Matt Pettoni - VP and Treasurer Craig Monaghan - President and CEO Michael Kearney - EVP and COO Keith Style - SVP and CFO.

Rick Nelson - Stephens Inc. John Murphy - Bank of America Merrill Lynch Bill Armstrong - CL King & Associates Brett Hoselton - KeyBanc Capital Markets Bret Jordan - BB&T Capital Markets David Whiston - Morningstar.

Good day and welcome to the Asbury Automotive Group Second Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President and Treasurer, Matt Pettoni. Please go ahead, sir..

Thanks, operator, and good morning to everyone. Welcome to Asbury Automotive Group's second quarter 2014 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's second quarter results was issued earlier this morning and is posted on our website at asburyauto.com.

Participating with us today are Craig Monaghan, our President and Chief Executive Officer; Michael Kearney, our Executive Vice President and Chief Operating Officer; and Keith Style, our Senior Vice President and Chief Financial Officer.

At the conclusion of our remarks, we'll open up the call for questions and I'll be available later for any follow-up questions you might have. Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements.

Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements.

For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time-to-time, including our Form 10-K for the year ended December 2013, any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today.

We expressly disclaim any responsibility to update forward-looking statements. It is my pleasure to hand the call over to our CFO, Keith Style..

Thanks, Matt. Good morning, everyone, and thank you for joining us today. This morning we reported record EPS from continuing operations of $1.19 for the second quarter. This represents a 21% increase from last year's adjusted income from continuing operations. There are no adjustments to our earnings this quarter.

The prior year quarter included real estate related charges totaling $3.2 million or $0.11 per diluted share. We continue to be pleased with the way our stores are performing driving growth in all areas of the business while maintaining cost control discipline. Total gross profit for the quarter was up $25.6 million or 12%.

70% of our incremental gross profit was from used vehicles, finance and insurance and parts and service. SG&A as a percent of gross profit decreased 90 basis points from last year to a ratio of 68.3%.

Our disciplined expense control enabled us to leverage the significant increase in the year-over-year gross profit and created flow through for the quarter of 40%. Turning to capital deployment. In the second quarter we acquired a Hyundai franchise in DeLand, Florida, with annualized revenues of approximately $40 million.

During the second quarter we spent $18.2 million on CapEx to upgrade our stores, expand our service capacity and invest in technology. We continue to budget CapEx of $60 million for 2014, which includes our core annual CapEx plan. In addition, we estimate an incremental $25 million of capital commitments related to our Q auto initiative in 2014.

Also, in the second quarter we repurchased $20 million of our common stock or 322,000 shares. Year-to-date, we have repatriated $29.4 million of capital to our shareholders under our share repurchase program and as we announced last week, our board of directors increased our current share repurchase authorization to $100 million.

Finally, from a liquidity perspective, we ended the quarter with $7 million in cash. $50 million available in floor plan offset accounts, $92 million available on our used vehicle line and $160 million available under our revolver.

And subsequent to quarter end we entered into 10-year mortgages with one of our captive finance partners totaling $59.8 million at a fixed rate of 4.25%.

In summary, we have sufficient liquidity to support our balanced capital allocation plan over the remainder of 2014 as well as the financial flexibility to invest in our strategic growth plans over the next couple of years. Now I will hand the call over to Michael to discuss our operational performance.

Michael?.

Thank you, Keith. We are extremely proud of our company's performance this quarter. Our gross profit increased 12% through growth in all of our business segments. This growth helped produce another record operating margin of 4.8% compared to 4.3% in the prior year period.

For the balance of my remarks I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance during the second quarter. New vehicle revenues increased 9% and gross profit increased 12% compared to the prior year.

Our new vehicle unit sales were up 7.4% in line with the industry growth of 7.1%. New vehicle margins for the quarter were up 20 basis points compared to last year at 6.3% and flat on a sequential basis.

Our gross profit per unit retail benefited from strong luxury sales in the quarter as well as continued margin improvement at a number of our midline import stores. As I stated last quarter, I believe we can maintain new vehicle gross profit per unit retail in a range of about $2,000 to $2,100.

