Please standby, we're about to begin. Good day and welcome to the Asbury Automotive Group Q4 Year End 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Matt Pettoni. Please go ahead.

Thanks, operator and good morning, everyone. Welcome to Asbury Automotive Group's fourth quarter 2017 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's fourth quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with us today are 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 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, David Hult. David?

Thank you, Matt. And good morning, everyone and welcome to our fourth quarter 2017 earnings call. During this quarter, we achieved record adjusted EPS of $1.81, a 16% increase over last year. Our success was driven by growth in new vehicle sales volume, enhanced F&I PVR and continued solid growth in parts and service. While we continue to operate in a challenging new and used margin environment, the fourth quarter capped off a solid year for Asbury. Let me touch on a few of the highlights for 2017. In a year impacted by major hurricanes and a decline in SAAR after seven years of growth, we generated $6.5 billion of revenue, retailed over 175,000 vehicles, delivered F&I PVRs of over $1,550, grew our same-store parts and service gross profit 4%, achieved adjusted operating margin of 4.6% and grew adjusted earnings per share by 6% to $6.43. In addition, we completed our Atlanta Nissan realignment, opened our Cumming Nissan add point, returned $35 million of capital to our shareholders and acquired a Chevrolet dealership in the Indiana market. In summary, our fourth quarter and full year results represent another record year for Asbury. In 2018, we also plan to continue our investments in our omni-channel capabilities that both enhance the customer experience and drive operating efficiencies. As always, we will continue with our strategy of being intelligent capital allocators, seeking the highest returns for our capital through investments in our existing business, acquiring new stores or returning capital to our shareholders. To that end, we have increased our share repurchase authorization up to $100 million. In conclusion, I believe that we are extremely well-positioned for success in 2018 and beyond. I will now hand the call over to Sean to discuss our financial performance. Sean?

Thank you, David, and good morning. We're pleased with our results for the fourth quarter. The highlights compared to the prior year fourth quarter are as follows: our same-store gross profit increased by 2%; gross margin increased by 20 basis points to 16.1%; SG&A as a percentage of gross profit declined by 200 basis points to 67.3%; adjusted operating margin increased by 30 basis points to 4.7%; adjusted net income increased by 11% to $37.8 million; and adjusted EPS increased by 16% to a record of $1.81. Q4, 2017 adjusted earnings exclude two items. First, a $7.9 million or $0.37 per share tax benefit associated with a write-down of our net deferred tax liability as a result of the recently passed Tax Cuts and Jobs Act. This adjustment drove our effective tax rate down to 21.9% for the quarter. The tax benefit was partially offset by a non-cash accounting charge of $5.1 million, $3.2 million after tax or $0.15 cents per share, associated with franchise rights impairments at certain stores. These items result in adjusted earnings being $4.7 million or $0.22 per share less than GAAP earnings. Note that adjusted net income for the fourth quarter of 2016 excluded a $45.5 million pre-tax gain from the sale of our Arkansas stores, $6.6 million we received before tax from legal settlements, a $500,000 pre-tax real estate impairment charge related to closing 2Q auto stores, and $900,000 of discrete tax benefits. In total, these adjustments decreased GAAP earnings per share for the fourth quarter of 2016 by $1.52. Our SG&A expenses in Q4 are a reflection of our culture of efficiency and cost control. Expenses in the quarter were positively impacted by certain operating decisions that we made to ensure that the business was appropriately sized for the environment. For the full…

