Lithia Motors, Inc. (LAD) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Lithia Motors Third 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 would now like to turn the call over to Bryan DeBoer, President and CEO. 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 the highest adjusted third quarter earnings in company history, $2.83 per share, or a 30% increase over our 2017 results. We generated strong top line growth as quarterly revenue increased 15% over the prior year to $3.1 billion. We increased revenues across all business lines. New vehicle increased 12, used vehicle increased 19%, and service and parts revenues increased 17%, building new opportunities to earn customers for life. We continue to focus on business fundamentals and producing substantial cash flows delivered through an omni-channel strategy. We made progress this quarter on unlocking the over $250 million in earnings potential that was acquired as part of our value-based investment strategy. Our track record of driving revenue growth followed by increasing earnings is well-established, and we look forward to continuing to capture that opportunity. Our seven-year compound annual growth rate for earnings is over 50%, and for revenues is over 25% compared to industry compound annual growth rates that were single digits. We own strong exclusive franchises led by high performing entrepreneurial people who innovate and believe in both departmental and overall store earnings potential. The key to reaching this potential is engaging and energize teams earning customers for life. Along those lines, we want to congratulate and thank our 10 locations that epitomize our mission, and were recently recognized as the Automotive News 2018 Best Dealerships to Work For. Our strong stable of brands, four distinct business lines and geographic diversity positions us to proactively respond to changing consumer preferences or shifts in demand. The longstanding relationships we have with our manufacturer partners provide further long-term stability. The franchises we own are dedicated market areas currently protected by law and make us the exclusive retailer of new vehicles of that brand in each of those markets. New sales result in trade-ins and off-lease returns of late model used vehicles which only we as franchisees can offer as certified pre-owned. Finally, service work is the largest contributor to gross profit, and only franchise locations can conduct warranty and recall repairs. We provide flexible purchasing and servicing options in an affordable and convenient manner. Our exclusive right to retail new and certified vehicles, and to provide recall and warranty repairs in designated market areas are critical aspects of the vehicle ownership lifecycle. This is the key differentiator of our business as compared to standalone public, used retailers or auto service and tire centers. While our existing business is growing, we see considerable opportunity investing in future innovation to expand our offerings in personal transportation needs to capture additional market share. Last month, we announced a strategic investment in Shift Technologies, a San Francisco-based digital retailer. This partnership will further the in-home vehicle purchasing, selling and servicing experience and leverage our nationwide network that currently reaches over 80% of consumers in the country. Together, we are focused on furthering our retail experience to allow customers to shop wherever, whenever and however they desire. Our investor presentation includes more details on areas of collaboration and synergies with Shift on slide 7. We also continue to invest in internal innovation. As a result of our efforts in this area, online traffic in lithia.com increased 33% over the prior year. With the second largest owned online inventory in the United States, we are able to provide customers exceptional selection and pricing. Consumers shopping directly with us can avoid the considerable fees charged by online aggregators who are utilizing our inventory and pricing to create traffic and increase costs across the vehicle marketplace. We anticipate further expenditures associated with our commitment to innovation and diversification in the future, which John will discuss in just a moment. For the past seven years, we have strategically targeted acquiring strong brands in desirable markets that underperform their potential. Our industry is unconsolidated with the 10 largest companies owning less than 8% of all new car dealerships in the U.S. market. We continue to optimize our nationwide network of service and delivery points. In the past 12 months, we have completed over $2 billion in acquisitions composed of strong brands in desirable markets that were underperforming their earnings potential. Our greenfield-like growth model of acquisition has an 86% success rate in achieving 15% to 20% after-tax return on equity on seasoned stores owned for five years or more. We continue to monitor over 2,600 acquisition targets, and remain primed to seize opportunities that meet our strict return on equity hurdles, and round out our national footprint. In the third quarter, we added one location and separated two franchises into independent facilities. We also completed the divestiture of seven poor performing locations this quarter increasing EPS $0.03 to $0.04 annually, and generating an estimated $48 million in capital to be redeployed towards stronger investments such as Shift. The seven divestitures were smaller than our average locations contributing only $250 million (08:00) in annualized revenues. Four of the seven stores were acquired as part of group acquisitions, and three were open points meaning none were independently targeted acquisitions. Their disposals also generated $16 million in gains, although we removed this benefit from our adjusted earnings. Our mission, Growth Powered by People, has taken us to an estimated annual run rate approaching $12 billion, and we are just getting started. The path to $15 per share in earnings power is clearer than ever. We will grow revenue and increase profit, expand our scale through accretive acquisitions, drive innovation through internal and external investment, and generate compelling returns to reward shareholders both now and in the future. With that, I'd like to turn the call over to Chris.

