty was up a little more at 5.4%. We are fortunate that some franchise laws in the Eastern -- some of the Eastern states have helped us a little bit on warranty labor rates. I'm not sure it has helped our relationship with our manufacturer partners because ultimately, they're paying more, but we appreciate what's happening there, and that's been a little bit of a catalyst, and that wave seems to be happening through franchise laws in a lot of parts of the country. So I really believe that the stability of our aftersales business going forward is only getting better. And that's really driven off longer warranty periods, more tied to propulsion in those vehicles in that first model years of that 5 to 7 years, there's things that break. And fortunately, as a dealer, we're the ones that benefit from that. Okay. One other cool little sidebar, Jeff, and I don't know if this is something that we watch closely, especially through our GreenCars strategies. We actually had the first quarter ever in our history where our new vehicle sales were made up over 50% by electrified vehicles, okay? We were almost 55% electrified vehicles in our new vehicle sales. So big move there, which was neat. We were 46.5% of our total new vehicles were hybrid, okay? So the advent of hybrid vehicles, whether it's Toyota, Honda, Hyundai or some of the domestics is really making a difference and I think helps drive the affordability of our consumers in a time where gas prices are astronomical in ways that are really benefiting us. And ultimately, that's going to pay in aftersales in the long run because a lot of those are new hybrid technology as well.

Just a quick follow-up. It's not really a follow-up, but it's a separate thread because you brought up franchise laws. You're uniquely qualified given your experience in the industry. Could you give any comments about the Stellantis situation and how they're handling the -- not necessarily the franchise laws, but the franchise agreement with one of the upstart larger used car competitors? I'm sure you have an opinion on that.

I don't really have much of an opinion on that. I do know that out of the 3 domestic manufacturers that Stellantis actually performed the best on a same-store basis. So whether or not we're getting some benefits out of that as well with our Driveway performance or whether our Dodge and Jeep guys are doing a great job there. We're not really seeing a big impact from that. And we don't -- I think I could safely say that I think consumers are looking for more transparent and simple and convenient ways to transact. And I think that is right on target with how we think about our Driveway experiences or how we think about our in-store experiences. And I know that our team is up for the challenge and are looking for any option for consumers to have what they're looking for in whatever capacity and whatever affordability range they're looking -- they're needing. So we're pretty excited about being able to compete head-to-head with those solutions by having a strong e-commerce presence in both new and used through our Driveway platforms as well as our over 500 local brand names.

You know I had to take a shot on that one. Congratulations on a great quarter.

Our next question is from John Babcock with Barclays.

First one just on Pinewood. You're going to start rolling that out later this year in North America. Is there anything you can share in terms of how you're thinking about how that's going to disrupt the different dealers or rather at the store level into next year? Obviously, we've seen pretty decent disruptions at Asbury. And I'm just kind of curious if there's any way you can frame that for us with Pinewood.

Yes. And hopefully, this doesn't come across as backhanded in any way to our peers because I'm sure they had great strategies of why they partnered with who they chose to partner with. I think when we reflect on our strategies, we spent almost 5 years looking for a partner, and we were fortunate to find it embedded in a retailer in the United Kingdom, Pendragon, and that's Pinewood.AI. So the ideas and the pathway of what we've done are being preempted by the U.K. business. I mean, we have 150 of our stores or 1/3 of our footprint globally that's already on the Pinewood.AI solutions, okay? They're now getting the second generation of the product that has AI embedded in it, which is where we're getting a lot of the cost savings. That will come to the United States. But I think most importantly, all of the enterprise-level functionality, all of the SaaS level control environment as well as the customer-facing operational environments have been tested in the U.K. and the U.K. teams are catalyzing and communicating with the U.S. teams. The idea of transitioning a DMS system sounds like a big project. It's not, okay? Lithia was the first to decide to move to one platform over 25 years ago and did that with CDK, okay? This move to Pinewood.AI was constructive with the help of the CEO of Pinewood, Bill Berman, who spent many years alongside myself and others in the industry to build solutions that put our consumers and our team members into the same environment. So the idea of having disruption in our stores, we don't believe is a big thing because our teams are used to doing the same things. They're bought off on it. They know that we own a large portion of it, and we will even as it goes private. But the idea of those transitions, we've been doing it for decades. We moved everyone to CDK. And typically, our transitions take somewhere around 3 days with a tail of approximately 3 weeks to be able to convert people to the DMS and be up and running, okay? We are very clear that the transitions of a DMS system that in the U.S. will also come with some transition away from certain vendors to reduce cost structures is going to be smooth. It's going to be efficient, and it's going to be a nonevent to us as an organization. And that's because we're not having a vendor come in and help our people transition, we're already transitioning them. So for us, we don't see it as disruptive. We see it as constructive to be able to drive our SG&A costs down through the embedded AI and having our customers and our team members in the same environment. Lastly, the costs on an overall tech stack portfolio on the DMS system of Pinewood.AI as well as the other vendor savings that we're looking toward are somewhere between a 20% and 50% reduction in overall costs. Now we'll have some redundancies for some period of time, okay? But ultimately, it's a lower cost solution that brings us the ability to find that sub-60% SG&A. So we're pretty excited about it. John, great question. I'm glad you teed me up on that. We could talk about that probably for hours, but I'll leave it at that.

