Asbury Automotive Group Inc

Good day and welcome to the Asbury Automotive Group Q2 2019 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Matt Petone. Please go ahead, sir.

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's second quarter 2019 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's second quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with us today are David Holt, 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 2018, 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 measure on our website. It is my pleasure to hand the call over to our CEO, David Holt. David? Thanks, Matt.

Good morning, everyone. Welcome to our second quarter 2019 earnings call. We achieved solid results in the second quarter with record-adjusted EPS of $2.38, a 14% increase over last year. We continue to experience new vehicle margin pressure. However, we were able to grow our total front end yield by over $50 per vehicle, grow parts and service revenue by 10 percent, and decrease our SG&A as a percentage of gross profit 60 basis points to 68 percent. We are making good progress executing on our vision to be the most guest-centric company in the automotive industry. Our omnichannel approach is multidimensional and encompasses all aspects of the business. As a reminder, in late 2015, we began changing our marketing approach, starting with the creation of an in-house digital marketing team. This team has transformed our social media, online, and mobile marketing, which has improved the efficiency and effectiveness of our marketing spend. In 2016, we revised and relaunched our online service appointment tool to provide a more convenient option for our customers to schedule service. In the first quarter of 2017, we launched our online sales tool called Push Start, which enables our customers to complete a transaction online and take delivery at home. This year, we added an online loan marketplace. This functionality allows customers to select their preferred financing alternative from specifically tailored offers from multiple lenders. This is an industry first. In late 2017, we launched our Guest Experience Center, which consists of brand certified digital sales specialists that are able to effectively manage online and telephone customer interactions. Last year, we launched our online collision estimator app, giving customers a user-friendly way to easily get collision estimates from their mobile device. Earlier this year, we dedicated a store to become our pilot dealership of the future, where we are testing alternative technologies and processes to optimize the model for the future. Some of the innovations that have been implemented include A tablet-based buying process enabling guests to purchase a car in a fraction of the time that would typically take at a traditional car dealership. Self-service kiosks in the service lane that allow our customers to experience improved speed, convenience, and transparency during the check-in process. We also recently added a service tracker software. that allows our customers to track online the progress of their car through the entire process. We expect this software will enhance both transparency and the guest experience, while at the same time reducing the number of inbound status calls. This holistic transformation of our business involves changes to almost every aspect of our business, including the culture and environment in our stores. While we are focused on being at the forefront of innovation in our industry, we believe that success is driven by a well-designed plan and thoughtful execution, rather than simply speed of implementation. We are confident that our investments in creating an unrivaled guest-centric experience will continue to yield attractive returns. I will now hand the call over to Sean to discuss our financial performance. Sean?