Thank you, Bryan. Our mission allows high-performing general managers and their teams to maintain nimble strategies in each of their locations. Our team utilizes world-class operational reporting to manage trends, identify opportunities, create alignment and take action. This will be the key to capturing the $250 million in unrealized earnings potential. Since our last earnings call, we have completed onsite reviews at all 182 of our locations, reaffirming store potential through established individual plans driven by each department manager. On last quarter's earnings call, we discussed an action plan to achieve $25 million in annualized savings. Inspired by our culture, our continuous improvement and personal ownership, we are pleased to see the target is on track and should be completed by early next year. With that, I'd like to discuss our same-store quarterly results in more detail. In the quarter, total sales increased 1%, reflecting strong performance in service and F&I. New vehicle revenue was down slightly as our average selling price increased 3% and unit sales decreased 5%. Gross profit per new vehicle retailed was $2,016 compared to $1,934 in the third quarter of 2017, an increase of $82. Retail used vehicle revenues increased 5%, of which roughly half was due to increased unit sales and half due to higher average selling prices. Our used to new ratio was 0.84:1, and gross profit per unit was $2,256 compared to $2,294 last year, a decrease of $38. Our mix within used vehicles saw core units increase 10%, value autos increase 5%, and certified units decline 3%. We continue to target selling 85 used vehicles per location each month. In the quarter, on a consolidated basis, we sold 68 used, an increase of 1 vehicle per store per month from the prior year. F&I per vehicle was $1,399 compared to $1,266 last year, an increase of $133. Of the vehicles we sold in the quarter, we arranged financing on 72%, sold a service contract on 46%, and sold a lifetime oil product on 24%. Our total gross profit per retail unit, defined as the sum of new vehicle gross, used vehicle gross, F&I gross, and wholesale gross divided by retail units sold was $3,498, an increase of $144 per unit over 2017. Our service, body and parts revenue increased 3% over the prior year; and customer pay work, which represents over half of the revenue stream, increased 5%, warranty increased 1%, wholesale parts decreased 1%, and our body shops decreased 5%. Gross margin was 15.4%, an increase of 30 basis points from the same period last year. Our total SG&A to gross profit was 69.6%, 90 basis points higher than the third quarter of last year. However, we showed significant improvement from the prior quarter's result of 71.3%. And more importantly, adjusted pre-tax income for the third quarter was up year-over-year, demonstrating that our recently acquired stores continue to season. In the past five years, we have acquired $7 billion in revenues, largely of stores that maintain a ratio of SG&A to gross profit well above 85%, at least 20% higher than our season stores which operate in the low to mid-60%. While these acquisitions have impacted our consolidated results, we are anticipating continued improvement as we achieved earnings potential and bring leverage to the model. In summary, we have made meaningful progress on both growing revenue and gross profit and reducing SG&A in the third quarter. We will continue to look to the leadership in our 182 locations to drive innovation, efficiency, and profitability while earning customers for life. And now, a few comments from, John.