Okay. That's super helpful. And then just as a quick follow-on to that, and I'll then pass it on. Have you shared in the past, I can't remember any efficiency metrics that typically occur after you've implemented Pinewood?

Well, what I've shared on the Pinewood.AI, which is the second generation Pinewood.AI. I should say second modern generation. They're on their fourth version of the DMS solution that they've rewritten it since 1990 multiple times, and now it's a cloud-based solution, was 447,000 hours in the United Kingdom, which is an equivalent of about USD 10 million to USD 11 million, okay? I would also note that, that 447,000 hours and it's translated U.S. dollars, is about 80% just on the service side, okay? That's really all we've really spent a lot of time on, but the sales functionality and the agentic that come with the customer interactions on sales could be massive as well, okay? The U.K. should be able to provide us numbers on that early in 2027 because now that their punchlist on the service elements are pretty much behind them and the Pinewood teams are now moving on to the coding for AI on the sales side, we should get some pretty good numbers. I would say this, and this is the total -- I'll call it a swag, okay? I'm going to guess that half of the cost savings to get us to a sub-60% level are going to come from AI solutions. The other half are going to come from job combinations, multiple functions, scale-level improvements on procurement, okay, as well as other vendors as well as these remote functions as we move into a world that is looking towards convenience, simplicity and empowerment from the consumers. Our consumers are wanting to be more in control of what they do. They feel more comfortable. Trust is built easier, and that keeps the Lithia & Driveway consumer in our ecosystem longer and more profitably. So anyway, some fun times, John, that we're really looking forward to the future.

Our next question is from Bret Jordan with Jefferies.

On the fixed ops parts and service business, I guess, could you talk about price versus traffic contribution to growth? And obviously, one of your peers talked about with the rollout of Tekion sort of evaluating and adjusting price potentially downwards. Is there more, I guess, competition in the space, affordability pressures, independent aftermarket challenges? Do you see anything dynamically changing on parts and service this year?

Yes. I think parts and service looks pretty stable, Bret. I'm not seeing massive changes. Our improvements are coming a little bit from price and a little bit from volume, about 50-50. So we're feeling pretty good about that. I think when we think about affordability, I think it is top of mind with our people. We do sell non-OEM parts post warranty period for those that are feeling pricing pressures. And I think I would probably encourage all of our teams. We've got to continue to push that and ensure that we don't get defection after the warranty period from our consumers, and it is a big area. And I'm imagining that was our Asbury friends, but they are exactly right that it's easy to get caught up and that our warranty rates are growing. So that means our customer pay rates can grow and lose sight of the fact that if we can service our customers' car for 10 years rather than 3 to 5 years, we all win a lot more. And I think that's the advantage of a new car retailer being top of funnel is it's our easiest way that if we can delight on the service side, then most likely they're going to come back and buy a new car or buy a used car for their child or someone else that they know, and it's just a perpetual cycle that is quite special as a top-of-funnel new car retailer. So we've got some inherent advantages that I think we've rested on our laurels as an industry. And I think Lithia & Driveway figured out, the secret sauce is figuring out how to delight our customers and do it in ways throughout the life cycle of that relationship so we can have multiple touch points each month rather than once every 3 to 5 years. And that's really what the MyDriveway portal does. And it's what Chuck is doing in DFC that we can chat with the customer every time they make a payment, and we can give an update on what the valuation of their trade-in is and what their equity position is or disequity position, and we can help them in all these different ways. And we've got Driveway that if they want to sit on their couch and buy a car or they want to sell us their car, we can do that, too. And AI is powering all of that. And it's a fun time to be part of Lithia & Driveway.

