Greetings, and welcome to the Asbury Automotive Group Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, George Villasana, Senior Vice President and Chief Legal Officer. Thank you, sir. You may begin.

Thank you, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's Second Quarter 2023 Earnings Call. The press release detailing Asbury's second quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Senior Vice President of Operations; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and will be available later for any follow-up questions. Before we begin, we 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, which may include financial projections, forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2022, 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. We also have posted an updated investor presentation on our website, investors.asburyauto.com highlighting our second quarter results. Now it is my pleasure to hand the call over to our CEO, David Hult. David?

Thank you, George, and good morning, everyone. Welcome to our second quarter earnings call. I'm proud of the team's performance in Q2. Our strong cost discipline and continued work to maximize our gross profit streams generated strong results this quarter. We've also been opportunistic utilizing our strong cash flow from operations for share repurchases. We repurchased over 1 million shares year-to-date, with 960,000 of those shares repurchased in the second quarter alone for $190 million. Within this current macro environment, we are well positioned due to our diversified business model, our strong balance sheet, our focus on profitability and our North Star to be the most guest-centric automotive retailer. Now I'll turn to our consolidated results for the second quarter of 2023. We delivered $3.7 billion in revenue at a gross profit margin of 19.1%. Our adjusted SG&A as a percentage of gross profit was 57%, generated an adjusted operating margin of 7.8%. Our adjusted EBITDA was $307 million, and adjusted EPS was $8.95. Looking forward, we are optimistic about the future of automotive retail. We operate in an environment where the average age of our car is 12.5 years, the highest it's ever been. While SAAR levels have been trending higher, they are still well below historical levels. The combination of older cars, complexity of new cars and the transition to EVs enables consistent growth within our parts and service business. With our strong balance sheet and robust liquidity, we are looking to deploy capital through opportunistic share buybacks and acquisitions. We continue to aggressively pursue acquisitions that will be accretive to Asbury. We're disciplined stewards of capital. We are strategic when the capital allocation opportunities arise, such as our recent share repurchase activity. Again, I'm pleased with the second quarter results, especially with regards to our expense management. We have been and continue to be thoughtful operators with an eye towards efficiency and strong profitability while integrating over 50 stores from our acquisitions. Finally, I would like to extend a thank you to my fellow team members for a terrific first half of 2023. I'll now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. I would also like to say thank you to all our team members for their hard work, dedication and commitment to be the most guest-centric automotive retailer. Now moving to same-store performance, which includes dealerships and TCA unless stated otherwise. Starting with new vehicles. Our new vehicle inventory ended the quarter at $766 million, which represents a 32-day supply. There was significant variation among brands and models. Our new vehicle revenue grew 8% year-over-year. New average gross profit per vehicle was $4,832. New vehicle gross margin was 9.5% this quarter. Turning to used vehicles. Used retail revenue and unit volume were both down 15% compared to prior year quarter. Used retail gross profit per vehicle was $2,085 for the quarter. Our used vehicle inventory ended the quarter at $358 million, which represents a 35-day supply. Shifting to F&I. We delivered an F&I PVR of $2,369, which is a slight decrease of $42 compared to the prior year quarter. In the second quarter, our total front-end yield per vehicle was $5,959, a decrease of $605. Moving to Parts and Service. Our Parts and Service business revenue increased 6% in the quarter. Customer pay revenue also grew 6%, and we expanded its gross profit by 6%. As a reminder, when we acquired LHM, we stated the full integration would take 5 years. We are now in year 2, and we're implementing significant changes from a process and systems perspective. This significant degree of change does have an effect on our operations. This quarter, we saw that the average repair order of the battery EVs was over 1.5x higher than the average internal combustion vehicle dollars per RO. For reference, today, about 95% of our ROs are internal combustion vehicles. While the proportion of EVs we…

