Lithia Motors, Inc. (NYSE:LAD) Q3 2023 Earnings Call Transcript

Lithia Motors, Inc. (NYSE:LAD) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good morning. And welcome to the Lithia & Driveway Third Quarter 2023 Conference Call [Operator Instructions]. I would now like to turn the call over to your host, Amit Marwaha, Director of Investor Relations. You may now begin.

Amit Marwaha: Thank you for joining us for our third quarter earnings call for 2023. With me today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance. Today’s discussion may include statements about future events, financial projections and expectations about the company’s products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements.

We undertake no duty to update any forward-looking statements, which are made as of the date of this release. Our results discussed today include references to non-GAAP financial measures. Please refer to the text of today’s press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our Web site, investors.lithiadriveway.com highlighting our third quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO.

Bryan DeBoer: Thanks, Amit. Good morning, and welcome to our third quarter earnings call. We appreciate everyone joining us today and the opportunity to update you on our business, growth initiatives and progress towards our long-term strategies. In Q3, Lithia & Driveway grew revenues to $8.3 billion, up 13% from Q3 of 2022, resulting in adjusted diluted earnings per share of $9.25. Overall same store sales momentum improved sequentially, led by new vehicle units up 5% and aftersales revenues up over 4%. Sequentially, GPUs were in line with our expectations for both new and used vehicles, while F&I margins remained resilient. Year-to-date, GPUs for the new vehicles have come down approximately $100 per month or down 19% from the end of 2022.

We are well supplied with new vehicles and parts to meet customer demand across the domestic brands throughout year end. Our teams are driving both growth and profitability while we focus on continuous gains in efficiency across vehicle operations, DFC and our other adjacencies. Our business model is flexible and diversified, giving our store teams the tools and autonomy to adjust with local market dynamics and manufacturers. Our goal is to provide customers with a wide variety of products and services and access to solutions that fit their needs throughout the vehicle ownership life cycle. This allows us to create a culture that is responsive to varying needs and delivers the best possible experience for customers wherever, whenever and however they desire.

Moving on to our financing operations. Driveway Finance Corporation, or DFC, posted Q3 results in line with expectations as receivables grew to $3.1 billion. The DFC team has been methodically and prudently navigating the shifting currents of increasing rates in the ABS and credit markets. The team has managed loan loss provisions in line with expectations and steadily growing their loan portfolio. Our plan remains on track to gradually expand margins, move towards profitability late next year while improving liquidity as we manage the pace and quality of originations. Both Chris and Chuck will be sharing further details on results of both vehicle and financing operations later in the call. At the heart of our strategy is expanding consumer solutions that are simple, convenient and transparent.

Our network is being designed to be within 100 miles of consumers, which allows us to leverage our physical and virtual infrastructure. Over time, we expect this will generate more convenient impressions, more memorable experiences, better returns on capital and an ecosystem that is unreplicable. Acquisitions are a core competency to our design and organization. We remain disciplined and opportunistic as we look for accretive opportunities that can improve our business. We target after-tax returns of 15% or more, 15% to 30% of revenues or 3 times to 7 times normalized EBITDA. Life-to-date, our acquisitions have yielded over a 95% success rate and after-tax returns of over 25%. We’re looking for acquisitions that are complementary to our network development strategy and meet our return thresholds in an unconsolidated industry.

During the third quarter, we completed two acquisitions in the United States. Combined, they are expected to generate approximately $290 million in annualized revenues. And year-to-date, we’ve acquired over $3.8 billion in revenues. In addition, I’m pleased to announce the impending purchase of Pendragon U.K. Motors, the Pendragon Fleet Management business, or PVM, and strategic partnership with Pinewood Technologies. This transformative transaction is a crucial step towards executing on our long-term design and brings with it a strong partnership with a highly profitable and innovative DMS CRM system, expands our footprint further into fleet management and finally, grows our retail footprint in the United Kingdom. We expect our annual revenue run rate to grow to approximately $38 billion and are excited with the addition of two fundamental pillars, DMS and Fleet Management Company, or FMC, to our global business.

