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Edited Transcript of ABG earnings conference call or presentation 22-Oct-19 2:00pm GMT

Q3 2019 Asbury Automotive Group Inc Earnings Call

NEW YORK Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Asbury Automotive Group Inc earnings conference call or presentation Tuesday, October 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David W. Hult

Asbury Automotive Group, Inc. - President, CEO & Director

* John Sirel Hartman

Asbury Automotive Group, Inc. - SVP of Operations

* Matthew Pettoni

Asbury Automotive Group, Inc. - VP of Finance & Treasurer

* Sean D. Goodman

Asbury Automotive Group, Inc. - Senior VP & CFO

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Bret David Jordan

Jefferies LLC, Research Division - MD

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* David Whiston

Morningstar Inc., Research Division - Strategist

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Asbury Automotive Group Q3 2019 Earnings Conference Call. Today's call is being recorded. And now at this time, I would like to turn the call over to Matt Pettoni. Please go ahead.

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Matthew Pettoni, Asbury Automotive Group, Inc. - VP of Finance & Treasurer [2]

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Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's Third Quarter 2019 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 David Hult, our President and Chief Executive officer; John Hartman, our Senior Vice President of Operations; and Sean Goodman, 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 2018, 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.

In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website.

It is my pleasure to hand the call over to our CEO, David Hult. David?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [3]

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Thanks, Matt, and good morning, everyone. Welcome to our third quarter 2019 earnings call. We achieved record third quarter adjusted EPS of $2.33, up 5% from the prior year. This was driven by revenue and gross profit growth of 5%. We were able to grow our parts and service gross profit by 9%, grow our total front-end yield by increasing F&I gross profit and bring our new vehicle inventory levels down by 10 days, which is within our targeted range.

During the quarter, we expanded our footprint in Indianapolis by acquiring a Toyota store, and we entered a new market by acquiring a Subaru store in Denver. Both of these stores are characterized by high quality and tenured team, solid performance profile, strong and loyal customer base and sound business processes. We're excited to be entering a new market in Denver. We have long been attracted to this market due to its business-friendly environment, moderate cost of doing business and growing population and attractive demographics. In Mike Shaw Subaru, we have found the ideal anchor store.

We plan to build our presence in the market, following a similar approach to what we successfully executed in Indianapolis. Subaru also happens to be the #2 brand in Colorado. We're excited about the return that we will generate from these 2 great acquisitions and the growth opportunities for Asbury in the Denver market.

This quarter, we continue to make great progress, implementing enhanced processes and procedures that leverage technology to create a highly guest-centric consumer experience. At our pilot store in North Carolina, we're excited to see -- excuse me, we're excited to consistently see exceptionally favorable consumer reviews as our guests react to a level of service and transparency. While we're focused on being at the forefront of innovation in our industry, we believe that success is driven by well designed process improvement and effective change management. We plan to start thoughtfully rolling out our technology-driven process improvements to additional stores in the first quarter of 2020.

We're confident that our investments in creating an unrivaled guest-centric experience will yield attractive returns.

Before I end, I want to thank Sean for his valuable service and contributions to Asbury. He's been a great partner and a pleasure to work with. I speak for the entire organization in wishing him well as he embarks on his next chapter.

I will now hand the call over to Sean to discuss our financial performance.

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [4]

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Thank you, David, and good morning, everyone. Overall, compared to the prior year third quarter, our revenue increased by 5%; gross profit increased by 5%; gross margin of 15.9% was 10 basis points higher than last year; SG&A as a percentage of gross profit increased by 100 basis points to 68.9%; operating margin decreased 10 basis points to 4.5%; income from operations increased by 2%; and adjusted earnings per share increased by 5% to $2.33.

As a reminder, in Q3 of 2018, we adjusted for an approximately $600,000 discreet tax item related to the 2017 tax act or $0.03 per share. There were no adjustments for the third quarter of 2019. During the quarter, some of our stores in Florida were impacted by the threat of Hurricane Dorian. However, the effect was not material to our financial results. Our performance this quarter was, however, significantly impacted by a single midline import brand, where despite earning the available manufacturer incentives, results were considerably below last year. This brand alone negatively impacted earnings per share for the quarter by approximately $0.14. Our effective tax rate was 24.4% for the quarter compared to 25% in the third quarter of 2018.

