Good day, ladies and gentlemen. And welcome to the Asbury Automotive Group Q3 2017 Earnings Call. Please note that today's call is being recorded. At this time, I would like to turn the conference over to Mr. Matt Pettoni. Please go ahead, sir.

Thanks, operator and good morning, everyone. Welcome to Asbury Automotive Group's third quarter 2017 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 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 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 2016, 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, Craig Monaghan. Craig?

Good morning, everyone. Despite Hurricanes Harvey and Irma impacting more than half of our stores, we are pleased with our results for the third quarter. We're EPS for the third of $1.48. We believe that our results were adversely impacted by approximately $0.15 associated with the hurricane. And the CEO transition announced in August. Excluding these events, our EPS would have been $1.63, or 7% higher than last year reflecting strong operating results in a declining SAAR environment. Notwithstanding the impact of the hurricanes, we were able achieve a gross margin of 16.2%, 40 basis points higher than last year and an industry leading operating margin of 4.4%, 20 basis points higher than last year. Looking forward to the fourth quarter, assuming that SAAR holds at current level, we continue to expect to deliver slow low single digit EPS growth. I'll now hand the call over to Sean to discuss our financial performance. Sean?

Thank you, Craig, and good morning, everyone. I'd like to start by giving you some color on the events that impacted us this quarter. Note that our earnings have not been adjusted for these events. Hurricanes Irma and Harvey impacted dealerships in Florida, Georgia and Houston, Texas. Our extensive emergency readiness program plus some good fortune resulted in very limited property damage. Our team did an outstanding job and our total loss from property damage ended being less than $500,000. However, given the closure of our stores for a number of days, we did incur significant business interruption. In the case of hurricane Harvey, the negative impact of the hurricane in the month of August was more than offset by very strong performance in September, when our Houston store generated record profits. Overall, from a financial perspective, hurricane Harvey turned out to be a net positive event for us this quarter. While we expect the strong performance of our Houston store to continue to through the beginning of Q4, it is only one store and impact to the fourth quarter will therefore not be material. In the case of hurricane Irma, although we had very limited property damage, stores in Florida and George, our two largest states were closed for an extended period of time and we lost business that we do not expect to recover. Unlike the situation with hurricane Harvey, this storm did not generate meaningful vehicle replacement demand. Overall, we estimate that were it not for these hurricanes, we would have sold well over 1,000 more vehicles, our pretax income would have been at least $3.5 million higher and earnings per share would have been at least $0.10 higher. During the quarter, we recorded an expense equivalent to $0.05 per share associated with the CEO transition that…

Thanks, Sean, and good morning, everyone. As we've mentioned, since over 50% of our business was impacted by the hurricanes, there is significant noise in our results. Given the impact of our hurricanes, I will for this quarter limit my remarks to only metrics that are meaningful to our true operating performance. My remarks will pertain to our same-store performance compared to the third quarter of 2016. Looking in new vehicles, we are starting to see some stabilization in gross margins. Consistent earlier this year margins in the third quarter were 40 basis points lower than last year. However, sequential margins were up 10 basis points from last quarter to 4.7%. This marks the third quarter of new margins stability. Our total new vehicle inventory were $674 million, in an environment where inventory levels are building across the industry and despite the hurricane impacts, we were very pleased that we were able to reduce our day supply by two days to 72 days. Turning to used vehicles. Our gross profit margin declined 60 basis points from the prior year to 7.1%. The decrease in margin was driven by a combination of aggressive new vehicle pricing and the continued inflow of off-lease vehicles. As I mentioned in the past, used vehicle sales provide incremental profit opportunities in both F&I and parts and service. We reduced our used vehicle inventory to 35 days supply which is 5 days lower than last year. Were it not for the hurricanes, our day supplied would have been even lower. Turning to F&I, our team continues to deliver strong results. Total F&I gross profit increased by 5% and gross profit per vehicle increased by $142 to $1,547. These gains help drive our total front end yield up $10 to $3,138 per vehicle. Looking at Parts and…

[Operator Instructions] And we will go first to Rick Nelson of Stephens.

Thanks. Good morning. [Technical Difficulty] David your comments about the new vehicle margin and stabilization and what you think is driving that?

Rick, I am sorry. I missed the first part of the question. I heard new vehicle margin.

Yes. Just to follow up on your comments David about new vehicle margins that you are seeing stabilization. I am curious what you see is the drivers of that stabilization.