Thanks, Chris. At September 30, 2018 we had approximately $228 million in cash and available credit, as well as unfinanced real estate that could provide another $227 million in 60 to 90 days for an estimated total liquidity of $455 million. At the end of the third quarter, we were in compliance with all of our debt covenants. We've taken advantage of the volatility in our stock to utilize our authorized share repurchase. Year-to-date, we have retired over 1.6 million shares or nearly 7% of float at a weighted average price of $88.95 per share. Under our existing $250 million authorization, approximately $19 million remains available. We also announced earlier today that our board of directors has authorized another $250 million in repurchases, bringing the total remaining authorization to $269 million. Our leveraged EBITDA, defined as adjusted EBITDA less used floor plan interest and capital expenditures, was $87 billion for the third quarter of 2018. Our net debt to EBITDA is 2.2 times, an improvement from last quarter, and within our targeted range of 2 times to 2.5 times. We anticipate the ratio to continue to decrease in future periods as our recent acquisitions annualized into the trailing 12 months EBITDA, and we continue to generate substantial free cash flow. Our adjusted tax rate was just over 26% in the quarter, consistent with our expectation for the full year. We anticipate an uptick in this rate in 2019 as a result of changing tax laws in New Jersey, one of our largest states. Our outlook for 2018 sees revenue in a range of $11.75 billion to $12.25 billion; and $9.50 in earnings per share. As Bryan mentioned earlier, we'll continue to invest in both internal and external innovation and anticipate incurring a minimum of $5 million in the first half of 2019 and operating expense as a result of these expenditures. In summary, 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 are continuing to innovate and capture more of the automotive value stream as we balance earnings today while investing for the future. This concludes our prepared remarks. We'd now like to open the call to questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Bret Jordan with Jefferies. Please proceed with your question.

Hey. Good morning, guys.

Good morning, Bret.

Hey, just a quick question, I guess, pretty solid beat in Q3, and maintenance of the $9.50 guide for the year. How do we think about Q4? Should we expect something accelerating from a spending standpoint?

Hey, Bret. Good morning. This is John. I think, our guidance for 2018 is consistent with our philosophy we've had for the last number of quarters, which is that we don't update sort of intra-quarter, so we kept that consistent for 2018. I think, more importantly, and Bryan's talked a lot about this in the prepared remarks, we have a $250 million plus opportunity (15:54) that we're pursuing, which we see a path well beyond $15 in EPS; if we can achieve that in the near term. And I think that's what we're more focused on for the future, which also doesn't consider the impact of any additional acquisitions, strategic initiatives or other kind of innovation or growth we might pursue. So I think we feel pretty comfortable of where we track, and I wouldn't read too much into the $9.50.

Okay, great. And then I guess a quick question on the Shift. It hasn't been in the portfolio for long, but how do we think about that, I guess, other metrics that we can maybe get an update on as to whether their inventory levels are up given the improved access to financing or maybe unit throughput that they've seen improve since they've been partnered with you, or how do we sort of think about that from a quarterly standpoint?

Hi, Bret. This is Bryan. We're really pleased with what's going on in the first 45 days of our strategic partnership. I know George, Tobey and their team are pretty active leaders and they're obviously looking at ramping up their inventories. They're now looking at how they scale as well, and to which markets they're going to be going into first, and that's the key to ramping up that inventory. I think, if we keep in mind, a few weeks ago, we announced the establishment of a floor plan line that we helped them get with U.S. Bank that allows them to scale their business to almost $1 billion in revenue, which is about 6, 7 times their current size. So they got lots of headway and we'll be providing updates on that in the coming quarters. That additional floor plan line also gave us greater ownership stake without investing any more capital. Also, as we think about the future on Shift, we anticipate a lot of further synergies while building each company's most importantly distinct individual brand, model, consumer offerings and positions in the marketplace. We're not planning on putting them together or oversharing. We're planning on building two different ways to go to the marketplace in an omnichannel effort that's very distinctive. I think if you also look at slide 7, we'll provide updates on that if further synergies come to be. And that currently just shows a good roadmap of where the next few quarters are looking.

