Lithia Motors, Inc. (LAD) Q1 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Lithia Motors First Quarter 2018 Conference Call. Management may make statements about future events, including 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 differ materially from the statements made. The company discloses material risks and uncertainties in its filings with the Securities and Exchange Commission. The company urges you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. Management undertakes no duty to update any forward-looking statements, which are made as of the date of this release. Management may also discuss non-GAAP financial measures. Please refer to the text of the earnings release for a reconciliation to comparable GAAP measures. Management will provide prepared remarks and then open the call for questions. I will now introduce Bryan DeBoer, President and CEO. Mr. DeBoer, you may begin.

Good morning and thank you for joining us today. On the call with me are Chris Holzshu, our Executive Vice President; and John North, Senior Vice President and CFO. Earlier today, we reported first quarter earnings of $2.07 per share, which marks our 30th consecutive quarter of record performance. We increased quarterly revenue 19% and earnings 16% over our adjusted 2017 results, primarily driven by our proven greenfield growth strategy of acquiring strong franchises that are underperforming to their potential and then improving them. Vehicle sales improved sequentially each month of the quarter. January and February were softer than expected, and we experienced more severe weather than typical in the Northeast throughout the quarter. Despite the slower start, we finished strong with a record March, which generated over 70% of our earnings in the quarter. We expect this momentum to continue throughout 2018 and beyond. From an operational perspective, on a same-store basis, total sales were flat. New vehicle sales decreased 2%, offset by solid results in all other business lines, with retail used vehicles up 5%, F&I increasing 5%, and service and parts growing 3%. Fixed operations remain strong as we continue to focus on customer retention through the creation of personalized service experiences with each customer. Sales shortfalls in January and February created an urgent call to action for our leaders to more aggressively pursue the over $200 million in unrealized earnings potential available to us. Aside from cost savings opportunities in personnel, advertising and interest expense, much of this earnings improvement will come from expanding sales and margin, which Chris will be elaborating on further in a moment. Our stores continue a variety of online buying and home delivery models tailored to their markets, the hallmark of our entrepreneurial spirit. Our service and delivery network reaches 81% of the U.S. population as measured by vehicle sales registrations. Online initiatives are pacing 24% ahead of last year, resulting in 80% of our total first quarter vehicle sales originating online or approximately 64,000 new and used vehicles sold. Our goal of selling 85 vehicles per location each month continues its progression as we sold 67 used vehicles in the first quarter, up from 66 units in the comparable period last year. We also posted an all-time record result in F&I at $1,380 per vehicle. We are operating in an exciting time where change in disruption can create considerable opportunities. The teams at our 186 locations are passionate about understanding our local customers and innovating to find creative and efficient solutions for them. The speed of adaptation of automation, electrification, car sharing and other changing ownership solutions are primarily being driven by consumer affordability and convenience. Understanding our customers' individual needs are key to future market share and retention dominance. Combining world-class performance management systems, a deep talent pool, a strong balance sheet and a proven growth strategy, we are poised to capture these opportunities, while balancing profitability along the way. During the first quarter, we added Honda and Acura in Buffalo, New York, expanding our national reach to another 1.2 million people. We also added the Day Group, complementing our Baierl locations in Pittsburgh, and the marquee assets from the Prestige Family of Fine Cars in Bergen County, New Jersey, adding to our existing base of stores as well there. Earlier this month, we added Broadway Ford in Idaho Falls, Idaho and Buhler Ford in Eatontown, New Jersey, our first domestic franchise in the area. Lastly, we divested three smaller franchises in Fresno, California. We estimate these moves will add $1.4 billion in net annualized revenues, propelling us beyond $12 billion in 2018. With two-thirds of the year remaining, we have nearly eclipsed the amount of revenues added in 2017. We see significant opportunities in the market that are more attractively priced than in the recent past. We intend to continue to expand and optimize our network of local customer service and delivery centers consistent with our strategies to effectively respond to changes in personal mobility. Our industry is still highly fragmented, and we believe we can emerge as a dominant provider of full service mobility and personal transportation solutions. Expanding our service and delivery sites builds the scale and national footprint that can accelerate our success in the evolving ecosystem of personal transportation. Future expansion into the Southeast and pockets in the Midwest remain an objective in the coming years. A larger organization with coast-to-coast coverage provides scale and inventory, cost management, financing and technology. The web rewards size, while owning and controlling the inventory is paramount. We have one of the largest new and used vehicle inventories online with over 75,000 units available for sale. We partner with industry leaders and start-ups on software development that is shared among our stores. Additionally, our network of inventory and people can provide traditional sales and service experiences, plus the crucial infrastructure for the operation of car sharing, fractional ownership and electric fleets. As a top of food chain provider with not only used vehicles, but also new vehicles, certified vehicles, financing, service and parts revenue streams, we create a more controllable, stable and diversified model than most, if not all, new market entrants. In summary, we remain focused on delivering the annual double-digit growth that we have accomplished for the last nine years. Accounting for the momentum we expect for the remainder of the year, the significant earnings power in the current operational base and the current acquisition environment, we remain optimistic on our 2018 outlook. These factors, coupled with the most liquidity in our history and sector-leading low leverage, gives us confidence that we can continue to drive significant top and bottom line improvement. With that, I'll turn the call over to Chris.

