Matt Pettoni - Vice President and Treasurer Craig Monaghan - President and Chief Executive Officer David Hult - Executive Vice President and Chief Operating Officer Keith Style - Senior Vice President and Chief Financial Officer.

Rick Nelson - Stephens Liz Suzuki - Bank of America Merrill Lynch Scott Stember - Sidoti & Company Bill Armstrong - CL King & Associates Brett Hoselton - KeyBanc Paresh Jain - Morgan Stanley.

Good day, and welcome to the Asbury Automotive Group fourth quarter and yearend 2014 earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Vice President and Treasurer, Matt Pettoni. Please go ahead, sir..

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's fourth quarter 2014 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's fourth 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; David Hult, 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 will open the call up for questions, and I will 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 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 CEO, Craig Monaghan..

Good morning, everyone, and thank you for joining us today. 2014 was another great year for Asbury. Our team grew full year 2014 revenues 10% and full year 2014 adjusted EPS 24%. For the fourth quarter, we are once again reporting record results with adjusted EPS from continuing operations of $1.07, an increase of 22%.

Our stores continue to produce excellent operating results by maximizing new and used vehicle sales opportunities, improving F&I penetration, pursuing incremental service opportunities and controlling expenses. In total, fourth quarter revenue was up 9% and gross profit was up 10%, and we achieved an operating margin of 4.4%.

These results and our strong balance sheet enabled us to deploy over $200 million of capital in the fourth quarter, including repurchasing $92 million of our stock, acquiring two Ford stores, opening our third Q auto store and continuing our investments in our core stores.

We are extremely proud and thankful for our teams' hard work this year to achieve these outstanding results. Looking forward to 2015, we believe automotive sales will remain healthy, as customers take advantage of extremely attractive financing options and a breadth of exciting new models.

For 2015, we are planning our business around a high $16 million SAR. Going forward, we will continue to execute our two-part strategy, driving operational excellence and deploying capital to its highest returns. Joining us on our call today is our new COO, David Hult.

David brings a wealth of auto retail industry knowledge and a proven track record to our team. We are very excited to have David on board. I also want to thank Michael Kearney, for his 25 years of service to Asbury. I am personally thankful for his partnership over our years of working together.

Now, I'll hand the call over to Keith, to discuss our financial performance.

Keith?.

Thanks, Craig, and good morning, everyone. This morning we reported record fourth quarter adjusted EPS from continuing operations of $1.07, a 22% increase from last year. The adjustment to our earnings this quarter was a $19.5 million after-tax loss on extinguishment of long-term debt associated with calling our 2020 bonds.

On an EPS basis, this loss totaled $0.66 per diluted share. There were no adjustments in the prior-year quarter. For the quarter, same-store revenue increased 7% and same-store gross profit increased 8%. Controlling our expenses enabled us to decrease SG&A, as a percent of gross profit, 70 basis points from last year to a ratio of 70%.

Flow-through for the total company was 37%, and was adversely impacted by our recent acquisitions and our standalone used-vehicle initiative, branded as Q auto. Going forward, we expect our flow-through percentage to be in the mid-30s due to our recent acquisitions and Q auto.

Q auto continues to progress in line with our expectations and resulted in an EPS loss of $0.04 in the fourth quarter versus our previous estimate of $0.04 to $0.06. Losses for Q auto totaled $0.10 for the full year of 2014. Looking to near-term expectations, we estimate this initiative may reduce EPS by $0.04 to $0.06 in the first quarter of 2015.

In 2014, our efforts have been largely focused on bringing our Q auto stores to life. Now, in 2015, our focus will be to bring these three stores to profitability. We will continue to provide updates each quarter as we move forward.

Turning to future capital deployment, our 2015 CapEx budget is approximately $65 million and includes $45 million associated with our core annual CapEx plan and $20 million of CapEx associated with recent acquisition, renovations and construction, which will enable us to move out of facilities that are currently under lease.

Turning to share repurchases. During the fourth quarter we repurchased 1.27 million shares of our common stock for approximately $92 million. This brings our total capital repatriation through share repurchases to approximately $161 million for 2014. And so far this year, we repurchased an additional 881,000 shares for $65 million.

At a board meeting last week, our board reestablished our share repurchase authorization to a total of $300 million. Turning to the balance sheet. During the quarter, we refinanced our $300 million of 8.375% senior subordinated notes due 2020, with our $400 million of 6% senior subordinated notes due 2024.

