Asbury Automotive Group Inc

Greetings and welcome to the Asbury Automotive Group Q3 2025 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star 0. It's now my pleasure to turn the call over to Chris Reeves. Vice President, Finance and Investor Relations. Please go ahead, Chris.

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 third quarter 2025 earnings call. The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Holt, our President and Chief Executive Officer for Paul Whatley, our 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 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, we see our filings with the SEC from time to time, including our Form 10-K for the year ended December 31, 2024, and 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 the 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. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our third quarter results. It is now my pleasure to hand the call over to our CEO, David Holt. David?

Thank you, Chris, and good morning, everyone. Welcome to our third quarter earnings call. Our acquisition of the Chambers Group has already had a positive impact on many of our operating metrics, and while it is still early in the integration process, I am pleased with how our teams are coming together. We've talked many times in the past about how our transition to TECION will transform how we sell and service vehicles and deliver a superior guest experience. Our litigation with CDK has reached the point where we can continue migrating stores onto the new DMS. Moving on to our operating performance for the quarter, pent-up consumer demand and the expiration of the EV tax credit drove strong new volumes. on our new vehicle performance on an all-store basis highlights the impact of our herb chambers acquisition and the heavier weighting towards luxury brands. In the near term, we'll be opportunistic and react to what the market gives us. Our parts and service business delivered consistent results once again, with same-store gross profit up by 7% and the customer pay segment up by 8% in the quarter. As referenced earlier, Growing the business while avoiding expense leakage is a top priority for the team. In the third quarter, our same-store SG&A as a percentage of gross profit was 63.6%, a decrease of 32 basis points. Our strategy for deploying capital to its highest and best use has primarily emphasized large, transformative acquisitions that expand our portfolio in the most desirable markets. Going forward, we are focused on de-levering the balance sheet, optimizing the makeup of our portfolio, and being opportunistic with share repurchases. As a reminder, we divested four stores in July with annualized revenue of $300 million in keeping with our disciplined approach to portfolio management. We resumed opportunistic share repurchases buying back $50 million in shares in the quarter. The pace of future share repurchases will be dictated by portfolio management activities, share price levels, and returns offered by organic and inorganic opportunities. And now for our consolidated results for the third quarter. We generated a record $4.8 billion in revenue, had a gross profit of $803 million, and a gross profit margin of 16.7%. We delivered an adjusted operating margin of 5.5%. And our adjusted earnings per share was $7.17. And our adjusted EBITDA was $261 million. At the end of my remarks, I traditionally hand the call over to Dan Clara to walk through our operational performance. However, Dan was not able to be with us today, so I'll hand the call over to Paul Whatley, Vice President of Operations, who's been doing a phenomenal job running our stores. Now Paul will discuss our operational performance in more detail.