Thank you, Bryan. Our mission of Growth Powered by People means cultivating a high-performing culture, where all of our team members deliver top-line performance, while leveraging our cost structure. Attracting, retaining and growing the best team possible is a key to capturing the dry powder we have identified at each location. To build an organization that continues to anticipate and respond to the needs of our customers, we inspire and empower our over 15,000 team members to innovate, grow and advance their careers. We are enhancing our internal personnel development efforts, as we have shown that our internally promoted leaders are twice as likely to succeed and become high-performing. Our efforts are delivering results, as last year we internally promoted 80% more managers than in 2016. Our entrepreneurial culture rewards innovation and technology and is helping us to attract seasoned leaders from across our industry. Millennials now make up over 50% of our workforce, boosting our familiarity with technology that enhances online buying, financing and servicing experiences for our customers. By allowing our teams to utilize a variety of technology and tool sets as they see fit, we can evaluate and experiment with the best technology solutions. Similar to an app environment, Lithia relies on competition between our internal developers and technology vendors to remain nimble and to avoid mandating a single solution across the entire organization. We are a rapidly growing organization, as we have acquired nearly $7 billion in annual revenues in the last five years. In addition, our same-store results currently contain 70 locations that are not fully seasoned and will continue to improve performance to generate an annuity stream of earnings in the future. Our job is to accelerate this improvement as quickly as possible. We see opportunity in each business line and, on average, new acquisitions have approximately 2.5 times more earnings potential than our seasoned stores. I'd like to provide more detail on the results in the quarter. As Bryan mentioned, approximately one-third of our locations were affected by weather in the first quarter, notably in Alaska, Montana and the Northeast, which impacted same-store comparisons. In the quarter, on a same-store basis, new vehicle revenue decreased 2%. Our average selling price increased 3% and unit sales decreased 4%, below national sales increases of 2%. Gross profit per new vehicle retailed was $2,010 compared to $1,951 in the first quarter of 2017, an increase of $59. As referenced in our investor presentation, new vehicle sales at our acquisitions average 30% below the market share expected by our manufacturers and 50% below the share achieved at our seasoned stores. We continue to inspire and motivate our teams to capture this opportunity. Same-store retail used vehicle revenues increased 5%, of which 4% was due to greater unit sales and 1% to an increase in selling prices. Our used to new ratio was 0.93 to 1. Gross profit per unit was $2,080 compared to $2,245 last year, a decrease of $165. Core units increased 11%, certified units decreased 3% and value auto decreased 3%. While our unseasoned stores saw an 11% increase in unit sales in the quarter, used vehicles continue to be our biggest focus area. This is typically the lowest performing business line at acquired stores, as they typically sell half as many used vehicles as seasoned stores. Achieving the 85 units per location per month objective will result in a 25% increase in used unit sales. Same-store F&I per vehicle was a record $1,380 compared to $1,309 last year. Of the vehicles we sold in the quarter, we arranged financing on 72%, sold a service contract on 47% and sold a lifetime oil product on 26%. In the quarter, our seasoned stores averaged over $1,500 per unit in F&I or more than $300 higher per vehicle than unseasoned stores, and almost double the PVR of newly acquired locations. Our same-store service, body and parts revenue increased 3%. Customer pay work increased 4%, warranty increased 3%, wholesale parts increased 1% and our body shops increased 1%. We will have over 4 million unique customer transactions in our maintenance centers in 2018. Our factory-certified technicians, superior service facilities and state-of-the-art diagnostic equipment will continue to ensure that we are the preferred location to service consumer vehicles and assist in attracting top technician talent. Opportunity remains as company-wide service retention, a measure of consumer loyalty and repeat business, is still at 20% below our seasoned store levels. Same-store gross margin was 15.5%, an increase of 30 basis points from the same period last year, primarily due to the mix shift. The inclement weather and related softer vehicle sales and service business in the first two months of the quarter elevated our SG&A expense as a percentage of gross profit, as we bumped up again semi-fixed, personnel and advertising cost. As vehicle sales recovered in March, we saw significant improvement in SG&A leverage, as productivity increased and we better leveraged our advertising expense. In March, our SG&A as a percentage of gross profit was in the mid-60% range. Our SG&A is variable, but not on an instantaneous basis. If we were to experience a sustained lower sales environment, our leaders would reduce SG&A spending levels to achieve appropriate cost leverage. Given our robust data and best-in-class operational reporting, we anticipate this could be achieved over a one to two-quarter period. Unseasoned stores performed 1,500 basis points worse in SG&A than seasoned stores. As we drive revenue growth in all lines of business, the typical new store SG&A of 90% or higher will move to company average, allowing us to further drive down our consolidated results over time. In summary, we have significant opportunity to capture the more than $200 million in dry powder available. The key to our success is the growth and development of entrepreneurial-driven leaders across the organization. This spirit allows us to remain humble, stay nimble and leverage technology to adapt to market needs, while maximizing the scale of our platform to innovate and deliver the best-in-class experience at our sales and delivery centers coast-to-coast. And now, a few comments from John.