Thank you David and good morning everyone. The second quarter marked another record performance with adjusted earnings per share of $2.38. Overall, compared to the prior year second quarter, our revenue increased by 5%, gross profit increased by 6%, gross margin of 16.4% was 30 basis points higher than last year. SG&A as a percentage of gross profit improved by 60 basis points to 68.0%. Adjusted operating margin increased 10 basis points to 4.7%. Adjusted income from operations increased by 8%. And adjusted earnings per share increased by 14%. Net income for the second quarter of 2019 was adjusted for an $11.7 million pre-tax gain, or 45 cents per share, on divestiture of our Nissan store in Houston and a $300,000 pre-tax gain, or one cent per share, on sale of vacant land. As a reminder, in the second quarter of 2018, we adjusted for an approximate $700,000 pre-tax gain from legal settlements, or three cents per share. Our effective tax rate was 25.3% for the second quarter of 2019 compared to 25.8% in the second quarter of 2018. Looking at expenses, SG&A as a percentage of gross profit for the quarter was 68.0%, an improvement of 60 basis points over last year. When comparing this quarter to the prior year's second quarter, it is worth noting that last year we experienced losses from two hailstorms. Efficient SG&A management is in our corporate DNA. Note also that many of our investments, including our omnichannel development costs and our investments in benefits for our frontline associates, flow through the SG&A line on our income statement. SG&A expenses in the second quarter reflect a favorable business mix, solid returns from our omnichannel investments, and certain investment timing adjustments as we fine-tune our ideas and test alternatives with the goal of optimizing the return on investment. While we expect SG&A as a percentage of gross profit to be higher in the second half of the year than the first half, given the results for the first half of the year, we now expect our annual SG&A as a percentage of gross profit to be between 68 and 69%. With respect to capital deployed, during the quarter, we spent $12 million on capital expenditures and $4 million repurchasing our common stock. Our remaining share repurchase authorization stands at $70 million. We continue to optimize our store portfolio. During the quarter, we divested our Nessun store in Houston. This store generated approximately $90 million in annual revenue. In the third quarter, we expect to close on two acquisitions which we anticipate will generate approximately $175 million in combined annual revenue. One of these stores is in the Indianapolis market, our eighth store in this market, and the other is in a new market for us. We plan to enter this new market using the store as an anchor. We plan to follow a similar market rollout strategy to what we have achieved in the Indianapolis market over the last two years. At the end of the quarter, our total leverage ratio stood at 2.8 times and our net leverage ratio at 2.2 times. While this is below our target net leverage range of 2.5 to 3 times, we do believe that the additional financial flexibility and positions us well to opportunistically capitalize on expected attractive future capital deployment opportunities. Our floor plan interest expense increased by $2.5 million over the prior year, driven by increases in both the libel rate and inventory levels. From a liquidity perspective, we ended the quarter with $10 million in cash, $87 million available in floor plan offset accounts, $116 million available on our used vehicle line, $235 million available on our revolving credit lines, and $177 million of undrawn mortgage facility. And I would now like to hand the call over to John to walk us through the operating performance in more detail. Thank you, Sean.

My remarks will pertain to our same-store performance compared to the second quarter of 2018. Looking at new vehicles, while SAR for the quarter was at 17 million units, or 2% below last year, we focused on retail SAR, which was down 3% for the quarter. In this lower retail SAR environment, new unit sales decreased 1.6%, outperforming the market. Overall, our new car margin was 3.9%, down 50 basis points from the prior year period. Although we experienced margin pressure across each brand segment, Our high import brand mix pressured the margin. We were able to offset the margin pressure by strength in F&I. Our total new vehicle inventory was at 895 million, and our day supply was 86, up 14 days from the prior year and above our target range of 70 to 75 days. Turning to used vehicles. Unit sales were flat from the prior year, and our gross profit margin of 7.1% represents a gross profit per vehicle of $1,554, down $13 from last year. Our used vehicle inventory of 162 million is at a 33-day supply, up two days from the prior year, and within our target range of 30 to 35 days. The used vehicle results this quarter fell short of our expectations, and we are focused on operational improvements to profitably grow this part of our business. Turning to F&I. Total F&I gross profit increased by 7%, and gross profit per vehicle increased by $128, or 8%, to $1,659 from the prior year quarter. When we think about gross profit per vehicle, we look at the total front-end yield, which combines new, used, and F&I gross profit. This provides the best view of our true profit per vehicle sold. In the second quarter, our front-end yield per vehicle increased to $3,150 from $3,096 last year. Note that our total front-end yield has remained stable over the past decade. Turning to parts and service, our parts and service revenue increased 8% and gross profit increased 6%. This was achieved with a 5% increase in customer pay and a 19% increase in warranty. Finally, I'd like to share a brief update on our omnichannel initiatives. Our Push Start online sales are up 29% from the prior year and represent approximately 9% of our total retail unit sales. We believe that this is partly attributable to new functionality that we have added to Push Start. This includes the online loan marketplace that David described earlier, the ability of customers to scan driver's license, registration and insurance documents, and the ability to upload trade-in photos for an appraisal. We continue to grow traffic utilizing our digital parts and service scheduling tool, and we reached a record of 128,000 online service appointments this quarter, up 26% from the prior year. In addition to our omnichannel strategy, the other part of the equation is our people. As previously announced, at the beginning of this year, we put together an industry-leading benefits package for our frontline associates, including subsidized medical plans, equity grants, education grants, a four-day work week, extended vacation time, and paid maternity leave. The early indications are that our enhanced benefits packages are having a favorable impact on both recruiting and retention. We are excited about the continued development of our omni-channel driven growth strategy that allows us to leverage our brick and mortar assets to be the most guest-centric automotive retailer in the industry. In conclusion, I would like to take this opportunity to express appreciation to all our teammates in the field and our support center who continue to produce best-in-class performance. We will now turn the call over to the operator and take your questions. Operator?

Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to ask a question. We'll now take a question from Rick Nelson with Stevens.

Thanks. Good morning. Nice quarter, guys. So there's been a lot of progress in the quarter, again, and year to date with SG&A. And I know, Sean, you had guided to bigger second half SG&A. Is that a step up in omnichannel spending, or are you making some different assumptions about gross profit? That might be different in the second half of the year, exactly what the drivers might be.

Yes, good morning, Rick. The driver of the increase in SG&A in the second half of the year will be increased investments in our omnichannel initiatives. This quarter, we did benefit from the favorable business mix, the volume growth. and the return on some of these investments because much of the return manifests itself in reduced costs in other parts of the business. But really the driver of the increased SG&A in the second half is the additional investments in our omnichannel initiatives.

Gotcha. Also, used cars, I want to follow up on that. We've seen now a couple of quarters where you haven't kept up with the peer group. I'm curious what the drivers are there. I think last quarter you pointed to some personnel issues. Is that still problematic?

Hey, Rick, this is John. No, we're past any personnel issues. When you look at the history, the company's performed well in used cars over time. We realize used volume is a great opportunity for us. We're good operators. We have a good team with a lot of bright people, and we're working to grow this part of our business.

Okay. And then if you could provide some color around the two new acquisitions, you know, one to tuck in, one a new market, you know, any input in terms of brands or multiples. Are these... Is Tuck Inn a turnaround situation or is that a well-run?

Rick? I'm sorry. Rick, this is David. As far as Indianapolis goes, we spent a lot of time a few years back researching that market and felt like we would be a good fit and a good steward for that market. And, you know, we wanted to start there with an anchor store, and we did that with the Harris Chevrolet store, and we built that market out nicely. This particular store that we're adding, we anticipate closing in the next week or so, will be an import brand, one that we do very well with and we're excited and kind of look at that we've probably filled out the market there for us as much as we want to. This particular other market is a new market to us. It's also a different brand for us as well. but it also is that anchor-type store, referring back to the hair Chevrolet example. And we've really done a lot of research and homework and feel like this is a good opportunity, another good state for us to grow in. So we're very excited to look forward to that opportunity coming up soon.

And finally, if I could ask you about the GPU pressures, especially in the The imports, I went $632 per unit this quarter. Is there specific brands that are driving that, or is it across the board? I noticed the advertising PBR is also up. I think I calculated 16%. One of your peers has drawn a line in the sand, given up volume. to improve margins? I'm curious. You're taking a different tack here.

Yeah, I'll do the best I can in answering that. Midline import is not all the same. When you look at the size of our company and the number of stores we have, Nissan is a meaningful size brand to us, and we're certainly weighted percentage-wise heavier than any of our peers with that brand. Their model has been to chase volume, and they have aggressive incentives. Our Nissan stores outperformed the markets that they're in, but fell dramatically short of reaching the potential opportunity or missed incentive money. So that had a material impact on our import number. As it specifically relates to the other midline imports, I would say we're similar to our peers. We're looking at that business differently, but their models are different than Nissan's. So it's really looking at each individual brand and assessing what is your best opportunity. And currently, or at least in the last quarter, with that particular brand, If you don't chase that incentive money based upon the market and where that brand is performing within the market, it could be a heck of a lot worse, in my opinion.

Okay, great. Yeah, it makes sense. Thanks a lot, and good luck.

Thank you.

We'll now take a question from John Murphy with Bank of America.

Good morning, guys. I want to ask sort of a slightly bigger picture question here, David. When you look at what's going on with retail sales, there's certainly a 3% decline as you kind of highlighted in the quarter. It was a little bit worse in the first quarter and it was in the same zip code last year in 2018. You grew earnings pretty dramatically last year. We just saw 14% growth in earnings per share. when you had retail sales down 3% in the second quarter of this year. As you look at this, if we continue to see a fade in retail sales, let's say sort of low to maybe mid-single digits for the next few years, if we're really in sort of a real downturn here, do you think you can continue to outstrip this with the other business segments and discipline on SG&A? Because you're doing a great job so far, and I think this is really kind of the proof that the model's playing out. I'm just curious your thoughts on how severe a negative in retail sales would actually bring earnings down, or you can just continue to chug along here and keep earnings even flat up in this kind of environment?