Thank you, David, and good morning, everyone. Over the past few months, we've integrated a large acquisition with the Chambers Group. We've divested stores. and we've rolled out Techion to 19 stores, and we still grew our business in new volume, fixed operations, and overall same store gross profit. I'm pleased the team has been able to successfully grow the business and maintain our margin profile while undertaking these large objectives for long-term success. And now I'm going to provide some updates on our same store performance, which includes dealerships and TCA, on a year-over-year basis unless stated otherwise. Starting with new vehicles, same store revenue was up 8% year-over-year and units were up 7%. We did see elevated consumer demand for EVs to take advantage of the expiring tax credit and significant increases in EV volume versus quarter two. New average gross profit per vehicle was $3,188 as the increase in EV sales and their lower PVR profile slightly pulled down our overall PVR. Brand unit performance varied widely depending on availability and consumer demand within certain OEMs. We continue to have relatively low day supply of key brands. Across all brands, our same-store new day supply was 58 days at the end of September, one day less than the end of Q2. We've generally been pleased with inventory balances against consumer demand. While it's been a stronger start to the year and inventory levels remained in check, we do expect headwinds through year end with a softening labor market and challenges with vehicle affordability. Turning to used vehicles, third quarter unit volume was down 4% year over year. and used retail GPU was $1,551, a slight increase over the prior year. For the quarter, our team sourced over 85% of our used vehicles from internal channels. The largest portion of this comes from customer trade-ins, which tend to be our most profitable acquisition channel. Our same-store DSI was 35 days at the end of the quarter, and we remain diligent on maintaining a healthy velocity of sales to manage inventory. Stepping back for a moment, we see our performance in used vehicles as our biggest opportunity to improve execution. The pool of available used cars starts to recover in 2026, improving further into 27 and 28. Our teams are focused on driving profitable volume growth over the coming quarters. Shifting to F&I. We earned an F&I PVR of $2,175, only $4 less than last year, and it would have been higher by $64 to $2239 without the non-cash deferral impact of TCA. In October, we finished the rollout of the Kuhn stores to TCA following the completion of the Techion conversion at those locations. Michael will walk you through additional details regarding TCA. Despite macro challenges of consumer affordability, we continue to see a healthy adoption rate of TCA products. Historically, the average customer chooses about two products per deal, and that number has held steady, even as pricing challenges have become more acute. And finally, in the third quarter, our total front-end yield per vehicle was $4,638, down $230 sequentially, partially due to increased EV volume. Now, moving to parts and service. As David mentioned earlier, our same store parts and service gross profit was up 7% year over year, and we generated a gross profit margin of 58.8%, an expansion of 172 basis points. And once again, our fixed absorption rate was over 100%, a key measure for the strength of our business. When looking at customer pay and warranty performance, Customer pay gross profit was up 8%. With warranty gross profit higher by 7%, we're on a combined basis up 8%. Lapping tough comps and warranty from recall work across multiple brands in 2024. We believe our stores are well positioned for growth trends within parts and service. We continue to invest in improved facilities and technology and in training for our people. And before I pass the call to Michael, I want to share a couple of highlights from the Chambers platform. Looking at overall store numbers, the heavier luxury weighted mix lifted PVRs for both new and used. It's even more impressive considering that it was only for a partial quarter performance. I am very optimistic about how Asbury has strategically set itself up for long-term success by continuously improving our operations today. I will now hand the call over to Michael to discuss our financial performance. Michael?

Thank you, Paul, and good morning to our team members, analysts, investors, and other participants on the call. And now on to our financial performance. For the third quarter, adjusted net income was $140 million. Adjusted EPS was $7.17 for the quarter. In addition, the non-cash deferral headwind due to TCA this quarter was $0.23 per share. our adjusted EPS would have been $7.40 without the deferral impact. Adjusted net income for the third quarter of 2025 excludes net of tax $27 million in net gain on divestitures, $9 million related to the non-cash asset impairment related to pending disposal, $7 million of professional fees related to the acquisition of chambers, $2 million in income tax expense related to the deferred tax true-up for the chambers acquisition, and $2 million related to the Techion implementation expenses. Adjusted SG&A's percentage of gross profit for the total company came in at 64.2%. While we are confident in our ability to reduce SG&A expense, there may be transition-related expenses pulled forward over the next couple of quarters as we roll out Techion to a greater number of stores. As it relates to new vehicle GPUs, we believe those will continue settling to our estimated range of $2,500 to $3,000. However, the trajectory and timing of this normalization would be sensitive to macro elements, and it may be difficult to pinpoint a solid timeframe for when this occurs. The adjusted tax rate for the quarter was 25.4%. We estimate the fourth quarter effective tax rate to be approximately 25.5%. TCA generated $14 million of pre-tax income in the third quarter. The negative non-cash deferral impact for the quarter was about $6 million. At the beginning of this year, we provided an outlook for TCA and the impact on earnings per share through 2029 based on information known at the time. With our recent acquisition and divestiture activity, delayed rollout of our Kuhn stores, and lower projected SAR through 2030, we have revised our estimate for the TCA business as shown in our presentation on slide 18. We now expect less deferred revenue impact over the next several years, primarily as a result of changes in the SAR estimates. Our initial projections were based on a fast return to 17 million SAR levels, while the latest publicly available forecasts indicate something closer to the high 15s to low 16 million range. Now moving back to our results, we generated $543 million of adjusted operating cash flow year-to-date and 11% increase over the comparable period last year. Excluding real estate purchases, we spent $104 million in capital expenditures so far this year. We now anticipate approximately $175 million in CapEx spend for 2025. This amount will depend on the timing of certain projects before year end, and we expect some CapEx in 2026 associated with chambers. we will provide a more robust view on 2026 CapEx following our Q4 results. Free cash flow was $438 million through the first three quarters of 2025, $50 million higher than 2024. We ended Q3 with $686 million of liquidity comprised of floor plan offset accounts, availability on both our used line and revolving credit facility, and cash excluding cash at total care auto. Our transaction adjusted net leverage ratio was 3.2 times on September 30th following the Chamber's acquisition. We believe our business model's ability to generate cash efficiently will help us reduce our leverage over the next 12 months while remaining agile enough to be opportunistic with share repurchases. The dealerships we sold this year enabled us to avoid lower return capex while also providing additional liquidity to reduce leverage and repurchase shares. We will continue to review our portfolio for similar opportunities. And finally, before I finish our prepared remarks, I want to thank our team members, and we look forward to finishing the year strong. And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator?