Thanks, Chris. At March 31, 2018, we had approximately $134 million in cash and available credit, as well as unfinanced real estate that could provide another $260 million in 60 to 90 days for an estimated total liquidity position of $394 million. At the end of the first quarter, we were in compliance with all of our debt covenants. Our leveraged EBITDA, defined as adjusted EBITDA less used floor plan interest and capital expenditures, was $60 million for the first quarter of 2018. Our free cash flow as outlined in the investor presentation was $35 million for the first quarter of 2018. We forecast free cash flow of $125 million for the full-year. Our net debt to EBITDA is 2.9 times, which increased from year-end levels due to the significant acquisition activity in March, while our denominator only benefited from one month of EBITDA from operations. As we continue through 2018 and the additional points contribute more EBITDA, we expect the ratio to return to our targeted range of 2 to 2.5 times. We still maintain one of the lowest leverage ratios in our industry. Earlier this morning, we announced a 7% increase in our dividend to $0.29 per share related to our first quarter financial results. We are pleased that the continued growth in earnings has allowed us to raise the dividend for the eighth consecutive year. We have taken advantage of the volatility in our share price to opportunistically repurchase stock. Year-to-date, we have repurchased 90,000 shares at a weighted average price of $98.02. Under our existing $250 million share repurchase authorization, approximately $154 million remains available. Our tax rate came in at just over 25% in the quarter, as we benefited from the annual vesting of our incentive-based stock awards. Any step-up in basis to our employees is recognized as a discrete item in the quarter. For the full-year, we still estimate an effective tax rate around 27%. As Bryan mentioned earlier, we continue to target revenue of $12 billion to $12.5 billion and $10.60 in earnings per share and an estimate of SAAR in the range of 16.5 million to 17 million units. We continue to generate significant free cash flow and our leverage remains at comfortable levels. We will deploy capital towards accretive investments and opportunistically return it to shareholders as efficiently as possible. We also continuously evaluate ways to expand our business into areas where we can capture more of the automotive value stream. This concludes our prepared remarks. We'd now like to open the call and take some questions. Operator?

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey. Good morning, guys.

Good morning, Bret.

Hi, Bret.