We’d like to welcome our new and future partners to our Lithia family as we expand our worldwide presence. As a reminder, we target annualized revenues acquired in the range of $3 billion to $5 billion per year. Our primary focus remains on building out our US network and complement our network strategies. We are proud of our team’s track record of executing and integrating multiple transactions as we make our way towards and beyond $50 billion in revenue. Moving on to the overall execution of our long-term strategy. Since the launch of our plan, we added important foundational adjacencies and will have acquired over $22 billion in revenues once the Pendragon transaction is completed. In addition, Driveway Finance Corporation, our captive finance division, continues to make steady progress as our top finance partner and have line of sight to realizing the full potential and contributions to our profitability in the future.

As you may recall, the average loan we originate at DFC is 3 times more profitable over its lifetime relative to the fees we receive from third party commissions. Shifting to our omnichannel platforms. We’re making steady progress, growing online MUVs up 34% across our digital channels, while digital transactions grew to over 37,000 units in the third quarter, up 21% compared to last year. Supported by the education provided by GreenCars, sustainable vehicle sales accounted for 16% of total new vehicle sales in the quarter, up from 10% in Q3 of ’22. LAD remains on track to become the preferred international omnichannel provider of products and services, meeting a diverse set of customers’ needs throughout the ownership life cycle and across multiple adjacencies.

Our plans have positioned us to improve margins and lower our SG&A through a combination of growth efficiency, diversification and scale. Combined, these efforts will disconnect the ratio of $1 of EPS from every $1 billion in revenue and achieving $1.10 to $1.20 for every $1 billion of revenue by 2025. This will be driven by a few key assumptions, namely: achieving through scale a blended US market share of 2.5% through both acquisitions, channel expansion, market share gains and same store growth improvements in a normalized SAAR environment; second, driving SG&A as a percentage of gross profit to below 60% through increased leverage of our cost structure in a normalized GPU environment and optimizing our network; third, continued maturity and growth of our first adjacency, DFC, achieving profitability in the latter half of 2024; fourth, continuing to expand revenue and consumer optionality with Driveway by attracting 98% new customers through a seamless and transparent one-price experience with seven day return privileges and shipping directly to your home; fifth, GreenCars, educating consumers on sustainable transportation and expanding our penetration levels of electric vehicles; and finally, ongoing return of capital to shareholders through dividends and opportunistic share buybacks.

The above opportunities are now well underway, combined with DMS and FMC design additions, sets us up for further growth and profitability in the coming years. In a normalized environment, we can now clearly see the path for significant change where $1 billion of revenue will ultimately generate $2 of EPS. Key factors underlying our future steady state and now totally within our control are as follows. First, optimizing our network and continuing to diversify our portfolio through focusing on acquiring larger stores located in higher profitability regions of the South Central and Southeast US, filling in the Midwest and integrating our international businesses while growing our omnichannel platform and other mobility verticals. Second, financing up to 20% of units with DFC and maturing beyond the headwinds associated with CECL reserves.

Third, through size and scale, we will continue to drive down vendor pricing, develop competencies internally to save costs and lower borrowing costs as a path towards an investment grade credit rating. Fourth, to increase our share of wallet through improving the customer life cycle by leveraging our cost structure to reduce our SG&A as a percentage of gross profit to below 50%. And finally, maturing contributions from other horizontals, including fleet management, software, charging infrastructure and consumer captive insurance. In closing, Lithia & Driveway provides a unique and unreplicable mobility platform and transportation solutions that deliver great customer experiences throughout the ownership life cycle at a global scale. Our design is durable, diversified, vast and nimble to meet the needs of consumers with both online and in-store solutions, coupled with financing solutions like DFC.

The combination of our strategy and experienced teams gives us the confidence in our ability to eclipse $50 billion in revenue and produce a ratio of $1.10 to $1.20 of EPS for every $1 billion of revenue in the midterm and ultimately over $2 long term. With the completion of Pendragon transaction, all elements of our original design are now securely in place, allowing us to do what we do best and are known for, and that’s execute. With that, I’d like to turn the call over to Chris.