Looking at expenses, SG&A as a percentage of gross profit for the quarter was 68.9%, an increase of 100 basis points over last year. This increase was driven by the enhanced benefits packages provided to our front-line associates, reduced OEM advertising credits and continued investments in the omnichannel initiatives. As expected, our year-to-date SG&A as a percentage of gross profit is 68.5% in line with our full year guidance of between 68% and 69%.

With respect to capital deployed, during the quarter, we spent $13 million on capital expenditures and $4 million repurchasing shares of our common stock. Our remaining share repurchase authorization stands at $66 million.

This year-to-date, we have invested $43 million in our existing business through capital expenditures and real estate acquisitions, returned $15 million to shareholders through share buyback activity, and we have completed the acquisition of 6 new stores with total annualized revenue of $425 million.

When making capital deployment decisions, we focus on achieving the highest risk-adjusted return. In the case of acquisitions, we assessed each store individually with consideration for the market dynamics, quality of the brand, customer profile, operating performance of the store, opportunities for value creation, stability of the earnings and much more. As an example, we have a higher hurdle rate of return when acquiring an underperforming import store requiring a significant turnaround investment than we would for a luxury store with a loyal customer base, high margins and a solid parts and service business.

At the end of the quarter, our total leverage ratio stood at 2.8x and our net leverage ratio at 2.3x. We believe that our capital structure positions us well to opportunistically capitalize on expected attractive future capital deployment opportunities. Our floor plan interest expense increased by $600,000 over the prior year, driven by an increase in inventory levels. Note that our new credit facility effective on September 25, resulted in a decrease in our new floor plan interest rate by 15 basis points and our used floor interest rate by 10 basis points.

From a liquidity perspective, we ended the quarter with $2 million in cash, $65 million available in floor plan offset accounts, $101 million available on our used vehicle line, $237 million available on our revolving credit lines and $173 million of undrawn mortgage facilities.

In closing, I want to take this opportunity to express my sincere thanks and appreciation to David and the Board for their support during my time at Asbury. It has been an honor to be part of this exceptional team, and I wish everyone all of the very best and continued success in the future.

With that, I'll hand the call over to John to walk us through the operating performance in more detail.

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [5]

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Thank you, Sean. My remarks will pertain to our same-store performance compared to the third quarter of 2018. Looking at new vehicles, SAAR for the quarter was at 17.1 million units or flat versus last year and retail SAAR was down 1% for the quarter. Our new unit sales decreased 5% and the margin rate was 3.9%, down 40 basis points from the prior year.

We experienced margin pressure across our midline import brands, however, domestic margins were flat, and we were able to grow gross profit in our luxury brands. We're pleased that we were, once again able to offset the overall margin pressure by strength in F&I. Our total new vehicle inventory was $810 million, and our days supply was 76, down 10 days from the prior quarter.

Turning to used vehicles. Unit sales were up 6% from the prior year on top of an 8% growth rate last year. Our gross profit margin of 6.6% represents a gross profit per vehicle of $1,467, down $113 from last year. Though our gross profit per unit was down, it is important to remember that used car volume growth also drives increased reconditioning parts and service gross profit as well as F&I business. Our used vehicle inventory of $176 million is at a 36-day supply, up 3 days from the prior quarter.

Turning to F&I. Total F&I gross profit increased by 8% and gross profit per vehicle increased by $119 or 8%, to $1,628 from the prior year quarter. Note that when we think about gross profit per vehicle, we look at the total front-end yield, which combines no used and F&I gross profit. This provides us with the best view of our true profit per vehicle sold. In the third quarter, our front-end yield per vehicle increased to $3,065 from $3,056 last year. This total front-end yield has remained stable over the past decade.

Turning to parts and service. Our parts and service revenue increased 8% and gross profit increased 7%. This was achieved with a 7% increase in customer pay and a 13% increase in warranty.