Thank you, Sean. I'm excited to be part of the Asbury team and to be with you this morning. My remarks will pertain to our same-store performance compared to the fourth quarter of 2016. Looking at new vehicles, our new unit sales were up 1%, while SAAR was down 1% from the prior year, as we took market share on most of our brands. Margins stabilized during the course of 2017 with our Q4 margin of 4.8% being 10 basis points higher than last quarter. However, fourth quarter margins were 30 basis points lower than last year. New vehicle margin pressure compared to last year continues to be the most notable in midline imports, where we have a heavy sedan versus truck mix. Our total new vehicle inventory was $647 million. With a strong quarter, we've reduced our day supply by 8 days to 53 days, which is slightly lower than where we'd like be. Turning to used vehicles. Our used vehicle unit sales decreased 9% and our gross profit margin declined 40 basis points from the prior year's 6.7%. In the fourth quarter, we changed the used car enterprise software at all of our stores. While the new software will benefit us in the long-term, the implementation led to business disruption, putting pressure on our used sales. We believe this new software should be fully utilized by the second quarter of 2018. Our used vehicle inventory of $136 million is at a 31-day supply, which is in our target range of 30 days to 35 days. Turing to F&I. Our team continues to deliver strong results. Total F&I gross profit increased by 6% and gross profit per vehicle increased by $148 to $1,662. These gains help drive our total front end yield up $109 to $33.20 per vehicle. As…

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

Thanks. Good morning. Nice quarter, guys. I'd like to ask you about tax reform, and the benefit that you're going to see in 2018 on the tax rate side, because – do you think, you're going to be able to retain those benefits and does it at all change your capital allocation priorities?

Hi, Rick. It's Sean. Good morning. Rick, so a couple of points on the tax reform. Firstly, tax reform does clearly provide a significant benefit to the company given the reduction in our tax rate by 12% to 13%, but tax reform doesn't change our strategy or our capital allocation approach. So, we'll continue to invest in the business including our associates, our facilities and our omni-channel customer experience. We're going to continue to seek value accretive acquisitions and we'll continue to look for opportunities to opportunistically return capital to shareholders. All of this with a long-term focus on shareholder value. As far as the ability to retain the benefit of the tax savings, somewhat difficult to answer, but we do believe that we should be able to retain the vast majority of the savings. Our competitors tend to be smaller private dealers or dealer groups and the operators of these competitors tend to focus more and are compensated more on pre-tax numbers. We also, while it's different for different entities, we do believe that the tax benefits for us should be generally speaking better or greater than the tax benefits for the smaller private operators. So, we do expect to be able to maintain the vast majority of the savings from tax reform.

Okay, great. Thanks for the color, Sean. Operationally, I'd like to talk about the new car side, which outpaced the industry. If you could discuss the drivers there and were there regional differences, Florida, for example and then the used volume came – was down, came in below lower expectations, I guess the software, I don't know if you can provide some color there and how you see that impacting the business, as we push forward?

Hey, Rick, I'll take the, the new volume question first. We outperformed the market specifically in the midline imports, we did a good job with a couple of brands there. And as far as the used vehicles go, we had the disruption with the software implementation. The company has been on the software for years, so it's really just a learning curve and the employees and the associates getting used to using the new software, which definitely caused a decrease in our sales in Q4.

And is that the auto software that you're rolling into the stores?

Yeah. It is. We went to the auto.

Okay.

Rick, just to follow-up on your point about the markets and you specifically called out Florida. Most of our markets gained market share or outpaced their markets that they did business in. We had very few that didn't.

And then finally, if I could ask you on the F&I side (19:19) was a big contributor to the front end yield, you had this reserve adjustment. Can you quantify what that reserve adjustment did for F&I per unit?

Sure, Rick. It's Sean again. So, what happened is cancellations on our F&I products came in lower than we expected and that did result in a reserve reduction. Yeah, overall, if you look at our F&I PVR on a same-store basis, the F&I PVR increased by $148 and we would attribute a third of that to the reserve adjustment, roughly a third of that $148 PVR increase.

Okay. Got you. Hey, thanks a lot and good luck.

Thank you.

Thanks, Rick.

And we'll take our next question from Irina Hodakovsky with KeyBanc.

Thank you. Good morning, everyone.

Good morning.

A question for you guys on the used vehicle side, the software update that pressured the numbers this quarter, do you expect this to continue into the first quarter or the second quarter of 2018?

I think by Q2, we'll be fully utilized with the new software. So I'd expect by Q2, we'll be fine.