Sure. John, I'll try and answer as best I can, and please circle back if I missed something. I'm sure like all our peers, we model this thing out all the way down to an $8 million SAR, if you will, and we're confident in our model that we can continue to grow the business. We are also working diligently on what we see as the new way of selling automobiles a few years from now. And we look at that as another opportunity to create more potential opportunity in SG&A while offering a higher level of service. We're excited about some of the software, but we look at there's a balance between software and people. We have a lot of great people in the field that are passionate about trying new things and software that's coming along. So I think there's more future opportunity in SG&A, especially as we advance more into the model. You know, as you can see, we're not performing well in pre-owned right now, and we're still performing overall pretty well. So when we figure out pre-owned, and we will, we just see that there's a lot of opportunity for us to continue growing.

Okay, so you're saying all the way down to an 8 million sort of shock SAR, like we saw in 2009, you think you can continue through the other segments to offset that and even grow earnings or maybe just stabilize earnings? That's a big statement.

Yeah, well, I guess a little bit out of context. We model it down that far, but I would tell you, and I think back to the 08 SAR and what went on there, The one big differentiator with a downturn that happened then that hadn't happened in previous cycles, the lending institutions were in a pretty tough spot. So at that moment in time, as bad as SAR was, we actually had a lot of people that wanted cars that couldn't get loans. So when we model these things, assuming that the lending is available, we think we can come pretty far down from a SAR number where we're at and continue to grow our business. as long as the lending is available for loans.

So just maybe to try to put a simple point on this to try to kind of bracket stuff. And if we saw about a 5% decline in retail sales for the next two or three years, a tough cycle, but plausible, you think even in that kind of environment, giving all your efforts, shifting the business structure, focusing on parts and service and use that you still would be able to slowly grow earnings at least? Yes. Okay, that's great. Then maybe a second question on SG&A and all the efforts here. Sort of my rough rule of thumb is that about half percent SG&A is fixed and half is variable. Of the half that's variable, 15% or so is advertising, 85% is sales comp. When you think about that, is that about correct And as you're talking about this new age of retailing and still servicing the customer very well, but shifting SG&A costs to something that is more systematic as opposed to personnel-based, how much opportunity is there maybe on the half that's variable and maybe even the half that is fixed?

Is that correct? Good morning. So firstly, when you think about our SG&A expenses at the moment, We think of the SG&A expenses as being about 20 to 30% fixed and the balance to be variable. Now some of that variable expenses varies directly, some we need to make adjustments to allow those expenses to be variable. But generally we think of SG&A as being 20 to 30% fixed in nature. So that obviously gives us some flexibility in a downward scenario. So to your second question, the business is evolving, and as it evolves, we think the model will change and there will be opportunities that will impact our SG&A cost structure. but it's fairly early days because there's a number of different variables there. So I hesitate to give any specific numbers around that at this point in time, but we do think that there's opportunities for the SG&A structure to change as the business model evolves.

Okay, and I hate to be a wise guy and push you on this a little bit, but is that the kind of a couple hundred basis points improvement or are we talking about a focus of 10% or more down the line? And it sounds like this is three to five plus years out at least.

Firstly, it is multiple years out. It is three to five years out. And as we said in our prepared remarks, we have this dealership of the future where we're trying out different models. We're trying out different cost structures. and seeing how that develops. So I feel it's still too early days to throw out a specific number there. But as we learn and we refine the work that we're doing there, we'll be in a better position to give a more specific number.

Okay. And then just maybe lastly, you know, rates are, you know, heading in the opposite direction than we kind of all may have expected six to 12 months ago. Just curious how that's impacting your ability to sell, right? I mean, I guess it's probably not changed too much, but if there might be some help on the horizon on consumer rates and also what it means for your floor plan financing and maybe your willingness to maybe take on a little bit more inventory as well.