Thank you, Dan. To our investors, analysts, team members and other participants on the call, good morning. I would like to provide some financial highlights for our company. For additional details on our financial performance for the quarter, please see our financial supplement in our press release today and our investor presentation on our website. Overall, adjusted net income was $188 million and adjusted EPS was $8.95 for the quarter. Adjusted net income for the second quarter of 2023 excludes net of tax gains of $11.6 million related to a $10.2 million gain on the sale of a dealership, and $1.4 million gain from a legal settlement. Adjusted net income also excludes a $3.2 million loss due to hail damage. These items decreased 2023 second quarter diluted EPS by $0.40. Adjusted net income for the second quarter of 2022 excludes losses net of tax of $21.5 million or $0.97 per diluted share related to the losses on the sale of dealerships and a collision center. Our effective tax rate for the same quarter of 2023 was 24.8%, in line with the second quarter of 2022. We estimate our tax rate for the full year of 2023 at 24.9%. Excluding real estate purchases, we spent $41 million on capital expenditures year-to-date. We expect full year 2023 CapEx to be $185 million as we continue to roll out planned CapEx related to our 2021 acquisitions. Of this $185 million, about $20 million is related to replacement of leased properties. Year-to-date, TCA made $51 million of pretax income. We are still on track to deploy TCA into the rest of our stores by the end of 2023. Due to the deferral, the income associated with the store rollouts in our larger states, we had conservatively expected TCA to generate $25 million of pretax…

[Operator Instructions]. Our first question comes from the line of Daniel Imbro with Stephens.

Maybe one actually on the expense side of the P&L. I thought SG&A growth was really impressive in the quarter, actually stepping down sequentially. Can you talk about just what drove the leverage? Is it savings from Clicklane? Is it some of the divestitures you guys have done? And then maybe taking a step back, what opportunities still remain to optimize SG&A to growth, understanding there will be some deleverage just as GPU is normalized?

Thank you for the question, Daniel. We've always -- for a lot of years now, we've led the peer space with SG&A, and we try and operate as efficiently as we can. We do think going forward, we have opportunities to lower our expense a little bit more over the next couple of years. But I think part of it in the quarter 2, we maintain pretty healthy margins, which certainly kept SG&A in check as well. But I would think for the next 12 to 18 months as we're working on our software efficiencies and productivity, there's opportunities for us to improve. Clicklane is growing a little bit. It's a little bit over 16% of our sales. It's growing at a consistent pace. But as that picks up, there will be tailwinds with expense there. Right now, there are really no benefits from an expense standpoint with Clicklane the way we're compensating today.

Got it. And then maybe shifting to the new side of the business. Inventory built a couple of days, but you maintained GPUs nicely despite the domestic exposure. Can you just talk about GPU trends maybe through the quarter? And were there any notable weak spots within the portfolio's profitability?

I would tell you, to your point on the domestics, we're back to what I would call a normal day supply of domestic vehicles. We're pretty close to it. And we're still well over a car. I think all of our peers and ourselves have been talking about it, we're not going to go back to '19 levels. And we certainly don't see that any time in our near future. We think our folks in the stores are doing a really great job at ordering the right inventory in maximizing the gross profit per transaction. We anticipate, as we sit here today, that to continue into the near future.

Perfect. And then last one for me. Maybe on the balance sheet, Michael, wrapping up. You guys deployed more cash from ops towards buyback, but it does still sound like there's an appetite for M&A. Can you talk about what you're looking for in a target? Are you looking to expand your brand mix with certain OEMs. And then I know today, TCA is not a use of cash. But when we look at those longer-term targets, is there going to need to be any cash infusion to get there? Or is that going to be self-funding from its own cash?

I'll take the TCA question first and then let David take the acquisition question. On TCA, if you think about the customer -- before TCA, the customer paid us in the dealership, we kept a percentage of that income and kept it as cash to the dealership and they took the rest of the cash and set it off to a third-party provider. And so all that cash that kind of funds TCA is from our customers. And so we're just taking the cash from the customers. Part of it stays at the dealership level and we can use for operating purposes, share buybacks, acquisitions. The rest of it goes into the investment bucket at TCA. So there's no cash that we have to come out of pocket to support that. It's all customer-driven.

From the acquisition standpoint, we divested 1 store in the quarter, and it was mainly due to logistics. It was a market where we only had 1 store. We couldn't find acquisitions in that market that we're going to strengthen that market. So we decided to sell that 1 store, and we also avoided a large CapEx project in doing that. So we thought it was the best use of cash. We're very focused on portfolio management, the brands that we have and where the stores sit within which states. We are aggressively in conversations with acquisitions now. We've seen a lot. Obviously, we haven't announced anything because we haven't been able to land something that meets our criteria in the states and brands that we want. We're hopeful with our current conversations that something will come together. But as you know, these things take time and you just have to play them out.