Based on the pace of sales we saw throughout June and continuing into July, our 2014 business plan for a SAR of around 16.2 million remains unchanged. We ended the second quarter with $598 million of new vehicle inventory or 68 days supply on a trailing 30-day basis.

We are comfortable with our existing overall new vehicle inventory levels in light of the current pace of business we are seeing in our stores. Used vehicle unit sales increased 3% over the second quarter of last year.

As we progress through the balance of this year, we will be facing increasingly stronger prior year sales comps so we expect our growth numbers to stabilize in the mid-single digit area for the year.

Although our margins decreased 40 basis points to 8.6% compared to the prior year period, gross profit per unit increased $28 and the substantial increase in volume more than offset the margin decline. This resulted in a 4% increase in used vehicle gross profit. On a sequential basis, our used vehicle margins decreased 50 basis points.

However, our gross profit per vehicle retail remained flat at $1807 because of $1039 increase in our selling price. The strong growth we produced in new vehicle unit sales resulted in a used to new sales ratio of 75%, down 400 basis points from the prior year quarter.

As we move into the third and fourth quarter, we expect our used to new sales ratio to stabilize around the 75% to 80% range as we enter into the stronger new vehicle sales season.

Our second quarter total frontend gross profit yield, that is new and used vehicle gross profit per vehicle sold plus our F&I profit per vehicle sold, increased $68 over the prior year period to $3,282 and essentially flat on a sequential basis.

We continue to execute our used vehicle acquisition strategy to ensure that we maintain an adequate supply of pre-owned vehicles. We have demonstrated that this plan provides the variety of product our customers are seeking. Additionally, this plan has provided us with the inventory levels that fuel our continued growth in this segment.

We ended the second quarter with $153 million of used vehicle inventory or 41 days supply on a trailing 30-day basis. We have invested $31 million, an increase of over 25% in used car inventory over the last 12 months to match our sales pace.

While our DSI is high during the selling season, we still plan to maintain that DSI within the range of 30 to 35 days. Our strategy and practice within the F&I segment of our business remains unchanged. Disciplined execution of F&I sales processes and training creates solid, sustainable growth in results.

Second quarter F&I revenues grew 6% compared to the prior year period. F&I per vehicle retail for the quarter was $1,308, flat on a year-over-year basis. The lending environment remains favorable. In the second quarter, our parts and service revenues grew 7% and gross profit grew 9% compared to the second quarter of 2013.

Parts and service gross margin for the quarter was 62%, up 100 basis points compared to the prior year. This year-over-year gross profit improvement continues to be augmented by 15% increase in reconditioning work, an 11% increase in warranty work, and a 6% increase in our customer pay.

For 2014 we believe we continue to grow our parts and service business in a mid-single digit range while maintaining our current margins through our ongoing customer retention programs. We continue to evaluate the latest generation of quick service processes at a number of our dealerships in order to further improve customer retention.

In addition to producing these record results, our team was able to open our first Q auto store. After seeing the results of our team's hard work following the store's first full month, we remain excited about this opportunity.

We are on track to open a second Q auto store this fall and we continue to estimate the launch of Q auto may reduce EPS by $0.08 to $0.12 in 2014. Finally, we would like to express our appreciation to all of our associates in the field as well as those in our support center.

Our company continues to improve in all aspects of our business and our employees are producing best-in-class results in many areas. This is a direct result of your collective dedication and effort. Again, we thank you. I will now turn the call over to Craig.

Craig?.

Thank you, Michael. We continue to execute our two part strategy. Drive operational excellence and deploy capital to its highest returns. Operationally, our employees once again produced record EPS and operating margins in the second quarter.

We are extremely proud of results our team continues to produce and I would like to thank all of our associates for their individual contributions that resulted in another successful quarter for our company. With respect to our capital allocation plan, we are focused on managing our balance sheet and deploying capital to its best returns.

We will continue to invest in our business, pursue acquisitions, repurchase our stock and invest in Q auto. With respect to acquisitions. Over the past year and half, we have added annualized revenue of more than $250 million.