Okay. Great. Thank you.

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

Great. Thank you for taking the question. Good morning and congratulations.

Good morning, Jamie.

Thanks, Jamie.

Wanted to ask on the F&I side if I could, pretty big beat relative to our expectations. Is there anything that happened last year in the third quarter that we should take into consideration from a compare standpoint; number one. And then number two, could you just remind us there've been some accounting changes. I won't say it was ASC 606. Is there anything that may have inflated that number a little bit that we should be adjusting for or thinking about in the third quarter number? Thanks.

Yeah. Good morning, Jamie. This is Chris. I think, as far as last year, I don't think there's anything that we would call out other than the comments that we continue to make, which is the opportunity that we have in our unseasoned store to move the needle in F&I. I mean, our range of F&I performance by location is between $600 and $2,500 per copy. And you look at our seasoned stores with an average of $1,500 per copy and our unseasoned stores at $800 a copy, it gives us a real opportunity for us to continue to focus on the upside potential of more F&I growth. It's going to come really from three primary areas, these haven't changed. Number one is making sure we have the right people in the F&I positions that are high performers. They understand what a win looks like, and they're compensated to fulfill the mission of delivering the products that we have, which is the second big objective that we have, which is making sure we have the right products in the right markets that meet the customers' wants and needs. And that's something that we've continued to work on to find the right mix shift based on location and based on brand. And then the last thing is just on process, making sure we have a good process that starts at the front end of the business with our salespeople moving to the desk and then into the F&I office, and give our F&I managers the opportunity to capture the F&I growth that we know is there. John, as far as accounting issues, anything you want to point out?

Yeah. We implemented a new revenue recognition standard. We made an adjustment to retain earnings at that time, and there's not a material impact to our F&I per unit going forward.

Great. Thank you very much. And if I may, just one quick one on used vehicle gross profits, can you just help us understand kind of what the main drivers are there and the trends we should start thinking about? It seems like there's a shift going on from new to used in terms of demand. Yourselves and your peer yesterday had some pretty good, I think, margin performance overall in used. Can you just help us delineate kind of the key drivers of trends there, and how we should think about that for the fourth quarter? Thanks.

You bet, Jamie. This is Bryan. Our average used vehicle price has been increasing. To us, that's a little bit of a problem, but it's also an opportunity to refocus on procuring lower-priced vehicles, that is the primary driver. Many of our stores look at per unit rather than percentages. And I think, as you look at our growth, our expansion is really in the three to eight-year-old vehicles. And you're starting to see that bucket really fill out nicely where we have a lot of $16 million and $17 million solid (21:24) numbers that are filling that up. And I think you'll see as we move forward that that continues to grow.

Very good. Thanks again and best of luck in the fourth quarter.

Thanks, Jamie.

Thanks, Jamie.

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

Thanks. Good morning, guys.

Hey, Steve.

Good morning, Steve.

A really strong operational quarter it looked like, almost a step function change in SG&A to gross. Was there anything specific you can point to in terms of new initiatives or things that you really focus your stores on this quarter, or was it just sort of a continued seasoning of the newly-acquired base?

Steve this is Bryan. I think that's very generous of you to say it. It looked like a really strong quarter. We look at ourselves in a humbly confident way, and look that it was just a mediocre quarter in our opinion. We believe there's so much opportunity, and I think when we spend our time thinking about our business going forward, our group, store and department leaders fully understand the urgency and importance of reaching their earnings potential, which I'm not sure it was as urgent in the past few quarters, and I think they're starting to get that. We also know that we have considerable cash needs to execute our growth plans in the future, and this is primary engine for getting that cash is our ability to capture that potential. I think, Chris may have some good insights as well. He spent the last 90 days out in the field and has done a nice job helping drive a lot of different initiatives.

