Matt Pettoni - Vice President & Treasurer Craig T. Monaghan - President, Chief Executive Officer & Director Keith R. Style - Chief Financial Officer & Senior Vice President David W. Hult - Chief Operating Officer & Executive Vice President.

N. Richard Nelson - Stephens, Inc. Brett D. Hoselton - KeyBanc Capital Markets, Inc. Bret Jordan - Jefferies LLC Steven Lee Dyer - Craig-Hallum Capital Group LLC Michael Montani - International Strategy & Investment Group LLC Paresh B. Jain - Morgan Stanley & Co. LLC.

Good day, and welcome to the Asbury Automotive Group Third Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Matt Pettoni, Vice President and Treasurer. Please go ahead, sir..

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's third quarter 2015 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's third 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 our Form 10-K for the year ended December 2014, 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.

Craig?.

driving operational excellence and deploying capital to its highest returns. We are extremely proud and thankful for our team's hard work to achieve these outstanding results. 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 third quarter adjusted EPS from continuing operations of $1.43. This represents a 32% increase from last year.

Income from continuing operations for the quarter was adjusted for a $21.4 million pre-tax gain on divestitures or $0.50 per diluted share and an $800,000 benefit from a lower tax rate or $0.03 per diluted share. There were no adjustments to earnings for the third quarter of 2014.

For the quarter, same-store revenue increased 8% and same-store gross profit increased 6%. Controlling our expenses enabled us to decrease SG&A as a percentage of gross profit 90 basis points from last year to a ratio of 69.2%. Looking forward, we believe we can maintain SG&A margins around this level in the fourth quarter.

Q auto, our three-store standalone used vehicle initiative, continues to progress in line with our expectations and resulted in an EPS loss of $0.01 in the third quarter. We continue to focus on our objective of achieving run rate profitability for Q.

In terms of capital deployment, we invested $15 million in our facilities during the quarter with the year-to-date CapEx totaling approximately $35 million.

Our 2015 CapEx budget is forecasted to be approximately $70 million and includes $45 million associated with core annual CapEx plan, with the remaining balance related to renovations of recently acquired dealerships and construction projects that allow us to move franchises out of currently leased facilities.

In addition, this year we have spent $22 million for lease buyout and property purchases related to future moves. Going forward, we will continue to seek opportunities to purchase property in anticipation of future lease buyouts. During the quarter, we sold three franchises with approximately $135 million of annual revenue.

This resulted in a $21.4 million pre-tax gain and approximately $56 million of cash proceeds. These sales enabled us to reallocate the capital to higher returns. As Craig mentioned earlier, during the quarter, we returned $104 million to our shareholders through the repurchase of 1.25 million shares of our common stock.

Over the past 12 months, we have repurchased approximately 15% of our outstanding shares.

Turning to our balance sheet, from a liquidity perspective, we ended the quarter with $4 million in cash, $13 million available on floor plan offset accounts, $35 million available on our used vehicle line, and $165 million available on our revolving credit line.

We ended the quarter with total leverage of 2.4 times, slightly below our targeted leverage range of 2.5 times to 3 times. Going forward, we are committed to achieving our targeted range and we will continue to deploy capital on an opportunistic basis.

Finally, before I hand the call over to David, I'm sure you have noticed that we have a new format for our tables in the earnings release. This layout contains all of the same information as prior quarters, but in a simpler and clearer format. Now, I'll hand the call over to David to discuss our operational performance.

David?.

Thanks, Keith. We are extremely proud of our company's performance this quarter. In an increasingly competitive market, we increased total revenue 14%, grew total income from operations 16%, and controlled our expenses to deliver an operating margin of 4.5%.

For the balance of my remarks, I would like to remind you that everything I'll be covering with respect to operational highlights will pertain to same-store retail performance in the third quarter. New vehicle revenue increased 10% and our new vehicle volume was up 8% compared to the prior year.