You commented on the weather impact on some of the softer sales in the quarter, but then the recovery later in the quarter. Could you talk about the regional dispersion on the recovery? Is it previously weather impacted markets or is it more operational recovery? And I guess within that, I think in the fourth quarter, you talked about DCH having plateaued a bit. Could you talk about recent trends on the East Coast?

Sure, Bret. This is Bryan. I think if you look at the quarter, the Northeast had weather throughout. Believe it or not though, it was still pretty bad in March. We actually had three of the storms hit in March, and they held up fairly well. If we look at Alaska and Montana, there was some weather. We also had a little bit of weather in Oregon for three days that we lost, which impacted things. But I think ultimately, I really believe – and I'm not – there is no way to really define specifically as to what it was in January and February and where the weaknesses were. We know it was weather-related, but we also notice that the consumers may have been a little bit tentative in many of the high state tax areas. And then, it seemed like they may be started to do their taxes and figure out that maybe it's not so bad and – with the impact of state tax not being deductible over a certain amount and they began to buy again in March. So, if we looked at some specific states, we can look at like New Jersey was down 3% in the quarter, but it was a strong March. New York was down 5% in the quarter, and again, a strong March. Oregon was down 2% in the quarter and a strong March. Vermont, same thing. Hawaii, same thing. Iowa, same thing, which are all – that's six out of the top 10 highest state taxes in the country. So, we're kind of pleased that the consumers have maybe grounded a little bit there and we think that they're trending back to their typical buying patterns. Specifically about DCH, I think this is something that we find a lot of times when stores have improvement that it's very easy to be comfortable with the accomplishments that you've achieved and forget that there's still more opportunity. But it's neat to see that our leadership teams at DCH are re-inspired. I think January and February helped create a realization for all of us that our DCH quarterly results at 2% operating margin in albeit a seasonally a little bit tougher quarter isn't where they want to be, and they came back through in March and we're seeing some pretty good similar trends of what we saw in March leading into April.

Great. Thank you. And then, one quick follow-up on service. It's a tough comp year-over-year, but one of your peers yesterday was commenting about a shortage of labor impacting the potential. Are you seeing anything meaningful headwinds to your service comps on the labor side?

We were up about 3% service, parts and body. We're not seeing shortages in labor like we used to. It is nice to see that oil prices in Texas are strong again, which is where we did see some labor shortages five to seven years ago when oil was close to $90, $100. But so far, it's pretty stable. We're able to grow our teams internally and we're able to maintain pretty good staffs in our service departments.

Great. Thank you. I appreciate it.

You bet, Bret.

Thank you. Our next question comes from Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Hi, guys. Thanks for taking the question. I wanted to dig...

Good morning, Chris.

Hey, good morning. I wanted to dig around a little bit on SG&A. Can you talk – are there any temporary items that were inflating SG&A this quarter? You mentioned weather. But did you actually incur extra SG&A because of the weather or it's just you didn't lever it as well against gross profits as you normally do?

Yeah, good morning. This is Chris. So, you've got to start with January and February, which are already some of the lowest production months that we have in the year, and then when you compound that with the severe weather that was really impacting a lot of our Northern states, you have some pretty significant impacts on the overall leverage we can get. And a lot of that's just due to our comp structure, where we carry the same teams that we had in December, which is one of our strongest months of the year, into January and February getting ready for March. And these individuals are on really a minimum wage or guarantee. That means when they don't hit production levels, we're not getting the leverage in cost on our personnel expense that we typically see in our better months. So, yeah, the combined weather with low production months in January and February definitely had an impact on our SG&A. And, as we said, the leverage returned again in March when we saw our SG&A as a percentage of gross profit down in the low to mid-60s.

Got you. Okay. And then, is there a way to describe how much of the SG&A growth was coming from kind of your acquired stores? Just trying to get a sense for like how we think about the rest of the year, now that you've kind of got past these weather issues.

This is Chris again. I think the easiest way to answer that is just looking at the buckets that we refer to, where you have your unseasoned stores and your seasoned stores. And on the recent acquisitions, we're seeing SG&A as a percentage of gross almost 15 percentage points or 1,500 basis points higher than our seasoned stores. So, as they integrate over time, and we can look at it in a succession of a five-year period, it continues to fall as they continue to focus on increasing top-line growth and maintaining a cost structure that brings more leverage and more profit to the bottom line.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Thanks. Good morning, guys. I'm trying to guess just to...