Great. And a quick follow-up. On U.K., new units up 16%. And you mentioned sort of a Chinese brand expansion. Could you talk maybe about what particular brands you're seeing that success with and how the Chinese product GPU stacks up versus legacy U.K. product?

Sure, Bret. Hopefully, you'll all let me caveat this a little bit that the readthrough into the North American markets may not be a straight line, okay? It does allow us in the U.K. to create the relationship, but there's a fundamental difference between the U.K. and the North American markets as we're seeing them today is that in the United Kingdom, our advantage is that we can dual those Chinese brands with U.S. brands or French brands or German brands -- not so much German brands other than some of the lower-end Volkswagen stuff. So -- but outside of that, we are getting about half our lift from the Chinese brands, which is beneficial. But remember, in terms of profitability, they're helping very little when it comes to after-sales business because there's no units in operation, okay? They're not helping a lot in used cars because there's no certified sales because they're new. We are pleased, though, with the relationships. They're decent product, okay? They're priced competitively, which helps with affordability in the United Kingdom, which is great. And we will continue to grow with those brands in the United Kingdom and possibly in North America, depending on what their structure looks like. The other key thing in the United Kingdom is what we're seeing is that the teams there are quite nimble, okay? And the way that we're able to go to market, we can add these brands in 60 days and be up and running and the capital cost is somewhere less than $100,000, okay? When we think about the North American market, they're talking about specific exclusive dealerships that could cost $5 million, $10 million, $20 million to sell that brand with no aftersales business. That's probably something that we're not going to be an early adopter as a dealer, okay? Because as a dealer, I've got nothing that can cover my fixed cost in aftersales, which, as we know, our absorption rate in aftersales is the majority of our fixed costs in North America. So lots of moving parts there. We are excited about the partnership, and it does give us some global relationships, which is helpful, and we'll have to take a wait-and-see approach as to where that leads us in the North American market.

Our next question is from Daniela Haigian with Morgan Stanley.

Bryan, some really good color on this call with Pinewood and SG&A. I wanted to pivot and ask one on capital allocation. You just raised the dividend. You added to the share buyback authorization. You repurchased 4% of shares this quarter. How are you sequencing or thinking about capital return versus M&A appetite? You did provide some helpful framework on target multiple ranges. Second part of my question goes into how do you characterize the kinds of stores, brands or geographies that you're looking to add to your portfolio?

Great questions, Daniela. And I think it'd be easy for me to sit on the call and Jardon has been showing us our stock price hitting an all-time high, and Bret mentioned that as well. I think it's easy to think that we're going to transition now into full acquisition mode. I think Lithia Motors & Driveway will take a balanced approach on capital allocation. And we still believe that at $450, $500, we still have intrinsic undervalue in terms of what we've built and the dry powder that exists within our stores when we start to talk about a sub-60% SG&A or the idea of growing our same-store sales at a consistent 5% and having $1.5 billion to $2 billion in free cash flows a year. We still look at share buybacks as a major source of our utilization. So sitting here today, we believe that we'll probably spend 1/3 on buybacks. We can probably spend 1/3 on M&A, and the rest goes to dividends and internal investments to continue to build for our future because I don't -- I think we can sit here today and say this is what automotive retail looks like, but Lithia Motors & Driveway is sitting here today going, what does the future look like? And how do we invest in what's going to yield high returns at low costs and create wonderful customer experiences and opportunities for our team members to continue to grow in the future, it's reinvestment, okay? And it's a neat time to be able to see all the different legs of our portfolio and the design that we did back in '15, '16, '17 and '18 are now coming through with DFC going to push way beyond $100 million, which was our initial target in earnings. We've got massive earnings coming in with Wheels and now some synergies with that relationship. We know what's happening with Pinewood.AI as an investment, let alone what it's going to do for us on a foundational aspect to our cost controls. And most importantly, I've got my people in the field. They are amped up, okay? Our operational leaders from our department leaders all the way up to our presidents are focused on cost management. They're focused on gaining market share and leveraging the ecosystem to be able to drive results. So for us, there's not a big change in how we're thinking about our capital allocation and that's about what we said last quarter, and we'll keep our head down and continue to drive results in the future.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Bryan for closing remarks.

Thank you, everyone, for joining us today. We had a great time. We're excited to see the power of our ecosystem and the quality of our earnings all align in the quarter and look forward to doing the same in Q3 and talking to you in October. All the best.

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