And now an update on our omnichannel initiatives. Our PUSHSTART online sales were up 3% from the prior year. We continue to grow traffic utilizing our digital parts and service scheduling tool, and we reached a record of 137,000 online service appointments this quarter, up 23% from the prior year.

In addition to our omnichannel strategy, an important part of our continued success is our people. As previously announced, at the beginning of this year, we put together an industry-leading benefits package for our front-line associates, including subsidized medical plans, equity grants, education grants, a 4-day workweek, extended vacation time and paid maternity leave. This enhanced benefits package is continuing to have favorable impact on both recruiting and retention.

In conclusion, I would like to take this opportunity to express appreciation to all our teammates in the field and our support center, who continue to produce best-in-class performance. I would also like to welcome all our new teammates in both Indiana and Colorado.

We'll now turn the call over to the operator and take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll first hear from Rick Nelson of Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [2]

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So I'd like to ask you about the new vehicle same-store units down 5%. Looks like that didn't keep pace with the overall market and the domestic brand decline of 17%. If you could comment on what was the driver there?

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [3]

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Sure. Rick, this is John. I'll address the domestic first. We were pleased we were able to increase the PVR on our domestic stores 3% and maintain our margin. This is certainly we want to increase the volume in domestic and it's an area of the business we'll focus on and improve. As far as the mid-line imports being down, 3 or 4 of the brands we actually outperform in the market. It was really one brand where we underperformed as far as volume, which took us down to 5% in that segment.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [4]

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And what was that lagging brand? Was that also responsible for the margin erosion that we saw at GPU?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [5]

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This is David. It was.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [6]

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David, I guess, what are the strategies here with that brand to reinvigorate it? I know you sold some stores. Your thoughts about that?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [7]

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Yes. We sold one. Over time, these brands are cyclical. We more than any of our peers have a high percentage of this brand, and it has a material impact on us right now. We're doing our best effort to do what we can to offset it with parts, service, F&I and Used, what we can control, but at the end of the day, we are a franchisee to the manufacturing. We're trying to be opportunistic and do the best we can with it.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [8]

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Okay. Turning to advertising. PVR, $198 compared to $154 of last year, that has really stepped up. Is that focused on specific brands? Or what is the driver to that growth rate?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [9]

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I'd say, it's a couple of things. One, there is a little bit less credits from the manufacturer this year over last year. That's a small piece of it. The other piece of it is, two, when we do acquisitions and we took in the Bill Estes Group, kind of all at once, we kind of go through a transition phase to not do a culture shock. There were a lot more aggressive in spending advertising dollars. So you'll see improvements over time and that number coming back down. It's just a moment in time, if you will. And most of it is related more than new acquisitions than it is the core company.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [10]

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Yes. In the used car arena, are you sourcing more cars at auction to drive volume and that's causing some of the margin erosion? If you could speak to the competitiveness of sourcing vehicles at auction?

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [11]

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Rick, this is John, again. Our auction purchases run a small percent. It's about 15% of our total retail sales. We still focus on trades to keep the margin high. We were certainly happy to get the used vehicle growth back this quarter, especially with our comp versus last year. What we focus on, Rick, is really, as a company, we turn the inventory about 1.2x per month. So for stocking 100 retail vehicles, we can expect 120 sales. The issue when you -- you have to go to auction is if you have 100 cars in stock, you have a big weekend and you sell 30 cars, now all you have is 70, and the guys tend to run out and try to backfill that with quick purchases. So we've really focused on trying to keep it more steady flow with a preowned inventory and having less fluctuations. That being said, we were happy with the volume last quarter. We're going to be focused on getting the margin back, too.

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [12]

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I would also add, Rick, we're focused on CPO, too. And our CPO sales for the quarter were up 11%, and with those, there is a little bit more cost involved certifying those vehicles.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [13]

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And just getting back to the problematic brand. Are you -- is there anything on the horizon, I guess, to shift back to regular those pressures with a brand?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [14]

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All I can say at this point, Rick, is our job is to be great capital allocators and really strong operators, and we're always seeking to how can we better position Asbury and our brand mix. And that's certainly a focus that we have right now.