Our gross profit was flat with the prior year due to a 60 basis point drop in our new vehicle margins to 5.4%. However, sequentially, we're able to hold our gross profit per unit flat. Looking forward, we believe we can maintain our per unit growth levels in the fourth quarter.

We ended the first quarter with $696 million of new vehicle inventory, or a 72-day supply on a trailing 30-day basis. Turning to used vehicles. Retail unit volume increased 2% and gross profit also grew 2%, with relatively stable margins.

Going forward, we believe our unit growth will continue in the low single-digits and we believe we can maintain these margin levels. Our used vehicles day supply is 36 days, which is slightly above our targeted range of 30 days to 35 days. Turning to F&I. Our third quarter F&I revenue grew 7% compared to the prior year.

F&I per vehicle retail for the quarter was $1,362, up $28 on a year-over-year basis. Turning to parts and service. In the third quarter, our parts and service revenue grew 11%, and gross profit grew 9% compared to the third quarter of 2014.

This was driven by a 6% increase in customer pay gross profit, a 7% increase in reconditioning gross profit, and a 30% increase in warranty gross profit. Our parts and service margin declined as a result of our focus on lower margin initiatives, targeted to drive customer retention.

For the rest of the year, we believe we can continue to grow our parts and service gross profit in the mid single-digit range. With respect to acquisitions, over the past year, we have acquired and integrated over $400 million in revenue. These stores are performing well above expectations.

I am proud to say that these results demonstrate our ability to maximize the potential of our core stores, while adding scale when opportunities arise. Finally, we would like to express our appreciation to all of our teammates in the field and in our support center who continue to produce best-in-class performance in many areas.

Our company continues to deliver record results, and this is a direct reflection of your passion and dedication. Again, thank you. We will now turn the call over to the operator and take your questions.

Operator?.

And we can take our first question from Rick Nelson with Stephens, Inc. Your line is open..

Thanks. Good morning (0:10:54)..

Good morning, Rick..

Like to ask you about the margin on the new car side and your expectations that you can maintain cap margin.

Is that kind of coming sequentially or year-over-year? Shouldn't we see an increase in the margin in the fourth quarter, given the premium/luxury mix?.

Rick, it's Craig. I'll start and then maybe David can jump in. It's obviously the numbers that we released today that we have seen some margin pressure in the new vehicle side and it's coming in a couple different areas.

Primarily, we think a big piece of it came from midline import where, with gas prices where we are, we think that that's a major contributor to the pressures that we continue to see there. We don't see that kind of pressure with our domestic stores, but we did see some pressure in the electric side as well.

And you're absolutely right, fourth quarter is a much heavier luxury quarter for us. Fourth quarter, we typically see some improvement in margins.

And when we're saying that we expect that we can hold margins here through the fourth quarter, and we're looking back at what we've seen historically, and that gives us some confidence that we think we can hold at these levels.

David, do you have anything to add?.

I would just say, I mean, the third quarter is that selling season sell-out with the model year change-over, and our goal is to chase market share. And we won with all our brands in market share except two, which builds a nice future for our fixed operations and customer growth..

I got you. And in the service and parts side of the business, strong comps there.

Warranty was a big driver; I'm curious how recalls affected that and the sustainability of that warranty number?.

Rick, this is David. I think, it's something that we've seen the last couple quarters. There has been more recalls this week alone, and last week as well. I don't see anything changing any time soon. And I think this is our new current reality for a little while..

Got you.

And does the warranty, in fact does that crowd out some of the customer pay opportunity?.

It does and it doesn't. It does put pressure on your human capital, but it also creates an opportunity to sell some customer pay work when they come in..

And finally, if I could ask about Q auto, is the plan to nurture these three stores, at what point do you determine whether you kind of push forward with unit growth?.

Rick, that word nurture is a great – that's a great term. I would tell you that we're very much committed to Q. We are still learning. We are experimenting with different things, we are – one of the things that we're looking at is having a sub-brand on the Q name in, potentially in our local markets.