I'll start on the floor plan and then I'll pass it on to John to talk a little bit about the impact on the consumer. But from a floor plan point of view, we have around $900 million of floor plan debt. And when you think of our capital structure, the floor plan debt is essentially floating rate and the rest of our debt is fixed rate. So based on the $900 million, a 1% change would impact our interest costs by about $9 million. So I think that's the impact on the P&L of changes in interest rates. From a consumer point of view, the lending environment at the moment is very favorable. We haven't had any issues obtaining financing for our consumers. But I think as interest rates decline, that can only be positive for the consumer and for our F&I product portfolio. I don't know, John, if you wanted to add anything on that.

Yeah, I can just add that the subprime market is still okay. Right now it's about 8% of our total business. The lenders there are cautious, but there's still plenty of available credit for the consumers.

And just one follow-up to that. Has there been any change in floor plan assistance or anything like that, or the automakers are still kicking in? There's been no real pullback there at all? There's been no pullback there. Okay, great. Thank you very much, guys. Thank you, Jordan.

And once again, that is star one. If you would like to ask a question, we'll now move to Brett Jordan with Jefferies.

Good morning, guys. Good morning. Question on the used side of the business and I guess sort of competitive landscape. Are you seeing maybe any structural GPU pressures as some of your peers get into the used-only space and seem to be sort of driving really low GPUs in exchange for the F&I attachment. And I guess, is that changing market pricing at all?

Hey, Brett, this is John. You know, the used vehicle pricing is very transparent. The information is out there for the consumer. So it's really, to keep the margins, it's really about your acquisition strategy and where you're acquiring the vehicles to keep the margin high. You know, the old days, that information wasn't available to the consumer. But now with the Internet and all the third-party sites out there, it's very transparent, which I think is a good thing. We just have to be diligent on our acquisition strategy and making sure we're acquiring the cars for the right money and putting the right conditioning into them. And we can still maintain a decent margin.

We've been pretty consistent in maintaining our PVRs, and we tend to ride towards the upper end of the sector with the PVRs. you know, we're thoughtful and while volume is important and needed to grow and it's out there, we certainly look at the transaction needing to be a profitable one. And there's certainly a lot of cost to sales associated with selling a vehicle. So while we want to sell the vehicle, certainly we certainly want to make a fair return on what we sell.

Right. If somebody's out there giving units away, obviously there's price transparency. So that doesn't just drop the entire market. Even if you're sourcing better units, The out-the-door cost, the price is going down. So you're not seeing sort of structural margin erosion.

You know, when you think about new, it's called race to the bottom with someone in the marketplace that will put a low price up there on a certain model. When it comes to pre-owned, every car is really unique. No two cars are alike as far as how they're equipped, what the miles and the conditions are. And it's a much larger pool to sell into. there's certainly some pressure on it because of the transparency that's in the marketplace. And, you know, for lack of a better term now, it's software. You know, the markets, all the pricing in each individual market that anyone does business in is really set by the software and what the consumers can see. You know, the question isn't so much about the sale price. It's about the acquisition. How profitable you're going to be in pre-owned is really where you're going to acquire the car and what you're going to acquire it for. because the market price is already set. All right, great.

Thank you.

Thank you.

Well, now I'll take a question from Armentas Sankaveshas with Morgan Stanley.

Great. Good morning. Thank you for taking the question. Good morning. I just wanted to get more color on your digital initiatives, just any sort of context on website traffic or how many units you've sold and you know, any sort of color you could provide would be helpful.

I can start. This is John. You know, for the quarter, you know, the push start sales were about 8% of our total retail volume. We sold just over 4,000 that started there on that application.

Okay. So it includes new end use then?

Correct.

Okay. And then anything on website traffic or any other commentary that suggests it's gaining traction or anything of that nature?

Our web traffic is growing at a double-digit rate month over month, year over year for the last three years. Our marketing team has done a fantastic job there. With the addition of the loan marketplace on that push start tool, It is an industry first, what I would compare it to almost like a rocket mortgage-like experience. That consumer fills out the application. They're seeing five or six different lenders at once coming back with what the rates and the terms are. That has certainly made an impact. And what John stated in his script earlier, with the addition of being able to upload the driver's license, insurance card registration, and photos to the trade, again, all making it more convenient and saving time for the consumer. You know, when John said 8%, I think it's closer to 9% of our total sales in the quarter. So, to us, it's a meaningful number. The traffic playing with that tool is significantly higher than the 9% close, but we're confident that will continue to grow over time, and we like the technology features that have been added to make it more convenient.