Chris Holzshu: Thank you, Bryan. First off, I’d like to provide an early welcome to the 6,000 associates at Pendragon that will be unifying with our Lithia & Driveway UK operations team to build what will be one of the strongest dealership platforms in the United Kingdom with over 10% market share in the brands we represent. Our strategic vision and commitment with Neil Williamson, our UK regional president, was to ensure that his team have the opportunity to bring our mission of growth powered by people across the Atlantic. With this partnership, we are well underway to solidifying that journey. Since the inception of our plan, we have positioned the organization to ensure that whether in the United States, Canada or the United Kingdom, our cultures would remain centered on entrepreneurial leadership at the local market level empowered to achieve our high performance.

Our seasoned and experienced regional operational leaders remain positioned to drive us towards the future. We remain committed to delivering a customer centric experience to be the retailer of choice wherever, whenever or however our customers desire. Focusing on our customer first will always ensure that we provide solutions that create sustainable growth and provide best-in-class returns to our shareholders. Now as it relates to the quarter. Overall, consumer demand remains strong for both vehicle sales and service despite the high interest rate environment and opportunities in OEM production. We believe we are at the late stages of a full production recovery that caused over 10 million units of product that vanished from the North American pipeline because of COVID-19 supply constraints.

While the average consumer APR and financed vehicles is up over 200 basis points year-over-year, the average monthly payments remain stable as consumers continue to invest in personal transportation needs at all price levels and incentives continue to accelerate. While a rebound in new vehicle production was impacted, the related depressed production put pressure on used inventory availability. This trend has highlighted the benefits of having a diverse network and over 2,000 used vehicle procurement specialists and a long-standing and disciplined approach to procuring vehicles from multiple channels. Lastly, with the age of the car parked at record levels and the number of units in operation increasing, the tailwind we have to deliver customer centric aftersales to all levels of affordability will remain strong for years to come.

Same store new vehicle revenues were up 5.5% due to unit volumes increasing 5% and ASPs rising 0.5%. New vehicle GPUs, including F&I, were $6,678 per unit, down from $7,500 in Q1 of this year and $8,165 in Q3 of 2022. We expect this trend in GPUs to continue, resulting in further reduction in margins in line with our outlook that new vehicle SAAR will return to historical levels in the US, UK and Canada in the next 24 months. New vehicle inventory days supply was 55 days compared to 47 days at year-end and 39 days in Q3 of 2022. High demand inventory that has been slow to reach our lots particularly amongst the imports is improving. Despite the headlines related to the OEM strike in North America, supply for D3 vehicles across our network remains healthy at over 70 days on ground.

Shifting to used vehicles. Same store used vehicle revenues were down 8% with unit volumes decreasing 2% and ASPs decreasing 6%. Used car price declines are driven by the availability of later model vehicles and the reduction in several years of new vehicle supply declines. Core product or vehicles three to seven years old make up 50% of our unit sales and trade-ins for these vehicles is the primary procurement channel for value auto, which makes up 20% of our unit panels. While this has put significant pressure on procurement of vehicles to meet demand, it also reinforces the competitive advantage we have of being top of funnel new car dealers where over 75% of purchases are coming from consumer channels only available to franchise dealers.

The competitive advantage enables us to provide the transportation needs to customers that fits their budgets regardless of market economic conditions. For used vehicles, including F&I, GPUs were $3,940, down 14% from last year. Overall, low inventory supply is supporting overall ASPs but GPUs are seeing variability due to procurement pressure and affordability for consumers when financing vehicles in this environment. We expect GPUs to fluctuate as supply normalizes, interest rates settle. Shifting to used vehicle inventory levels. Vehicle inventory days supply was 58 days compared to 65 days this time last year. Our [physical] footprint will soon span over 500 locations worldwide, which combined with the ability to shop, sell and service vehicles wherever, whenever and however customers desire, will create massive benefit as we leverage the size and scale of our network and give customers optionality and experience that they desire.

As Bryan mentioned, we are dedicated to creating an international omnichannel provider of products and services that meet a diverse set of consumer needs, and we are still in the early innings of this unrealized opportunity. In the third quarter, Lithia & Driveway’s online channels averaged 13.3 million unique visitors, an increase of 34% from the same period last year with advertising spend down 10%. Total e-commerce sales now represent 22% of retail transactions. Driveway’s strategic growth and cost structure continue to be refined as we work towards the rightsizing of that business. Brand recognition remains on track as we work towards improving the consumer experience and our product offerings. The average distance to deliver a shop vehicle from our stores is now 800 miles and most customers have never shopped or serviced with us before.