And based on the opportunities we are seeing in the marketplace today, we believe we can more than double that pace over the next 18 months. Finally, with the additional share repurchase authorization from our board, we have the flexibility to continue executing on our balanced approach to capital allocation.

We are very excited about our accomplishments and look forward to opportunities that we see ahead of us. We will now be happy to take your questions.

Operator?.

(Operator Instructions) And we will go first to the site of Rick Nelson from Stephens Inc. Please to ahead, your line is open..

Congrats on the nice quarter. I would like to learn about the rollout of the shared service center. If you could update us there and how you think that affected the expense ratios and the flow throughs, the 40% flow through in the quarter. And what your expectations for that shared service center might be with regard to expense ratios..

Hey, Rick, this is Keith. Good to hear from you this morning. The shared services are still progressing, they are underway. I will discuss kind of the core program, is about 60% complete today and we still expect that it will be largely complete by the end of the year.

With respect to the impact on the quarter and impact on SG&A for the quarter, we obviously are in a transition phase but we have some expenses coming out while we invest in other areas of the shared services. So overall, there is really very little impact for the quarter..

How about the used car, the free standing Q auto, $0.08 to $0.12.

How much landed in the second quarter?.

Rick, it's Keith again. We do have start up costs associated with our Q auto initiative. In the second quarter we had about $0.02, which is about $1 million of costs to invest and get our first off the ground here and invest in our marketing campaigns..

Okay. Thanks. And finally, if I could ask about capital allocation. Stock buybacks, you are at $29 million year-to-date, your target annually has been $30 million. So it looks like the capital deployment to favoring buybacks versus acquisitions but then your commentary on the acquisition front seemed pretty optimistic..

Yes. Rick, it's Craig. Over the last quarter we are seeing a lot more activity on the acquisition front. We are talking to a number of individuals about potential acquisitions. So that’s why we are feeling a little more optimistic that we can accelerate the pace that we have seen in the past.

But we enjoy the fact that the board has also given us $100 million share repurchase authorization. So we feel like we are in a great position to deploy capital. We've certainly got the ability to do so with the strength in the balance sheet and we are committed to making things happen. .

Very good.

Any commentary on the valuations, on the private dealer front in terms of acquisitions?.

Rick, our standard threshold is, we won't pay more for an acquisition than where we trade. We tend to focus on an EBITDA multiple and we believe there's acquisitions out there today that we can get executed below that threshold..

And we will go next to the site of John Murphy with Bank of America. Please go ahead..

Craig, maybe just a follow up on the question on M&A. You know there's one big competitor out there that’s not operating so well. Sonic that is a stock that's a lot less expensive than yours.

Is that something that you could ever consider combining with Asbury? Obviously the financing would be very difficult or complicated, I shouldn’t say difficult but complicated. It might not be difficult at all.

Is an acquisition of that size something that you would ever consider or M&A that we would consider?.

John, we are not -- I want to say we think about the world that way. We are really focused on our bidding. We feel like we could do a large acquisition. So we kind of have a model here internally that we'd work to get stronger.

And as we get stronger that will enable us to do bigger and bigger things in future and we kind of break what the strength's been. We have got to be outstanding operators and I think Michael and his team have done a great job of demonstrating that.

That we have got good people out in our stores, in our regional offices that can handle significant acquisitions. The acquisitions that we have done have rolled in quite smoothly. Keith and his team have done a great job building the infrastructure. As Keith mentioned, our shared services are well on their way.

The last two acquisitions we've done and we had them operating on our systems within 48 hours of the acquisitions being done. That includes chart of accounts, DMS, CRM, etcetera. So I think the infrastructure is in place as well and that we have got a very strong balance sheet. We've access to capital.

I think we could access the equity if we needed that as well. So I think we can do something sizable. You know we are looking for the right opportunities in the marketplace..

And the receptivity from the automakers has increased dramatically over the last couple of years through the downturn.

Is that correct as far as getting the franchise approvals?.