And then on the SG&A expense, you did a lot better than we expected and you did this despite the headwinds in your used operation. As that normalizes, should we anticipate SG&A leverage to improve further?

Irina, yes, we had a very good quarter from an SG&A point of view. We made some operating decisions, as I mentioned in my prepared remarks that really helped us during this quarter. We are a cost conscious organization, we're very data-driven as well and the adjustments we made really reflected what we believed to be a tighter margin environment and a lower SAAR environment going into 2018. In 2018, we expect the benefits from the cost saving changes that we made in 2017 – we expect these benefits to continue to flow through in 2018. However, we do expect offsetting pressure and therefore, we've guided in 2018 to an SG&A percentage of 69% – 69% to 70%. And the reason for this is, we do expect some pressure on the SG&A from lower SAAR environment that will obviously impact our fixed cost absorption. We also expect pressure because we're going to invest and continue to invest in our omni-channel experience and we're very pleased with the results of our omni-channel investments to-date and therefore, we're going to continue to invest in this area. And we're also seeing some cost pressure in certain areas of the business and just an example of where we see cost pressures in the area of insurance, after the several catastrophic weather events in 2017, we're seeing a significant increases in our insurance costs as well. And that's overall is why we're seeing offsetting pressure and that's why we've guided to the 69% to 70% SG&A percentage in 2018.

Understandable. Thank you for that detail. One last question on used volume, if you were to exclude the training process in the adjustment period, do you have an estimate of how you would have done on volume in used?

Yeah. This is David. I'll jump on in that. It's – any number we said would really be kind of winging it. This software – we use one software since Asbury's inception and not just switching the software, it's inventory feeds website, there was a lot of disruption going on. It really would be hard to quantify what it would be. It's more than fair to say, it would have been significantly better than the result was, but it would be hard to tell you an exact number.

Thank you very much.

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

Hey. Good morning, guys.

Good morning.

I mean, your discussion on the tax reform benefits, it sounds like the independents or smaller operators might not see the same that you do and obviously, declining SAAR, could you give us some maybe color on what the M&A environment looks like, is it heating up or more willing to sell now?

No, it's – we're actually pretty excited about all the opportunities that we've been seeing lately and that we're currently looking at now and are hopeful that we'll see some come to fruition pretty soon. So, we think it's pretty good. I know there's been a lot of talk about the tax savings and will the private cap dealers give it away and have it be a more competitive market and John touched on it earlier, but I thought it was important to bring it up again. This is not an operating P&L issue where it's in the hands of the operators and we don't see this as a pass-through at all. I know a lot of private cap dealers, in the last couple of years their profitability has been going backwards. So I think they're looking forward at this opportunity to get that money back, so to speak. So, we see most of this passing through well for us.

Okay. Great. And then on parts and service, I think mid single-digit outlook for this year, how much of that is customer pay versus a recovery in the used as the software normalize you get more refurb business?

Well, this is John. You saw that the decline in used car sales took us down about 4% on the service and parts side, but we were up in customer pay. Expect that to continue and expect to get the lift from the used vehicle sales moving forward.

And not to make an excuse, but the fourth quarter last year was a stiff comp, we're up 9%. So, we're coming off that 9% number, and still had a 4% left. So, we feel pretty good about that.

Okay. Is customer pay still the majority of the growth for this year?

Well, clearly that's our main focus, because it's what we can control the most of. But as we see the used car volume recover, there's no question that in turn it will make a material difference as well. It's very difficult to predict what kind of warranty work is going to come down the pipe.

Okay. Great. Thank you.

And we'll take our next question from James Albertine with Consumer Edge Research.

Great. Thank you. And good morning, everyone.

Good morning.