Hey, Steve.

Figure out a little bit more about the lack of leverage in January and February. They're always seasonally weak months, certainly relative to the rest of the year. I get the weather part, but SG&A to gross was as soft as it's been in quite a number of years. So, I'm just wondering if there's just a little bit more to the – as they're more recent acquisitions that haven't been sort of truly optimized. Is that really more of it?

Steve, this is Chris. Good morning. I guess it really is predominantly on the same-store basis, when you looked at what the weather impact was. We can talk about new acquisitions and the impact they have. But for the quarter, what we saw was a $5 million increase in gross profit year-over-year on that same-store base. But our SG&A was actually up $8 million. So, we actually had decreasing incremental leverage on a same-store basis in the quarter on a same-store basis, and predominantly all of our stores in January and February saw that trend. And it's really a function of again the way that our comp structure works, and even our advertising plans, they don't leverage down significantly in those months. And so, then when you had three, four days of weather issues in our Northern states really across from Alaska, Oregon, Washington, North Dakota, Montana, all the way out East in New York and New Jersey, we just didn't get the scale. And, as Bryan said, 70% of our profit came from March because of that. So, trends are looking good in April and we anticipate that that's behind us.

Got it. Thanks. And then just secondly as it relates to used, so your days sales ticked up a little bit and I think is at the sort of the high-end of your comp range for reasons you guys have laid out before and the margins are down. What are you seeing in used and sort of how do you sort of do that dance between turning inventory and keeping gross margins?

Steve, this is Bryan. You're correct. We ended Q1 at 57 days' supply, which was 5 to 7 days higher than it was at the end of Q1 last year. We started the quarter, however, almost 17 days higher than where we were in the previous year. And I think in January and February, a lot of that margin degradation occurred. We did end up pulling out March. It was $175 a unit better gross per unit than it was in January and February, and we're seeing those similar trends in April.

All right, got it. I'll hop back in queue. Thank you.

Thanks, Steve.

Thank you. Our next question comes from James Albertine with Consumer Edge Research. Please proceed with your question.

Good morning and thank you for taking my question, gentlemen.

Hi, Jamie.

I wanted to ask, it's been a few years now, you've been running your dual-market strategy. When it's sunny outside and it's not snowing or sleeting, how do you compare your urban market performance versus your rural market performance and are there any considerations that you've picked up on whether it's access to talent, not just service, but as well sort of store manager level or general manager talent in those markets that you may have underestimated as a difficulty when you reached into urban versus your sort of primarily rural strategy? Thanks.

Jamie, this is Bryan. I love the – when it's sunny out, but that's a good catch. Anyway, I think if we're comparing and contrasting our exclusive market strategy versus our metro market strategy, specifically looking at what we're learning in metro markets, the upside is huge. I think from a technology standpoint, you have to be much more savvy in metropolitan areas, which is helping bring a lot of value into our exclusive markets as well. I think if we look at the competition or even the consumers, they're less tolerant, which means you have to be even better at what you do, which leads to the third item, which is are you able to keep the people. When we first combined with DCH, we weren't sure that people were going to be as stable and would be more transient. We're really pleased to find out that there are similarities between stability of people in metros versus exclusive markets. Our turnover rates are very similar to our exclusive markets. And if you run a good business and provide opportunity and ownership for those people to be able to make their own decisions, we're finding that the stability of people is very similar, which means you're able to continue to grow and season the stores. If we look at where we're at in terms of margin today, our margins in the metropolitan areas are slightly worse than our exclusive areas. However, we have multiple stores that are showing us that the margins in metropolitan areas have the potential to be even higher than what exclusive markets are. And I think some early examples of that are maybe a Paramus Honda in Bergen County or the new Toyota store in Downtown LA that are starting to reach volume levels where you're levering your fixed cost at such a high amount that everything is dropping to the bottom line. And I think we're very pleased with our entry into metropolitan areas because of that.