Yeah. Thanks, Bryan. I mean, we spent the last few months, as Bryan said, in every single store, ensuring that we have the right people with the right plans taking action immediately to capture the store and departmental potential. Like so many of the seasoned market general managers that we have, we're starting to see some of our newer acquisition general managers step-up in the Southwest and see immediate results. We're seeing the same thing happening in the Northeast, and we think there's lots of opportunity left for us to continue to march towards that $250 million in store potential that we have. And then lastly, we have made good progress on the rightsizing efforts that we talked about last quarter, specifically around personnel, overseeing stores and at the corporate offices.

That's great, guys. Thanks. Is there any way to quantify, I guess, progress along the route to that $250 million as time goes by. I mean, I'm sure you have some sense of it. But how would we best sort of track your progress towards that?

Yeah, Steve, this is Chris, again. I think, probably the easiest way for us to talk about it is related to group acquisitions that we've done. And as you can imagine, they all season in our minds at varying rates towards that what we call store potential. So if I look at the Baierl Group, which we picked up in early 2017, they're approximately 70% of store potential in their group of stores, they've done a really nice job. DCH, which we picked up in 2014 has made some real – early progress, but we feel like there's about 60% toward store potential. Downtown LA, that group which we picked up late last year is about 50% towards store potential. And then you take the rest of the larger groups that we acquired in the last several years, Carbone, Prestige, Day, Ray Laks, those groups are all still at 40% or lower towards store potential. But one thing to keep in mind when we talk about store potential for us to hit our return hurdle rates that we use for acquisitions, they have to hit approximately 70% of store potential for us to get the success that we're looking for in the acquisition side.

That's really helpful. Thank you. Another one from me, I guess, just a lot of focus on interest rates lately, and how they may or may not be impacting buyer behavior, I guess. Anecdotally, what are you seeing? Are you just seeing people sort of moving from new to used? Are you seeing people sort of go down a trim level? How do you sort of see that changing your business over the recent past and the foreseeable future?

Hey, Steve. This is John, and I can jump in from a mathematic perspective. I think, if you look at most calculations, a 1% move in interest rates is going to move monthly payment somewhere around $20, and it kind of depends on the ASP being financed, but call it $15 to $25, so let's split the difference at $20, which isn't that significant in our view of kind of a change in monthly payment relative to consumer demand. So I think it's been pretty manageable so far, and we haven't seen big impacts there.

Okay. And then a last one from me if I could, just John, I think you've mentioned an increasing tax rate next year. Are you sort of willing or able to spitball how we should think about that from a modeling perspective?

Yeah. I think it's clearly going to have a 27% on the front of it. I think we're running in the mid-26%s now. But New Jersey went from an independent return state to consolidated return, and so it eliminates our ability to do some of our tax strategies there, and it's going to bump us up at least a percent in rate.

Okay. Thank you.

Thanks, Steve.

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

Good morning, guys. Just wanted to follow up real quick on the outlook, and I know you guys don't update this intra-quarter. But I mean, is there anything going on in the fourth quarter where you think pre-tax income would be down year over year, because that's kind of what's indicated? And I know you're not updating it, but I'm just trying to make sure we're not missing anything in the market where there could be a tough comp or something else you're seeing in the market that would drive pre-tax down year-over-year in the fourth quarter.

Hey, John. This is John. No.

That's all I needed. Perfect.

That was easy.

Yeah. That's a good – that's a very good answer. I appreciate that. The second question is, if we think about sort of the future of SG&A, I mean, obviously, there's a lot of work that you're doing there in some of your acquisitions, as you've kind of highlighted. But also as the world is going to more digital, and you're leveraging all of your efforts there, just curious how you think about where SG&A levels may go in the future. I mean, there's a big chunk of this that's sales comp, which might get worked out of the system. Just curious how you're thinking about it.