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. Once again, that's star one to be placed in the question queue. Our first question today is coming from Jeff Flick from Stevens Bank. Your line is now live.

Good morning, everybody. Thanks for taking my question. Paul, welcome to the call. Thank you. David, I was wondering, obviously, with the Chambers acquisition and everything that was going on in Q3 with EVs, obviously some of your competitors have talked about maybe the ICE incentive scenario being a little different in Q3 because of all the attention on EVs. I'm just wondering if you could kind of unpack where you see new GPUs going in Q4 as we get into the all-important luxury season.

Sure. Jeff, this is David. Traditionally, the fourth quarter is a great quarter for luxury, and specifically in December. So we don't see any indications where that wouldn't be the case now. Our EV volume of units in Q3 compared to Q2 doubled. And our EV average gross profit per car sold is significantly lower than what the hybrid and combustible engine gross profit is. So While that will probably slow down a little bit, even though they're still incentivized from the manufacturers, in luxury, we think we'll pick up in the fourth quarter. At this point, we think our margins will hold up well in the fourth quarter. But again, difficult to predict, not knowing what macro events could happen.

And as it relates to chambers, when that gets into the – or Q will be the first quarter where it's all the way in there – Just based on the AKs that you guys filed, it would appear the chambers will have a slightly accretive effect on new GPUs. Is that correct?

Absolutely will. You know, so far since we've acquired them, their gross profits on new vehicles and used vehicles is the lead platform in our organization. They do a fantastic job generating gross on both sides. And you look at our numbers in Q3 on an all-store basis, they pulled up our PVRs on new and used. So we're very pleased with the operators and how they run their business.

Awesome. Thanks very much, and good luck on fourth quarter. Thank you.

Thank you. Next question today is coming from Ryan Seagal from Craig Callum Cabra Group. Your line is now live.

Hey, good morning, guys. I want to dig into TCA just given the change or updated outlook here. So if I look at the previous – assumptions from a year ago this time when you originally gave them. It was $5.69 of EPS accretion or incremental in 2029. Now it's $0.81. I guess a 6% reduction in SAR assumption, $17 million to $16 million. It has that type of impact on EPS. But I guess, can you help me walk through really the next several years and what's changing? I assume there has to be more changing there than just the SAR assumption.

Yeah. So on that number, you know, TCA, we have a couple things in there. One, you know, the Chamber's acquisition will have that deferral headwind when we roll that out starting, you know, kind of mid-next year. Also, we disposed of some, you know, pretty good stores out west in terms of the Toyota stores in California and the Lexus stores. And those will have, you know, an impact. We'll get the, you know, lack of the deferral hit, but you basically lose that volume in the future. So you have those two pieces on the acquisition and disposal side. And then Coons, we originally projected to roll out early this year. It rolled out in October, and so that's a delay on that kind of deferral hit. But the biggest one is just SAR. We had assumed that we'd be back to $17 million SAR in 2027, and it would kind of stay at those levels for a couple years. And now the projection is kind of high 15s to low 16s during that time frame. And that cumulative effect on SAR, the difference between the 17 and kind of the high 15 to 16, hits you every year and just kind of rolls out. We still expect to get back to that $5 of EPS. It's just going to be delayed until SAR fully recovers. And so biggest impact is just the SAR piece of that equation. And, you know, you looked at the numbers. Next year's numbers significantly lower from a deferral hit. Again, just the SAR being delayed has a big impact on the negative deferral hit that we expected next year.

So we can basically assume just kick it out two years kind of from the previous assumptions to get back to that EPS, you know, five plus dollars.

Yeah. Yeah. It's probably, you know, 2031, 2030. Again, it depends on when you think we get back to that high 16, 17 million SAR range. We really have to get back to those levels to drive that volume necessary to get those levels.

And then maybe one more follow-up and then I'll leave this one. But Would you eventually get there with a 16 million SAR just will take longer, or do you actually need 17 million SAR type volume to get to that level?