I think we are probably getting to a point where inventory levels are started get under control. The pressure is coming off pushing some of the inventory the way we have. We are still seeing significant pressure on our mid line imports from a margin perspective. But they are really starting to stabilize well for us in luxury and domestic.

And if you take out product related to the hurricane do you think, is that a driver?

It's hard to say. We certainly miss some incentive money because of the hurricanes that would have impacted the margin in a positive way. But it's really tough to predict how much of an impact it would have.

Got you. Also like to ask about F&I that was standout this quarter, you had decline in some of the new unit sales but same store F&I was up 5% per unit and per unit showed growth. How you were able to accomplish that?

There are two main pieces to that. Really a credit to our associates in the field and their production has really increased at the store level. And we've also seen benefits of renegotiated contract with our vendor partners.

And any comments on sales post the hurricane. Are you seeing a pickup in demand?

Yes, Rick, in Houston I would tell you it's significant. I mean after the hurricanes the results were fantastic with all the cars lost there. We haven't seen any of that in Florida. That was mostly winds and not so much flooding and didn't see a lot of total loss of vehicles. So that really just truly loss business down there.

We will now go to Brett Hoselton of KeyBanc.

Good morning. Couple of quick questions here. The $0.05 for the management and then the $0.10 for the hurricanes that you called out on a go forward basis, I assume the $0.05 goes away and then the $0.10, it's the question of how much of that potentially reverses as you move into the fourth quarter. Am I correct?

Yes, hi, it's Sean. The $0.05 is one off in Q3. As I mentioned in my remarks there is an additional $0.03 in Q4 after that it goes away completely.

I apologize. I joined the call little late so I apologize.

Sorry, yes, the $0.10 is the net benefit -- sorry the net negative impact that we had in Q3. And there is nothing that comes back in Q4 subsequently. As David just mentioned, Houston was very, very positive and Houston is only a single store and therefore the impact in Q4 is not going to be significant. And Florida we are not seeing any incremental demand associated with that Hurricane.

So when you think about $0.10 impact, was it primarily front end or back end?

It's both. As I mentioned --

You didn't split between the two --

This is David. I'll jump in. It's little bit difficult to predict. When you think about fixed operations, you have those hours available for that day to sell. So when you lose all those days and you open back up you can't replace those hours. It's not possible.

Exactly.

From a sales perspective, we can see when the activity decreased. And then it went to zero and how long it took before it increased. So we can certainly see the lack of sales or how many sales we missed, really difficult to quantify the split between the two. But I'd say generally speaking it was more and powerful impact.

Yes. Okay so in my mind you are not very likely to have down days due to hurricanes in the fourth quarter so you more than likely just not sequentially going to get that back. And then the question is do you get any kick-up as a result of maybe some delayed new car purchases or insurance payment or something along those lines. It's just sequentially $0.10 should reverse itself. It seems like largely, I don't see any reason why wouldn't -- would you largely agree with that or disagree with that for some reasons.

Well, this is Craig. I'll jump in there. I think like David -- I'd go back to the point that David made. And I think we had to separate Houston from Florida. So maybe I can start there. Houston was a net positive for us like we mentioned. The store came roaring back like we had record results in September. That will carry through maybe to -- well it will carry though but to a much lesser degree in the fourth quarter. So we can put that one to the side. Florida is the old empty seats in the airline. I mean the majority would be lost fixed work. There was we mentioned that probably 1,000 loss vehicle sales overall between both locations. But they are gone. Our expenses once you lose that opportunity it doesn't come back. If you want to look quarter-to-quarter, yes, we are $0.10 down this quarter. We don't expect to have $0.10 drag next quarter.

Yes, can you switching gears, what's our current thinking on the Q Auto operation, I think I apologize if you mentioned this earlier, I just missed the opening part of the call.

We are completely out of the Q Auto.

We will now go to Bret Jordan of Jefferies.

Hey, good morning, guys. Hey on your comments about seeing new margins stabilize, would it follow that used margins might stabilize if some of the downward pressure on used with the higher incentive abates or is the off-lease volume just kind of continue to put pressure there?

It's very tough to predict but based on what we know it's coming in 2018 and 2019 for off-leased vehicle, it's hard to imagine that the margin will grow a lot. Your cost to sale tends to go up every year. So it will be competitive to keep the PVRs consistent so with maybe upside but the margin pressure will stay -- in my mind will stay consistent.

