Greetings, and welcome to the Asbury Automotive Group Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeves, Vice President of Finance and Investor Relations. Thank you, sir. You may begin.

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 second quarter 2024 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 up the call for questions, and we'll 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 second 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 second quarter earnings call. I want to start by thanking our team members and our OEM and banking partners for their efforts to ensure we continue to deliver the highest possible guest experience through the challenges associated with the CDK outage. Their resourcefulness and dedication helped to ensure all store locations continue to sell and service vehicles, although certain levels of speed and efficiency were certainly impacted. Beginning on June 19, the outage affected all Asbury stores with the exception of our Koons stores, which utilized a different dealer management system. We received initial access to the DMS on July 1. However, all functions of CDK were not fully restored for us until July 8 with other plug-ins and bolt-on applications coming back online in the weeks thereafter. Once CDK services were restored, team members across the country worked tirelessly to recreate transactional activity that occurred during the outage back into the DMS. Due to the length of the disruption, the recovery process took approximately 12 days. To give you a sense of scale, just within our parts and service business almost 100,000 repair orders were recreated into CDK. For several years, we've talked about our disciplined investments in technology designed to create a guest experience that is both more transparent and quicker. We designed the showroom map and our ClickLane tool to facilitate in-person transactions that may have started online. During the outage, this application served as the primary way for us to facilitate the sale of vehicles since ClickLane functionality was not impacted by CDK. Tools such as these, combined with the dedication of our team members and partners, helped to mitigate the impact of our financial performance from the CDK incident. For the quarter, we estimate this impact to be between $0.95 and $1.15 in diluted earnings per share from a combination of fewer new and used vehicle sales, which also impacted our F&I business, a reduction in parts and service volumes and certain one-time expenses related to our recovery efforts. The likelihood of recovering some portion of this through insurance or other recoveries is difficult to predict and is therefore not included in the previously mentioned estimate. Additionally, any recoveries we do receive may not occur for several quarters or longer. I'd now like to turn our focus to the performance of our business, excluding the impact of the outage. Through the hard work of our team members, we delivered record second quarter total revenue and record second quarter parts and service revenue with $581 million and gross profit of $340 million. Our used vehicles were pacing towards 1% growth in total units on a same-store basis through the first two months of the quarter. However, we ended the quarter down 2% due to the CDK outage. In parts and service, beyond the record quarter for total gross profit dollars, we saw strong performance in same-store results, pacing at 8% growth going into June before finishing with 4% growth due to the CDK outage. I am pleased with the performance and momentum of this business. Now for our consolidated results for the quarter. We generated $4.2 billion in revenue at a gross profit margin of 17.2%. Our same-store adjusted SG&A as a percentage of gross profit was 64.4% and 64.8% on an adjusted all-store basis. We delivered an adjusted operating margin of 5.6%. Our adjusted earnings per share was $6.40 and our adjusted EBITDA was $236 million. During the quarter, we repurchased 193,000 shares for $43 million and another 160,000 shares for $36 million so far in the third quarter. This brings our year-to-date total through August 1 to 592,000 shares for $130 million. Our approach to capital allocation is a continuous process and we're constantly evaluating the optimal balance between acquisitions, organic investments, and share repurchases. We are committed to prioritizing the most strategic and accretive use of capital, and we'll continue to be opportunistic in pursuing attractive avenues for growth. Effective capital allocation also extends to managing the makeup of our existing portfolio. In the second quarter, we divested two Nissan stores and we'll continue to monitor opportunities to make other changes throughout the year. Now, before I hand the call over to Dan, I want to say thank you again to our team members for their perseverance and sacrifice through the late nights and long weekends. I was proud of how you came together to solve a common challenge, all while continuing to be the most gas-centric automotive retailer. Now, Dan will discuss our operational performance.

