Chris Bottiglieri: Hi, everybody. Thanks for taking the question. One quick clerical question and a bigger picture question for that. But the first one is following up on the changing the slide deck. It looks like you kept the – reiterated the $50 to $55 in the near-term plan, but then cut the SG&A to gross, the operating and cut operating margins at least at the midpoint. So just trying to understand if you’re targeting the higher end still or you’re just giving a range or why the EPS didn’t change mathematically?
Bryan DeBoer: Chris, so I think what Chris is referencing is Slide 14. It’s an important new slide of the slide deck, because it reconciles how we get to $2 of EPS for every $1 billion of revenue. Where we’re looking short-term, why don’t we take that offline, we can help you with your model and be able to achieve that. I would like to go back through of what our crosswalk is, to get to the $2 of EPS. It’s important to know this. And everything that happens until we normalize in GPUs, yes, we’re going to always be rolling up our sleeves and driving to execute and achieve the highest results. But our focus is on how to achieve and weave together the ecosystem to achieve $2, okay? So our stores today, the $22 billion that we purchased over the last four years, three and a half, four years, we believe between those and the existing store base should be able to produce another $0.30 to $0.40 for every $1 billion of revenue.
And that’s coming from being in better markets, being in less regulated markets like the Southeast and the South Central, and improving the performance in the stores, meaning grow the people, okay. And incentivize them to be able to grow market share and reduce costs, okay? Alongside that is DFC, well on its way to profitability later this year, okay? And most importantly, through the pains of most of the CECL as well as the seasoning of the portfolio, which is quite beneficial. That’s another $0.20 to $0.25 per share at normalized steady-state position at a 20% penetration rate, okay? So keep that in mind. We also just added a fleet management company. Even though we have one in Canada and a little on in Detroit, this is a real fleet management company with 30,000 to 40,000 units under contract that they’re managing, they’re selling and they’re bringing back into their organization.
We believe that fleet management can be another $0.10 to $0.15 of lift in the long-term, okay? It’s a highly profitable business. The Pinewood Vehicle Management or PVM is highly profitable, just like Pinewood Technologies is highly profitable, okay? So, we’re not looking for additional burn rates of any kind, okay? We’re looking at how to get rid of those burn rates, and we’re well on our pathway to do that. Other adjacencies, and you can see what those are listed as in the slide deck, add another 5% to 10%. And we believe there may be more upside in those adjacencies. We just haven’t been able to put our fingers on all that but will in the coming quarters and years. Lastly, the remaining 10%, or so comes from scale advantages i.e., cost savings on Pinewood if we’re able to move to that system someday, okay?
Cost of capital, okay, moving to IG rating and saving 50 to 75 basis points in our overall interest costs, okay? Those type of things as well as the possibility of buybacks, even though we don’t believe that needs to be the driver to get to the $2, okay? So keep that in mind, Chris, as we think about it, but I think that’s where the executive team is focused, while the operational teams are really focusing on how do, they get to the $50 to $55 or $60 as soon as they possibly can.
Operator: Our next question is from Bret Jordan with Jefferies. Please proceed with your question.
Bret Jordan: Hi, guys. Can we talk a bit more about the credit business, maybe what you’re seeing year-over-year in loss reserves? I think your FICO scores have improved and your delinquencies may be down, but obviously a bigger loan portfolio. I mean, maybe – I guess, really what you’re seeing in the underlying consumer health. And then also on the recovery side from repos, what you’re seeing in repo volumes and how those are winding up as you sell them out?
Chuck Lietz: Yes, Bret, great question. This is Chuck. So first and just sort of a general market sort of overview, we see the same things that everybody else sees, which is the consumers are under some degree of stress, and that delinquency rates have either got right to, or slightly above sort of pre-pandemic levels for 30-day delinquency. But I think that really goes back to sort of DFC’s strategy and real power of being top-of-funnel captive finance business. And then back in 2022 first quarter, we were able to dramatically increase our credit quality, over 50 points of weighted average FICO from two years ago. And that’s really standing us a good stead relative to withstanding sort of some of the impacts of some of this negative noise that we’re seeing in the economy.
So our portfolio is performing very well. We had a recent ABS issuance in the market this quarter that should go off very well and was very well received by the marketplace. And we feel that, that’s a big contributor to how we are managing our portfolio. To answer the second part of your question, which is the repos, our recovery rates were stressed probably the last 12 to 15 months with some of the industry experience of the lack of repo agents and repo and recovery being limited by the distance of which they would go to car vehicles. We have overcome that and our recovery rates are either at, or slightly above the market rate. It’s still something we watch very closely and keep an eye on, but we feel comfortable that our recovery rates are in line with the market.
Thanks for your question.
Operator: Our next question is from Michael Ward with Freedom Capital. Please proceed with your question.
Michael Ward: Thanks very much. Good morning, everyone. Bryan, I think you mentioned in your comments that you saw SG&A expense as a percentage of growth going down below 50%. And I think you guys have already talked about used vehicle gross as normalizing, moving higher. What are the other components of that? Does that assume that you get a higher profitability from DCF? Is that folded in there? I assume there’s some SG&A costs in there for the ramp-up of DCF. What are we looking at there?
Bryan DeBoer: It does. So we get to 55% operationally within our core businesses, which is vehicle operations. So that includes Driveway, GreenCars and all the Lithia core stores, okay?
Michael Ward: And you have stores at that level today, correct?
Bryan DeBoer: We have stores, lots of stores at that level in normalized times. Lots, okay? And remember, we purged almost 50 stores over the last, what, six, seven years that were stores that typically had SG&A of above 85%, 90%, okay? So about quarter of our stores today operate in the mid-50% range in normalized times, okay? We believe that the network has been built with such good quality stores that, we believe that’s the normal, okay? And that’s where our ability to execute and utilize our world-class performance management systems like, what we call our SPS, which is our core guiding document for performance management. And that’s how we really drive the results. And it’s built on the back of both market share, loyalty as well as profitability to achieve higher performance.
And that is really the secret sauce of what Lithia has always been able to do and will do once again to achieve that 55%. The rest of the 5%-plus is coming from higher-margin businesses like fleet management, okay, and DFC as well as a few of the other adjacencies. And then obviously some scale advantages and cost that we expect to be able to realize in the coming years.
Operator: Our next question is from David Whiston with Morningstar. Please proceed with your question.
David Whiston: Thanks. Good morning. Could you just give your opinion on when you think leasing penetration will be back towards close to 30%?
Chris Holzshu: Yes, David, it’s Chris. I mean, I think it’s hard to highlight when that is, because we don’t control kind of the incentive base that, the manufacturers support us with. But it’s obvious that with the buildup of inventory especially in the domestic ranks, that contributions, whether it’s in leasing, or finance participation, or even cash incentives are going to be the driving factor in that. And I think throughout the back half of the year, we expect that to continue. And I think the other side of it is getting a clear line of sight on the residuals that they provide, which in this dynamic market that, we’ve been dealing with the last couple of years with COVID and pricing and everything else. I think, is on everybody’s mind, but a little outside of our control, David, but we’ll continue to execute in the environment that we’re in.
Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to Amit Marwaha for any closing comments.
Amit Marwaha: I want to thank everybody for joining us today. We look forward to speaking in the coming days and weeks. Have a good day. Take care.
Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