So for example, you could see Q a cogent family automotive store. We – as we reported, we had a $0.01 loss in the quarter, we think relative to the opportunity that we see there, that's a small price to pay for what we still believe has very, very serious upside potential, and we'll be sticking with it..

Okay. Thanks a lot, and good luck..

Thanks, Rick..

Thank you..

And we can take our next question from Brett Hoselton with KeyBanc Capital Markets, Inc. Your line is now open..

Good morning, gentlemen..

Morning, Brett..

Let me follow on with Rick's question on Q auto.

At what point in time do you anticipate kind of making a – maybe a more substantial change in your approach to Q auto? Is this something that you're just going to kind of work with, with three stores for another six months to a year and kind of evaluate it or is this – is there is a possibility that within six months, you could say, you know what, we're going to start to open up more stores?.

Brett, I think we – it's hard for us to say whether it's six months to a year. We're learning every month. I go back to – we still feel very strongly about it. We think we'd be remiss not to continue to work with it, but we're going to learn as we go.

You could – depending on what we see in analysis, it's – for some of the stores in Florida, now that the snowbirds are coming back, we've got a broader customer base. I think we've just – I liked Rick's word – we're going to continue to nurture it. It is not consuming a tremendous amount of capital. We've got a great team that's working on it.

We like the progress that we see. And we just think that – we see it from the other way; we'd be remiss not to continue to work with this. When we see – we will give you a heads up. If we're getting ready to open additional stores, we'll let you know. But at this point, we want to just continue with these three while we continue to refine the model..

And then, how should we think about gross profit throughput as we move forward? It would seem that the Q auto would become more of a tailwind as opposed to a headwind, it's been this year.

And so, it would seem that the gross profit throughput would potentially be improving as we move through the next year, but how do you think about gross profit throughput?.

Are you talking specifically about the Q stores or about the business in general?.

The overall business..

Brett, this is Keith. Good morning. We continue to target that 50% range on throughput. For the quarter, we were about – we were just slightly below that – 38%, 39%, so right in our target range. I would say that in the market we're in, with the pressure on new margins, I think that's a pretty good job, with 39% throughput.

As far as Q auto and the impact, it will have a slight – it will help us out slightly next year compared to what we had for the full period of this year, but it's still a very small amount. It's just three stores out of a portfolio of a total of 87 including those stores, so it's a small amount.

So, I don't expect anything terribly meaningful going forward from Q auto with respect to throughput..

And the divestitures that you made, the three divestitures that you made, is there any way that you can kind of quantify the earnings impact apart from the special items in the third quarter? I mean what kind of earnings would those stores have contributed?.

Yeah. Brett, this is Keith. We don't plan to disclose what the earnings contribution was from those stores. I will say we did provide the revenue amount of $135 million in annualized revenue. So, that would give you an understanding of about what we divested out from a revenue standpoint..

And then how do we think, about on a go-forward basis, is this a – are you kind of looking through your current portfolio and planning on making some other divestitures or is this kind of just three unique franchises that you felt opportunistic?.

Brett, it's Craig, I'll take that one. I mean it's – I think as with any portfolio, we're constantly reevaluating what makes sense, what makes – what might not make sense. And where there is an opportunity to divest of a store, where we think we can take that capital and redeploy it to higher returns, it's something that we will always consider..

And then finally, how do we think about the pace of share repurchase and the pace of acquisitions going forward? I mean, your acquisition pace was about $400 million over the past year. Your share repurchase pace was about $400 million over the past – I think four quarters.

How do you think about both of those on a go-forward basis?.

The way we're thinking about it is really from a leverage perspective, to start. I mean we've been very clear that we want to maintain leverage in the 2.5 times to 3 times. That creates, if you would, capacity for either share repurchase or acquisitions, again once we take care of our core capital requirements.