As our physical footprint grows, each location provides the ability to connect with 50 times more customers without the fixed investment as we expand the power and the reach of Driveway. During the quarter, service, body and parts delivered strong same-store sales, rising 4% and overall gross profit margin increased 120 basis points. Customer pay, which represents 60% of our aftersales business, was up 3%, while warranty sales were up 13%. As the average age of the vehicles continues to trend higher and the complexity of new vehicles continues to increase, our factory trained and certified technicians will continue to be a coveted asset that will only enhance our omnichannel solutions. Excluding Driveway related costs, adjusted SG&A as a percentage of gross profit was consistent with last quarter at close to 60% versus 62.7% on a consolidated basis.

We remain focused on reducing overall SG&A in our operating model where size and scale combined with technology, improved productivity, reducing overall personnel costs, which will be the catalyst to drive down SG&A to 50% long term. In closing, our team is well positioned to build one of the most dynamic omnichannel growth engines to meet the needs of our consumers. While we have yet to fully capitalize on the unprecedented size and scale we have created, we will continue to stay focused on execution that results in exceeding our goal of delivering $2 in EPS for every $1 billion in revenue. With that, I’d like to turn the call over to Chuck.

Chuck Lietz: Thanks, Chris. The financing operations segment had a disciplined quarter and narrowed our quarterly operating losses we executed on our core competencies. DFC originated $502 million in loans in the quarter and the portfolio now exceeds $3 billion. We hit another milestone as our weighted average APR on loans originated in the quarter hit 10%, up 50 basis points from the prior quarter and 240 basis points over a year ago. This was achieved without an impact to credit quality as weighted average FICO increased 2 points from the prior quarter to [732]. In addition, weighted average front-end LTV decreased slightly from the prior quarter to 95.6%. For the quarter, we had a 9.7 penetration rate declining from the second quarter, primarily due to our focus on increasing yield rates and to move in line with our top-tier competitors that we benchmark to.

Penetration was also impacted by increasing rate subvention from OEM captive lenders, taking our new vehicle mix down to 24% in the quarter. We monitor the overall auto lending ecosystem, and DFC’s underwriting standards are consistent with the rates and structures being offered by lenders in Lithia & Driveway’s extensive network. As such, DFC’s lending practices have not impacted LAD sales volumes. Third quarter net interest margin increased to $29.9 million as our weighted average APR in originations moved higher. Cost of funds benefited from amendments to our warehouse facilities and the maturation of our capital structure. We now have 84% of our portfolio funded via ABS term issuances for our warehouse facilities as of the end of the quarter.

Net provision expense decreased from the prior quarter to $23.1 million, and the allowance for loan losses as a percentage of loans receivable stayed flat at 3.2%. The increasing credit quality of recent originations along with the impact of decreased origination volumes have outweighed the volatile current macroeconomic environment. 30-day delinquency rates were flat from the prior quarter at 4.1% and down 1.9% from a year ago, reflecting improved portfolio credit quality. We expect that by early 2024, the performance of more recent vintages will offset the negative headwinds resulting from the 2021 and early 2022 vintages that are most exposed to the decline in used vehicle pricing. Overall, the financing operations segment had an operating loss of $4.4 million for the quarter and losses sit at $43.8 million year-to-date.

While we are still in the start-up phase, we remain confident in our path to profitability and that we are tracking to break even towards the latter half of 2024 and will be profitable on a monthly basis exiting next year. We are confident that DFC will realize $650 million of earnings in the LAD future state from a fully mature portfolio and a $50 billion LAD revenue base. With that, I’d like to turn this call over to Tina.

Tina Miller: Thanks, Chuck, and thank you, everyone, for joining us today. In the third quarter, we reported adjusted EBITDA of $457 million and $1.8 billion for the trailing 12-month period. This result was driven by strength in new vehicle demand and service and parts, offset by the impact of declining new vehicle gross profits with returning supply, higher floor plan interest costs and investments associated with our adjacencies. We ended the quarter with net leverage, excluding floor plan and debt related to DFC at 2 times, up a little over a quarter of a turn from the second quarter. During the quarter, we generated free cash flows of $261 million and $870 million year-to-date. We continue to maintain strong cash flow generation and a disciplined balance sheet as we execute our growth plans.