Thank you, David, and good morning, everyone. First, I'd like to extend my gratitude for our team members navigating this unprecedented situation and by going above and beyond to serve our guests through this time. Your perseverance, agility, and patience are greatly appreciated. During the CDK outage, we utilized our omni-channel platform ClickLane to serve as a transactional software tool, allowing us to sell vehicles in the affected stores. We retail more than 15,200 sales through ClickLane in the quarter with over 8,000 occurring in June. ClickLane is often thought of as an online-only tool. However, we use the showroom app functionality within ClickLane to facilitate in-store sales. Now, moving to same-store performance, which includes dealerships and TCA unless stated otherwise, and to help quantify the impact of the disruption on our pace, I will provide some metrics of our April and May performance. Starting with new vehicles. In the period of April and May, we were flat on a unit growth. Same-store revenue and unit volume for the full quarter decreased 6% with varying results among the brands in our portfolio. New average gross profit per vehicle was $3,649, roughly in line with our expectations for the path of new gross profit per unit this year. New vehicle gross margin was 7.1%. Our same-store new day supply was 74 days at the end of June, compared to 53 days at the end of May due to the CDK outage. Turning to used vehicles. Second quarter unit volume decreased 2% versus last year, a percentage in line with the first quarter. However, going into June, we were up 1% in volume. Our same-store used day supply was 39 days at the end of the quarter, slightly higher than our historical average driven by the CDK incident. For reference, at the end of May, our day supply was 31 days for same-store use. Shifting to F&I, we earned an F&I PBR of $2,124 in the quarter. As expected, the deferred revenue headwind of TCA is starting to be more pronounced. It contributed $169 of the $255 decrease in the F&I PBR number year-over-year, and we continue to expect this headwind to be impactful throughout 2024. In the first quarter, our total front-end yield per vehicle was $4,807. Moving to parts and service. As David mentioned earlier, we were very happy with the record performance of our parts and service business. Our parts and service gross profit going into June was pacing at 8% year-over-year before ending the quarter at 4%. For the quarter, we earned a gross profit margin of 58.7%, an expansion of 314 basis points versus the prior year quarter, despite weather issues in several of our markets and the impact from the CDK event. I'd like to give some color on our performance in some of the revenue buckets and how the CDK outage impacted our business. Within our customer pay repair order revenue, we were pacing up 10% at the end of May, ending the quarter up 4%. In warranty, we were up 17% before ending the quarter up 7% in revenue. The CDK outage was particularly significant for our wholesale parts and services business. Wholesale parts was flat through May before ending down 7%. The month of June had an $8 million decrease year-over-year or 21%. Collision was down 6% in the first two months, and we finished the quarter down 11%. Despite the challenges in June, we saw great progress among our team members in stores in the West, which as a cohort outperformed the portfolio of our Eastern stores on a same-store basis. I will now hand the call over to Michael to discuss our financial performance.

Thank you, Dan. First off, I would like to echo what Dan and David said about our team members going above and beyond to keep the business operating during a challenging time, truly inspirational work by all involved. Our financial results were clearly impacted by the CDK outage. But broadly speaking, we were pleased with our 2Q results through mid-June and expect performance to normalize now that we are through our recovery efforts. I will now walk us through a more detailed financial overview of the quarter. Overall, adjusted net income was $236 million and adjusted EPS was $6.40 for the quarter. Adjusted net income for the second quarter of 2024 excludes net of tax, $101.3 million of non-cash asset impairments, gain on divestitures of $2.7 million, and losses related to hail damage of $2.3 million. Adjusted net income for the second quarter of 2023 excluded net of tax gain on divestiture of $10.2 million, gain on legal settlement of $1.4 million, and losses related to hail damage of $3.2 million. Adjusted SG&A as a percentage of gross profit came in at 64.8%, driven by higher compensation, third-party vendor spend, elevated advertising expenses, and other miscellaneous costs. We've always been disciplined with cost control, and we will look for opportunities to bring that down through targeted expense reductions that do not come at the expense of growth. We now expect SG&A as a percentage of gross profit to be in the mid-60s for the remainder of the year. The adjusted tax rate for the quarter was 25.3%, and we still estimate our tax rate for the full year 2024 to be approximately 25%. TCA generated $21.6 million of pre-tax income in the second quarter and $41 million year-to-date. We anticipate full year results to be between $65 million and $80 million on a pre-tax basis. We have delayed the rollout TCA to Florida in Koons, but plan to offer TCA across these markets later this year. We generated $193 million of adjusted operating cash flow in the second quarter and $402 million through the end of June. This is slightly higher than our typical cash flow in the second quarter due to timing of payments impacted by CDK. For the quarter, we repurchased $43 million in shares and $103 million year-to-date through August 1. Excluding real estate purchases, we spent $65 million from capital expenditures year-to-date, and we anticipate full year spend to be approximately $200 million to $250 million. Free cash flow was $154 million for the quarter and $337 million year-to-date. We ended the quarter with $806 million of liquidity, comprised of floor plan offset accounts, availability on both our used and revolving credit facility and cash, excluding cash of total care audit. Our pro forma adjusted net leverage was 2.7x at the end of June, reflecting our share repurchase activity, which we view as a compelling use of capital during a period of time where we're focused on integrating our recent acquisitions. We are committed to creating opportunities in our capital allocation approach across share buybacks, M&A, and organic investment opportunities. Finally, I would like to again thank our team members for their focus on the guest experience and our growth strategy. Thank you. This concludes our prepared remarks. We will now turn the call over to the operator to take your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from John Murphy with Bank of America. Please go ahead with your questions.