The new notes allow practically unlimited restricted payments, which include share repurchases as long as we've maintained a leverage ratio of less than 3x. To align our key debt instruments, we also amended our credit agreement to match our restricted payment covenants in our new bond.

Finally, from a liquidity perspective, we ended the quarter with $3 million in cash, $26 million available in floor plan offset accounts, $92 million available on our used vehicle line and $165 million available on our revolving credit line. We ended the quarter with a leverage ratio of 2.5x.

And as announced this morning, we closed on our $100 million mortgage facility, further taking advantage of the low interest rate environment. In summary, we remain committed to deploying our available liquidity and achieving our targeted leverage ratio of 2.5x to 3x. Now, I'll hand the call over to David, to discuss our operational performance.

David?.

Thanks, Keith. I appreciate everyone's kind words and I am excited to be at Asbury. After spending the last three months getting to know the team, I am optimistic about the future and look forward to continue the success our employees have created. We are extremely proud of our company's performance this quarter.

Our gross profit increased 10% in all of our business lines. This growth help reduce an operating margin of 4.4% compared to 4.2% in prior-year period. For the balance of my remarks, I'd like to remind you that everything I'll be covering with respect to operational highlights will pertain to same-store retail performance during the fourth quarter.

New vehicle rose 7% revenue and 3% gross profit from prior year. Our new vehicle unit sales were up 6% and new vehicle margins for the quarter were 6.1%. Our new margins were down in midline import brands as a result of increased market competition.

Looking forward, we believe we can maintain new vehicle gross profit per unit retail in a range of around $2,100 a unit. We ended the fourth quarter with $700 million of new vehicle inventory or a 60 day 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, but we will continue to monitor and adjust our inventory levels to reflect the changes in the business environment. Turning to used vehicles.

Our fourth quarter used vehicle gross profit increase 5% over the last year, driven by a 5% growth in unit volume. Going forward, in 2015, we believe we can maintain used vehicle margins at our current levels and believe our unit growth in used vehicles will continue in the low-single digits.

Our used vehicle inventories increased $20 million to $142 million from the prior-year quarter. With our increased volume, we were able to maintain day supply within our targeted range of 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 a solid sustainable growth and result. Fourth quarter F&I revenues grew 8% compared to the prior year. F&I per vehicle retail for the quarter was another all-time record of $1,374, up $30 on a year-over-year basis. The lending environment remains favorable.

In the fourth quarter, our parts and service revenue grew 8% and gross profit grew 12% compared to the fourth quarter of 2013. Our customer pay business, which represents approximately 56% of our parts and service gross profit, increased 8% from prior year. In addition, reconditioning was up 21% and warranty was up 17%.

For 2015, we believe we can continue to grow parts and service business in the mid-single digit range, while maintaining relatively stable margins. However, there could be some margin pressure from increase focused on our quick service initiatives.

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. This is a direct result of your collective dedication and effort. Again, thank you.

We will now turn the call over to the operator and take your questions.

Operator?.

[Operator Instructions] We'll take our first question from Rick Nelson with Stephens..

I'd like to talk about capital allocation. The stock buybacks seemed to really ramp this quarter into the first quarter. If I went back, I think you targeted $30 million in buybacks for the year. Coming into the year we got $161 million, a lot of that backend loaded into first quarter.

Curious what your thoughts are there versus the alternatives? And would you take on additional leverage to do buybacks?.

We are fortunate that the business has been strong this year. We've produced tremendous cash flow. And as that was happening, our leverage, in particularly, our net leverages was falling down to levels that were below our target rate.

As Keith mentioned, we'd like to deploy all excess liquidity, and then in addition to that keep our leverage in the 2.5x to 3x. We had gone to the point, where we are building a lot of liquidity on the balance sheet and leverage had fallen below 2.5x.

And so what you saw here, particularly in the fourth quarter, was a concerted effort on our part to get that capital redeployed. And we did that through the combination of acquisitions and share repurchase. Leverage is now at 2.5 and on a net basis it will be below that, because we still have excess liquidity.

And we will continue to work to deploy capital and get that leverage back to what we think are a reasonable range of somewhere between 2.5x and 3x..

Also I'd like to ask you about the acquisition opportunities.

You closed two big Ford stores, if you could comment on valuations there and how that compares to buyback opportunities? And how you see Berkshire now in the game, if that's causing any pausing on the acquisition environment, as potential sellers seek out Berkshire bids or have things in fact unchanged in that regard?.

