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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2016 - Q3
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Executives

Matt Pettoni - Asbury Automotive Group, Inc. Craig T. Monaghan - Asbury Automotive Group, Inc. Keith R. Style - Asbury Automotive Group, Inc. David W. Hult - Asbury Automotive Group, Inc..

Analysts

Rick Nelson - Stephens, Inc. William R. Armstrong - C.L. King & Associates, Inc. Bret Jordan - Jefferies LLC Michael Montani - Evercore ISI Jamie Albertine - Consumer Edge Research LLC Elizabeth Lane Suzuki - Bank of America Merrill Lynch Chris Bottiglieri - Wolfe Research LLC.

Operator

Please stand by. Good day, and welcome to the Asbury Automotive Group Q3 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matt Pettoni. Please go ahead, sir..

Matt Pettoni - Asbury Automotive Group, Inc.

Thanks, operator. And good morning, everyone. Welcome to Asbury Automotive Group's third quarter 2016 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 2015, and 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?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Good morning, everyone. This morning we announced adjusted earnings per share of $1.52 for the third quarter, a 6% increase over last year. With unit sales at 17.5 million, SAAR was down 2% in the quarter.

While our new unit volumes moved in line with the industry, we experienced new margin pressure due to a combination of lower manufacturer incentives and aggressive sales objectives. Despite these challenges, we successfully reduced our new vehicle inventory levels during the quarter.

Our used vehicle business was adversely impacted by stop-sale inventory associated with ongoing factory recalls. But despite the challenges we faced in both our new and used businesses, our strong parts and service growth enabled us to hold gross profit flat on a same-store basis.

In summary, our adjusted results represent another third quarter EPS record, and our 29th consecutive quarter of EPS growth. Going forward, we see further opportunities to grow our used vehicle, F&I and parts and service businesses.

Assuming a stable SAAR environment, we believe the operational initiatives we have underway will provide the platform for us to deliver modest EBITDA growth in 2017, which will be further enhanced by capital deployment. With that, I'll turn the call over to Keith to bring us through our financial highlights.

Keith?.

Keith R. Style - Asbury Automotive Group, Inc.

Thanks, Craig. And good morning, everyone. This morning we reported record third quarter adjusted EPS of $1.52. This represents a 6% increase from last year. Adjusted net income for the quarter excluded a $1.8 million pre-tax real estate related charge or $0.05 per diluted share.

Adjusted net income for the third quarter of 2015 excluded a $21.4 million pre-tax gain on divestitures or $0.50 per diluted share, and an $800,000 tax benefit or $0.03 per diluted share. Before I get into a more detailed review of our financial performance, I'd like to provide a high-level overview of our third quarter results.

First, our total revenue for the quarter was down 2%. However, on a same-store basis, our revenue was up 1%. The majority of the decline in total revenue is attributable to strategic divestitures we made during the second half of 2015 to realign our dealership portfolio.

Second, we added leverage to our balance sheet with our $200 million bond add-on in the fourth quarter of last year, increasing other interest expense by $2.5 million for the quarter.

Finally, we deployed $206 million to repurchase our stock over the past year, reducing our average share count by 15%, and enabling us to deliver 6% EPS growth for the quarter. With that summary behind us, let's turn to SG&A. Our SG&A as a percentage of gross profit for the quarter was 69.9%, up 70 basis points from last year.

As we discussed on the call last quarter, increased enrollment in our employee medical insurance plans put pressure on our overall personnel expense. Adjusting for the $2 million increase in our benefit plans, our SG&A ratio would have been flat with last year.

We expect that the cost of employee medical insurance will continue to impact our SG&A, and as a result, we expect our SG&A as a percentage of gross profit to be between 70% and 71% for the fourth quarter. In terms of capital deployment, CapEx, excluding real estate purchases, totaled $19 million for the quarter.

For 2016, we continue to plan for $80 million of CapEx, which includes $45 million associated with our core annual CapEx plan and $35 million of CapEx associated with recent acquisitions and construction, which will enable us to move out of facilities that are currently under lease.

In addition to executing on our CapEx plan, for the year, we have purchased $20 million of previously-leased property and $11 million of property for future expansion. We now own approximately 70% of our real estate portfolio, which we believe provides flexibility and long-term value for our shareholders.

Going forward, we will continue to seek opportunities to purchase real estate currently under lease and acquire properties in connection with future dealership relocations.