I think that is correct because I think the large consolidators as a group have demonstrated that we do a good job of maintaining the share. We are very focused on the CPO side, taking care of the customers, and obviously we've managed our way through the downturn very well.

I think in so doing we have improved the receptivity of the large manufacturers to us becoming bigger partners with them..

Okay. Good to hear. Just a second question on IT and online customer experience spending. We are hearing from a lot of your competitors that they are spending a lot more, trying to move more and more of the transaction and interface with the consumer online.

Seems like you guys haven't talked about that in a meaningful way yet but might be working on it in the background. Just curious if you see any big IT spend coming up that you are not working on right now that you are seeing in some of the other dealers..

Hey, John, this is Michael. I will take a shot at that. You know just from the digitals space, really starting about three years ago we started moving substantial portion of our market spend into the digital arena. So we have been keeping up with that. And from that standpoint we have a very consistent program and it's in place.

We don’t have any IT spend planned to large projects. We continue to stay up with the technology but we do it in a little less significant fashion. We focus our processes on the customer interface.

With how our people interact with the customers and we work with them in the methodology and the technology in which the customers feel most comfortable on..

Okay. And then just lastly on the used vehicle business. You guys are executing very well here. I'm just curious, you know the market is pretty tight right now. Some of your competition, even some of the dealers that we talked to are having a hard time acquiring inventory, but it looks like you're having no problem with that and holding your grosses.

Just curious what you're seeing in the market.

Are you playing in a different geography or a different segment of the market that’s allowing you to perform so well or is it just really focus?.

Hey, John, this is Michael again. I think as we mentioned, I guess starting about, maybe three and half years ago, we started some process -- some internal process change on how we approach the used car business. So we are very aggressive on how we work our trade desk. We firmly believe that that’s the best source of cars.

Of course we do buy at auctions but they are more expensive there. We just have a philosophical bend in our company that we work very hard to get trades. We work very hard in the shops to make sure that those trades are frontline ready as quickly as we can possibly get them done.

And then culturally in the selling process we make all of our sales staff very much aware of all of product that we get in. There is no geography difference in how we do it. It's across the company. So I think it's just a store level execution..

And we will take our next question from the site of Bill Armstrong with CL King & Associates. Please go ahead..

Question on your new unit sales. Looks like your new unit comps, you outperformed the market on luxury and maybe you underperformed a little bit on the midlines, especially the domestic midlines.

Anything to call out there in terms of trends within your brand portfolio?.

Hi, Bill, this is Michael. That’s a good question. Nothing really to call out. We do not have a large footprint with the domestics as you will know. We do have a large footprint of course with the midline imports and with luxuries. Across the brand segments we had substantial market share gains in our luxuries and in most of our midline imports.

So we barely outperformed the SAR but did outperform it, you know we increased a little bit. But I think most of our strength is coming from our brand mix right now..

And we will take our next question from the site of Brett Hoselton. Please go ahead, your line is open, from KeyBanc..

Wanted to just go back to acquisitions. You set forth a target of $500 million in revenue over the next few years and it sounds like you're optimistic you are going achieve that. But it doesn't sound like you're in the market to make a billion dollar acquisition. I mean a billion dollars in revenue or something like that.

It doesn't appear to be an interest to do anything materially transformational.

Am I reading that correctly?.

Brett, I think we are opportunistic. There aren't many billion dollar deals that come along but if there were, they are certainly something that we would seriously take a look at. Right now we are seeing deals that are of reasonable size. Certainly significantly larger than the deal that we closed this past quarter. And that’s what we are focused on.

We are seeing a number of those deals floating around the marketplace and that’s why I made the statement that I think we can double the pace that we have been running at over the past year and half or so..

And then on the parts and service side, as we think about the growth rate there, in the investment community there is a perception that that growth rate is going to accelerate. Some people are optimistic that that growth rate could accelerate on a same store basis into the double-digits. Kind of 10%, maybe 15% per year or something along those lines.

So I am wondering, what do you think about that as a possibility and what would be the potential bottlenecks that might prevent you from being able to get into the double-digit range. I mean you just ran at 7% this quarter which is a good number.