To get to the high five EPS, we need the 17 million SAR because you need that volume level. Now, you can also get there with future acquisitions and adding additional stores, but you need a total volume level to drive the products going through the system. So, you know, we'd have to get there with the $17 million or additional acquisitions.

Gotcha. Just for my follow-up, SG&A, just curious if I look kind of on an adjusted basis, you know, gross profit up similar sequentially as SG&A. I guess just curious from kind of an SG&A to gross profit leverage as you look into Key4 and even into 26. Any comments would be helpful?

I think, you know, It all depends on what you think gross profit is going to do on the new vehicle side. We think fourth quarter hangs in there on gross profit, so we should be able to maintain these SG&A levels. Going into next year, we should still be able to maintain these SG&A percentage of gross levels, but again, it depends on what your view is on where new vehicle PBRs shake out. Going out beyond that, once we get past the Techion rollout, We will have some kind of one-time costs if we go through that rollout phase. We pull those out as adjusted items this quarter. We'll continue to do that in future quarters. Once we get past the Techion rollout, there's opportunities for productivity gains and cost savings because of the Techion piece that will help us drive that number down.

Great. Thanks, guys. Good luck.

Thank you. Thank you. Next question. Today's coming from Rajat Gupta from J.P. Morgan. Your line is now live.

Oh, great. Thanks for taking the question. I had a question on just the total contribution from, you know, just the total, you know, just the acquisitions net of divestitures. If I look at the 8K, it looks like when you do the adjustment on the leverage calculation, you're adding roughly 78 million of net EBITDA, you know, for the acquisition divestitures. It would seem like the third quarter contribution is more like $25, $26 million. I mean, is it like $100 million-ish kind of annualized run rate EBITDA net of all the divestitures that you've done with Herb Chambers? Is that a reasonable run rate to assume for the total for all the deals this year? I just want to clarify that and have a quick follow-up.

Yeah, it's probably a little bit above that, but in that ballpark. We sold the Toyota and Lexus stores, so those were good EBITDA stores. But yeah, in that ballpark part, a touch above that number.

Understood. That's helpful. Just a broader question on capital allocation. I was a bit surprised to see the buyback this quarter, just given you just integrated HERP chambers. I'm curious, you know, if you're able to rank order what your priorities are going forward, should we think about, you know, excess free cash flow going more into just delivering and buyback from here? Or is M&A still within the rank order? I'm just curious, you know, if you could rank order those. Thanks.

Rujat, this is David. I'll take a crack at it and then Michael can respond. You know, I think some of the divestitures that you've seen, and I talked about in my script as far as organic or inorganic, We'll continue to balance our portfolio. We'll generate cash with that. And, you know, I think there'll be a heavier focus on share repurchases. Debt will take care of itself over the next 12 to 18 months and paying itself down. If we think our share price is at an attractive price, that would probably be number one. And if for some reason that isn't the case, then naturally buying down debt will be it. But we generate a lot of cash. That'll continue through next year. So I would say share repurchases debt, but they could trade places depending upon what's going on at a moment in time. Understood.

Great. Thanks for all the color and best of luck.

Thank you. Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Brett Jordan from Jefferies. Your line is now live.

Hey, good morning, guys. Hey, good morning. A few of your peers who have reported were sort of talking cautiously about recent luxury trends sort of at the consumer level, and it sounds like you guys really aren't seeing that. Is that more brand-specific or region-specific around luxury performance?

Yeah, I would – Brad, this is David. I would say it's more brand- than region-specific. You know, on a same-store basis, I think we're back 1% in the quarter on volume, so we don't think that's material. Naturally, Lexus is probably the hottest luxury brand out there right now, but they're all performing fairly well, and we're traditionally going into a quarter that does well with luxury. It may be choppy October, November, but we still anticipate at this point a strong luxury end to the quarter. We're not seeing any material change in traffic or desire with the luxury consumer. Great. Thank you.

Evan, on parts and service and customer pay, could you in that 8% growth?

Sure. Almost half and half. It was a little bit more, I would say, 60% dollars and 40% traffic growth. So it's always nice to see the growth in traffic that we have from what we call a repair order count. Up 6%, 7% in the quarter for warranty is light compared to our peers. That would have, if we were higher in warranty, that would have drove our overall fixed number higher, obviously. But we came off heavy comps last year from warranty.

When did the comp peak last year in warranty? There were some big recalls late in the year. Is the fourth quarter the hardest warranty compare?