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Operator [15]

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Next, we'll hear from John Murphy of Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [16]

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I just wanted to follow up on one of the comments, and I apologize, I may have misunderstood or misheard this. Sean, when you were talking about this mid-line import brand issues with, you said there was a $0.14 per share hit, is that correct? Because the volume rebates, the stair-step rebates didn't come through. I just wanted to understand if I'm getting this right?

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [17]

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Yes, John. The EPS impact was $0.14, 1-4, and it was primarily related to reduced manufacturer incentives. So a decline in the available incentive dollars.

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [18]

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John, just to clarify further. We attained almost all of that money that was available by that OEM, but the total amount available was about 30% less than it was prior year.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [19]

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Okay. And that was known in advance, that was not a change in the program mid-quarter or mid-month or something like that?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [20]

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No. We were notified of it right after the quarter started.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [21]

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Okay. Then a second question. When you think about the front-end gross being up $9, obviously F&I PVR is helping out quite a bit there. Just curious if you can gauge us -- give us sort of a range of what sort of like the highest F&I, PVR you have on an individual vehicle, roughly? And how far you think you have a penetration for extended service contracts and stuff like that, that might also help? Just trying to understand where this can go, and if there is an absolute number, increased potential and also a penetration potential as well?

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [22]

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John, this is John. I think there is still plenty of opportunity in F&I. I think we've talked about this before, we kind of focus on the bottom half of the organization and get them up to average. So as far as PVR, VSC penetration and overall penetration on product, I think there is still opportunity for us to grow.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [23]

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Okay. And then just lastly, I think in some of your slides you say about 23% of your parts and service revenue is recon. If I run that through, it looks like it was about $52 million of recon revenue in products and service in the quarter. If I apply that all to you, it looks like you're doing about $2,300, $2,400 of recon revenue per unit and probably about $1,500 in profit there. Is that -- I mean, are you -- recon really driving that big a chunk of profits in parts and service or is there something else going on there? What sort of the average recon revenue and gross profit number we should think about for used vehicle?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [24]

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So I would tell you that the number per vehicle is a lot lower than that on reconditioning. It will vary by brand, but it typically hovers around $1,200 to $1,300 a car. So if you think about us selling a used car, the way we look at it, to your point, we look at that front-end margin, we recognize that $1,200 and then match with the F&I dollars.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [25]

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I'm sorry, and the recon -- that's a revenue number we should assume roughly 60, 62% gross profit of that. Is that a fair way to think about it?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [26]

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I'm sorry, John. I missed the revenue word. That's a gross profit number.

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [27]

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Yes. It's a gross profit number, John, not a revenue number.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [28]

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So if you looked in all-in and fully loaded GP for a used vehicle, you guys are printing $1,475 on the vehicle sale and about another $1,200 to $1,300 on GP for -- on the recon side within parts and service?

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [29]

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That's correct.

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Operator [30]

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Next, we'll hear from Bret Jordan of Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - MD [31]

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Could you talk a little bit about the warranty growth? And I guess, are we looking at particular recalls? Or how long might we expect this pretty significant warranty growth to continue?

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [32]

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This is John, Bret. There are still some recalls going out. There's nothing major right now. Takata is still running out in some of the stores. So there is nothing major right now that's out as far as warranty recall. There's still a lot of little things reprogramming and that type of thing going on.

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Bret David Jordan, Jefferies LLC, Research Division - MD [33]

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Okay. And then a question on F&I, just sort of a big picture. Is there a negative correlation between FICO scores and F&I spend? And can you get at the lower end consumer either a longer loan term or gap insurance or products that don't sell further upstream?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [34]

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So I would tell you as the credit scores go lower, and we'll just talk subprime for a second, your F&I dollars are very much governed by the lender, right down to what products you can offer and sell or not. So I would say, you actually have more opportunity as the FICO scores go higher for product sales.

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Operator [35]

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Next, we'll hear from Armintas Sinkevicius of Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [36]

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As we were thinking about the quarter here, second quarter had an elevated level of inventory versus a year ago. You work that down. I'm surprised not to see it come through in the new vehicle, same-store sales. Maybe you could walk me through the dynamic on the inventory days supply and the impact to same-store sales?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [37]

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We worked hard in the quarter trying to bring on new vehicle inventory back to our targeted range. Some of it was, we moved inventory internally. So the stores that had a higher day supply, we moved it to the stores with the lower day supply.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [38]

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And that potentially how we get to the lower day supply, which is shifting inventory around?