Yeah. John, this is Chris. Obviously, our first priority in each one of our stores is to generate top line revenue and growth, and that's one of the easiest ways to fix a steady state of expenses that we have today. But as you said, as we work towards kind of digital retail in the future, we can continue to attack personnel costs and marketing costs at a new level. And as we've said since 2014, we've acquired over $7 billion in revenue, which really dilutes the performance that we have in our SG&A as it sits today as we don't turn those stores in a one-year period and bring them into the portfolio. As we said, it takes a little while to season those. But we do continue to target our SG&A to gross in the mid to low-60 percentage, and that's what we saw in 2014. So without any synergies that we're getting off of digital retail, and the way that we're going to engage with customers in the future, we're confident we can get back to that 65%.

So there's 5 points before we get into the future, and then there's opportunity beyond that, give or take?

Yes. Yes.

Then as we think about Shift and what it's doing for your used vehicle business, will it aid your march from 68 used vehicles per store to 85? And how are you kind of encapsulating that in that thought process? Is that leverage there or is that – is Shift going to be incremental to that target?

Hi, John. This is Bryan. I think, when we think about our used car business, the major driver of being able to improve sales as well as margin is to be able to procure vehicles and what Shift will have the ability to do someday which they're doing a nice job at it is procuring vehicles at a very rapid rate. And I think, as we start to use their technology or look into those opportunities, our stores will be able to do that. And with their traditional reconditioning and sales models, they should be able to push those through their systems at an accelerated rate. If you think about the cost to be able to do that, I think, over time the stores will see benefits in driving down the SG&A just through procuring vehicles in an easier manner, and being able to recondition them more efficiently. But outside of that, it's really a store's decision to be able to look at the opportunities and capture those opportunities in terms of SG&A relative to driving up volume on used vehicles.

But specifically the 85 target is really absent any benefits from Shift; and Shift would sort of be additive to the efforts and maybe incremental to that. Is that a fair statement?

That's a fair statement.

And the leverage – the leverage as we look at almost 20 more cars per dealership, I mean, the flow through on that's got to be very, very high. Is that correct? Is it almost the whole gross?

It definitely is a large portion. I mean, it's – and as we grow the core product, it's even higher margin.

Okay. And then just lastly, there's a lot of noise and conflicting data points on pricing on new vehicles, and I'm just curious what you would characterize the incentive environment like? Is it hypercompetitive, balanced or very, very disciplined? And if there are any sort of pockets between segments or manufacturers that you might be able to illustrate for us?

Sure, John. I mean, we do see changes in incentives. I would call it still fairly stable. But from a retailer standpoint, incentives really just help us balance out margins, volumes and have very little impact on our overall gross profit, they stabilize things. I think, sometimes there's an overlap of thinking of us as a manufacturer whereas a manufacturer incentives obviously affect their margins. There are three OEMs that have material volume-based programs that can impact margins. But in recent quarters, they're much more attainable numbers than what they've been in the past and again much more stable.

So a stable to slightly rational environment from the automakers' perspective...

Perfect.

...not making massive disruptions. Is that a fair characterization?

That's a good characterization.

Great. Thank you very much, guys.

Thanks, John.

Thanks, John.

Our next question comes from Armintas Sinkevicius with Morgan Stanley. Please proceed with your question. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. Thank you for taking the question. With regards to Shift, you're providing them the storage and reconditioning facilities, the capital, the introductions with regards to their floor plan financing. But what are you getting from Shift other than some of the parts valuation for the investment? Are you putting the inventory on their app or are you getting inventory from Shift as you just talk about procurement of vehicles? I know you said you're running them as two separate businesses, but just trying to understand what the collaboration, the learnings that you're looking to get from an online retailer that comes with a different perspective on the industry and the technology that they have.