Hi, good morning, guys. Maybe just a first simple question on the CDK situation. David, as you think about sort of the catch-up here as the system has normalized through the course of July, how much catch-up do you think there will be as we think of sort of the different verticals of new used and parts and service?

Hey John, it's David. Over half our competitors are non-CDK and they were functioning as normal. And you could see it in the month-end performance when you could see the local market activity; you can almost pick who was on CDK and who had a different DMS. So I think people tend to go out and make their purchases and don't tend to wait while some will wait depending upon the product. Parts and services, you miss those opportunities, sell the hours, you don't get those hours back. So I don't think there's going to be a lot coming into the quarter. Having said that, probably the second half of July is when we go back to what I would call normal operations. And we've seen a very steady increase in our parts and service gross profit and also transactional revenue grow nicely in July compared to July of the prior year.

Okay. That's helpful. And then just a second question on parts and service. I mean, it's running really hot, previous CDK disruption. I mean, as you think about the forward second half of the year and going into 2025, sort of that mid to high-single-digit same-store sales number, a number that you think is reasonably achievable. I mean you got dented pretty hard here in June.

Yes, absolutely. We will certainly beat that and probably closer to the high-single-digit numbers.

Okay. And then just lastly, I mean, ClickLane sounded like it was a pretty good Band-Aid sort of redundancy system. But is there any thought about what you're going to do with sort of the reliance on CDK going forward? Could it be an incremental investment in ClickLane to make that actually even more robust than it already is? Or I mean, what is kind of the longer-term thought process here?

Yes. It's a great question, John, and that's at least something catastrophic like this happens other than come up with quick solutions to fix it you think about going forward. Every dealership needs a dealer management system, and they're all capable as we've seen with other industries with cyber-attacks that are coming. ClickLane's intention was always built to be a stand-alone transactional tool online, and we think it served itself really well. It can print all the documents, even the documents where some states require wet signatures, but it's not an accounting or DMS system. So we still need an outlet to plug into, it's functioned on its own. It did all the transactions. It handled the leasing, it handled the financing, it handled the signatures, but it's still all those deals had to be recreated back into the DMS system. So unfortunately, our industry, and I don't see a workaround, we need a dealer management system or an accounting system, if you will, to aggregate the data.

Okay. All right. Thank you very much, guys.

Thank you.

Our next question comes from Rajat Gupta with J.P. Morgan. Please proceed with your question.

Great. Thanks for taking the question. I had just a follow-up on John's question earlier on parts and services. The high-single-digit expectation going forward, was that like a revenue number or a gross profit number? And can you give us a sense of what drove the strong gross margin expansion in the second quarter in parts and services as well? Was that just mix? Or was there just more pricing drop-through? Just curious if you could unpack that a little bit. And I have a quick follow-up.

Sure. The high-single-digits, thank you for clarifying that. We tend to focus on gross profit more than revenue because that's what ultimately pays the bill. So that's that high-single-digit piece of it. As far as the margin increase, it's a combination of a few things. We're large into wholesale parts revenue and gross profit, which brings down your margins. Missing $8 million in wholesale parts sales in the quarter was a massive impact and would have put us close to total revenue flat year-over-year on a same-store basis. So that was a little bit of a tailwind picking up the margin with the lack of wholesale sales. In Collision, we have so many Collision outlets in the reverse. A lot of the transactional work didn't happen there because they were waiting on parts as well. So those two were certainly part of the indication as to why the gross margin went up, but it's also on our end, the last 90 days, we've been very focused on raising our margin within our service business alone. We saw a nice incremental growth across all our brands and all our markets and we're doing everything we can to make sure that sticks going forward.

