Greetings and welcome to the Asbury Automotive Group First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Reeves, VP of Finance and Investor Relations. Please go ahead.

Thanks, 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 first quarter 2024 earnings call. The press release detailing Asbury's first 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 up the call for questions, and we 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 2023, 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 have also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our first quarter results. It is my pleasure to now hand the call over to our CEO, David Hult. David?

Thank you, Chris. Good morning, everyone. Welcome to our first quarter earnings call. I want to start by saying I am proud of the hardworking efforts of our team members who delivered our first-ever quarter of more than $4 billion in revenue. As we continue to progress along our growth strategy, it is important to reflect on the performance of all of our team members, leaders, and platforms that are powering our path forward, including our first fully operational quarter with our new team members from the Coons Group. Thank you all very much. In our second quarter 2023 earnings release, we said there would be integration-related headwinds to our parts and service business that would extend into the third and fourth quarter before improving in Q1 of 2024. This quarter's performance shows we are progressing and expect this portion of the business to grow at mid-single digits or higher through year-end. In the fourth quarter earnings call, we discussed our commitment to a more aggressive stance in our pre-owned sourcing. We maintained same-store PVRs quarter over quarter and increased same-store unit volume by more than 9% or 2,700 units versus the fourth quarter of 2023. Now for our consolidated results for the first quarter, we generated $4.2 billion in revenue at a gross profit margin of 17.9%. Our SG&A as a percentage of gross profit was 62.5%. We delivered an operating margin of 6.3%. Our earnings per share was $7.21, and our EBITDA was $259 million. As part of our multi-year capital allocation plan, we repurchased 240,000 shares for $50 million in the first quarter. We continue to be opportunistic with our capital deployment, prioritizing the most strategic and accretive use of capital. We continuously evaluate the performance of our portfolio, making acquisitions or divestitures where it makes the most sense. We divested a Lexus store in Delaware during the first quarter per our OEM framework agreement. We will monitor opportunities to make other changes to the portfolio throughout the year. Looking ahead, there are factors like our brand mix that may influence our volumes on new and lead to near-term headwinds on performance. We are still in a tight market when it comes to sourcing quality used vehicles efficiently, and we will continue to prioritize profitable growth. I'd also like to highlight that we published our corporate responsibility report this month. We invite you to read it if you haven't already. Now, before I hand the call over to Dan, I want to say thank you again to our team members as together we strive to be the most gas-centric automotive retailer. Now, Dan will discuss our operational performance.

Thank you, David, and good morning, everyone. I'll join David in also thanking our team members, driving our strong results and delivering a best-in-class experience. Now, moving to same-store performance, which includes dealerships and TCA, unless stated otherwise, starting with new vehicles. Overall, we were pleased with our new vehicle PBR performance given current market conditions. Same-store revenue decreased 1%, and new unit volume was flat compared to the prior year. New average gross profit per vehicle was $3,988, and a new vehicle gross margin was 7.8%. Our same-store new day supply was 53 days at the end of March, compared to 43 days at the end of the fourth quarter, a trend consistent with industry-wide growth in inventory. We continue to manage our appropriate day supply and volume in new cars, given our brand mix. Turning to used vehicles, used retail revenue decreased 4% for the quarter as we expected due to lower cost of sale. Unit volume, while down less than 2% year-over-year, increased on a sequential basis, as David mentioned earlier. Used retail gross profit per vehicle was $1,647, roughly in line with the fourth quarter of 2023. We appreciate the progress of the team's performance on volume and gross profit in such a challenging environment. Our same-store used DSI was 25 days supply. We still view 2024 as a challenging year to acquire pre-owned vehicles until supply returns. Shifting to F&I, we delivered an F&I PBR of $2,218 in the quarter, holding resilient amidst continued pressure on consumer payments. On a consolidated all-store basis, our PBR was $2,259. The deferred revenue headwind of TCA contributed $67 of the $85 decrease in consolidated F&I PBR year-over-year. We anticipate this headwind to be impactful throughout 2024. In the first quarter, our total front-end yield per vehicle was $5,080. Moving to parts and service, our parts and service gross profit grew 6%, and we earned a gross profit margin of 56.9%, an expansion of 213 basis points versus the prior year first quarter, despite weather issues in several of our markets. The last several quarters, as we mentioned, were impacted by integration efforts, and it is encouraging to see our fixed operation business returning to growth. The hard work of our teammates and leaders is paying off, and we expect even better performance in the quarters ahead. Finally, on a same-store basis, we retailed 10,832 units through ClickLane, or about 16% of overall units. New vehicles represented 5,186 of these units, a 14% increase in new volume over the first quarter last year, and those vehicles are making up a larger portion of ClickLane transactions versus the first quarter of 2023. Consistent with recent trends, over 90% of customers are new customers to Asbury, and we remain committed to this key, differentiating omni-channel tool. I will now hand the call over to Michael to discuss our financial performance.