And the way we think about that is very simple; I mean we're looking to make investments where we can get the greatest returns. And when we find acquisitions that make economic sense that that's what we will go after. And we've been able to make these acquisitions at significant discounts to where we trade.

So, we feel like when we make those buys, we gain an arbitrage opportunity on day one and then as we can bring synergies to those operations, we get incremental benefits later on. If we can't find acquisitions that make good sense, we've got a wonderful option of always buying our stores via share repurchase, and that will always be our fallback..

Okay. Thank you very much, gentlemen..

Thank you..

Thank you..

And we can take our next question from Bret Jordan with Jefferies. Your line is open..

Hey, good morning..

Good morning..

Couple questions. I guess, as you looked at some of the margin pressures on the service side, you're mentioning customer retention.

Could you talk about any specific promotions that you're doing in that space and is it sort of an ongoing tire initiative that you started a couple of years ago?.

I would say we started focusing on it at the beginning of the year. And it was kind of a three-prong approach going after our independents, going after retaining our own customer base and going after acquisition customers. And to do that, you have to be priced competitive with the independents and we chose to do that.

And an example, our customer pay gross, it was up 6% in the quarter. But when you think about it from a customer standpoint on a same-store basis, we were up 22,000 customer pay RO count – repair orders over the quarter. So, we had 22,000 additional customers coming during the quarter that we hadn't seen before.

So, we're pretty proud of that number and see that continuing to grow..

Okay. Great.

And a question on the Q auto, and as you look at customer, as you look at ongoing service in that channel, what's the success level of retaining the used vehicle buyer in the service pay after the sale?.

At this point, it's not a material part of that business. One of the things that we have learned with Q is that when we come out of the box with a brand that never existed before, you've got a challenge. We just don't have that much recognition, we don't have that many cars on the road that we sold, so we've got a very lower unit operation number.

We see that business growing over time, if you would, the parts and service business at Q. But at this point in time, it's a very small part of the business..

Okay, great. Thank you..

And we can take our next question from Steven Dyer with Craig-Hallum Capital Group. Your line is now open..

Thanks. Good morning, guys..

Morning..

Good morning..

Couple quick ones, kind of a two-parter, as you look at the pressure on midline imports, if we were to assume that gas prices are to stay in this level for a while, is there a point where that margin pressure anniversaries itself or lets up going forward?.

This is Craig, I'll take a shot and Dave or Keith may want to add to it, but, we've been feeling the impact of these low gas prices for some time. We saw our margins, I think, begin – it felt like they began to stabilize in this quarter, certainly versus last quarter, and I think we may seeing exactly what you're talking about..

And then related to that, as you look at the acquisition landscape, does it make acquiring maybe a domestic franchise or series of franchises anymore appealing, are you looking harder at that to try to diversify a little bit more away from that?.

Absolutely. The last three acquisitions we did were all Ford stores. We've had tremendous success with those acquisitions. We like them for the reasons you pointed out. I'd add too it allows us to diversify into the truck business, our business is very heavy car today as opposed to truck.

There are franchises that trade at a lower price point relative to many of the other stores in the marketplace. And our experience has been they worked out quite well for us, and you might expect to see us continue to target domestic stores in markets where trucks are a substantial part of the business..

Great. Okay. Thanks, guys..

Sure thing..

And we can take our next question from Michael Montani with Evercore ISI. Your line is now open..

Hey, guys. Good morning.

Just wanted to first ask on Q auto, and apologize if I had missed this, but did you give what the profit impact was for this quarter and any outlook for 4Q?.

We said that we'd lost $0.01 in the quarter, and we said that we're continuing to work with Q auto, that we're committed to it, that we want to drive these three stores to profitability. And we feel like we're making great progress and are absolutely committed to the endeavor..

Wanted to ask about the service side. You mentioned the 22,000 customer count increase in new customers, which is – it sounds strong.