Okay. And correct me if I'm wrong, but I believe push start is a bit of a deployment on a smaller scale. How do you think about expanding that to the rest of your store base and the timing around that?

So it's a little complex because we have obviously franchise agreements with each individual brand that we have. The loan marketplace that I talked about is in about 69 of our stores. of the 87. And as far as the uploading of the insurance card driver's license and trade stuff, that's not actually on all of them. The limitation on the loan marketplace is some of the OEMs not actually allowing that, but the other stores, it's actually on there. So it's on the majority of our stores at this point.

Okay. Much appreciated.

Thank you.

We'll now take a question from Chris Badeglieri with Wolf Research.

Hey, guys. Thanks for taking the question. Clerical one first, the 175 of acquisition revenue, is that a year one revenue number or is that like a terminal revenue multiple number?

That's an annualized year one revenue number. Okay, that's helpful. And those transactions will close during the third quarter, right? Just for money purposes, yeah.

Gotcha. Okay, perfect. And then for the actual questions, I'm curious if you're seeing any kind of impact from tariffs in your parts and service business. I'm not sure, like, what the aftermarket mix is or even if the OE parts have tariffs on them. I realize that, you know, parts is only half the cogs, but, you know, given I would think pretty powerful, you know, labor inflation, you know, in the markets, you know, any of pricing power, Just trying to get a sense for how much tariffs and labor are helping your parts and service. Any way to contextualize that would be helpful.

This is John. We haven't seen any significant increases in our parts prices due to tariffs.

Low aftermarket exposure there. That's helpful. I want to ask more about the parts and service in general. The whole industry is growing pretty prolific right now. Is there a way to I guess one, like how do you feel about the sustainability of kind of the warranty growth right now? Is there something structural changing that should allow the industry to support this level of warranty growth? Or is it a couple kind of like one-off campaigns that seem to be popping up? And then second, I was doing some math on your slide deck. It would seem to suggest that the incremental margins on parts are about 25% to 30%. Is that a reasonable assumption as we think about kind of like the growth of parts and services? And any thoughts that would be helpful?

I'll tackle the warranty question first. So you can see we were up 19%. There was growth in warranty. You know, the warranty kind of comes with those. It's mostly due to the spikes or due to the recalls. Acura, Kia, and Hyundai had some pretty significant recalls going on last quarter. As the cars get better, the warranty dollars tend to fade. So I think the spikes you see are really the recalls. And the great thing about the recalls to me is it gives you an opportunity to to generate another customer pay repair order. We've been pretty consistent with customer pay. If you look over the last five or six quarters, I'd like to grow that more. We have plenty of opportunities still as far as capacity goes to grow that.

I'll just jump in at a couple quick things. We're actually excited about the future with electrification in the hybrid vehicles. They tend to be a higher retention customer. and you make pretty good dollars on those. So we see a good upside in the future as that goes. As far as warranty, very, very difficult to model. You know, with technology increasing in these cars and the competitive nature of technology, there's a ton of recalls out there, and they're always going to shift and take a different place to who's in first and who's in last, depending upon technology that's been implemented and put out there. very hard to model, but we see that staying consistent over time, just switching between brands. Your last point about the parts margin, it varies by brand. You're not far off, but it typically runs in the mid-30% range, 35% to 40% range on the parts margin. Wow, that's crazy. Such a great business.

And sorry, not to be greedy, one last one. You kind of triggered a thought there. Within hybrids, like, you know, you're If you think about the brands that have high hybrid exposure, have you seen any material shift in market share from where you think you're just disproportionately taking share relative to the independent channel? Just trying to get a sense for, like, as we, you know, have more electrification in the car fleet, how that could potentially impact franchise dealers at the expense of independent dealers. Any data that you're willing to share or thoughts to help us take to that would be really helpful. Thank you.