Thank you, Dan. To our investors, analysts, team members, and other participants on our 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, net income was $147.1 million, and EPS was $7.21 for the quarter. There were no non-GAAP adjustments to net income for the first quarter of 2024 or 2023. SG&A's percentage of gross profit came in at 62.5% versus 61% in the fourth quarter of 2023, driven by higher service loaner costs, elevated advertising expenses, and several Q1-specific costs, namely share-based compensation. For the year, we expect SG&A's percentage of gross profit to be in the low 60s. The tax rate for the quarter was 24.9%, and we estimate our tax rate for the full year 2024 to be approximately 25%. TCA generated $19.5 million of pre-tax income in the first quarter, and we anticipate full year results to be between $30 and $45 million on a pre-tax basis. We plan to offer TCA across our remaining stores in Florida and Coons later this year. For the quarter, we generated $209 million of adjusted operating cash flow, a portion of which was used for our previously mentioned share repurchase activity. Excluding real estate purchases, we spent $26 million on capital expenditures in the first quarter, and we anticipate full year spend to be $200 to $225 million, with free cash flows of $183 million for the quarter. We ended the quarter with $712 million of liquidity comprised of floor plan offset accounts, availability on both our use line and revolving credit facility, and cash, excluding cash at total per item. While we will continue to use our floor plan offset account to manage interest expense, we expect floor plan costs to remain relatively flat. Through the years, we've balanced the impact of rising inventory levels with the opportunity cost of deploying the cash to more creative activities. Our pro forma adjusted net leverage was 2.6 times at the end of March, and we will continue to be opportunistic in our capital allocation approach across share buybacks, M&A, and organic investment opportunities. Finally, I would like to join David and Dan in thanking our valued team members and leaders for a strong quarter and start to the year. Thank you. This concludes our prepared remarks. We will now turn the call over to the operator and take your questions.

Thank you. Ladies and gentlemen, our first question comes from John Murphy with Bank of America. Please proceed.

Good morning, everybody. Just one quick question on the store that was sold per framework agreement. I'm just curious if you can sort of discuss what that brand is or was, and how the framework agreements are potentially morphing or easing as you guys are on the acquisition pace and others are on the acquisition pace, or maybe not changing at all?

Sure, John. This is David. I'll take my best shot at it. The store we divested was a Lexus store. We are limited in every framework agreement we have with every manufacturer is different. We're limited to only own eight Lexus stores in the US, and that's consistent with the brand, whether you're public or private. Whenever we buy a group that has a Lexus store in it, if we're capped at eight and we have eight, it's always going to include a divestiture at some point in time. There are extreme differences within framework agreements between all manufacturers. So there's no easy way of stating it, but I'll tell you our framework agreements haven't changed in a while. Some have been updated in the last couple of years. Based on our geographic locations of our stores and our brand mix, we're not governed at this point to grow other than with the specifically the number of Lexus stores we have.