Our capital allocation strategy targets 65% toward acquisitions, 25% directed to internal investments, including capital expenditures and 10% for shareholder return in the form of dividends and share repurchases when they’re appropriate and opportunistic. Our acquisitions completed during the quarter were funded through using free cash flows from operations and through our working capital facilities. We maintain our targets and financial discipline with leverage below 3 times, even with the purchase of Pendragon expected to occur in the fourth quarter. We’re confident in our ability to achieve an investment grade rating over time. However, in the near term, we are prioritizing growth and acquisitions to drive our long-term strategy. Our goal is to fund the growth strategy and investment in adjacencies as they mature while maintaining a strong, disciplined balance sheet structure.

One of the unique elements of our strategy is the resilient annual cash flow generation of our existing business and our ability to ensure acquisitions are cash flow accretive on day one. We see significant synergies in deploying our capital towards growth as we build out our network, expand the markets we operate in and invest in adjacencies that provide consumer centric solutions for the full vehicle ownership life cycle. Our team is headed towards achieving our revenue goals and margin expansion to have LAD’s EPS to revenue ratio producing $1.10 to $1.20 in earnings per share for every $1 billion in revenue and in the longer term, generating $2 in earnings per share. As demonstrated by our achievements over the past few years, our culture of growth and high performance, coupled with the talents of our teams, give us the necessary tools to achieve our plan and create 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: [Operator Instructions] Our first question comes from Daniel Imbro with Stephens.

Daniel Imbro: Bryan, I’ll try to follow the rule to keep it to one question or at least one topic, but yes, I wanted to maybe focus on Pendragon a bit. I guess you said in the slides you still expect it to close in the fourth quarter. Can you maybe talk about the path forward to getting the deal closed, what are the upcoming dates or important things to keep in mind? And then stepping back from just the near-term accretion, there’s obviously a lot of pieces of the asset. There’s the Pinewood system, there’s growing the technology, there’s fleet. What excites you most, what do you see as the most near-term opportunity for financial accretion and strategic rationale, what are the longer term pieces? Can you just provide more detail on kind of strategically how you view all the different assets of Pendragon?

Bryan DeBoer: Well, as you saw, there was — I think they call it a circular battle instead of a proxy battle in the United Kingdom. We actually got results of the final vote of shareholders about five hours ago, which is wonderful. There were 72% of the outstanding shares that were voted and it was approved at a 99% approval rate, which is exceptional. So I think everyone really sees that the future of software-as-a-service exclusively company is the right answer and ultimately approved our deal. So from this point forward, all that’s left is really FCA approval and we expect a closing, we would expect sometime in late part of Q4, worst case early part of Q1, but it’s all dependent upon what’s called the FCA that has to approve the overall transaction.

But we’ve done our preliminary work, should be clear sailing. Now once we get to that point, obviously, there’s multiple components. But our big push is for the software-as-a-service company, Pinewood Technologies, led by Bill Berman, he’s going to be driving the marketing and growth. And as you may have saw in some of the press releases, that software company will grow and grow quite quickly globally outside of North America. We have three of the top 10 major groups in the United Kingdom that have verbally committed to join forces with us as well as one other that most likely will be joining as well. Plus we’ll be growing the platform across Western Europe. That gets us the phase one of the software company now. In terms of the North American JV, there’s a development plan related to how we’re going to approach that.

And to be fair, it’s probably a year or two out before we get something live and before it ever is truly monetized. It’s more of a pathway to be able to attach and attack our $110 million data stack, which is what our tech stack basically costs today and to curb some of those costs and most importantly, glue together all the fundamentals about our strategy that are a lot different than a lot of companies out there. So when we look at why Pendragon and why it’s such an important transaction to our future, it really built two pillars for our future of the initial four or five that we had established. Obviously, the software component allows us to get into a high profitability business as well as a pathway to leverage our own cost structures through that.