Okay. But you used -- would you think it goes further down or do you think it's just go sideways in this environment?

Yes. I don't hate to predict this because I am usually wrong. But I don't see a declining for us but our goal is certainly trying to increase but if nothing else maintain it.

Okay, thanks. Then I guess on valuation and M&A side. I mean you talked about certainly looking at some broader scope. Are you saying any thoughts on the sellers? Are they more flexible or less flexible?

I think we are seeing more sellers and I think with that comes a little more flexibility. We are very happy with the transaction that we completed earlier this year. We felt like that was very fairly priced and the store performed very well. We got another transaction we hope to finish towards the end of this year or early next year. And again that's another what we believe it's a good deal. And there are other conversations that are happening behind that but it's like anything else until the deal is closed, we just wait -- you have to wait and how things play out.

Okay, great. And then a final. On the storm comment on Florida you mentioned that there was really a net loss on that. Would you say that the service business benefited at all? I mean obviously not enough to make up what you lost in unit sales but was there any silver lining in that cloud?

No. Unfortunately it's empty hotel rooms that you didn't fill for the night. So when the business comes back you can't duplicate the production in that shop.

We will now take a question from Jamie Albertine of Consumer Edge.

Great, thank you, good morning. I hope you can hear me okay, apologies, calling from the mobile. If I may F&I PVR, I don't know if that question was asked. I apologize if I am asking the question it's been already asked earlier but very good execution it seems. Wanted to understand a little bit more kind of underlying the growth in PVR there. What is changed or what are you seeing consumers gravitates more that's helping enable that this quarter versus prior quarters?

Jamie, I'll jump in. This is David. The success of F&I is a two part. First part is store level performance certainly increased. More focused on product sales. We are continuing to see our product sales as a piece of our PVR increase percentage wise compared to finance reserve. And the second piece of it is renegotiated contract with our vendors. We've been very disciplined and focused on training. We were lucky to have great talent and leaders in the field. So the combination of the two.

This is Sean. I'd just add one thing to that is that next quarter will be anniversary in new contract and so growth maybe moderated in the fourth quarter relative to the prior.

So as a follow up based on that, Sean. And we think about certainly with the growth in used vehicle, supply coming and presumed growth in used vehicles sales, so what degree should we anticipate sort of holding this level or is a modest decline sort of more prudent to bake into our model at this point given the mix shift to used from new?

In term of F&I, I believe that there should be a modest increase in the fourth quarter but again just not at the same level as you saw in the third quarter just given the anniversary-ing of the contract renegotiation.

Understood, appreciate that color. And then if I may just a strategic question. With the closure and sort of abandonment of the Q Auto strategy, it seems there is a premium now on dealers, on companies throughout auto retail to try and brand around strategy related to digital [Technical Difficulty] driven growth. You got some acquisitions you've talked about, you said sellers are -- conversations are going well and there are more sellers. How should we think about your differentiation when it comes to the digital strategy? Looking ahead into 2018 and what's the reason to sort of own Asbury in an environment that's going increasingly digital relative to your peers?

We've talked about little bit last quarter with our omni channel approach. We are really focused on creating that transactional line really getting consistent with our processes there and increasing sales that way. Our investment continues, we are pleased with what we see so far. And see that as core strength for us. Our goal is instead of creating more expensive brick-and-motor is to really create larger throughput through our stores with centrally assisting the stores digitally and enhancing the transactions online.

We will now go to John Murphy of Bank of America.

Good morning, guys. And congratulations to both Craig and David, really great stuff from both of you. Just a first question given this is the first quarter where Q Auto is now technically shutdown. I mean as you think about sort of the resources both capital and human capital that were used to sort of try to drive that business. Has that had any sort of net impact on used vehicle business inside your dealership four walls or is that really an opportunity potentially maybe refocused and grow the used vehicle business inside of the existing dealership base?

John, this is David. I'll jump in and if I don't hear right lease come back. Naturally when you have a project like that on the side, it is a distraction for some of our leadership to focus on that business. And there is also cooperation with our stores from a shared inventory standpoint. Now that the focus is back on our core stores and our core business both from a leadership perspective and keeping the units within the stores. We see this is opportunity to again increase our throughout with our current stores.

If I could step further than that.

That will be great.