Got it. Okay, that's very helpful. And then the used environment, there seems like it's challenging from a supply standpoint. Given that we've sold so few new vehicles in the past three or four years, when is your expectation of that supply actually improving? It seems like that's more like potentially even a '26 event as opposed to a '25. And what can you do in the interim to deal with that shortage?

Generally, we've been focused on gross profit over volume. As we said in the fourth quarter, we're going to pivot a little bit. Historically, our company purchases about 10% outside of our structure, cars to bring in to sell. Last quarter, it was about 20%, which obviously put pressure on our PBR. To your point, really since COVID began up through three years forward, there's really a depletion of multiple millions of vehicles that didn't hit the market. So we're in that pool now, where this year and I believe next year too, is going to be a more challenging year. I think this is the toughest year. I think you get some relief next year with some fleet business from rental car companies and that stuff. But I would think normalization would be early '26, potentially end of '25. And then just one last one on parts and service. I mean, you have 6% is great. It was actually up against a somewhat tough comp. As we think about the rest of the year, do the comps get a bit easier?

It sounds like you're making progress in acquired stores that are going into the base. Could we think about a 5% plus parts and service or sort of high single-digit parts and service same-store sales comp maybe for the remainder of the year and potentially even beyond that?

Good morning, John. This is Dan. I'll start and then David can add on to whatever I missed. Yes, we're very happy with the progress that the team members are making and have shown over the past few quarters as we integrated the new acquisition. To answer your question directly, yes, I think that that's a realistic target as we continue through 2024, meaning the 5% growth.

No, John, I really don't have anything to add. I would tell you we're pleased with the margin increase. Like everyone else, in the first quarter, we suffered some shutdowns or some days in the mountain states because of heavy weather. Between Colorado and Utah and Idaho, we have almost 40 stores, I think 38 stores to be specific. We had multiple days that were shut down, and you just can't make up for those fixed days. But as Dan stated, the progress is certainly good. It's continuing into this quarter. And to your point, the second half of the year is where our comps get easier. So we should certainly see a minimum of 5% or greater.

Our next question comes from Rajat Gupta with JP Morgan. Please proceed.

Great, thanks for taking the question. Just had a question on SG&A first. It looks like there was some deleveraging here in the quarter because of some of the weak domestic brand unit sales and maybe still a little slower growth in the service business. But I'm curious, as the service business now returns to mid-single-digit type growth, and whatever you're embedding in terms of new GPU expectations for the course of the year, how should we think about that SG&A to gross ratio moving forward from these levels? And I have a quick follow-up.

Yes, this is Michael. On the SG&A side, we'll have continued decline in new vehicle gross profit, which will put pressure on the SG&A. But to your point, the return of fixed ops to good growth, and then a few items that are unique to the first quarter that we're going to be able to cut some cost out later in the year. We think we can hold these kind of low 60s levels for SG&A percentage of gross going forward.

And Rajat, I'll just add to that. While the domestic volume was not great, I still think PBR, like $3,900 is extremely healthy. Certainly, you can maintain SG&A costs in that market. Brands are cyclical as far as how they go. We have a heavy mix of Stellantis. It was a tough quarter for Stellantis, as everybody knows, and certainly was for us as well. But we know over time that'll change.

And what's the kind of GPU decline? Like, you're assuming the same pace for the rest of the year? Like, just on the first quarter?

Yes, our assumption is $300 a quarter. But you could have a plus or minus in any given quarter, but kind of that natural trend of $300 over the next few quarters.

Got it, got it. And just to follow up on capital allocation, you mentioned earlier on using the floor plan offset as a lever to manage those floor plan expenses. But you did buy back some stock here in the first quarter. Like, how should we think about that decision between buyback versus M&A in the current backdrop and what you're seeing in your pipeline for deals today?