And then secondarily is the fleet management company, which is called Pendragon Vehicle Management, or PVM, which is, again, a high profitability business, massive synergies to automotive retail and service and vehicle procurement and vehicle divestiture and so on that we think are the real two key parts of this. Now along with it came $4.5 billion in revenues, that’s built on a lot of nice high line dealerships as well as some mainstream dealerships that really rounds out our United Kingdom presence with almost 10% market share within the high line brands that we’ll have. So our growth really now in the United Kingdom is limited to, I would say, probably VW, Toyota, and maybe continuing to grow with BYD, which we will have about a third of the country in the lower part of the United Kingdom that Pendragon already has.

Outside of that, our focus, again, is in North America, okay, to build out our network and reach that $60 billion to $70 billion, which we look at as our true optimized network in North America to really springboard the adjacencies and build a platform for our customers that’s holistic in life cycle. I know that was long winded, Daniel. Hopefully, that covered what we’re looking for there and maybe have a quick follow-up.

Daniel Imbro: It did cover it, yes. And then if I could, just a quick follow-up, maybe just on the US business. With the ongoing strike, you guys have decent domestic exposure. What have you seen here maybe progressing into October? We’ve heard anecdotes of parts availability issues and discounting slowing as inventory works down. Just how are you guys planning for that here in the fourth quarter? What are the puts and takes as you look at the rest of the year from the ongoing strike?

Bryan DeBoer: I think most importantly, believe it or not, our D3 inventory sits still above 70 days supply on the ground, okay? And in transit, we’re still sitting at the same amount we were six weeks ago before the strike. Both of those numbers are consistent. So we look pretty strong going into the year and we’d encourage that we try to find a middle ground. So in the future, in Q1, we’ve got some inventory sitting out there. I will say this. If you remember and go back, Lithia at one time was three quarters domestic unit sales. Today, Lithia only sits at 23.9% domestic unit sales, okay? So we’ve flipped it on its head. And now with the international expansion as well as the luxury and import expansion domestically, we don’t have as much exposure as we used to. And again, we sit pretty nicely right now with units on the ground and let’s hope for some type of reconciliation over the next four to five weeks.

Daniel Imbro: And on the parts side, has there been any change in parts availability for your service progress?

Bryan DeBoer: Chris, you have insights on parts?

Chris Holzshu: Yes, so we have the highest level of parts inventory that we’ve seen in the last six months. So what the production ramp-up has done is given us parts on the ground, I think, preparing for the expected kind of decline in overall parts in the coming kind of quarters. No line of sight on what that’s going to look like. And I understand that there’s a lot of training going on right now to kind of make sure that we can keep as many of those parts coming into our stores as possible. I think the pressure that we have right now is more on special parts kind of fast-moving parts, special warranty kind of related parts that are supplies being strained. But too early really to judge the impact on that when you’re seeing overall warranty up 13%.

Operator: Our next question comes from John Murphy with Bank of America.

John Murphy: I just wanted to follow up on that inventory question. Outside of the D3, how does your inventory stand? And how many sales do you think you’re kind of losing or not fulfilling because of that tight inventory in the US?

Chris Holzshu: So I think when it really comes down to it, demand is high. Demand is high for news. Demand is high for used. What it really kind of is happening right now is really around affordability. And so when you think about interest rates going up, we still have — the majority of our consumers have a FICO score less than 720. What we’re managing is really price point because payments — overall average payment is staying flat. And so as production continues to kind of drop down in ASP level trim packages, same product but maybe decontented a little bit, I think you’re going to continue to see the push up on new vehicles getting back to kind of the 16.5 million, 17 million SAAR that we saw for five straight years pre kind of COVID pandemic.

But the other side of that is that you have a lot of customers that manage their overall payment by going into the used market. And the dynamic that we’re dealing with, as I mentioned in the prepared remarks, is we lost 10 million units in production, which is putting a strain on those late-model vehicles that are now coming through the pipeline. And so we really believe that being a top of funnel new car dealer where 70% of our vehicles come in on trade is a massive advantage because it allows us to be at least not buying those vehicles from options where the higher prices are being paid to fill spots but not fill [gross]. And so some of the pressure that you saw this quarter on used car gross, it will probably continue just because as we have to fill holes and move volume, which does benefit us on the recon side, it benefits on F&I is going to continue to just kind of balance out between where those prices are and whether consumers go into new car purchases or used cars.