I wanted to ask, if I may, in light of your comments on the new vehicle side that most of your stores outperformed the industry in the markets in which they operate. A question we've been getting a lot is on the sort of the gap between new and used or late model used vehicle pricing, and particularly on a monthly payment basis. I wanted to understand what you're seeing there that's driving folks into new vehicles and whether or not you feel there's any sort of decision-making going on that may be – might be impacting certified pre-owned or late model used vehicle sales negatively, more incentives on the new vehicle side or something of that nature, just wanted to get some color there if we could?

Well, this is John. As these are late model pre-owned vehicles come off the lease market, you do get a price difference in payment that gets close to new, especially if the incentives are heavy. But then it becomes a decision from the consumer, which way they're going to go and it can have an effect on pre-owned sales, if the price point becomes too close.

The only thing I will add to that...

Yeah. Go ahead. Sorry.

...I mean you've seen in the fourth quarter, the incentives were pretty steep. You do see the off-lease cars coming, I mean, if you have looked at our cost of sale year-over-year, it bumped up by almost $600. And that made an impact on our margin, where really our PVR was only down $23 year-over-year. So, when you have heavy incentives like that and these off-lease cars coming off and it's more of a truck-car mix than it was a car-truck mix before...

Sure.

...your average cost of sale is going to creep up closer. I do see the value in CPO and all the benefits the consumers get from the warranty to the incentives and the rates and everything else. So, I don't think that that'll be deterred in any way. And I wouldn't look at our used performance in the quarter to signify a concern.

Understood. Yes, idiosyncrasies there with the software rollout, and I get that. But it does sound like what you're saying is the fourth quarter maybe that gap between new and used pricing contracted a little relative to prior quarters, am I hearing you correctly?

Yes.

Okay. Great. And then one final one from me, if I may on the credit side, just sort of a broader update in the markets in which you operate. Are there any shifts either in terms of the types of consumers coming into stores from a credit tranche basis or documentation requirements, competitiveness among lenders? Just trying to get a sort of a mark-to-market, if you will, what's the latest and greatest from an auto credit perspective? Thanks.

I haven't seen a big shift in the credit at all, as far as in the subprime market, which is a small percent of our business. The stipulations are getting a little bit tighter, but credit availability hasn't been an issue in all the tranches.

Okay. Great. Thanks again and best of luck.

Thank you.

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

Hi. Good morning, guys. Just to stay on the used vehicle business, I mean, obviously backing away from your closing Q auto and then with the software change over rate, I mean it seems like there's obviously been a big change in strategy and there's a huge opportunity in front of you, it seems like on the used. If we get beyond the second quarter of 2018 where there might still be some noise from the software change over, how are you thinking about the used vehicle business? Is this the kind of thing where you try to shoot for a 1:1 ratio in your stores as they stand right now? I mean, what's really the focus in the new strategy we should be thinking about beyond the noise in the near-term?

Well, the ratio 1:1 would be great and I think that's more realistic in the domestic brands, and some of the luxury, the import. But I think moving forward, whether what the SAAR does, and we're saying it's going to be between 16.5% and 17%. We can control our destiny and use to a greater extent. There's leased vehicles coming in that is available for inventory. We can trade at the door and we can get inventory out of our service drives. So, I think when it comes to used vehicles, we've got more control of our destiny than waiting for the new SAAR.

So what is – what was the specific rationale for the changeover in the software, is it to take advantage of that or is it just that the old software was not as efficient as it should be? I'm just trying to understand what drove the change and what you say, you can drive going forward?

Sure. We're not a huge a company, but anytime you change something across the enterprise, it's painful. So, you put it off for long periods of time. The software we had was serviceable, but the data that it gave us wasn't as timely as what the new software gives us. The new software is far more complex and more data driven than the old, so we're confident once we get comfortable with it, we'll really be able to increase our turn, which is what we're focused on. But, we want to turn the inventory faster and naturally grow our volume through trades.

Got it. Okay. And then also on used, I mean if you could sort of dimension the F&I PVR opportunity on used versus new, because it does seem like used might be a growing portion of that component over time. What is the opportunity delta between F&I PVR and used and new?