This is Bryan. Thanks for the question. I think, when we think about the synergies that would come back to the Lithia stores, we look at primarily – and you can see this again on slide 7, that technology can be a big benefit. If you look at what our web traffic increase last quarter, we were up 33%, and that's compared to a 1% increase in same-store sales. So relatively speaking, we're seeing our consumers shift to more of a digital type of experience. They're still doing business with us. So we really believe that technology is the answer to that. And many of our internal initiatives are helping with that as well. We think that there could be bleed over down the road. But obviously, right now, Shift is intently focused on scaling, which is taking a lot of their efforts today with their 35 or so engineers. We also believe that, over time that inventory can make a difference. There could even be some level of sharing with people with expertise on both sides, whether digital or traditional. They could go back and forth. In terms of the sharing of facilities, we know that the major synergy looking forward is the network that we have, which touches 81% of the country, and the ability then to catalyze that with the Shift's technology to be able to utilize those at a more effective rate, while still remembering that they're two distinct go-to-market strategies that would always be independent, okay? And then, obviously, there's some data capital and relationship-sharing that are less important to that. I think, lastly, and I spoke to it on John's question a few moments ago on used, but the ability for Shift to procure vehicles for Lithia Motors or for Shift to be able to use their technology, to be able to procure vehicles in our markets can greatly accelerate our used vehicle sales. And that's still preliminary, and we're still working on some of those, but the coming quarters, we'll be able to share more information as that progresses. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And then, you planned last quarter to do about a dozen divestitures. You're roughly a little bit over halfway there. How should we be thinking about your portfolio on a go-forward basis? Are there any more stores remaining? Any meaningful contributions from the remaining stores?

This is Bryan, again. You're correct. We've divested the majority of our lowest quality assets, which we're very pleased about. I think, as we move forward, we'll continue to monitor our portfolios to ensure that we are always optimizing our network, we're always earning the highest return on our capital, and we're also continuing to raise the bar on the performance of all of our stores as a whole. And I think that's an important thing that is a little less tangible, but is how we really drive the ability to capture that store and department potential. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Great. And one last one here on acquisitions, the acquisition pace has slowed the last couple of quarters. Obviously, you have a lot that you're working with – and you expect leverage to decrease as the acquisitions annualize and you generate the free cash flow. But any change in view in your M&A strategy here in the near-term as you integrate the acquisitions you've made to-date?

I think, part of our core strategy is that we're always continuing to build that store potential. So we see considerable opportunities to further expand on our traditional growth strategy. I will say this in regards to the market: it's extremely active, and it's quickly turned from a seller's market to what we would call a buyer's market because there's a lot of deals out there that seem still priced as if it's a seller's market. So I think the important thing that we look at is despite it being a buyer's market, we think that we always treat our businesses as a seller's market. So hopefully, we can attract and buy dealerships in an accretive way while still maintaining our current return on equity hurdle rates. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Great. Thank you so much.

You bet.

Our next question is from Chris Bottiglieri with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for taking the questions.

You bet.

First, as I kind of dig in on SG&A more, it was pretty good improvement. I was wondering, if you could maybe help dimensionalize it a little bit. I know you had those Cascade provisions in the past. I was wondering if you could maybe tell us what the compare was versus last year in this quarter. From your cost takeout initiatives, how much of that's already been helping the quarter. And if there's any way to quantify the SG&A dollars from disposals. Trying to maybe just get a picture of what's sustainable from this quarter. Thanks.

Hey, Chris. This is John. Good morning. I'll take the first and third parts of that, and maybe kick it over to Chris to talk about kind of the cost control initiatives. So in terms of Southern Cascades, that's our in-house auto finance portfolio. We did take a reserve in the second quarter of this year. Our intention and requirement under GAAP is to estimate our future losses at the time we took the reserve. So our view was that that was sort of a discrete event to get us where we needed to be, and we had no further adjustment to the portfolio in the third quarter. So I think that that was kind of on track with our expectation. Thinking back to last year in the quarter, I don't think we had a material impact in that if memory serves. Regarding maybe the SG&A, we can give that to Chris in a second. But I guess – go ahead, Chris.