From a liquidity perspective, we ended the quarter with $4 million in cash, $36 million available in floor plan offset accounts, $90 million available on our used vehicle line, and $240 million available on our revolving credit line.

Our total leverage ratio stands at 3.1 times, and on a net basis, our leverage ratio was 2.6 times, which is in line with our target range of 2.5 times to 3 times. Going forward, we are committed to remaining in our targeted range, while maintaining flexibility to deploy capital on an opportunistic basis.

With respect to managing our broader dealership portfolio, we are currently in the process of divesting our remaining stores in Arkansas, which we anticipate closing late in the fourth quarter. We intend to redeploy the majority of the proceeds from this sale on an acquisition with a more favorable return.

Naturally, both transactions are subject to manufacturer approval. Now, I'll hand the call over to, David to discuss our operational performance.

David?.

David W. Hult - Asbury Automotive Group, Inc.

Thanks, Keith, and good morning, everyone. My remarks will pertain to our same-store performance compared to the third quarter of 2015. New vehicles; our new unit volumes were in line with SAAR. From a margin perspective, luxury gross has improved.

While both mid-line import and domestic margins declined, the declines were concentrated in two of our brands where we saw lower dealer incentives and aggressive sales objectives. These factors resulted in our new vehicle gross profit decreasing by 7% for the quarter.

Despite the challenging sales environment, we were able to reduce our new vehicle inventory by 11 days from last quarter to a 72-day supply on a trailing 30-day basis. Our new vehicle inventory totaled $695 million. Turning to used vehicles, our used vehicle retail gross profit was down 6% due to lower unit sales and margin pressure.

Our margins were impacted by the influx of off-lease vehicles into the market. While we did not meet our used vehicle sales expectations, we are pleased with our 7% increase in CPO unit sales. We believe there is additional opportunity to grow our used vehicle unit sales, specifically our CPO sales as additional off-lease inventory comes to market.

Our used vehicle days supply was 40 days, which is above our targeted range of 30 days to 35 days. Adjusting for $11 million of stop-sale inventory, our used vehicle days supply would have been slightly above our targeted range.

Turning to F&I, our team continues to deliver strong results, delivering F&I per vehicle retailed of $1,393, flat with last year. We've not seen any changes in the lending environment. Now for parts and service. Parts and service was the highlight of the quarter.

We were able to offset the declines in our new and used business with strong growth in parts and service. Over the past couple of years, we have focused intently on growing this part of our business, including building out our leadership team, implementing business processes and integrating technologies to enhance the customer experience.

These efforts have resulted in consistent growth in our parts and service business, which continued into third quarter with our teams delivering 7% gross profit growth, including 7% growth in customer pay and 11% growth in warranty. Looking forward, we believe we can continue to grow our parts and service gross profit in the mid-single-digit range.

Finally, we'd 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. Again, thank you. We will now turn the call over to the operator and take your questions.

Operator?.

Operator

We'll take our first question from Rick Nelson with Stephens..

Rick Nelson - Stephens, Inc.

Thanks. Good morning..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Good morning, Rick..

Keith R. Style - Asbury Automotive Group, Inc.

Good morning..

Rick Nelson - Stephens, Inc.

To ask you about the GPU, there was quite a divergence there from big declines with domestic brands and increases in the premium luxury segment.

I guess, some more color around that, and your expectations as we push out forward?.

Keith R. Style - Asbury Automotive Group, Inc.

Rick, the way we look at it, as you pointed out, luxury was certainly a positive for us. With a couple of our partners, you know, I'll talk globally when you think about the incentives and year-over-year how it looks, it's not just the component of hitting a sales target, but it's the dollar incentive.

So you could actually hit the dollar incentives this year, but the numbers or the money that they pay out could be significantly lower than prior year, so we've experienced some of that. It's a little bit of both. In some cases we've miss sales targets, in some cases we've hit them, but the payouts have been significantly less..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Rick, it's Craig, give you little more color, the most challenging incentives we saw this quarter were on the domestic side of the business. Far more challenging and for many of the other brands..

Rick Nelson - Stephens, Inc.

Thanks for that. Also, I'd like to ask you about the proceeds in Arkansas with that divestiture. It sounds like, maybe you've got something lined up on the acquisition front, if you could size both of those up that would be helpful..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Yeah. Rick, that's correct, we do have something sized up, lined up. We expect to sign the contract on that any day now. The profit from the stores that we are acquiring would actually more than offset the profit from the stores that we're divesting, so we think it's a good value added transaction for the company..