Well, and this is horrible to say for all the independents that are out there, but that's one of the things we're most excited about. With the technology in these vehicles, these independents don't have the tools to work on them, nor the training. And it's actually very dangerous to work on these vehicles. So we see service retention numbers in the next five to seven years getting at rates that this industry has never seen. And quite honestly, the skill level coming up within the technicians and training. So We actually see it as a positive. The retention numbers are always higher with these customers. For lack of a better term, they really have to come back to a brand-certified dealer to work on these vehicles. Going to an independent would not be a smart choice.

Really helpful. Thank you for all the thoughts. Absolutely.

We'll now take our next question from Rajat Gupta with J.P. Morgan.

Hi, thanks for taking my question. Just had a, you know, question on F&I GPUs. I mean, it's pretty strong this quarter. A lot of the peers are seeing pretty good growth here, you know, despite good use volumes. How should we think about the second half trajectory here for Asbury, given, you know, used units, you know, probably start to pick up for you guys? I'm going to have a follow-up.

We had a good quarter with F&I. The finance penetration was up 2%. VSC penetration was up 1%. And we did a good job increasing our PVR on cash deals. That was up about $16. So when we look at F&I, we always kind of focus on lifting the bottom half of the group up. So I still think there's some opportunity there to improve. And I think I missed the second half of your question. I'm sorry.

I was just wondering, I mean, in the second half of this year, as your used units start to pick up again, should we still expect this kind of GPU growth? I'm assuming mix should be a little bit of a headwind.

Yeah, I would say if you look at our peers, we have room to grow. We're excited about RFNI, but we're not satisfied in the sense that we know there's potential there and we're missing it. So we're hoping to be more aggressive and get more F&I dollars. To specifically say can we model it in, very difficult to say what's going to happen. Generally speaking, and it varies by brand, we make a little bit more F&I dollars on new than we do pre-owned. Some of that has to do with the cost of sale, but certainly make good dollars as well on pre-owned F&I.

Good. And then on Fox and Services, I just want to follow up. You had pretty good revenue growth there, but it looks like margins were down a little bit year over year, not too much. I didn't mean to nitpick here, but is that just driven by mix, or is there any impact from all the benefit packages that were announced earlier this year? Just trying to get a sense of the trajectory going forward.

Yeah. I would say, and I don't have it right in front of me, but I think if you looked in the table we sent out, it's really to do with the internal gross profit or the reconditioning. The lack of used car sales actually pulled that gross profit down. I think if you pull out that internal piece and just looked at CP and warranty, the gross profit growth was actually 8% on a same-store basis. So we like the direction. I would call it a slow, sustainable, solid growth in our parts and service. It's not just capturing the dollars. It's making sure we retain the customer and can handle the level of service properly. That's what continues to grow into the future. But I think what pulled us down a little bit in the quarter was internal.

I don't know if Sean, if you... Yeah, I'll just add to that and say actually on our schedules, it shows that the parts and service gross profit, when you exclude the internal reconditioning, is actually identical to the previous year at 48.0%. So it really is purely a mix of internal work versus external work.

Got it. That's clear. Thanks.

We'll now take our next question from Stephanie Benjamin with SunTrust.

Hi, good morning. Thanks for the question. Go ahead. If you could talk a little bit more about the Omni investments you have or the SG&A investments you have in the second half to build out your Omni capabilities, you know, which areas you're specifically targeting, whether it's more online tools for parts and service or it's just building out your capabilities, any additional color would be helpful.

Yeah, I would say it kind of goes back to my script a little bit where we talked about a solid plan and thoughtful execution. I think we get excited about these opportunities and talk about them a little bit, and we're a little bit slower to implement because we try to be very thoughtful and look at each one of our independent stores and how they're operating. When you start to scale these things, they have a cause and effect on them. So we've been a little bit slow this half of the first half of the year, not so much in launching the tools within the individual stores, but as far as scaling them out. The example I'll give is the loan to marketplace one. That's really been in the last 45 days that that scaled and went out to stores where six months ago we anticipated in every store a lot faster. So we're a little bit slower to move and make sure we perfect it because the user experience has to be there. Same thing, that service tracker that I mentioned and I mentioned it on the previous call, it's out there, but it's not out there in scale. So we're still playing with it and trying to perfect it, and then we'll scale that in the – in the second half of the year along with some other things. So I think it's more the ramp up of expenses of scaling some of the tools we mentioned.