You're testing my memory, but I'm pretty sure it is, yeah. Okay, great.

Thank you.

Yep.

Thank you. Next question today is coming from Glenn Chin from Seaport Research Partners. Your line is now live. Good morning, gentlemen. Thank you.

Just a couple questions on Techion. David, I think you mentioned it's been rolled out to 19 stores. If you can just give us an update on how it's going, any surprises, favorable and or unfavorable, and the pace at which we should expect it to continue to be rolled out. And then lastly... Any changes on the prospects for savings there?

Sure. If I missed something, Glenn, just circle back around. We have 23 stores on Techion. The 19 stores that we did with Coons was Reynolds and 4CDK. We start rolling out CDK stores in this quarter. So we anticipate, hopefully, you know, towards the end of next year, we'll be done rolling out all the stores. From an efficiency standpoint, when you think about CDK or traditional DMS, most dealers have a lot of bolt-ons. So for your employees, they have to have multiple screens open to service one customer. We lose 70% of those bolt-ons with Techion, so it makes it more efficient for our folks to communicate and be more transparent with our guests, but also raise their productivity per employee. So there's some good tailwinds there. Some things that were a little surprising to me, and maybe I just didn't think it through well, because it's cloud-based software and it's extremely intuitive compared to the traditional DMSs, I thought the understanding and migration to the software would be fast. It's been fast for someone that is new to the automotive business or hasn't been on one of the traditional DMSs. They pick up Techion fast. For our folks that have been on CDK for 20-plus years or Reynolds, It's taken them a little bit longer to get comfortable and used to Techion. And I would say for a traditional person that's been on one of the legacy DMSs for a long time, it's about six or seven months before they really become efficient with the software, where I thought it would have been closer to three months. If it's a new hire that doesn't know the industry of the software, they are adapting to the software extremely fast. So I just think it's going to take some time. When we get past the rollout and all the expenses that are involved in the rollout, there will absolutely be SG&A savings from a software standpoint, from a third-party software standpoint, in what I would call fees for API connections that we had with the legacy DMS. Okay.

And any change in those prospects for savings, David, given the, you know, it sounds like somewhat of a longer tail as far as adoption or efficiency gains?

Yeah, there'll definitely be savings. I think we'll start to, you know, who knows how things go the next, you know, six to nine months rolling out the rest of the stores. But as we sit here today, you know, fourth quarter, we should fully realize the savings of the software costs. And then I would say the end of the first quarter of 27, you should really start to see the efficiency gains with Techion. And look, not all horses are equal. Not all markets are rolling out at once. So the early adopters or transitioning to the software will, you know, probably see gains middle of next year, while The stores that go on the back end of integration will experience it in early 27.

Okay, great. Thank you for all the color.

Thank you. Thank you. Next question today is coming from David Whiston from Morningstar. Your line is now live.

Thank you, Morning. Just focusing on used vehicles, you hear all the time everyone wants to get more. of that volume, especially around buying off the street to avoid auction. It's obviously a great opportunity, but what more can you guys be doing in terms of marketing, both old-fashioned marketing versus digital marketing, to get more vehicles off the street?

David, this is Paul. We've got our click lane acquisition tool, which is one tool that we use to buy cars off the street. It's a digitally marketed platform that creates leads that are specifically for selling cars, not necessarily buying anything from us. But that's the number one portion. The second place is the service drive. And those are where we're focusing. We also have opportunity, we think, in lower end or lower price cars. with retaining more of our wholesale cars and we're more focused on that as well.

And David, I would add, you know, we believe from our standpoint, one of the benefits that we continue to lead the space in SG&A, you know, sometimes volume doesn't create more profitability. You know, larger used car volume at lower gross profits raise your SG&A. And while it's a very competitive market for pre-owned right now because the pool is so shallow, It just doesn't make sense from our perspective to chase volume and be up two or three or 4% volume, but backwards in profitability. So we're trying to balance that as best we can. As Paul said in his script, um, just because of the COVID hangover and lack of cars being built back then 26, there'll be more used cars in the market. 27 gets even better in 28. You're back to a normalized market. So I just think naturally you'll see lifts in volumes as you go forward. The key is acquisitions because your gross profit is 100% determined on what you acquire the vehicle for.

Thanks, guys.

Thank you. Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to David for any further closing comments.

Thank you, operator. This concludes today's call. We look forward to speaking with you all after the fourth quarter earnings. Have a great day. Thank you.

That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.