Keith R. Style - Asbury Automotive Group, Inc.

Rick, this is Keith. Just from a modeling perspective, the assets that were placed and held for sale during the quarter equate to about $240 million in revenue..

Rick Nelson - Stephens, Inc.

And would the acquisition then be similar sized or?.

Keith R. Style - Asbury Automotive Group, Inc.

Yeah. Rick, as Craig mentioned, it will be – on a revenue basis, not as large, but on a profitability basis it will exceed what we're divesting, yes..

Rick Nelson - Stephens, Inc.

Okay. Thanks for that. So, service and parts has been tracking well-above that mid-single-digit guidance now for several quarters.

Any comments on the sustainability of that nice increases in customer pay and warranty?.

David W. Hult - Asbury Automotive Group, Inc.

Rick, this is David. We've implemented a lot of initiatives over the last couple of years and quite honestly, they're not fully out in the field at all locations yet, so we're still in the process of rolling everything out.

We're very happy with the progress that we have in parts and service, and we feel that we have a very strong, stable base going forward..

Rick Nelson - Stephens, Inc.

And if I could ask a final question about October? What you're seeing there, some of our channel checks are indicating that things may have weakened some in October?.

David W. Hult - Asbury Automotive Group, Inc.

The hurricane, because of our location of our stores, Rick, it impacted about a third of our business. While we didn't sustain a lot of damage, it was certainly a disruption for a few days to our business..

Rick Nelson - Stephens, Inc.

Thanks a lot, and good luck..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Thank you, Rick..

Operator

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

William R. Armstrong - C.L. King & Associates, Inc.

Good morning, gentlemen. On parts and service, obviously you had a nice increase in same-store revenue, (16:45) down about 60 basis points.

So I was wondering, what was the driver there for the relatively soft margins?.

David W. Hult - Asbury Automotive Group, Inc.

This is, David. It was really pretty stable. It's really just – it's really the mix between internal customer pay and warranty. With our declining used car sales there wasn't as much internal growth, which we recognize at 100% margin, so that's really what pulled it down a little bit..

William R. Armstrong - C.L. King & Associates, Inc.

Okay, got it. And used gross GPUs, you mentioned off-lease, more off-lease vehicles.

So I was wondering if you can maybe flesh that out a little bit more; why would that have a negative impact on your overall used gross profits?.

David W. Hult - Asbury Automotive Group, Inc.

This is David, again. It really just goes down to the basic law of supply and demand. We've been forecasting, no, the industry has been forecasting this influx of vehicles coming. I think we're all seeing a little bit and we seem to be somewhat in line with our peers as far as our margin depression..

William R. Armstrong - C.L. King & Associates, Inc.

And is this because, you're converting a lot of them to CPO and CPO is relatively low margins because of the reconditioning costs?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

We certainly – when you look at the used car sale, we benefit, obviously through parts and service, we benefit with F&I and clearly we benefit on used car margins. Normally our GPU, gross per unit is very good. This quarter it was slightly depressed but, to your point, we were up 7% in CPO sales..

William R. Armstrong - C.L. King & Associates, Inc.

Okay. Thank you..

Operator

We'll take our next question from Bret Jordan with Jefferies..

Bret Jordan - Jefferies LLC

Hey. Good morning, guys..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Hi, Bret..

Keith R. Style - Asbury Automotive Group, Inc.

Good morning..

Bret Jordan - Jefferies LLC

A question on the stop-sale inventory, I think, you said you had about $11 million in the quarter.

What's the flow of the recalled vehicle looking like now? Is the airbag part supply smoother, and I guess, are you seeing any benefit in the customer pay from cross-selling that recall volume?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Bret, it's Craig. Let me start, and David can jump in. We – in some of brands when we came into the quarter, we had as much as 40% of our used vehicle inventory on stop-sale. We made a lot of progress during the course of the quarter, that number now is in those same stores is down to about 20%.

So we're starting to get the parts, we're starting to get the cars back out on the front line. Progress is being made, but clearly when you've got a store and you've got that much inventory sitting in your lines, it's going to impact sales..

David W. Hult - Asbury Automotive Group, Inc.

Bret, I'll just jump in with this to your comment on customer pay.