I would, this is Dave Rajat. I would say our opinion is, we're proud of our business and our operating margins. We think that our multiple is low. And generally when you look at that, it seems like it's a better return to potentially look at stock buybacks. In the current market that we are in, there's certainly a lot of stores on the market from an M&A standpoint. But I think we really want to be extremely selective. It's never been about the growth for us and how large we get. It's really about returns for our shareholders and how well we run our business. Every month, we're constantly evaluating what's the best use of capital. I would say from an acquisition standpoint, it would have to be something that was accretive for us and really interesting for us at this stage. On the floor plan expense side, the increase in inventory over the rest of the year, and then some of the cash will be able to put to the offset account. We think that floor plan expense can use through the rest of the year. Again, increased inventory, and then a little bit of cash going into the offset account.

And our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed.

Hey, good morning, guys. I want to stay on the use side. You have challenges on the used vehicle supply. That's fairly obvious across the industry. Your GPU is down sequentially, despite favorable industry seasonality, your peers being up, et cetera. So I guess, curious to dig a little bit deeper on your takeaways, kind of in early metrics, positive and negative from leaning more into volume relative to your internal expectations when you made that strategy pivot?

Yes, and I mentioned it earlier. I would say percentage-wise, we doubled the number of cars we purchased. We make significantly less gross profit on a vehicle that we have to purchase because we're competing to buy it within the market. When we trade in a vehicle, we're still north of $2,000 a vehicle, and we think that's very healthy. Some of the benefits, I'm sure our peers have discussed it in the past, is your parts and service increased business from reconditioning costs and the F&I income that you pick up as well. But there still has to be a healthy balance, and you really have to make sure you maintain what we would consider a healthy front-end margin on pre-owned. Dan, I don't know if there's anything you want to add.

I'll just add a little bit more color. Yes, we saw sequentially dropping, I think, from 1666 to 1647, from a PBR standpoint, back to your point. But then from a used car standpoint, I believe we increased it 9% sequentially, quarter over quarter. That just goes to validate the strategy adjustment that we made, that we announced at the end of Q4 in 2023, that we were going to get more aggressive, go after the volume because we know back to what David stated, the benefits that it brings to our internal gross profit in parts and service, F&I, and then obviously putting another unit in operation out there that we can service down the road.

Helpful. Anything else from a regional standpoint? I know you called out some weather impact, but anything in the southeast, southwest Texas to call on?

No, I would say for us, it was fairly stable. We saw a little bit of hit for us in full-size trucks from a year-over-year perspective. But the imports performed extremely well. We have a very low day supply of them, probably could have done better there as well. We had the tough headwind for Stellantis, but the other two domestic brands held up pretty well in the quarter. And luxury is very stable for us. So, all in all, based on the market and what went on in the first quarter, we're pleased with what the team did from a performance standpoint.

Our next question comes from Brett Jordan with Jeffries. Please proceed.

Hey, good morning, guys. Morning. New GPUs, I think you talked about 300 a quarter for the next few quarters. Is it reasonable to think then that 3000-ish is what you expect to be the new base level for new GPUs?

Yes, Brett, this is David. It's really tough to navigate. Will it be rate drops throughout the year? How aggressive do the incentives get? It's the old adage of supply and demand. Right now the demand is high on imports. The day supply is low. So the margins are holding up really well. In the near term, we don't see that dramatically changing. So we think that holds up pretty well. Even back in 2019 and before, our domestic gross profits were always pretty healthy. Now the amount of domestic stores we've added out in the mountain states, we anticipate that will do well, certainly above what 2019 did. Luxury is going to be mixed as well, but that's a pretty resilient market. Our margins are still really high. There may be some fall off there, but we think wherever the fall off is, it's significantly above where it was in the past, which gives us a good edge into keeping our SG&A down.

Okay, and then on ClickLane, you've talked in the past about those transactions usually being physically close to the selling dealership. Is that still the case? And I guess, what are you seeing in F&I attachment in those online transactions?