Our next question comes from the line of John Murphy with Bank of America.

I just wanted to ask about parts and service. It's very interesting comments about your experience with EV so far. And what we've heard just from on the GM call, the $790 million charge they took for the Bolt recall. So it seems like there's going to be opportunity for warranty work or repair work on EVs, it might be far higher as you're saying 5x on the ROs versus the average IC vehicle. I just -- what are you expecting there? Is there a big capital investment that needs to go on in the service base to get ready for that? And then also maybe conversely, just in a more traditional sense, I mean, how much pent-up service work do you think there still is as people finally come back and actually are doing the work they need to do out there?

John, this is Dan. Just before I answer your question, just a correction, the EV ROs, customer pay ROs was 1.5% [indiscernible] compared to [indiscernible] so I just want to make the correction. First question, as far as the EV and any infrastructure or investment that is required. Yes, there -- it does require -- and I'll start first with the technician training tremendous amount of training that goes into that where technicians go to the local OEMs outside of the market or in a lot of the cases inside the market, but then also got to have the proper equipment. And as you can imagine, a tremendous amount of infrastructure being invested in the charging stations for these vehicles because as we see that a transition, we need to make sure that not only service the guests that are acquiring the cars, but also we're able to fully charging whether in our service departments or while we are pressing them for delivery for a lack of a better term. As far as the pent-up demand, you see the average age of our parked car is 12.5 years. So definitely -- and we also see some consumers keeping cars longer now based on those numbers. So the pent-up demand is still there. And we feel that in the near future, will continue to positively impact us.

And just to add some color to the sales, it may come up later, but I'll just mention it now, we're still sitting at a point where 30% of our vehicles are presold.

That's very helpful. But I'm just -- sorry, back to the parts and service same-store, I mean, is this the kind of thing that with this pent-up demand and what's going on with EVs that you think sort of mid-single-digit growth rate on a same-store sales basis is reasonable sort of in the near term for parts and service to assume? I mean, it seems like it's pretty sticky, and it's trending there. But I'm just curious what your view is on that.

We really do. I think up until 2030 and maybe beyond parts and service is going to be pretty strong. It was a bumpy quarter for us with parts and service. We have a lot going on with all our acquisitions out West, integrating new software and changing processes. So that takes a period of time in toll in your business that you can become efficient with it. But we definitely think mid- to high single-digit numbers are certainly very conservative for the foreseeable future.

Okay. And then just lastly, on floor plan interest expense. I mean, obviously, great performance there. You guys are managing the growth very well with, I guess, a lot of hedging instruments. Can you just explain to what's going on there and how successful you think you'll be of mitigating the rate rise along with the actual unit rise over time as the industry recovers.

Yes. So on the floor plan side, most of that's just the floor plan offset account. We negotiated the ability to put -- to basically offset 100% of the floor plan. And so all the excess cash we have right now is parked against that floor plan balance. So it's not hedging, it's just use of cash to offset the balance.

[Operator Instructions]. Our next question comes from the line of Rajat Gupta with JPMorgan.

I just wanted to follow up on the previous question on new car GPUs. Curious if you could give us a sense of how your electric vehicle mix is today, both in terms of unit sales and inventory? And was there an outsized impact from a moderation in on those EVs relative to IC that had an impact in the quarter. And if that were the case, when do we expect it to flush out of the system and get back to a more normal level? And I have a follow-up.

Rajat, this is Dan. I'll address your last question first, and then if I forget one, please remind me. But the -- what we're seeing with the EVs from a pricing standpoint and also from a margin standpoint. Yes, it does have an impact when you see the supply and demand. But I will tell you, the biggest impact that we see is the level of support from the tax credits that you -- that might be available out there. When the tax credits are readily available for those cars, those -- that inventory moves at a much faster pace. And also the need for discounting is not as much needed as when the credit is not there. So -- and we see that in different pockets of -- that we operate, both positively impacted and then negatively impact. Can you remind me what your second question was, please?