We're heavy with Honda and Acura and some of the brands that have suffered, and obviously that's why our warranty is up 11%, when we think about a warranty customer coming in, on average and this will vary a little bit, but recent trends, we're typically up selling that customer a little over $100 per repair order on that warranty ticket, so customer pay is benefiting when the warranty customer comes in..

Bret Jordan - Jefferies LLC

Okay. Great. And as far as, just one last question.

If there's going to be a flood of Honda CRVs, because you got the parts, finally, and you were able to fix and sell that used unit, is there going to be depreciation or I guess deflation in particular brands as the supply really hits the market, and is that something that the manufacturers are helping out on the absorption of?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

It varies by manufacturer. Some of the manufacturers have been providing us with assistance both to carry the vehicles and for depreciation. So obviously we won't feel much of an impact there.

There are other situations where, yeah, there could be some impact on the vehicles, but I would say, broadly speaking, a lot of these vehicles are vehicles that are very much in demand, and we're actually looking forward to bringing them to market. David might have more color to add..

David W. Hult - Asbury Automotive Group, Inc.

No, I clearly agree with you. Bret, that particular model that you mentioned, the demand is very high, so I can't imagine ever having too much supply. We do have a new model coming out soon which will probably create a lot more trade-ins, but we look at that as a very positive going forward..

Bret Jordan - Jefferies LLC

Okay. Great. Thank you..

Operator

We'll take our next question from Mike Montani with Evercore ISI..

Michael Montani - Evercore ISI

Hey, guys. Just wanted to follow-up on the GPU decline that we saw this quarter. I guess, the question I had was two-fold.

One is, how should we think about new vehicle GPUs into the fourth quarter? Do you look for more of a 2015 step-up sequentially of like, $90 to $100? Or is it more like 2014, where you could get $150 just because the results were somewhat depressed last year? And then a follow-up on that..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Mike, it's Craig. Let me start. It's very difficult for us to give you a precise forecast on how these incentive programs are going to play out in the future. And as you see in our results this quarter, these GPUs are very much a function of what's happening with the sales targets and incentive programs.

We've seen some of the manufacturers, certainly one of the manufacturers, has made some production cuts. I think, it helps. We've seen some modifications to some of the incentive programs. We think that helps.

But I think, it would be unrealistic for us to say that we can give you a hard forecast where this goes, certainly next quarter and the quarter thereafter..

David W. Hult - Asbury Automotive Group, Inc.

The only comment I would add to that is, one of our domestic partners recently stopped their stair-step program, so going into the fourth quarter, we don't have those incentives. And when you look at the fourth quarter of 2015, those incentives certainly existed if you hit the targets..

Michael Montani - Evercore ISI

Okay, that was actually what I was going to follow-up on.

So I guess, from that domestic partner, it sounds like sequentially they stopped the program, if I'm not mistaken, October 1, is that right?.

David W. Hult - Asbury Automotive Group, Inc.

That's correct..

Michael Montani - Evercore ISI

So I guess sequentially, is it fair to say for that one that, it actually is a firmer GPU environment, all else equal?.

David W. Hult - Asbury Automotive Group, Inc.

It's too early to tell..

Michael Montani - Evercore ISI

Okay. If I could, on a separate note, the F&I per unit has been flattening out here a little bit even though transaction prices are rising.

Can you just talk about kind of what's going on with attach rate? And then, is there some kind of an impact due to cap to mark-ups there that's constraining that?.

David W. Hult - Asbury Automotive Group, Inc.

I would tell you, it's a combination of a few things, our F&I PVR in the quarter. It's a combination of charge-backs, some turnover in folks and in some cases, it's some location, some – just poor performance in product sales..

Michael Montani - Evercore ISI

Okay.

So if some of your peers, like AN and GPI are like $1,600 per retail unit, and you all are more like $1,400; is it realistic to think that, that continues to improve or have we kind of hit a near-term limit here?.

David W. Hult - Asbury Automotive Group, Inc.

We think this quarter was a small setback for us when it comes to F&I, and we're pretty positive about the fourth quarter..

Michael Montani - Evercore ISI

Okay. Thanks..

David W. Hult - Asbury Automotive Group, Inc.

As it relates to F&I..

Michael Montani - Evercore ISI

Okay. Thanks. Last, if I could, was on tax rate.

Can you guys just clarify how to think about that into fourth quarter? And then kind of moving forward given some of these parts that we've been discussing?.

Keith R. Style - Asbury Automotive Group, Inc.