And if I may, Bryan, and just as a quick follow-up, you've accelerated your M&A. You've talked about this now for several quarters, and we certainly applaud the M&A growth strategy. It's worked very well over time. Are we at a point though that you're sort of accelerating to the point where general managers might be sharing responsibilities in an interim fashion until you find more permanent solutions for some of the newly acquired stores? And could that be having an impact potentially on the speed of integration and the sort of the leverage near-term of some of those newer acquisitions?

Jamie, I think that's a – it's a really good insight, because I think the realization that growth is powered by people, as Chris mentioned, is how we grow. And I think we're always balancing that idea of are we growing faster than our people can handle. And I think at today's rate, I don't believe that's why there was a little bit of difficulty in January and February. I do believe that some of the new acquisitions like the new ones in Bergen County, the stores lost money last year. In the – we just bought them in March and it's going to take some time to turn those stores. So, the idea of accretion like a typical acquisition can be difficult. But we also know that those five key assets from that group three years ago made considerable profits, upward of 3% operating margin. So, we believe that it's a quick turnaround. I do think that the idea of slowing growth to be able to catch up may be relevant at some time. I don't believe that that's where we're at today. And ultimately, if acquisitions are accretive on day one, you would continue to deploy capital, because we believe it's a better use than share buyback or even dividends or other uses of capital. So, I think it's a great insight and it may take us a little further discussion on the phone, if you'd like.

No, I appreciate that color and we can certainly follow up offline. But thanks again and best of luck in the next quarter.

Great, Jamie. Thanks.

Thank you. Our next question comes from Rick Nelson with Stephens. Please proceed with your question.

Thanks. Good morning. So, Bryan, you mentioned this service delivery model. Can you provide more color on that and how you see that evolving?

I think when we look at who we are today, much of our business has transitioned away from traditional, what we would call, old retail automotive business, where a customer drives by the dealership and they see a car and they decide to stop and come in, or we advertise in the newspaper or on TV and they decide to come in, and their car breaks and they decide to bring it into their closest service facility. Today, most of our interactions with our consumers begin on a web-based interaction. So, my comments, we mentioned the fact that over 81% of our business is done and initiated online, which means the interaction was found online on that vehicle unlike driving by that vehicle. It typically starts with chat or it starts with e-mail discussions or possibly a phone call, where we're looking at how do we meet our customers' needs and then how do we fulfill that engagement with that customer, whether it's delivering at his home or whether it's them coming to one of the dealerships to be able to take delivery of that car. The same happenings are happening in service and parts, whereas many of our stores today, it's a different experience. People aren't hanging around the dealership as much as they used to. They may come in and drop their cars off or we may go pick it up in their living room and bring it back to our store, then redeliver it back to their home. If they're bringing their cars in, many times the customers will just get an Uber and go home or we'll shuttle them or we have loaner vehicles that are there. But the interactions are mostly more in passing rather than long interactions, which is making technology a lot easier to interact with our customer. And I think I could get into a lot of different examples of how technology helps those interactions by online appointment making, by online payments and so on and so on to be able to talk about those. But the business that we're in today is about fulfillment and fulfilling those needs of the consumers the way they choose within the comfort of their own homes rather than trying to draw them into the dealerships, where they're sitting around and hopefully they'll have a reciprocal effect and buy a car or do something else to be able to spend their time and money.

But it is all done out of existing kind of facilities, you're not developing a new type of model?

We believe that our existing footprint, which touches over three-quarters of the population in the United States, can service that entire portion of the country. And this is being built out on online fashions by each of our individual stores. And then, here in Medford, we're also developing strategies on our own and technologies to be able to go to market in different ways. It's not as easy as saying that we have one website for every solution. We have multiple websites to go to market. We have multiple app solutions in each individual store, and 185 times three to four different apps or websites isn't something that is a one size shoe fits all model. We believe that consumers have individual needs and that we need to be able to meet each of those individual needs rather than build a template that's the same for everyone.

Got you. And if I could sneak one in on capital allocation, how do you view the trade-off between acquisitions and stock buybacks now with your stock below $100? I know you were active on the buyback front as well this quarter.