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [39]

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Go ahead, David.

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [40]

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This is David. It's also -- again, you're doing your allocations with these manufacturers once or twice a month. So it's obviously scaling back. And when you think about an overall days' supply, you're looking at a number, but what you have to realize is the width of these inventories, how many different model lineups there are. And then within the model lineups, how many different packages offerings there are. It's very difficult to satisfy everyone, but you have to have a fair sampling of inventory to try to be at a hit. Especially in the domestic truck side, the amount of -- there's hundreds of different ways you can order and package these trucks. So it's really key to make sure you spend the time to be thoughtful about how you are packaging and moving those trucks. John's comment as far as moving inventory, that was more on the domestic side with trucks and that market shifts around a little bit, based upon how the trucks are equipped and what market has a certain need.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [41]

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Okay. And then as we're thinking about the challenges here from the third quarter with the specific brand, how do we think about the incentive environment here for the fourth quarter?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [42]

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Yes. I would say, we're in the same position today as we were in the third quarter as it relates to incentives and where we are with that particular brand. Quite honestly, we called it out because it was a very material number. We're actually pretty happy with our quarter. When you think about what we did with F&I, parts, service and used, climbing over that 8% growth rate last year and our additional investment in our omnichannel, there was a lot going on in the quarter then you had the noise of a hurricane. The hurricane that didn't hit, but it was 5 days of impact. We know how the media can drive those up. Our stores were actually shut for a couple of days. And then the few days, they were open around, and there was no business because everyone is focused on the hurricane. So there was a lot going on in the quarter, and quite honestly, we were happy we stayed focused to generate what we did.

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Operator [43]

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Next, we'll hear from Chris Bottiglieri of Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [44]

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Quick question on the PUSHSTART, I think, 3% growth. You've been making lot of progress on that, pretty impressive growth over time. Was there any about the comparison this quarter that was more difficult, I mean, 3% just kind of seems relatively low to where you are with that. And then just for context, given your exposure to Atlanta and Florida, are you seeing any impact from CarMax's omnichannel push or even Carvana for that matter? Any thoughts there would be helpful?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [45]

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Sure. This is David. I would tell you, it's a new entry for new car dealers to be able to do full transactions online. I don't know what everyone else will report, we're the first out, but my perception is we've been leading the market as far as sales. And I think when you initially come to market, you get that low-hanging fruit and pretty strong increases quarter-over-quarter. It's really now about us enhancing the product, getting more lenders online, because what we've seen over this -- the last year with the product, where it started off kind of half-new, half-used sales, it's tipped more to more used than new. So having that availability of lenders online, we think, will enhance it further. We have a tremendous amount of activity on the tool and a tremendous amount using it, but the exit point right now for most consumers that aren't converting are around the credit application piece where they are putting their social security number online. It's a difficult challenge to convince a consumer in this day and age to put their personal information out there.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [46]

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Got you. That makes sense. And then just one follow-up question unrelated. For warranty, can you elaborate a little bit on the programming a bit? Like, as the compares get more difficult on warranty into Q4, into next year? Maybe how much confidence you have that, that warranty could continue? I'm just not sure I understand, like, what's driving the warranty growth, given SAAR has been flat and CPO has been up slightly? This doesn't seem like a metric that should grow as robustly as it has. Just want to get your thoughts on kind of sustainability of that would be helpful?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [47]

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Sure. I would say, in years past, there were certain brands that had dramatic recalls for large dollar amounts. And this year, it's more about many brands having small recalls. I think as technology gets better in these vehicles, there is a lot of programming errors and issues that come up. It's very, very difficult to us, I mean, in over -- this has come up on 34 years for me in retail. One of the hardest things to predict is, what is warranty going to look like next year. It's very difficult to say. Some of the brands that are down this year, we expected to be up. Some of the brands that are up, we expected to be down. So it's really very difficult. I guess there's a little bit of a cadence around new models, and as far as looking ahead to think potentially, you might have some small issues that come with it. But we tend to go into every new year thinking warranty is going to be flat or we model that and then see how that adjusts throughout the months.