Yeah, Mike. This is Keith. Our tax rate is moving around a little bit with some discrete items. During the quarter, maybe a $0.01, $0.02 pickup on tax rate from discrete items. For planning purposes, we should be looking at 38% to 38.5% into the fourth quarter and to next year..

Michael Montani - Evercore ISI

All right. Thank you..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Thanks, Mike..

Operator

We'll take our next question from Jamie Albertine with Consumer Edge Research..

Jamie Albertine - Consumer Edge Research LLC

Great. Thank you for taking the question, and good morning, gentlemen..

Keith R. Style - Asbury Automotive Group, Inc.

Good morning..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Good morning, Jamie..

Jamie Albertine - Consumer Edge Research LLC

Wanted to – sorry to do this, to belabor the point on GPUs, but on the used side of the business, I think, as you mentioned, it seems like the industry is expecting this broader supply improvement.

You've got some pricing, in fact, in the quarter it looked like on a positive year-over-year basis from a comp store sales perspective, and yet margins were under pressure. I imagine, it's going to be volatile here on out. But it looks like your compare eases significantly for used vehicle gross margins in the fourth quarter.

So what I'm really asking is how do I balance sort of an easier compare with what I would imagine is further increase in supply that could pressure prices looking into the balance of the year?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Jamie, they're all factors that we take into account as well. In fact, again I come back to it, we think we can do better in used, we think we can do better with CPO. It's an area where quite frankly we did not live up to our own internal expectations. And it's going to get a tremendous amount of focus from us as we move forward..

Jamie Albertine - Consumer Edge Research LLC

Is there a reference point you can provide. I think you said historically that some of your better stores may be as high as 2:1 used to new retail ratio, maybe even higher if I recall. Your average is about 0.75 used to new if I did the math right here.

So how quickly and how many opportunities are there within the portfolio? How quickly could we see that trend higher? And what are some of the best stores running at right now?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Some of the best stores we have run a little bit over 1:1, which is well-above obviously the industry average. When we – we're trying to look at used vehicles in a holistic approach and understanding what it generates for parts and service and that internal gross and how we benefit from that.

As far as margin pressure going forward, I think, it will look similar to what it looks like right now, but our opportunity is within the volume aspect.

Again, I've said it, I'll state it again; we're very happy with that CPO increase, we think there's more opportunity there, and we think some things that we've been working on within this past quarter will tend to come to fruition plus the benefit of these stop-sale vehicles actually freeing up..

Jamie Albertine - Consumer Edge Research LLC

Okay. I appreciate that.

And if I can sneak just a strategic question in very quickly; within your portfolio, and I know you span a lot of geographies, obviously a lot of brands within those geographies, have you seen a divergence between the best and the worst markets sort of in the last few months, as it seems, at least from the outside looking in like SAAR's gotten a lot choppier depending on who you talk to.

And I'm wondering if your markets have widened in terms of best versus worst; and in the worst performing markets, if the offsets are occurring as you'd imagine; parts and services picking up, F&I is stickier maybe than last recession? Just trying to get a sense of the resiliency in those underperforming markets..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Well, that's a big question. Let me take a shot at it and maybe Keith and David have more to add. Markets are different, as you would imagine, I think, based in part on the strength of the local economy. Clearly, our stores in Texas are more challenged than stores we see in Florida, as an example. Just the kind of thing you would expect.

But I think brand is also important. And if we were to sit down together and go through a list of stores and markets, I think brand might jump out at us more here this quarter than markets, and you see it here in these GPUs. It's hard for us to absorb this type of a GPU movement; and not have a material impact on the bottom line at store..

Jamie Albertine - Consumer Edge Research LLC

Got it. Very helpful..

Craig T. Monaghan - Asbury Automotive Group, Inc.

As far as – if I could just continue. So with that in mind, the way we're thinking about the business is, let's attack the things we can control. As we've mentioned earlier, we think there's opportunities for us to do better in F&I. That's 100% margin business for us, so it's an area that we continue to focus on.

There's clearly opportunity to grow our used vehicle business. As I mentioned earlier, I think we didn't live up to our expectations in the quarter.

We think there's a lot of growth opportunity there, and in many ways that's a key driver across the entire stores as David mentioned, because it brings us incremental F&I benefits as well as benefits in parts and service.

And then, like David said earlier, parts and service is where we're making a lot of our investment in people, we're investing in systems, we're putting a lot of our marketing initiatives behind our parts and service areas. There's a lot of capital that's being invested in our Collision Centers, it's an area that we feel very good about.

