Please standby, we are about to begin. Good day, and welcome to the Asbury Automotive Group Third Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President and Treasurer, Matt Pettoni. Please go ahead, sir.

Thanks, operator, and good morning everyone. Welcome to Asbury Automotive Group's third quarter 2014 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our Web site at asburyauto.com. Participating with us today are Craig Monaghan, our President and Chief Executive Officer; Michael Kearney, our Executive Vice President and Chief Operating Officer; and Keith Style, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we'll open the call up for questions and I'll 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 2013, 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. It is my pleasure to hand the call over to our CEO, Craig Monaghan.

Good morning, everyone, and thank you for joining us today. Earlier this morning we reported record third quarter diluted EPS from continuing operations of a $1.08, a 19% increase over the prior year adjusted quarter. I'll like to thank all of our associates for achieving these great results. The overall automotive retail and lending environments remain healthy, and going forward, we'll continue to execute our two-part strategy, driving operational excellence and deploying capital to its highest returns. We're investing in our business, pursuing acquisitions, repurchasing stock and investing in our standalone used vehicle store initiative, Q auto. Addressing share repurchases; so far this year we've bought back $70 million of our stock. Last week, our Board of Directors increased our share repurchase authorization to $200 million. This will allow us to be even more aggressive in repatriating capital to our shareholders. With regard to acquisitions, we entered into agreements to acquire two stores, which should add a combined 250 million in revenue and close later this quarter or early first quarter. Of course these transactions are subject to manufacture approvals and customary closing conditions. In addition, we are targeting 500 million in revenue through acquisitions over the next 18 months. We're very excited about our accomplishments and look forward to the opportunities we see ahead of us. Now, I'll hand the call over to Keith to discuss our financial performance. Keith?

Thanks, Craig, and good morning, everyone. This morning we reported record third quarter EPS from continuing operations of $1.08. As Craig mentioned, this represent a 19% increase from last year's adjusted income from continuing operations. There are no adjustments to earnings in the current quarter. However, the prior quarter included $6.8 million loss on the extinguishment of long-term debt, and a $2.1 million real estate charge in connection with the lease buyout, which was reported in the other operating expense line of the income statement. Together, these two charges totaled $5.5 million after-tax or $0.18 per diluted share. For the quarter, same store revenue increased 7% and same store gross profit was up 8%. Controlling our expenses enabled us to leverage this significant increase in gross profit and resulted in same store flow through of 46%. And same store SG&A as a percent of gross profit decreased to 120 basis points from last year to a ratio of 69.5%. Our Q auto initiative, which is not included in our same store performance continues to progress in line with our expectations, resulting in a loss of $0.03 in the third quarter. We estimate this initiative may reduce EPS by $0.04 to $0.06 in the fourth quarter of 2014, with similar losses expected in the first quarter of 2015. Turning to capital deployment; our 2014 CapEx budget is forecast to be approximately $55 million, and includes approximately 45 million associated with our core annual CapEx plan and $10 million in construction costs primarily to relocate franchises out of currently leased facilities. Year-to-date, we've spent approximately $40 million of the CapEx budget. In addition to our CapEx budget, during the quarter we invested $5 million to purchase the real estate of a previously leased facility. : I'd like to take a few minutes…

Thank you, Keith. We are extremely proud of our company's performance this quarter. Our gross profit increased 9% through growth in all of our business lines. This growth helped produce operating margins of 4.4% compared to 4.2% in the prior year period. For the balance of my remarks, I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same store retail performance during the third quarter. New vehicle revenues increased 7% and gross profit increased 4% compared to the prior year. Our new vehicle unit sales were up 6.7% and new vehicle margins for the quarter were 6.0%. Although these margins were down 10 basis points compared to last year and down 30 points on a sequential basis, we grew our market share in essentially all of our regions and for all of our brands in this quarter and year-to-date. Our new margins were down due primarily to a mix shift and the effects of increased volume-based manufacture incentives. I believe we can maintain new vehicle gross profit per unit retail in a range of around $2000 to $2100 a unit. However, if these types of manufacture incentives continue, we feel we could see continued pressure on margins. At the pace of sales we saw throughout September and continuing into October, our fourth quarter 2014 business plan calls for a SAR of 16.5 million. We're currently planning for SAR in the mid 16 million range for 2015. We ended the third quarter with $612 million of new vehicle inventory or 73-day supply on a trailing 30-day basis. We are comfortable with our existing overall new vehicle inventory levels in light of the current pace of business we are seeing in our stores, but we'll continue to monitor and adjust to…

Thank you, Michael. We'll now be happy to take your questions. Operator?

Thank you. (Operator Instructions) And we'll take our first question from Rick Nelson with Stephens.

Good morning. Craig or Michael, could you update us on some of the early learnings from the used car format, Q auto? You've stepped up now from two to three stores. Is it still considered a test, or are we in rollout mode and the opportunity you see ahead there?