But I guess how can we contextualize that either in percentage terms or can you share kind of progress you might be making on actual retention rates themselves?.

This is David. That obviously varies a lot by brand. But when you look at it overall from a percent standpoint, it's between 8.5% and 9% increase year-over-year..

Okay. That's strong. Just on the U-side, the gross profit per unit there are a bit more resilient actually than I had expected. But then, the outlook for a low single-digit used unit comp to continue is also a little bit lower.

So, can you just help discuss kind of puts and takes there, and how you think about managing gross profit per unit versus potentially getting an incremental unit sale, especially in light of potential reconditioning profits that you could be making from incremental units?.

This is David. There's a balance there and it really breaks down to each individual market. I mean, we have some markets that are up double-digits from a volume standpoint and some that are flat. As a company, we're very focused on our internal growth, first and foremost, and that drives us.

And we're finding ways in markets to increase our throughput better than others in some markets. It's a focus on the fourth quarter, and I think that low-single digits is probably where we'll be..

And just lastly on the cost control side, which is obviously strong this quarter, moving forward, in the past, there's been some competitors who've tested the 66 type level of SG&A to gross.

Is there structural impediments that would keep you guys from getting to that level as you continue to ring out these efficiencies or is that sustainable, maybe is a different way to ask it?.

Hey, Michael, it's Keith. Good morning. I think the right way to look at it when we compare ourselves to our peers, is we have to look at our real estate portfolios and whether or not we're renting or whether or not we own. Obviously we've had a focus on owning real estate as of late versus renting and being under leases.

So you should adjust for that when you normalize. If you do that, you'll find that through the second quarter at least, we will see how everybody else comes out here in the third quarter, we're pretty much top of class in that metric.

We talked in the past before, we need incremental gross profit to drive that leverage ratio down; we have to leverage our fixed cost structure and that's what we're looking to do with the key acquisitions that Craig mentioned for $400 million over the last year. And we're looking to grow the business beyond that..

Okay. Thanks guys. Good luck..

Thank you..

Thank you..

And we will now take a question from Paresh Jain with Morgan Stanley. Your line is open..

Morning, everyone. A couple of questions. First on acquisitions; the leverage ratio and the liquidity available still leaves enough room for you to do more sizeable acquisitions, more platform deals.

Are you even looking at such deals outside of Asbury's current footprint, the current geographic footprint?.

Yeah, we are. There's been a lot of conversation in the marketplace. There have been a number of platform owners who've been talking about potentially selling their businesses and we've been engaged in those conversations.

Some of those have been outside of our traditional markets, but large enough on their own, if you would, in their own footprint that would make sense for us to consider a conversation.

We – but I would say that in many instances, their price expectations are – were higher than what we felt was reasonable, and for that reason, you didn't see us get anything done on that size during the quarter..

Got it. And then one on the used strategy with Q auto. The peer-to-peer online dealer model continues to gain traction, but more importantly, it is bringing a lot of transparency, not only on the pricing front, but also in terms of gross profits.

Is that a concern at all when you're thinking about Q auto strategy?.

No. We also notice that there is a lot of activity in the used market, a lot of new entrants. They're small at this stage of the game, but it's clearly a market that many others are finding more and more intriguing. I would go back to one of our fundamental concepts. We send somewhere around 35,000 cars to auction every year.

We believe that many of those vehicles end up on our competitors' lots, and we would love to figure out a way to retain those vehicles in our systems and retail them ourselves to generate incremental profit. And we don't think what anybody else is doing online or anywhere else really matters.

We think this is an opportunity that exists within our own system, and we're committed to figuring out how to make that work..

Got it. Thank you. That's all I had..

Sure thing. Thank you..

With that question, that concludes today's discussion. We appreciate you all for joining us today and look forward to taking to you at the end of fourth quarter..

Thank you for your participation. This does conclude today's program. You may disconnect at any time..