Good morning, Brett. This is Dan. Yes, we're still seeing the average delivery distance in Q1 of 2024 was 49 miles, so pretty consistent to what we have seen in Q4 of 23, that was 51. And then just as a reference point, Q3 of 23 was 40 miles. So pretty consistent with what we're seeing there. From an F&I PBR, we are looking at for Q1 of 24, we finished around 2,190 a car, which is slightly below about 1.3% below sequentially and about 3.7% behind last year. So, we are happy with the numbers. Like I stated in my script earlier today, we're committed to this omni-channel, and we strongly believe that it is going to continue to enhance the guest experience.

Right, and I could slip one more in. I guess, what are you seeing on OE lease promotions? Are they ramping up lease focus in the lines where inventory is building or is that pretty stable?

We are starting to see, yes, increasing slightly. Obviously, it depends by OEM as well. But to answer your question directly, yes, we're starting to see a slight increase.

And our next question comes from the line of David Whiston with Morningstar. Please proceed.

Thanks, good morning. First, a two-part question on consumers' willingness to spend. Unit volume for luxury was down just a little bit, whereas, as you noted, import is doing quite well still on the volume side. Is there any hesitation with luxury customers on spending money in any way? And then also across all of your segments of volume or luxury, is there any hesitation on consumers in terms of not getting a vehicle option they would have a few years ago or not doing TCA or not getting an F&I product attachment they would have earlier?

David, it's a great question. I would tell you with any new hot luxury vehicle that comes out, regardless of the price point, they sell right away; they're pre-sold. So I think it's more of a timing issue. From our perspective, we viewed the first quarter as being stable, and we actually thought it was pretty good. There's still some transitioning within the luxury brands with model mix and timing, and you never have enough of the SUVs and you might have a few extra EVs, and that's balancing out as well. But I think it's pretty healthy there, and that luxury customer is pretty resilient. When you get to the import side, and even domestic, and Dan could add more color to this than I can, but you're reaching a price point with those interest rates where they are. It's affecting the F&I numbers a little bit, it's affecting the cost of sale. You've seen it come down. I think our cost of sale on used was back in '22 at a high of like 32.5%. So it's down dramatically and continuing to come down, but on the new side, it's only coming down slightly because the build probably hasn't caught up yet. There is a little bit of pressure, but still again on the import side, if there's a new product coming out, like anything else, the demand is higher than supply, and the margins are holding up well. So the market we feel has been pretty resilient. We don't think that we can sustain another rate increase or two. I think that'd be a little painful for us. But so far, I would say generally speaking, the customer base has been fairly resilient. Dan, does anyone have anything to add?

I agree, I have nothing to add.

Okay, thank you. With respect to the balance sheet and capital allocation, there's buybacks and M&A, but there's also possibly debt reduction with earnings normalizing. Do you feel the need to accelerate debt reduction at some point this year?

No, I mean, our stated range is kind of two and a half to three. If we don't find anything with good returns and we think debt buyout would be good, but there's a share buybacks and acquisitions that are good allocations. We don't need to get it down kind of into the below two, five, but we'd like to be in this mid-range with the EBITDA coming down or the gross profit coming down the new vehicle side. With the stacks we have out there with the bonds, you can only chip away at so much of it. The big stack that's in '26 is really mortgages, considering the rates in the market, significantly lower than what the market rates are. So it's really tough to justify taking that capital and paying off 3% debt.

Okay, and you mentioned you probably can't handle rates going up much, but if we were to actually get even one rate cut, is that going to matter in your opinion this year? Do we need multiple rate cuts for the consumer to feel better?

Yes, this is just an opinion, obviously no way of knowing, but I don't think one rate cut is going to, you know, it's a nice spark, and it'll probably do well for the market for the day or so. But from our standpoint, it probably needs two or three rate cuts for us to really what I would call a tailwind for us.

Thank you. Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the call back to David Hult for closing remarks.

Thank you, operator. This concludes our call today. We appreciate everyone's participation, and we're looking forward to speaking with all of you at the end of the second quarter. Have a great day.

This concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.