What are your thoughts there?.

So Brett, this is Michael. I will take a shot at that one. I think, as we said throughout the latter part of last year and this year, we target the mid-single digit growth rates which we have been able to maintain. We feel quite comfortable with that. There is a lot of talk, there is lot of information about car parking.

That’s an operation that we, again look at all that data. But we plan our growth rate around that mid-single digit one. In terms of road blocks, obviously the biggest single road block, if you have all the facilities in place, would be the number of technicians. That’s the true throttle valve, to how much work you can actually put through a shop.

We have a aggressive program internally for hiring and maintaining and now training our own techs. It's a brand new program. We have just started it but we feel very comfortable about that. So we want to make sure that when that growth is presented to us we are, again as Craig said, very opportunistic.

We will take advantage of it and we don’t want to let some outside influence be a hurdle for us..

Okay. And I was hoping you could maybe, go into maybe a little bit more detail on the technician side of it. Because I think the investment community is under the impression that it's just a matter of going out in the street and just buying or hiring some guy and just come on down, it's easy to fix cars.

Is it that simple, or is there some skill level involved in the technicians and maybe therefore it's more difficult to find good qualified technicians?.

So Brett, this is Michael again. So the short answer is, there is a substantial amount of skill level with the technicians that work on these cars today. As you know they are very sophisticated. They are quite complicated. So there is a very high level of that. We have a year-over-year increase in technicians. We are up 9% in our hiring.

We started a program in one of our markets, taking a facility and bringing in young men and women and train them at a certain level. We have a small facility that we have put together that we are working on training them. So again that we have control of those individuals.

On the broader answer of your question, it's not just going out and hiring people. There is quite a demand for skilled, high-skilled labor in the United States right now. So everybody is competing. And it's one of those that we all participate in. But it's something that you have to proactively go out and pursue..

And we will go next to the site of Bret Jordan with BB&T Capital. Please go ahead..

On the parts and service side, I guess could you give us any color what you're seeing so far in Q auto as far as traction in your service operations there, and whether or not as it all makes all models used car dealership you're retaining the customer paid service?.

Bret, this is Michael. So we have been open just a little bit more than a month, so it's very early in our process. But our model does in fact include servicing what we sell. So we will continue to work through that model. But it’s again, we have only been open a little bit more than a month and it's one store..

Okay. And then I guess to some extent as you look at inventory on the used side, are you seeing a cyclical improvement I guess from a lease return volume pickup, or maybe give us some color as far as your retention of trade and lease returns.

How much you are putting out to auction versus what you're reselling maybe as a percentage of vehicles coming to the lot..

So we started to see actually a year and half, two years ago, the cycle of the lease returns starting to build from the downturn in '08, '09 and early '10. So that number is somewhat consistent. Obviously as the business has grown, new car business has grown, we are seeing more and more leases.

We are, obviously like the other dealers that are out there, we get first shot at our leases and we have a aggressive program. So we don’t have to go to the auction block, we take our own returns and leases. So that Bret, has been fairly steady state with growth that mirrors the growth of the new car side.

Trade-ins, we as a broad brush take about 60% of our inventory as trades. It's very broad because it's franchise dependent, it's somewhat market dependent. So we are out actively having to pursue as a broad spectrum. Somewhere between 30% and 40% of the cars that we have an inventory, we acquire at brick and mortar auctions or online auctions..

And we will go next to the site of Ravi Shanker with Morgan Stanley. Please go ahead..

This is [Paresh Sen] in for Ravi. Couple of questions. On the F&I per vehicle, we have seen some pretty big year-on-year improvements in the last two years. But things have slowed up a little bit in the last two quarters. Any color on the flat year-on-year performance an sense of how much dry powder you guys have left on the product penetration side..

Yes, this is Michael. I will answer that. We have seen some substantial increases. I think, and we have noted it before, that our growth can be a little lumpy. We will have some nice increases and then we will have some plateaus. But again as we stated numerous times, there is always a bottom third of the team and we will continue to work on those.