So we step back from everything that we see happening, there's still a lot we can control, there's a lot going on, there are lot of initiatives that will come to fruition and we feel pretty good about how we can manage through this softness, if you would, as we move forward..

Jamie Albertine - Consumer Edge Research LLC

Got it. Extremely helpful as always, gentlemen. Thank you again, and good luck in the fourth quarter..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Thank you..

David W. Hult - Asbury Automotive Group, Inc.

Thank you, Jamie..

Operator

We'll take our next question from John Murphy with Bank of America..

Elizabeth Lane Suzuki - Bank of America Merrill Lynch

Morning, this is Liz Suzuki on for, John.

You may have mentioned this already, but were there any particular brands or vehicle classes that actually experienced any year-over-year improvement in gross profit per unit, or was it pretty much just weak across the board?.

David W. Hult - Asbury Automotive Group, Inc.

We certainly, obviously the luxury segment was up year-over-year and we did have some mid-line imports that were up year-over-year as well..

Elizabeth Lane Suzuki - Bank of America Merrill Lynch

Okay.

Any particular brands in there that you would call out as being strong?.

David W. Hult - Asbury Automotive Group, Inc.

You know we'd prefer not to mention any of them..

Elizabeth Lane Suzuki - Bank of America Merrill Lynch

Gotcha. Okay. And it looks like you took a break on share buy backs, even though the average share price was pretty similar in the third quarter versus the second quarter, in fact that was actually down a little bit.

Are you getting more cautious about the company's liquidity needs given the tough selling environment or was there another channel of capital deployment that looked more attractive this quarter?.

Keith R. Style - Asbury Automotive Group, Inc.

It was – this is Keith. I think, when we look at capital deployment, we take a lot of things into consideration. We look at our business, the performance throughout the quarter, we look at the broader markets, we look at where we're trading from a share buy back perspective. There's a lot of things to take into consideration.

No, to answer your specific question from a liquidity standpoint, no, we're still well within our targets on our leverage ratios. You could see that, with a list of liquidity positions I have provided we have plenty of liquidity. Quite frankly, we're very well positioned.

We are generating and anticipate generating about $100 million in free cash flow a year and our leverage ratio being net at 2.6 times, we're in very good position. As Craig mentioned in his prepared remarks, we anticipate that capital allocation will enhance our future share performance or earnings performance..

Craig T. Monaghan - Asbury Automotive Group, Inc.

And if I could just jump in there and give a little more color. If you were to look at the months across the third quarter, July was a very soft month for us and caused us to reconsider our capital, well, our share repurchase programs in light of the softness that we saw in July.

The August and September actually performed considerably better than July..

Elizabeth Lane Suzuki - Bank of America Merrill Lynch

All right. Thanks very much..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Thanks..

David W. Hult - Asbury Automotive Group, Inc.

Thanks, Liz..

Operator

We'll take our next question from Chris Bottiglieri with Wolfe Research..

Chris Bottiglieri - Wolfe Research LLC

Hi, thanks for taking the question. Your plus 7% CPO is actually really strong, especially relative to peers in the market.

So one, I was wondering, if you could remind us what your CPO penetration is? And then, two, more broadly, how you think about this CPO market overall? You know, are the OEMs still being supportive right now, given new vehicles are flattening out? Do you think there's just – we're reaching, at the industry level, are we reaching the upper band of consumer demand? Just some thoughts there?.

David W. Hult - Asbury Automotive Group, Inc.

From a CPO perspective, like I said, we're up about 7%, but the percentage of our total business; it runs about 35%, 40% of our total used car sales. We see that there's opportunity there to grow that number further.

I don't know if I answered fully your question, if I missed a piece of it?.

Chris Bottiglieri - Wolfe Research LLC

Yeah, I was just wondering for the market itself seems like it's slowing; obviously not for you guys, but maybe just some thoughts overall on the CPO market, if you have any?.

David W. Hult - Asbury Automotive Group, Inc.

From talking to peers and what I hear in our industry, it doesn't appear to be slowing at this point from what we can see..

Chris Bottiglieri - Wolfe Research LLC

Okay. Next question I had was on stop-sales. It seems like, if I calculated it correctly, about 7% of your used inventory is now on stop-sale versus 10% last quarter. So I guess, one, is it safe to assume the worst is behind you and for the industry. And then two, I was just wondering if you could talk more broadly.