It's typically, it's a little bit better on the used vehicle side, but on the luxury side, when you're looking at new, you've got a higher amount financed per vehicle and it can be good there also.

Got it. So, it's a little bit better, but not a ton, is that a fair characterization? So, it shouldn't change the shift that much, it shouldn't change the total number all that much if we see a shift towards used?

That's a fair characterization, yes.

Okay. That's helpful. And then lastly, GM has changed their pay plan for some of the sales people at their dealers as far as the volume bonuses and such they can achieve. Are you seeing anything else coming from any other automakers or brands in change, in pay plans or bonuses for sales folks? And what kind of impact does that kind of a change have on that sort of the motivation of individual sales person or just volumes in general?

So, I'll do my best and try to address this. One of our – what we believe to be one of our strengths is our entrepreneurial model and we really allow the general managers to decide on compensation as far as that goes. We have everything from just front end yield compensations to total yield what the sales people get paid on finance and insurance as well. Our goal – our belief is, total yield is the best way to go, because it kind of neutralizes the up and down for the sales associates, which would slow the turnover down. As far as incentives from the manufacturers to the sales people, they've been out there for decades doing it and from time-to-time, it's there and time-to-time it's not, and it changes. We certainly welcome it. Any time our associates can benefit from a situation like that, we certainly enjoy watching them receive the additional income. But we truly believe that total yield approach is the best way to neutralize the swings for the sales associates.

That's very helpful. Thank you very much.

Thank you.

And we'll take our next question from Armintas Sinkevicius with Morgan Stanley. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. Thank you for taking the question. Maybe you could talk about just the industry landscape for the used car side, having gone through the storms, there's a bit of volatility there in the results. Where are we now and how are you thinking about the tax season coming up and your used business, how it stands there?

I'll take that. Typically, the used cars get a little bit of bump during tax season. The wholesale business becomes a little bit stronger in the spring during that. So I see it as favorable. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And did you see any dynamics around the storms, where demand was pulled forward from say the fourth quarter into September, or anything like that?

No. The major hurricanes really was Texas and Florida, now they impacted Georgia and South Carolina and other places as well. But from a car replacement standpoint, I mean it was a tale of two different stories. Texas had tremendous car replacement, because of all the flooding. Specifically, Houston area, we had one store there and we benefited from it dramatically. Completely different story in Florida, it was a huge business disruption, it shut down our business for a period of time, but there wasn't that flooding. So, we didn't have the vehicle loss, so we didn't see any spike in sales in Florida. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And then the other one the Indianapolis acquisition, do you have any financial metrics as far as how to think about how much revenue is coming online or anything like that?

This is Sean. The revenue from the Indianapolis acquisition should be around $100 million of additional revenue coming online. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. Got it. Thank you.

Thank you.

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

Hi. Thanks for taking the question. Wanted to dig in a little bit on some of this new software that you're using on the used side for analytical services online packages. I was wondering how does this structure, is it a one-time fee or how do you pay for it? I guess, what I'm trying to get at is I'm wondering to what extent some of the technological change be favoring large dealers versus small operators?

You're referring to the tax savings?

No, no, I'm talking about the new used software you're rolling out, some of the online software you're rolling out, the online scheduling for parts and services like, yeah how is – what is that stuff costing you in aggregate? Like how – is it per unit basis or is it like a fixed one-time fee?

I'll do the best I can at addressing that, but I don't know that I'll hit it exactly. You can see in our SG&A, we absorbed all the expenses for all of it. And when we talk about the significant increases in online service appointments, what we're really – those appointments were coming through the traditional phones. We're trying to create a more online experience for our customers. We've learned based on the research that we've done, the more that we can get customers to do most online or as much online as possible, the experience is better for them, our costs are lower for us and we can be more efficient at what we do. And we think we've – based on what you can see in our SG&A in our fourth quarter numbers, we're seeing benefits, really strong benefits of what we've done online with the experience. So, it's not so much that there's additional traffic or additional expense, there is some additional expense, but it's more where we're moving the traffic to, which is online and we're absorbing those expenses as we go. So, you can see the expense increases are not material.