Great. That's helpful. That makes sense. And then just switching gears on just M&A, have you seen just any kind of compression in multiples just given this kind of continuation of declining SAR or maybe a bit of opportunity to be a little bit more aggressive on M&A? Thanks.

This is David. We've seen a tremendous amount of M&A this year, some really big groups and small independent stuff, and really the pricing's been all over the board. Some of it is still unrealistic. Generally speaking, it's coming down and becoming more realistic, and we're excited about that. But for our organization, it It's not about being the biggest. We don't see any economies in scale of being large, and that to us reflects in our SG&A and operating margins. It's really about thoughtful and being good stewards and making good acquisitions that are going to create great returns for our shareholders. So we're excited about what we're seeing. We see opportunities to grow, but we're trying to grow at a pace that makes sense and make sure that we don't fall in love with an acquisition. It's very easy to buy something a lot harder to run it. and we want to make sure that we're thoughtful about the acquisition and it's a good future investment and asset for our company.

Stephanie, did you have anything further?

Nope, I'm all set. Thanks so much for all the clarity.

Thank you.

Well, now I'll take our next question from David Weston with Morningstar.

Thanks. Good morning. I wanted to go back to used. You mentioned it did fall short of your expectations. I was assuming you were referring maybe to the 3% volume number, and it's a relatively hot used market right now. Can you just talk about specifically what was going on at the store level that caused you to fall short of expectations?

Yeah, this is John, David. So it's really just we didn't execute on some basic things, and This is a fairly, it's a complex business, but it's a simple business. So really, if we focus on doing the right things every single day, as far as acquisition, appraisal, merchandising, marketing, we'll be fine. And that's what we're focusing on moving forward.

And I would say it's a little bit of the DNA discipline within the stores that really trying to maintain that PBR. The easiest way to maintain that PBR is sell trade-ins and The quickest way to lower that PVR is acquire a lot of vehicles from the auction. They're trying to stay disciplined in their purchases to do the best they can at maintaining that margin. We have to do a better job at acquiring vehicles because that's really what it's about. You can either acquire a vehicle, but at the right acquisition prices is really about that. Each asset stands on its own, and we really are focused on that return on the asset.

So the issue was more on pricing rather than just not getting enough vehicles, you're not pushing used enough is what you're saying, right?

Yeah, I would say, you know, generally speaking, when you think about SAR being depressed a little bit, that means you're selling a few less cars or a flat, and the trade-ins you're not seeing quite as many. So, therefore, you're going to be a little bit depleted from an inventory supply there. How you supplement that is either through your service drive or through auctions. and while it's easy to buy truckloads of vehicles at auctions, it's not just about acquiring the car. It's about making a fair profit on the car and does the investment make sense. So I would say we're a little bit more conservative at acquiring cars at auctions. We wholesaled less cars in the quarter than we did previously, so we're doing a better job at keeping them. But generally, we're lacking probably enough cars to really produce the results we need. We're turning the inventory well. We're keeping the day supply well, the gross profits well. We just need to do a better job at acquiring more at the right price.

Okay, thanks. And on light trucks, are you seeing even at the margin any weakness within crossover SUV or pickup? And looking out to next year, are you at all concerned that maybe especially in the compact crossover area, is the market going to get too subdivided, too oversaturated in supply when we have even more models coming from the automakers?

The consumer has been heading towards that crossover light-duty truck for a while. It's a great market. There's plenty of vehicles available. I don't see it eroding the margin because there's more availability or options for the consumer.

Okay, and just last question on the Nissan gain on the store. There is a pretty big gain. Is that entirely non-cash, and was there some sort of big reserve that you had to write off to make the gain so big, or what was going on there on the accounting?

No, there's no big reserve that's being written off associated with that, but that store was an underperforming store, and as an underperforming store, Over time, the intangible assets related to that store had been written down. And so as a result of writing those intangible assets down over time, which didn't happen in this period, happened in previous periods going back a while, there was a significant gain due to that.

Okay. Thanks, guys. Thank you.

This concludes today's discussion. We appreciate your participation. Have a great day. Thank you.