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Operator [48]

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Rajat Gupta with JPMorgan has our next question.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [49]

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Just had a question on the SG&A pick up in the quarter. I know you had talked about second half being a little higher than first half. You had cited omnichannel investments as one of the reasons. You also cited reduced OEM advertising credits as one of the reasons. Can you help elaborate what's going on there? And is this more of a one-time nature step up in investments? Or is this something we should expect within the base run rate going forward? And I have a follow-up.

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [50]

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This is David. I'll start and then Sean can clean it up. We foreshadowed in the last couple of quarters or the second half of the year, we anticipated SG&A going up. So we kind of ended up where we expected to end up. The OEM credits being a little bit light, it wasn't across the board with all OEMs, it was only certain ones, and it wasn't material. We knew we had the acquisition of Bill Estes coming on and what they were used to spending and what that was going to do for an impact. And we understood the cadence of our investment in omnichannel. So again, that was the purpose of foreshadowing in prior quarters expecting it to increase. Sean, I don't know how you want to...?

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [51]

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Yes, the only thing I'd add to that is, one of the other items was the enhanced benefits packages that we are providing to our front-line associates that is just the timing of the expenses related to that will be higher in the second half as we foreshadowed last quarter. Our year-to-date SG&A is 68.5%, it's very much in line with our expectation of between 68% and 69%. And -- so we continue to expect that for the full year 2019.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [52]

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Got it. And I know in the beginning of the year, you talked about 67% to 68%, I believe, or you will be in that ballpark historically. I mean, is 68% or 69% kind of a good level to think about going forward? Just if I think about 2020 or going forward, is that kind of a good range you would like to be in or it could go anywhere from here?

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [53]

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Sure. So we started the year -- our guidance actually at the beginning of the year was between 69% and 70%, really relating to the additional investments that we've been making in our omnichannel initiatives. And as -- I'm sure you can appreciate, a lot of those additional investments flowed through the SG&A line on the income statement. Our SG&A expenses will be lower than that this year primarily because of the results from our omnichannel initiatives better than we initially expected, and that's actually resulted in some benefits on the SG&A line and that's driven our SG&A expenses lower. Do I believe long term that there are opportunities to increase the efficiency of our SG&A spend below that sort of range? I do, but I think that is a long-term outlook as we enhance our omnichannel initiatives and our enhanced processes. But I think 68% to 69% is a reasonable expectation in the medium term.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [54]

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Got it. That's helpful. And then any updated thoughts on capital allocation? What you're seeing in the M&A space out there in terms of multiples? Is it still a pretty attractive market out there? Looks like, there is still decent amount of opportunity on your balance sheet to take on some leverage. So what are you seeing out there? And then, any thoughts on potential (inaudible) little bit towards buyback as well given where the stock price is?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [55]

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This is David. There is a tremendous amount of activity with acquisitions out there. Some of the stronger brands and luxury brands are holding their multiples well. Some of the more struggling brands right now the multiples have come down pretty good. I think our approach going into every quarter is, where is our opportunity and what presents our highest potential for return for our shareholders. And we'll certainly be opportunistic and enter the quarter that way. We do believe in growth and adding stores, but thoughtfully. It's very easy to buy something, much harder to run it. So we really want to make sure that it's a good long-term acquisition for the company, and most importantly, it balances out our portfolio well.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [56]

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Got it. And any thoughts on buyback in the near term? Or is the focus more on M&A at this point?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [57]

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Yes. I would simply answer that by saying, as the quarter ends and we see what our opportunities are, certainly, that's a lever that we will pull if that's more attractive than an acquisition.

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Sean D. Goodman, Asbury Automotive Group, Inc. - Senior VP & CFO [58]

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Yes, and I'll just add to that, that we had a balanced approach to capital allocation and we are very opportunistic, as David said. It's hard to look at our numbers for one quarter. You have to look at for numbers over a period of time. You look, for example, last year in the fourth quarter, we've spent almost $50 million on share buybacks. This year, we spent a little bit more on acquisitions than buybacks, but it just really is based on the opportunities of where we can see the opportunity to create the highest risk-adjusted return for our shareholders.