I'll start with the latter question, we like yourselves, we're very well aware of the fact that some of these very large investors have been signaling that they -- some signaling they want to get involved, and Buffet actually getting involved. I will tell you that at least with the acquisitions that we're looking at, we've not seen any impact.

There are still plenty of store for sale and we've not seen any impact on pricing. With respect to your philosophy on acquisitions, I would boil it down to our baseline is we can always buy our own stores through share repurchase. We tend to think about our thresholds on a cash flow basis or an EV to EBITDA basis.

We trade somewhere around 10x EV to EBITDA. If we can buy stores below that price point, we think that makes sense. Sometimes we will bake in the synergies we think we can bring to the table. But these acquisitions that we've been able to make in the fourth quarter were priced below that 10x threshold, I would say significantly below that threshold.

So we think they make great sense for us. And then like we mentioned, we also see buying the stock, as we grade out the stock, it's a great opportunity. It's very easy to execute. Matt just goes out and buys the stock. We don't have any integration issues.

We don't have to convert DMS, CRMs or any of those things, so we fell like at this that we're executing, it works for us. It's hard for us to project what we'll do in the future, because it will be a function of what the market brings to us..

And we'll take our next question from John Murphy with Bank of America Merrill Lynch..

This is Liz Suzuki on for John. Used vehicle pricing appears to be trending very strong, despite what seems like constant rhetoric in the industry about how it should start coming under pressure.

What are your planning assumptions for used vehicle pricing over the next year?.

We don't see any issue with our pricing right now, we see it maintaining. I can't speak for how the year is going to go, but car market conditions and what we saw in the fourth quarter, prices remain strong in all markets. There is a little bit of movement in '14 in the compact segment, but the rest of the segments remain strong..

And last year, we were hearing commentary from the dealers that they were having a hard time finding enough technicians to meet demand in the parts and service channel.

Is Asbury experiencing any shortage of skilled workers or coming up against any capacity constraints in the service space?.

I'll hop in on that one. I think, yes. We as an industry produce more technicians, and in Asbury we feel that pressure as well. The constraints in our stores are not bays or stalls or lists. The constraints are technicians. We've got a number of programs in place to help us meet the demands in our stores. We work with a lot of local community colleges.

A lot of students go to school and then also work part-time in our stores. We've recently initiated our own technical institute, if you will, where we are training employees in a standalone training center that we've put together.

So I would say that it's an ongoing challenge, but it's something that we have been able to manage our way through and I think will continue to manage through it in the future..

And we'll take our next question from Scott Stember with Sidoti & Company..

You guys did a great job of lowering your SG&A as a percentage of gross profit despite some of these extraneous costs that you've had.

Can you just maybe talk about some of the leverage you've been pulling and talk about some of the current initiatives, like the shared services center? How far along are we in implementing that and what kind of additional leverage can you get in 2015?.

I think if you take a look at our track record over the last three to five years, you can see that we have done some substantial heavy lifting in reducing our cost structure. I would say, when you look at our flow through this quarter at 37% on a same-store basis, it was healthier than that.

It truly is leveraging our fixed cost, our people cost, and doing a good job of dropping it to the bottomline including controlling our advertising spend as well. As far as shared services, some initiative is still underway. There is five basic components to our shared service activity. Two of those have been finalized, accounts receivable and payroll.

It's fully consolidated. And we continue to work on inventory processing and billing and accounts payable, which would be finalized, all final and wrapped up by mid-year in 2015. I would tell you, looking at the AR situation and the payroll situation; we've been able to add a number of stores, three stores this year plus our Q auto initiative stores.

Our employee count is about 8,300 at this point. And we haven't had to add anybody or any people in those departments, because we're getting nice leverage out of our process that we put into place. Once we get halfway through the year, we get these other three groups fully done. And I would expect that we would have the same situation in the future.

So it's really a cost leverage standpoint more than it is a cost reduction, but I will be able to leverage that cost structure once it's in place mid-year..

And just one last question on Q auto, I know it's early. And you're really just finding out how everything is working.

But can you just give us some anecdotal commentary, a little bit more granular on what you're seeing on the sales side and some of the other components of the business, whether it's an F&I or parts and service component?.

I'll go back to the point you made, it's early. Our objective was to get these three stores up and running. We do. Essentially, we have a large-store, a medium-sized store and a small-store, and store that open first is performing the best. The store that we opened third is actually the smaller format store and it's doing well also.