In addition to the talent and the stores, a lot of our technology people especially -- we got about 25 people in our digital department that we're spending a fair amount of time in our Q initiative and that energy has been refocused and redirected to how we can compete tomorrow in the digital world. We will be -- we will share more with you in the future about that but that's really where that initiative has refocused. Our digital -- our approach in digital transaction in the future.

And maybe try to follow up on that and maybe push a little bit further, Craig, now you kind of mentioned that and something we've been thinking about now you have the inventory and you've got the stores. If you can open up the virtual store front and push that opportunity or that inventory through that incremental digital store front. I mean is that a real material opportunity that makes a lot more sense existing sort of leveraging your existing assets and inventory management in a way that's much more asset efficient and maybe reaches a much broader set of eyeballs or consumers than you would with a physical store? Is that a fair way to think this might be going?

Yes. I think that's very fair. I think it's -- part of what we are trying to do is drive much more productivity in the store, improve the customer experience, let that customer's first interaction with us be very professional. We've got plenty of brick-and-motor that's not the issue, it's how do we take advantage of that and how do we make this transaction much more -- so much more efficient, so much less time consuming in the world that we are going to be operating in tomorrow.

Yes, I'd jump in. As we sit here today, 4% to 5% of our sales currently have been sold online now completely. We are continuing to see progression in that area. It is opening up our channels in the lot of respects but again it's still to push the traffic back down to the store and the transactions we are delivering it at the store, delivering at the people's home. Progression has been solid over the last few months and continues to grow in that area.

Okay, that's helpful. And then just a second question on acquisitions. I think David you mentioned -- I think it was you David you mentioned that the environment was getting a little bit more favorable or maybe evaluations are getting a little bit more reasonable. What is the kind of changed there? Is it just sort of some succession plan that's going in families or is there something you think changed in the market environment? Or is it interest rates going up? Or is it political uncertainty? I mean what do you think is driving this sort of incremental availability? It sounds like of deals.

From my perspective I think it's continually -- continuing decline in SAAR all year, it surely making dealers that don't have succession plan rethink about how much longer they want to deal with this and handle things to where they are. So it's created a lot of opportunities. It's a lot tougher couple of years ago when the SAAR was climbing and everyone wanted the moon for their stores. Now they are being more reasonable understanding the environment that we are in. So I think it's created a lot more dialogue. There always been stores out there for sale but the conversations were usually short when you heard some of the expectations.

Okay and then just lastly, we've heard mixed stories on the pricing environment although chance like most automakers are now sort of commenting that the competitor pricing environment is a bit tougher than they would have expected with the sales rates running into $70 million range right now. Just curious what your views is on the pricing environment generally and given your stabilization in new vehicle grosses, is there any risk as the pricing environment potentially gets even more competitive as SAAR actually really does start to fall?

I guess I will base it on history not knowing what the future holds. Usually in downtime it's a great time to really grow your business and there are always opportunities out there. And I think one of the strength of Asbury is we've always been very opportunistic. I think there will be great opportunities coming in the future for us. What they are? I am not really sure but we'll stay very disciplined on our approach and how we look at a transaction and really make sure the ROI is where we needed to be for that transaction to make sense for us.

Okay. I am sorry but also any comments on the pricing environment, the new vehicle pricing environment? I apologize, I switched gears.

I am sorry. It's hard to say after what we've just been through with the hurricanes and where we are going to the fourth quarter. We like what we are seeing so far in the quarter but when I look back at July and August and September and difference in those three months, it's certainly been unpredictable.

We will now take a question from Armintas Sinkevicius of Morgan Stanley

Good morning. Thank you for taking the question. David, I know you have been around for a while so it's nothing really new but perhaps you could talk about how you think about the new role at the company and anything you would do differently at the margin going forward?

I would say Craig has done an amazing job for Asbury and created a real disciplined approach and how to run the business which I full aligned with. As I said in my remarks, really don't see anything changing. We wanted to be the best operators we can possibly be and we really want to be intelligent with how we handle the capital. And I don't see anything changing in that sense at all.

And then a question around the storm impact. Given the sort of the different impact in Florida versus Houston, more wind damage in Florida. I know you said the business isn't coming back but is there a chance that we see more parts and services business in the fourth quarter than we would otherwise expect?