Yeah. Rick, this is John. I think we always try to be opportunistic with our share repurchases. We apply a similar hurdle rate, and as you know, we typically target paying three to five times on an EBITDA basis for acquisitions once they reach maturity. So, I would say when you start to see our stock bought at the upper end of that range, we want to be more constructive. And if the market's not going to reward us with a multiple and valuation that makes sense, we're happy to buy back stock. We still believe the best use of capital is through acquisitions to develop the national footprint that Bryan spoke to, which allows us to reach more of the U.S. population, which we think is the best longer term strategy. But we won't drive by the opportunity to be constructive on repurchases if the market's there for it.

Okay, fair enough. Thanks a lot and good luck.

Thanks, Rick.

Thank you. Our next question comes from the line of Armintas Sinkevicius with Morgan Stanley. Please proceed with your question. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. Thank you for taking the question.

Good morning, Armintas. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. So, this might be hard to sort of decipher from this quarter's results, but sort of inter-quarter, we spoke about DCH had sort of flat-lined, above targets but had been sort of flat in 2017 versus 2016 and your guidance for 2018 was to be similar to 2017. Just any sort of trends that you're seeing from DCH in sort of the first several months here of the year to help us think about the potential you see in the acquisition?

Armintas, this is Bryan. I think again similar to most of the organization, January and February was weak, and DCH was just as strong as the rest of the group when it came to March. I think if we look at their new acquisition opportunities, it's taking them a little bit longer to be able to improve stores. But I also know that they're a little more strategic in terms of how they approach problem solving. We're working with them on their measurement base, whereas they're utilizing a lot of the details at that first level rather than more macro level reporting and allow the people to be able to grow and prosper on their own, which we're helping with that type of strategy to be able to help grow the business. But like we said, their SG&A for the quarter was at 82%, which is not much better than it was when we combined three years ago. So, I think there is a lot of opportunity to continue to expand at both DCH and many of our other new acquisitions. On a positive note, the Baierl organization has taken off really well. If you recall, they were upwards of mid-80s as well in SG&A as a percentage of gross when they joined us. And they finished the quarter at a little bit below 70%, which is a big move pretty quickly. So, we'll have to be re-inspiring them that when they plateau, they have to find new solutions to be able to hit that next level. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And then, I think about the acquisition in New Jersey. That's, in our mind, sort of a premium sort of a trophy asset, if you may. How do we think about improvements – and it's a quality asset that you're able to acquire, given the sort of the macro circumstances, but how do we think about your ability to drive improvements in an acquisition like that?

Good question, Armintas. I think let me go back to the fundamentals of Lithia's greenfield growth strategy. It's to buy strong assets, which I think we all know that the Bergen County is one of the highest income markets within our country, let alone in New Jersey, it's number one. So, those franchises, those five franchises, are probably the strongest high-line franchises in the Northeast, okay. If we go back to how we look at developing those strong assets, we have an 86% track record of hitting our ROE targets. Now, those assets had deteriorated over the last three years, not so much in volume, but more so in operational profits. So, we believe that it's fundamentally our ability to regain margins, top line margins, to grow our used vehicles, to expand our service and parts gross profit, to bring our customers back into those stores, and then control the cost as we do that. So, on that acquisition, we had targeted that it's probably going to take us three years to be able to get them back to the 2.5% to 3% range. Fundamentally, the leadership in the store, there is fairly good leadership. We did replace general management in one of the stores and we're starting to see early signs of success in that store. We hope the other stores make the moves that they need to make to be able to trend towards that 2.5%, 3% margin within that three-year time horizon that we initially forecast. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay, I got it. Great. Well, thank you for taking the question.

Thanks for your question.

Thank you. Our next question comes from John Murphy with Bank of America. Please proceed with your question.

Good morning, guys. Just a first question just on acquisitions, it seems like there might be – and this is sort of a nuance in the way you're talking about stuff, but it seems like there might be some inclination to kind of lean back a little bit and not be as aggressive and work down SG&A and focus on sort of the cost like you just kind of just went through on Prestige. But there also does seem like there is nuance where you're saying you really need a national footprint in the Southeast and Midwest where you're less represented, are areas you're focused on. As you think about these acquisitions, could you go pretty aggressively into the Southeast and the Midwest just to get that footprint and maybe worry about the profitability a little bit further down the line, because it seems like you're really looking at that national footprint as something that is a little bit different than you would have thought about three years ago and in the next 5 to 10 years it just might be absolutely vital to long-term success?