There is a lot of new technologies that is at play in those stores. We're working very closely with some of our partners to bring those technologies to life. We essentially write the specs, they do the software development. But I would say this, we are very happy with we are. We are very much in line with our expectations.

We are learning a tremendous amount. Some of what we learn is good. Some of what we learn are things we don't need to be doing going forward. I would say that we remain optimistic about the endeavor and look forward to providing new with continued updates as we move forward.

But I would also come back and say, we lost $0.04 in the fourth quarter, so we still have work to do. We are very much committed to it and we'll keep you posted as we move forward..

We'll take our next question from Bill Armstrong with CL King & Associates..

You touched on this a little bit in your opening comments. But I wanted to talk, maybe you can give us a little more detail on what's going on with midline imports with the gross profit per unit down year-over-year.

And what's the outlook there going forward?.

We believe there's continuing competition pressure to increase volume and gain market share and we're competing locally in our markets. And we think where we are at is we'll stay for the remainder of the year..

So do you expect to see continued negative comparisons in terms of gross profit per unit in the midline import space?.

Based on what we see right now, we think it's leveling off where it's at and it will at stay consistent..

Shifting gears to Texas.

Are you seeing any weakness yet, in either demand in your stores in Texas or in the way lenders are approaching the market in terms of maybe tightening underwriting standards for new car loans?.

No. We haven't seen anything, and Texas remains strong for us. And at least, at the moment, we're doing very well in Texas and excited about what we've produced so far..

And then finally just on Q auto.

Would you be able to disclose how many used vehicle units Q auto sold during the quarter?.

We don't want to go there yet. Q auto is so much in its infancy. We want to get some time under our belts and continue to experiment with it, before we start releasing operational data on these three stores..

Do you plan any more new Q auto stores this year or are you going to stick the three for now?.

We're going to stick with the three for the time being..

And we'll take our next question from Brett Hoselton with KeyBanc..

Just kind of start off with Q auto a little bit here.

Based on your plans at this point in time, Craig, and how things are progressing and so forth, how do we think about the impact as we move through 2015? Do you think that you have the potential to breakeven, for example, in the three stores by the end of the year?.

We are learning. I'd go back to where I start. I mean, if we knew, we would tell you. But we have to remember, this is a start up. With any start up, we build models, we have all types of projections, but we just don't know. And we are constantly experimenting with different approaches to the way we're running our business.

I'd like to refer to it as a bit of puzzle. I'd come back to this big picture, Brett, if I could. We send somewhere around 35,000 cars to auction every year. There's a large percentage of those cars are very retailable.

And what we're trying to do fundamentally with Q is redirect some portion of those cars to Q, so that we can be the ones who enjoy the profits that come with retailing those automobiles. And we've got the stores up and running. We think we're in good locations. We've got, like I said, earlier, we've got some technologies in that.

We're doing a number of things in those stores we don't do on our core stores. But it is a learning experience. I think I'll comeback and say, I think it's got a lot of potential, but we just need to keep our nose to the grindstone and keep at that this and see where it goes.

Our crystal ball is just not clear enough to really say anything more than that..

As you think about the evaluation process in your plan, when do you think you kind of get to the point where you make the determination, look, this is successful; or we have to kind of cut bait or fish? Is this kind of, let's run it through the end of 2015; or is it let's go for three years and then decide? And then, let's say, that whatever that period of time is, you get to the point where you decide, this is pretty successful.

Do you have any expectations beyond that? I mean I'm sure you do, but do you have any expectations that you would be willing to share with us as to where you might take this if it actually is successful based on what you define as success?.

Those are fair questions. And we could sit around and hypothesize about does it have its own financing arm, does it sells its own warranty products, you could go on and on. But the way we look at it is, there is nothing at Q that can't sell a used car and make -money. All those other things are great, great things to think about for another day.

Right now, we are 100% dialed-in on let's make money in these three stores. And it's our entire effort, let's make money in these three stores. And once we get across that hurdle, then we can help conversations about potentially more stores or potentially doing other types of business there.

But the foundation of Q is getting profitable in these three stores. And we're all hands on deck trying to get there with respect to timing. I think the window here is much closer to, let's prove it by the end of this year than let's give it the next three years.

Again, I'll come back to is, we've got a lot of lot of used vehicle expertise in-house, we've get a lot technology assets, we've got capital, we know a lot about used cars, we're throwing some very talented people at this, and I very much believe that if we're going to prove this thing, it should come on the short end of that cycle rather the long end of that cycle.