I have probably done a poor job of trying to explain this. But it's -- when you think about it when the shop opens on a given day, you only have so much capacity that you can handle for that day. Even when you are closed and there say pent-up demand, the shop all of a sudden can't handle twice the amount of work that it was handling before. So, yes, I am sure there is some demand but it tends to get pushed out over time than all come it once because your capacity can't handle it on a daily basis.

And we'll now take a question from Chris Bottiglieri of Wolfe Research.

Hi, thanks for taking the question. Question on capacity utilization parts and services kind of I think it's probably lost like what 6 selling days some of those markets. So what is the capacity utilization in parts and services? And I think related follow up on October, what are you seeing there? One of your independent peers has seen trends weaken in October on customer pay. I know it's a slightly different end market but wanted to see what you are seeing there and maybe what could explain that? Thank you.

Let me take a first shot and then maybe David will jump behind me. When we think of capacity we think of it really in two ways. There is physical capacity within the stores. How many lists do we have? How much volume can we handle now with our fixed asset essentially? And broadly speaking we have far more physical capacity than we have demand. Then the second one way we look at capacity is in terms of technicians. And that's really the limiting factor today. We could use more technicians. There is tremendous demand for technicians in the market. The wages that we pay technicians continue to increase. And that's truly the limiting factor. David, you might want to more cover to both of those.

No. I agree. The only thing I'd cover you made -- asked the question about customer pay. Without getting into too much detail it's fair to say we are very pleased with what we are seeing in October for customer pay.

Got you, okay. And then quick question on kind of the segment detail. I know there is probably some new ones nuisance accounting here but looks like volume like volume ever since profits in domestic, looks like volumes accelerated meaningfully, especially on tier basis if I am looking this correctly. The overall index for the domestic in those kinds of affected market trying to understand what could cause that or if you maybe you just decided to walk away from incentive that is in the environment?

And so I don't get it right please come back and correct me. When we look at our domestic portfolio, we are heavy with Ford. In past meaning last year there were lot of stair step programs that we are incentivizing to chase volume that are in the incentive. They were changed their approaches this year and gotten away from stair steps and put the money in different category. So that in it itself would probably pull back some of the volume.

And is that more like a Q3 event than Q2 it looks like kind of got worse in Q3 relative to Q2?

Well, generally speaking Q3 is your sell-down quarter and model year change over. The program didn't change for that manufacture so end of fourth quarter last year.

Our next question will be from Brett Hoselton of KeyBanc.

Thanks for the follow up guys, appreciate it. Talked about not really make any major changes in the strategy however it sound like the M&A environment is becoming more appealing so how should we think about dividing your free cash flow between share repurchases versus acquisitions?

I guess the simplistic answer would be we continue to remain opportunistic. And it really becomes a decision based on the time on the deal transaction what it could be, where our stock is then, what we think are the best returns for our shareholders.

So this time there is not really a conscious thought process of coming towards maybe back half of the cycle and valuations are coming down literally moving to gross mode, it's just kind of more of the same.

I would generally say Brett, everyday we are focused on running the business and looking for opportunities to increase our value, whether it be through buying back stock or acquiring stores. So we are kind of going towards the mindset as what's the best approach.

And now we will go to Bret Jordan with Jefferies.

Thanks for the follow up again. On your comment on around October, customer pay being positive. Are you doing anything I guess different promotion wise, years ago you used to run the tire programs to drive traffic, is there anything different you are doing now?

Bret it's - it really drives back to almost two years ago when we really started this digital initiative and fixed and created that service CRM and trying to bring a lot of our service business online. We really are getting comfortable with the software. We are seeing gain both in the dollar and revenue side and the efficiency standpoint in joint business with our customers. So I think it's a combination of everything that we have been working on. No specific program just really focused on retaining our customers, growing our customer base and operating our fixed operations as efficiently as possible.

Well, that was our last question but before we go I'd just like to say a couple of words. This is my last earnings call before I retire. And I want to take an opportunity here to thank all of our employees, our partners, our stakeholders for their support. Our shareholders and everyone that has been part of Asbury over the last nine years. I feel like we've achieved a lot. We couldn't have achieved it without all of you. So big thank you. At the same time, I'd also like to congratulate David on his promotion to COO. The company couldn't be in better hands and I look forward to seeing success for the future. And with that we'll wrap up the call. And I am sure David and Sean look forward to talking to you next quarter.

And with that ladies and gentlemen, that does conclude today's call. We thank you again for your participation. You may now disconnect.