So we are quite confident we will continue to grow it. I can't tell you where the high end is on it. We will tell you that it is a little bit lumpy but we feel very confident in our skill set, our training programs, that we will continue to grow that number..

Understood. And a follow up on the used question from John. We continue to see pricing strengthen in that segment but volume came in a bit lower than expectations. And it's something we saw at another dealer that reported.

I guess supply really wasn’t an issue for you guys because it was around 41 days, I just wanted to understand if it was pricing that kind of held up sales a little bit..

So this is Michael again. What we saw particularly in May, in June, was a fairly substantial increase in incentive activity on the new car side. Particularly in the larger volume brands, fairly aggressive incentive pricing.

So when you have that type of incentive that’s out there, you will lower -- tendency to lower the true transaction price of the new vehicle. Very aggressive financing incentive programs out that are also so. What we experienced again particularly in May and June was a very aggressive new car market which impacts our used car sales.

There was also a little bit of price increase on the used vehicle side in a couple of our brands due to having to go out and acquire more than we normally do at the auctions. So I think those two in combination saw little bit of a pressure on our vehicle sales and that then of course resulted in the lower used to new ratio at the same time..

And we will go next to the site of David Whiston with Morningstar. Go ahead..

On the adjusted leverage ratio, it’s pretty comfortable at two times. Could you comment on what you would want that to be both in good times and then, perhaps just within a range, but both in good times and also during recession..

David, this is Keith. We been through the ups and downs of our last 10 years and we understand our business works pretty well on the cash flow we generate and what levers we can handle.

We know that today sitting at two times is a little bit below the level that we've discussed in the past as being optimal, and optimal would be somewhere in the range of 2.5 to 3 times..

Okay. Thanks. And on the acquisition front, should you assume you are going to try and keep that brand mix pretty much identical going forward or would you want to perhaps invest in the growing brands, just be with the Cadillac..

This is Craig. We are pretty wide open when we think about brands. Obviously we like the portfolio that we have today. But the acquisitions that we are looking at now tend to be groups that have multiple brands and we are open minded about expanding the makeup of the portfolio if that’s what would come with one of these transactions..

Okay, thanks. And last question. In terms of the state of the consumer, obviously we had a really slow start to the year and we've had a very fast couple of months now.

Can you just comment on your opinion on the state of the consumer? Do you think we are still catching up from the winter or do you think it's very much full speed ahead and everyone still needs a car..

May I will take a shot at this. Michael, you might have to be in as well. But we did see some slowness in the beginning of the year. But once we got through the first couple of months essentially, it seems to us that the consumer has very much become engaged and continues to be engaged.

And we see it very much across geographies, although I will say that Florida seems by far to be the strongest geography that we've got today. But car sales are good, parts and service business is good and we don't see any signs of any slowdown at this point in time..

Dave, this is Michael. I will just emphasize what Craig said. The consumer, we see activity both of course in the pre-owned and the new side, but we see consumer activity in the repair side and we see it both in the showroom traffic as well as on the Web site, the leads and the leads that we get from other sources. So we see a continued activity.

Don’t see any big bumps one way or the other, but it is the selling season so we believe it will continue at least throughout summer..

And we will take our final question as a follow up question from the site of Bill Armstrong. Please go ahead..

Within the used unit comps of 3%, what was the increase for CPO units on a same-store basis?.

Bill, this is Michael. I will have to get -- we will have to get back you on that, Keith, as a follow up. I don’t have that number, I am sorry..

Okay. And just maybe broadly, you mentioned aggressive incentive pricing during the quarter that may have pressured your sale.

Is it fair to say that that pressure might have been more heavily focused on the CPO side of you?.

No. Bill, it was really on the new car side and I would say it impacted -- in those brands, it impacted all of the pre-owned in those brands..

Well, as the operator mentioned that was our last question. I would like to thank you all for joining us today and we look forward to speaking with you again next quarter..

We would like to thank everybody for their participation on today's conference call. Please feel free to disconnect at any time..