I think we all see it the same way..

On the new car side, and David, I think this might be for you. Let's see, from talking to dealers it sounds like, while it's somewhat competitive, it sounds like Nissan is really pushing things quite hard, and maybe more so than Toyota and Honda.

Would you say that that's a fair characterization or would you say that the challenges that you're facing there competition-wise and so forth are equal across the three majors, let's say?.

I would say it's very competitive space. It's always been a very competitive space, and I don't see that changing in any way, shape or form..

And then finally, maybe Craig or Keith, as you start to think about that 2.5x to 3x leverage ratio, your goal of kind of staying closer within that range or something along those lines, should we then basically as we look out over the next year, two years, three years, perceive or believe that you're just going to take any capital that's available, when you're below that range and either maybe repurchase stock, buyback leases, and/or make an acquisition, and so that capital is pretty much committed towards that goal?.

Bret, its Keith, I'll start and then Craig could jump in. When we started out beginning of last year, I think we got to the point, and Craig mentioned it before, where our cash generation, our EBITDA actually outran our balance sheet for a period of time. We've made great progress in making that up. We are at 2.5x at the end of the quarter here.

We are at 2.1x net. And when I say net, I mean net of cash and net of our used car floor plan. We just gotten out some mortgage this morning for $100 million, it's a mortgage facility. We'll pull it in as we need it. That would bring us up into the 2.8x range based on our trailing 12 months of EBITDA and put us right in the middle of that range.

So we'll be on very good position from our target perspective. I'll let Craig talk a bit more on the go forward..

I think, Brett, what you lined out is pretty accurate. We want to get into that range. As we generate cash, we will deploy it. And we can find acquisitions that make sense and we'll be all over that. I mean, these recent acquisitions look more attractive to us than share purchasing, that's why we went after them. Share repurchases is always the fallback.

Maybe one thing I would say is as we look at the acquisition world, there is quite a disparity in pricing between what you might pay for the domestic store versus what you pay for a luxury store. And the price for the luxury store could be 50% higher.

So we think there is somewhat of an arbitrage opportunity in the market, and we are very happy with these Ford stores that we bought. And when we see opportunities like that, we'll pursue them. But at the same time, we love buying our own stores. So we feel like we're in a great position where we can't go wrong..

And we'll take our next question from Paresh Jain with Morgan Stanley..

I had a couple of questions, one on luxury and then a follow-up on the used market strategy. Luxury seems to be performing really well.

Any sense of how much of this is being driven by availability of entry-level luxury brand vehicles, say in the $35,000 to $40,000 price range?.

We see the luxury market as very strong and very consistent. They are all widening their model selections and that's certainly increasing their opportunities to gain luxury business. We are very happy with the mix we have and look forward to a strong year with all the luxury brands..

On the used market strategy, having standalone used stores obviously makes a lot of sense in a very fragmented market. But at the same time it seems like there are some peer-to-peer used car buying and selling platforms emerging, although it's just in a few geographies right now.

Wanted to know your thoughts on that business model and if you consider them threat at all in the long run?.

Used vehicle market is a huge market. And what, we, as franchise dealers do is just a fraction of that market. I don't remember the exact numbers; I think we're talking about used vehicle market in the 40 million to 50 million unit range.

So we talk about a SAAR of 16 million, 17 million units to put in perspective versus 40 million to 50 million in the used vehicle market. The franchise dealers would be just a small portion of that. Before we got into Q and as we're into Q now, we spent a fair amount of time researching who's out there.

And what we found was that, obviously, CarMax is the dominant player, but even they have a small single-digit percentage ownership of that market. So it's obviously extremely fragmented. There does seem to be more players, who have gotten involved lately.

But we just come back to our little world here at Asbury and we've got three stores in the market that we know very well. We think we've got potentially a great source of inventory for those stores that's slipping out of our, if you would, our cycle.

And we just want to get some of that inventory back into these stores and we think there is the potential for a very attractive business there. And quite frankly, we don't spend a lot of time worrying about others. We're just trying to make our little world work. And we think we've got a real good shot at pulling it off. End of Q&A.

That concludes our discussion today. We don't have anymore questions. We appreciate you joining us and look forward to talking to you again at the end of the first quarter. Thank you very much..

That does conclude today's conference call. We appreciate your participation..