Yeah. Hey, Chris. I guess, as far as it relates to the $25 million in the action plan that we called out last quarter, as I said, we're about 50% of the way there, primarily through personnel and advertising adjustments we made both at our store and at our corporate levels. The impact that they had overall, though, on the margin when we have $1.2 billion in annualized SG&A, the $25 million, while it does have an impact directly to the bottom line, it's not going to move the needle as much as generating more top line growth and having an overall initiative for all of our stores to continue to focus on the benefits of cost control.

And then, I think on your third question related to disposals, Chris, we did pro forma the gain, which was roughly about $16 million from the disposal of those stores. Bryan mentioned $0.03 to $0.04 in annualized EPS accretion that should resolve those disposals. Really, that's a capital allocation decision. So, I mean, clearly, they weren't a big headwind to our earnings. But at $0.03 to $0.04 relative to the capital committed, it was dilutive to ROE, and we are pleased that we're able to divest those stores, pick up a nice cash gain that we did adjust out of our results this quarter, and we'll continue to look for those opportunities, as Bryan mentioned, I think, on the last question.

Got you. Okay. And then, I wanted to count that as one question. I know it was a (41:07), but I want to shift gear to – shift to Shift. Can you talk about to what extent do you guys have an internal transportation network rate now today; I know CarMax transfers like 30% of their vehicles roughly. Can I have a similar metric today that you have and then maybe talk about where Shift is today with those capabilities as it relates to multi-hauler distribution?

Chris, this is Bryan. We do move cars seasonally as well as to the best markets. That happens organically in our organization through a website where they can buy and sell cars from each other. We don't proactively manage inventories and move them from one location to another. However, we believe that there could be some benefits there in the future, and we'll look to that as we continue to grow.

Got you. And then from Shift's perspective, do you know if they have anything like this built out yet or is that still on the horizon?

John, you want to touch on that?

Yeah. They definitely do. I think the important thing to remember about Shift and one of the most impressive things I think is their logistics software. So their ability to go pick up cars, deliver cars to consumers is one part of that. The other part of it is their ability from a back office perspective to move cars between locations. And so for example, they'll relocate cars from their LA-San Diego market into their San Francisco market if they have a consumer who's interested, and that's done overnight. So yes, they are distributing. There is benefit in having those hubs be close together from a proximity perspective, and we're impressed with their ability to sort of, I guess maximize the utility of their inventory by moving it between those locations, which they can do all using their technology and infrastructure software.

Got you. Okay. That's helpful. Thank you.

Thanks Chris.

Our next question is from David Whiston with Morningstar. Please proceed with your question.

Thanks. Good morning. My first question is on...

Hey, David.

Hey, there. My first question is on new vehicle GPU same-store is up 4%, up 7% consolidated. Unit volume was down, so I'm just curious how you're avoiding the discount pressures there hitting other dealers. It looks like maybe you're just not chasing volume and keeping profitability, but is it more complex than that?

Yeah, David. Good morning. This is Chris. I think one of the advantages of being out in the stores the last several months is that you're getting to feel the impact of what each one of our general managers is dealing with in each different franchise. And a lot of the mainline, the franchises that we have, have had declining incentives, declining residuals. You have a rising interest rate environment, and the stores are making the decision to go after gross profit instead of chasing some of the volume incentives that Bryan alluded to earlier that were objective still may be a little out of line. But I think that we're starting to see more parity between the manufacturers' volume incentive programs, as well as the alignment with what the stores can actually retail, which I think has balanced our GPUs up, so, yes.

Okay. And on F&I, I saw GM has a new extended warranty program. Does that cut into your ESP business in any way, or is it – do you view it more as a positive thing for your business?

David, Chris again. We have a great relationship with our OEM partners as far as the products and services that they offer, both in addition to the vehicles, obviously. But at the same time, 70% of the service contracts that we sell are sold through our proprietary contract brand, and so it's just a balance. So in short, I guess the answer is, no, we've seen no impact related to OEM products coming into our stores.

Okay. Thanks, guys.

Thanks, David.

There are no further questions at this time. I'd like to turn the call back to Bryan DeBoer for closing comments.

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