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Operator [59]

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Next, we'll hear from Stephanie Benjamin of SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [60]

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I was hoping if you could maybe talk a little bit further on your omnichannel investments and some of the digital investments that you're making? I know that in the past and even in the slide deck you called out, whether it's on the sales side or building out financing capabilities. Maybe you could provide a little bit more granularity on what you're focusing on right now? Or is it really a broad suite of things? And what we can expect to be your focus on that next quarter or even as we move into 2020?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [61]

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Sure. This is David. I would say it's ramping up in the second half of the year and will probably neutralize a little bit towards the first half of next year. It's really in several different categories. It's software expense costs and investments. It's investment in people, adding positions, changing positions. So I would say it's human capital and software technologies where the biggest investments have been in this second half of the year and will be there in the first half of the year. So we have the online approach with parts and service that we are doing. We have the online goal of completing a car deal, a 100% online, which we're not there yet but we are getting closer. And then we have the guest experience piece within the dealership and how did the 2 meld into 1, so they are not 2 different processes and they are very seamless. So we are very focused on that integration. And that was my point in the script when I referred to that store in North Carolina. So it's kind of the omnichannel what we've been working on at an enterprise level, creating those transactions, but then bringing it in to the store to make it seamless. And that's where eventually we're going, and that's where we're going to start rolling out in 2020. We see strong potential not only from a guest experience standpoint but an opportunity to tighten up SG&A little bit.

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Operator [62]

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Next, we'll hear from David Whiston of Morningstar Equity Research.

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David Whiston, Morningstar Inc., Research Division - Strategist [63]

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First question is on same-store used-to-new ratio. What was driving that really large increase of 880 bps? Is that omnichannel? Is that just a lot more off-lease supply, turning people away from new? Can you just talk about that a little more?

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John Sirel Hartman, Asbury Automotive Group, Inc. - SVP of Operations [64]

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Well, you saw our -- this is John. You saw our used vehicle sales were up. So obviously that was part of it. And David had touched on the online that the PUSHSTART is really heavily more towards the used vehicle side than new currently.

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David Whiston, Morningstar Inc., Research Division - Strategist [65]

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Okay. On the pressure from the mid-line import brands. Obviously, these types of stair steps and monthly targets, it's an issue all the time and some automakers are more flexible than others. My question is basically, at what point do you just -- how many quarters or years does it take for you to say, at some point, maybe that it's not worth it for a particular brand, I mean?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [66]

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I think this space has been saying for a couple of years, it's not worth it, and it's a little bit more exacerbated, and hopefully not be confusing with this. But when you think about, we believe our opportunities are parts, service, F&I and used, and we can control that. We can't control the new car market. Having said that, several of the midline import brands are very strong parts and service business units as well. One of the mid-line imports, really, the one that we're referring to today on the variable side, also happens to be a little bit weaker than the other mid-line imports when it relates to products and services. So in an odd way, you're getting exacerbated on both ends. You're feeling it with the incentives on new, and then it's not traditionally as robust the products and service customer and some of their competitors.

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David Whiston, Morningstar Inc., Research Division - Strategist [67]

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Okay. Finally, just a broader strategic question. Always been interested in the fact that you're not in California, given it's the largest car market in the country. Do you have interest in ever expanding there?

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David W. Hult, Asbury Automotive Group, Inc. - President, CEO & Director [68]

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You can never say never. There's a -- when we look at an acquisition, a big part of it is land costs and a business-friendly environment, dealerships expand and contract well from an expense standpoint in markets and can adjust to SAAR well. You can't adjust your fixed expenses. So our goal is to always be in markets that we can weather up and down times, and we don't laden ourself with a heavy debt on fixed expenses, meaning real estate or a heavy tax environment or something like that. So California is a great state to do business in, I'm sure, but we think that there is better opportunities for Asbury to create larger returns in other markets.

This concludes today's discussion. We appreciate your participation in today's call. Have a great day.