It seems more mixed from your public peers in terms of exposure to stop-sales, but would you say the large privates are experiencing similar headwinds from some of the smaller privates or is it kind of just – it's hard to, I guess, directionally quantify?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Chris, it's Craig. I'll start, and David, can give us more color. The issue with stop-sale is that, it's concentrated in certain brands. And we've got a couple brands where our stop-sale inventories, used vehicle inventories, are in the 15% to 20% range and that's got an impact on the operation of the store, right.

We mentioned earlier, it is – the situation is improving. We saw good improvement over the course of the quarter. But until we get this completely behind us, it does cause some disruption, again, in selected brands..

David W. Hult - Asbury Automotive Group, Inc.

The only thing I would add to that, when you talked about the public and the private side, it just – it really comes down to the brand mix and what someone has, what the impact will be..

Chris Bottiglieri - Wolfe Research LLC

Okay. And then one final question. I noticed that for the Q auto, it looks like you're kind of co-branding that with your Courtesy brand, now.

So one, I was kind of curious, are there learnings from that? I know there's a longer-term question but if you decide to rollout Q auto across other markets, how do you get to the branding? And then does your experience thus far kind of maybe rethink like a national re-branding strategy down the road?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

It's – Q is, it's a distribution channel that we continue to experiment with. You're correct, we have – we are experimenting especially on the web, that's probably where you saw that branding modification that we've made. It's still Q. If you drive-by store, you'd see a very large Q on it.

We're concentrating in the Tampa market, but we are moving to the sub-brand of Q auto, a Courtesy Quality outlet. And our view is that, we're going to experiment with this, see how it works, we've got three of the stores that are using that concept on the web.

The fourth store is still a pure Q store, so we're continuing to experiment with our positioning.

But our view is that, if we can make that approach successful in that market, we could move to another market, Atlanta for example, and we could still have a model where it's a large Q on the store, but instead of it being a Courtesy Quality outlet, it could be a Nalley Quality outlet..

Chris Bottiglieri - Wolfe Research LLC

Okay. That's very helpful. Thank you for the time – for the question..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Sure, thing..

Operator

Our next question comes from Michael Montani with Evercore ISI..

Michael Montani - Evercore ISI

Hey, guys.

Just wanted to follow-up, if I could, on the SAAR and the new car environment; understanding Hurricane Matthew impacted you for a few days, but if you were to try to back that out, and just look at the daily selling rate excluding that, did you notice any divergence from the 3Q trend, is it consistent, better, worse, can you just discuss that?.

David W. Hult - Asbury Automotive Group, Inc.

I would say, it's consistent..

Michael Montani - Evercore ISI

Okay. And then if I could, just to follow-on, with the stop-sale.

If I heard correctly, I think you said 20% of the units are still on stop-sale, and that had been 40% to start the quarter? I guess, first of all, is that correct? And then, within that, are you seeing down 40% to 50% volumes for those units that are on stop-sale? Because, I guess, I'm trying to get my arms around the potential headwind and that would really suggest that, all else equal, it could be high-single-digit headwind to the used business..

Craig T. Monaghan - Asbury Automotive Group, Inc.

I'll start off. In one of our brands, we started the quarter with some of those stores at 40% of their inventory on stop-sale. That same brand is now down to 20%. If we were to rank these stores, I think our second highest brand is in the 17% range possibly, and then we're going to drop down into the low teens.

But again this is probably three brands where we see this issue. And you're going to have to help me with the rest of the question, I missed that..

Michael Montani - Evercore ISI

Well, I guess what I'm trying to get at is, for those stores, are you seeing a material divergence in their used unit comp performance versus the stores that are not impacted by this Takata issue or stop-sales?.

Craig T. Monaghan - Asbury Automotive Group, Inc.

Absolutely..

Michael Montani - Evercore ISI

Can you put anything around that, like, on a similar geography are we talking about 100 bps or 200 bps or is this like 800 bps or 900 bps kind of impact or divergence in trend, rather?.

Keith R. Style - Asbury Automotive Group, Inc.

Mike, this is Keith. We don't have that data all set in front of us right now, but it's certainly something we can talk about and share with in the future..

Michael Montani - Evercore ISI

Okay. Thanks a lot..

Craig T. Monaghan - Asbury Automotive Group, Inc.

Well, that concludes today's Q&A session. We appreciate you participating with us, and we look forward to talking to you at the end of next quarter..

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