Yeah. Okay. And I had a question on rising rates. You quantify the floor plan expense. Is there like a floor plan assistance offset that's related to rates? And then two, maybe just more generally speaking, can you walk us through some of the puts and takes, when you see rising rates historically, how does that affect F&I penetration, lease versus own, sales, any other metrics you can help contextualize what rising rates will mean for your business?

So, I'll jump on and then Sean can jump in. From a PVR standpoint, if you think about 100 basis point increase, depending upon the term, it's anywhere from $20 to $25 a month. So it's not material, it's not significant. We won't feel any impact in that sense. Now, if it starts going up 300 basis points, 400 basis points, that would change, but we don't see that happening. So we don't see it slowing – the 100 basis point increase would be dramatic, but we do not see that affecting our car sales, because the difference in payment is so low.

Yeah, the only thing I would add to that is that our floor plan debt is floating and therefore, there is a corresponding impact on our interest expense. But our other debt is fixed, so there would be no impact on – from a corporate point of view, there will be no impact on our interest expense other than the floor plan interest expense.

Yeah. And then the floor plan assistance, is that at all tied to the rate environment or that is completely separate?

Sorry, I didn't quite get the – was that the floor plan incentives, what was it?

No, the floor plan assistance expense – income item. No, I'll follow-up on.

I'm sorry. Sorry, can you repeat that?

Yeah. I was just – the floor plan assistance, is that all tied to the interest rates, is there any kind of offset to the expense?

So mostly – most of the manufacturers haven't increased their floor plan assistance. Some do move with the interest rate a little bit. But generally speaking, most of the increase or incremental increase in rate will be passed on to us.

Okay. Thank you.

Yeah.

And we'll go back to Irina Hodakovsky with KeyBanc.

Thanks. Yeah, I have a follow-up question for you guys on the used vehicle software. What type of data do you track to improve your inventory turnover? If you could maybe highlight a couple of key items you're tracking, how does the inventory turnover improve from this program versus the old one?

The biggest difference is we track market day supply on the used, where it used to be more aging buckets. So, now if we look at a vehicle, if it has a low market day supply, we know that vehicle will turn quicker and we can price it appropriately versus a vehicle that has a high market day supply and there's abundance of them in the market. We need to price that more aggressively to move it quicker. So the data is much more fine-tuned.

The other significant increase I'll add to that, from appraising the vehicle, it is – it's more real time data, meaning today and this week what's happening and the old software was really a 90-day look back.

Got you. And then two strategic questions for you, in terms of acquisitions, with the lower tax rate makes targeted stores the evaluation and the approval process more likely, your return on invested capital is probably easier to meet. So, all things equal, this would be beneficial to the acquisitions outlook, but can you update us on what you're seeing overall in the market, the inventory of stores for sale, has anything changed in the positive or negative direction to, let's say, six months ago?

Generally, I would say – I'll speak – all I can do is speak for Asbury. We're seeing more deals in the last 60 days than we've seen in the last six months. And the pricing is becoming more realistic than it was, say, 12 months ago.

Okay. And then the last question for you. You've provided more detailed guidance than in the past this time around. What is driving this change?

Sorry, the question, I just want to make sure I understand – is the question is, we provided more detailed guidance what's driving the change, is that correct?

Right. I mean, you're increasing transparency with the investment community, but at the same time there's a little bit of a risk involved, right, whenever you're providing more guidance. I'm just wondering what's driving the change from the – is it the fact that we're at the top of the new vehicle market? What are you hoping to achieve with improving guidance forecast?

We're really looking to just be as transparent as we can as to where we see the business going in 2018 and the key metrics that we're driving towards in 2018. And we're just trying to be transparent with that with the investment community.

Thank you. We appreciate that. Thank you, gentlemen.

Thank you.

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

And that concludes today's call. Thank you for your participation. You may now disconnect.