Got it. Got it. That's helpful clarification. And then the mid-60s SG&A to gross expectations for the remainder of the year, what kind of GPU assumptions on new and used side underlying that forecast? Could you give us some color there? Thank you.

Yes. For the GPUs, we anticipate that new vehicles will continue to decrease for the rest of the year along the current trend we are following. Meanwhile, we expect used vehicles to remain stable in the existing market environment. We do not foresee significant changes in the used vehicle market that would increase those PVRs, at least for the remainder of this year. Therefore, both current GPUs are slightly lower for new vehicles in that forecast.

Got it. Got it. That’s helpful clarification. Thank you. I’ll get back in queue.

Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead with your question.

Good morning, everyone. Referring to Slide 13, which illustrates the impact of the CDK outage, I'm curious about ClickLane's role as a transactional software tool for in-store sales. Could you explain the challenges faced by end consumers and why there was such a significant loss in sales, given that there was a temporary software solution available for transactions?

Ryan, I'll begin, and then Dan can add in. In my view, many people tend to categorize the market into luxury, domestic, and import segments, but it's essential to delve deeper into each brand's situation. The fluctuations in our sales performance are more influenced by our brand mix. We have several brands that have increased their sales compared to the previous year. Stellantis accounts for 155 of our dealerships, nearly 15% of our total locations, and while all brands experience cycles, it is currently facing challenges. The decline in our year-over-year domestic unit sales is entirely linked to Stellantis. Additionally, we saw significant effects from Nissan on the import side. Despite the CDK outage, our struggles stem from a heavy reliance on a couple of brands in our mix. It's important to remember that all brands go through cycles, and while this poses a challenge now, we anticipate stronger performance in the future when they rebound. I believe the transactional tool functioned effectively, although it faced limitations due to API connections with some original equipment manufacturer financial divisions. Some of these manufacturers haven't implemented software as advanced as ours, hindering API connectivity, particularly with certain European brands and their leasing options, which slowed our efforts. Overall, I feel we performed well; the volume shortfall is more related to our brand mix rather than the outage. Dan, do you have a different perspective?

Yes, I completely agree with David. I want to add, Ryan, that ClickLane as a transactional tool was very effective during the outage. However, we should remember that most of our stores operate under Elead, which was also impacted by the CDK outage. The consequence of this was that when Elead, our CRM, went down, we lost visibility into any leads or deals we were working on before the outage. We were essentially in the dark. While ClickLane helped us continue operations, we lost significant momentum in following up with our team members and guests prior to the outage, which contributed to our performance decline.

And Ryan, just to follow-up on that. Elead is a CRM system that's owned by CDK that we utilize. But I will say our development team internally quickly integrated with our third-parties to create basically within our sandbox, the ability for us to capture leads and respond to them. So a little bit of delay, but we were able to get back up on top.

Great. And then just for my follow-up. You guys are on path to trial four stores on Tekion. Curious if this changes kind of how you think about DMS technology server-based versus cloud-based, et cetera, going forward? And then anything on that timeline as well? And if you would like to comment on that legal battle between unlocking some of that data that's in the headlines. I would love to hear that as well.

Yes. Thanks, Ryan. I don't want to comment on ongoing legal issues. I would say we're excited about Tekion; it is 100% cloud-based. We will be more all eggs in one basket with them, if you will, because we won't have nearly as many bolt-on applications. But we view that as a positive deal from a transparency standpoint with our guests and our team members being able to service our customers. We intend at this point to launch the four stores and our shared service center in October and hopefully continue to rollout from there on starting in early 2025. We're really comfortable, and we've had great conversations with Tekion on their cybersecurity and their SOC 1 and SOC 2 and what they do. But again, as we've seen with every industry in this day and age, unfortunately, everyone is subject to some kind of cyber-attack.

Great. Thanks, guys. Good luck.

Thank you.

It appears that there are no further questions at this time. I would now like to turn the floor back over to David Hult for closing comments.

Thank you, Operator. We appreciate everyone's participation today on the call, and we look forward to speaking with all of you at the end of the third quarter. Have a great day and a wonderful weekend. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.