Great, John. Thanks for the question. This is Bryan again. We're definitely not letting off on our acquisition cadence. Our current strategy remains intact. We will do acquisitions as they meet our 3 to 5 times EBITDA or between 10% and 20% of revenue on our purchase price. We look for a 15% to 20% after-tax return on a stabilized basis, which is the same strategies. And if we see those opportunities, we'll strike. The focus on parts of the Midwest or the Southeast are not that crucial at the time being. We still cover 81% of the country fairly easily. So, we weren't going to stretch to be able to get there. We are looking for a management team in the Southeast, because we believe that in that market it would be nice to have a base of people to be able to leverage and grow from. But I think in closing, more importantly, we're still growing. We don't believe that there's any hiccup in terms of our operating model, in terms of this greenfielding value-based acquisition strategy or we don't believe that there is a shortage of people. In fact, on the larger acquisitions like Baierl and Day and DCH as well as Carbone, there's great people that were there that we typically don't get when we buy our traditional one and two dealership acquisitions, and we're getting them in those. And we believe, if anything, we may have a glut of people in some of those areas. So, for us, it's same strategy, same focus, and we believe that we'll be able to expand into the Southeast through our normal acquisition targeting over the coming three to five years.

And...

Hey, John. This is Chris. Just to add on to that real quick is, the reason that we mentioned that there's 70 stores that are unseasoned that are in our same-store results is because we know that they're not going to come in, in one year, get to the level of performance that our seasoned stores are. And so, the cadence over time and the pressure that we're seeing on our SG&A is anticipated. And I think the key on that is continue to see steady progression in each of the cohort of acquisitions that we have and continue to focus one store at a time on the individual opportunities. And so, our plan is if we just stop buying stores, you would see our numbers improve as far as percentages, but we're not going to continue to see the top line growth and get the national footprint that Bryan is talking to.

Okay. That's incredibly helpful. And then, just one last follow-up. As you look at the month of March, there were some controversies sort of around the way that reporting sort of ended, and a lot of dealers as well as automakers closed the month on April 2. I'm just curious, as you guys closed your books, did you close them on March 31 or did you close them on April 2 and what kind of impact may have that had on March? There's some confusion around the SAAR number in March was a little bit pumped up because of that just a little bit. Just curious how you saw that in your business.

Hey, John. This is John. We closed our books on March 31, like we do every year in the first quarter. So, the OEMs have those extra days from time-to-time depending on how the weekends fall, but that doesn't apply to us.

Okay, great. Thank you very much.

Thanks, John.

Thank you. Our final question comes from David Whiston with Morningstar. Please proceed with your question.

Thanks. Good morning. On the acquisitions, I agree with you that – I think you are going to continue to be aggressive. But you've only got $65 million in your revolver. So, do you need to amend that anytime soon?

Hey, David. This is John. We do plan on an amendment in 2018. I think we're in the process of doing that. I would expect you're going to see us upsize the revolver primarily to generate more new vehicle floor plan capacity. So, what's happened is we've shifted more of the balance, because we can reallocate it among those lines to give us more availability for new and used cars, and we're going to go out to our lender group, and I expect that they'll likely be supportive of upsizing.

Okay. And gas prices have been creeping up a bit, but are still quite affordable. What do you think American consumers would do both in your rural markets and in LA and New York if gas went to $4 or $5 a gallon? Would it be same kind of mass rush to sedans or people say these crossovers are really way more fuel efficient than they were 10 years ago?

David, this is Bryan. I think you have to look at each individual market and the behaviors within that market, because I think if you look at many of our rural agriculture and energy-based markets, even during the higher gas prices that we saw in the late 2000s, we didn't see major changes in the buying behaviors because trucks and SUVs are how they live. Now, when we talk about crossovers, there will be some transitioning into that type of model, but I think it's a individual region-by-region decision as to how people are impacted by fuel prices.

Okay. Thanks very much.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. DeBoer for any closing remarks.

Thank you everyone for joining us today, and we look forward to updating you again on our results in July. Bye-bye.