Just like is there any way to quantify like what the GPU impact was from electric vehicles. And any color on like just the day supply of EVs versus IC today in your inventory on the ground?

Rajat, this is David. I would tell you that the gross profits when you look at our PVRs that we put in the tables, they're pretty much similar to what you see there. It does vary by model, or by brand, I should say, but our luxury stores with their EVs, they're moving pretty well, and the gross profits are pretty close to what the combustible engine gross profits are. And with some of the midline imports, same scenario, some of the brands with Hyundai and Mercedes as 2 examples with vehicles, we're doing a nice job of turning that inventory and we feel the gross profits are very much in line with what you see with the rest of our combustible engine gross profits.

Got it. Got it. That's helpful color. And then also following up on John's question on parts and services. The first quarter to second quarter, we saw some deceleration in the year-over-year rate. You talked about some of the operational integration impacts from LHM, was that a driver of that deceleration? Or was it like this is where you had expected to land irrespective? Just curious like if there's any way to think about like why that decelerated or was it like industry specific? Was it company specific? Because some of your peers like have a higher number there. So...

It's an excellent point. We certainly -- most of the deceleration is with the conversion stores out West, and changing software. I mean we have a lot of tenured folks out there, hardworking people that we're used to doing things in a certain way. When you go through some DMS changes that we've had and change the software that we're using in parts and service, which also changes process at the same time. It has a cause and effect from a performance standpoint, and it takes a little bit -- it's probably foreseeable for the next quarter or 2 to see similar results. But then we're hoping right after that, we should be starting to see the efficiencies and folks getting used to the new software, and we'd be back to normal, if you will. Just when you think about it in that brief period of time between the Stevinson and Miller acquisition and [indiscernible], we almost doubled the company within 30 days. That was a significant size impact to our company as a whole. So there's a lot of transition that we're going through. Last year was more a year where we kept things sustained and didn't really go through a lot of conversions and change. And this is the year that we chose to really tackle that. So our folks out there are probably frustrated with us a little bit with some of the change in implementation of software. But once everyone gets used to it, we think we'll be at a much better place and more efficient out there like our legacy stores are.

[Operator Instructions]. Our next question comes from the line of Bret Jordan with Jefferies.

Your comment on domestic GPU still holding over . Is there a lot of dispersion in the domestics? I mean, does that include Stellantis, where there is the highest inventory level or are they holding ?

No, Bret, it's a good question. And Stellantis, as you can see, is our highest percent of domestic. It is our highest day supply as well. We're really pleasantly surprised. All 3 manufacturers are very similar to their PVRs where they are. So there's no huge disparity between any of the 3.

Okay. Great. And then sort of a big picture question on the 5-year plan. Looking at it, and obviously, lot of talk about the integration plans for '23. What's the biggest risk? Is it sort of a SAAR supply-demand volume risk or integration of acquired stores? I mean sort of how do you bucket the challenges to the 5-year plan?

Yes. I would say it's threefold, finding the right acquisitions to make sure we can hit our target. That 5-year plan was based on a $17 million SAAR. So we haven't seen that for a while. And may not see it for a little while as well. We think the conversion piece really differs. Miller was an anomaly because it was so large to take something like that on prior acquisitions that were smaller were much easier to integrate. So we don't see that as a big risk or an issue. It's really about finding the right acquisitions to add to us getting back to a $17 million SAAR. I would think of the big ones. And then being patient and consistent with Clicklane. We really think we have something there that we can build on. It continues to grow. It's a good percentage of our business and we want to see that become a larger percent of our business. We think that has great opportunity to grow as well.

Okay. Great. And just -- you said 30% of the vehicles were presold. Could you tell us what percent were sold at MSRP?

So when you think about that, I don't have the exact percentage for you. But when you think about it, most of the presold vehicles will be sold at or very close to MSRP. And you think about our luxury and import, almost 50% of the volume come from Lexus, Mercedes, Toyota and Honda. All those brands, we have a low day supply. So you could imagine that a lot of those vehicles are presold in those lines, which are going to garner high PVRs.

We have no further questions at this time. Mr. Hult, I would now like to turn the floor back over to you for closing comments.

Thank you, operator. We appreciate everyone's participation in today's call. We look forward to our next conversation after our third quarter earnings. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.