So, Rick, this is Michael. I'll give a shot at it, and maybe Craig will jump in. I'll answer the question in reverse. We're still in early stages of development. We're committed to do the third store. We're very excited about the results that we've seen. I think the major parts of this that we've learned is that there are different ways to sell cars to the consumers. We're learning that we can make that work. We're developing some technology that is different than we use in our other stores that is very promising and may be expandable in the future. And we're learning that there is a -- as we know from the other business, a substantial amount of Internet business that is out there. So, it has been a learning experience. We're very pleased with the results so far. As we've said, we're opening up a third store in Fort Myers.

Okay. Thank you for that. Also, on the acquisition front, you made a new announcement today, two big stores; if you could comment on the multiples that you're seeing out there, given your recent experience.

Yes, Rick, It's Craig. I'd be happy to address that question. These are stores that we're very happy with the multiples. They are in line with the multiples that we paid on the transactions we've been able to get done over the last 24 months. They're not closed yet. Just have to point that out. Like I mentioned earlier we hope to get them closed either later this year or early next year. But they fall right in line with the type of acquisitions that we target. And fundamentally, we don't want to pay more for an acquisition than where we trade.

Got you. And if I could also ask you about subprime financing, the availability, what you're seeing there, any changes.

Rick, this is Michael again. No changes from the last quarter. It is a very healthy subprime market. We have a number of lenders that we've been using for, I would say, the last two to four years. We see some new entrants into that business as well as some expanded buying in the subprime market by some of our manufacture captives. So, it's -- as I mentioned in the script, I think it's a very favorable lending environment both on the prime and the subprime side.

Great. Thanks. I'll let others hop on. Thank you.

Thank you, Rick.

And we'll take our next question from John Murphy with Bank of America Merrill Lynch.

Good morning. This is Liz Suzuki on for John. Can you talk a little bit more about the two stores? I think you have agreements to acquire; annualized revenues of $250 million seems pretty big for two stores, and I believe it's the equivalent of all the stores you had acquired for the 18 months prior to this quarter. So I'd love to get some more detail if you can provide it.

Yes. This is Craig. It’s two stores in our markets, so they're in our footprint, they're in two different states. Because they're not closed yet, we're not comfortable giving a lot more detail. But yes, they are large stores, but we think they fit perfectly into the portfolio, and we look forward to getting the transactions closed.

Okay, great. Thanks. And just one question regarding used vehicles; after Lithia's preannouncement last Monday specifically citing pressure on used vehicle pricing, I was little surprised to see that your revenue per used vehicle increased over $500 a unit this quarter. Do you think -- was the issue specific to the company and is it an industry-wide trend of pricing pressure, or was there something else going on specifically at Asbury this quarter that helped drive up used pricing?

Liz, this is Michael. Our increase in used car pricing was really a function of our acquisition costs, as well as in the second quarter we are very aggressive in executing our plan to continue to grow the used car business. Consequently, we had just higher inventory. We do have a fair amount of certified pre-owned business in our high lines, and as you can imagine, those are much more expensive cars. So I think that that's the reason that we saw a $400 increase in our pricing.

All right, thanks very much.

We will take our next question from Bill Armstrong with CL King & Associates.

Good morning, guys. A couple of questions; it looks like luxury underperformed a little bit versus your volume brands. I was wondering if you could just flush that out for us a little bit.

Yes, Bill, this is Michael. Yes, that is correct. We had a -- number one, I'd say was a seasonally strong growth in the midline, but I would also comment that we're seeing a lot of production by the midline imports and a lot of inventories that's out there and there is a wide spectrum availability for the consumer. We saw some increase in what I call, "volume-based incentives," on those brands, as again, an attempt to gain market share. We became very aggressive in going after market shares. So, yes, I'd say we overperformed in the midline segment. On the luxury side, it was a little bit less than we had experienced. In the past, our big luxury selling season is traditionally the fourth quarter, but we did see a much stronger midline import in the third quarter.

Got it. And moving over to parts and service, your gross margins were up very nicely. I was wondering if you could maybe provide us a little color on what drove that. Was it mix, or was it higher margins within some of these sub-categories?

This is Michael again. I think there is a couple of factors that are going on there. We had a substantial amount of reconditioning work that is done on our used car side. That's a very high margin business. I think we're also seeing the effect of some of our internal pricing, and some of our retention tools that allow us to do a little bit heavier work in some segments. I don't think it's mix-related, I think it's more of a function of the incentives and programs that we put in place a number of years ago.

I see, okay. That was all I had. Thank you.

And we'll take our next question from Brett Hoselton with KeyBanc.

Good morning, everyone. It's actually Irena Hodakovsky. How are you doing?

Good morning.

Congratulations, nice quarter. I had two questions for you, one on the used and one on your capital allocation. Your used growth was up 2% on a same store basis and yet you had very difficult comps and your gross profit per unit was intact. Are you seeing supply of late-model used vehicles improving and is there any relief in wholesale pricing?

This is Michael. I think the margin pressure that we experienced on the used car side is really a function of two events that occurred. I alluded to them in the script. The first one was that we ended the quarter with a very high day supply, something that we do not -- does not fit our parameters. And as a result of that, processes were put in place to make sure that, that inventory was brought down. A lot of that was accomplished through retailing as opposed to sending those vehicles to the auction. That put pressure on the retail side. The other part of it is that vehicles that were acquired in the latter part of the second quarter were acquired at a historically high level. Pricing on those vehicles did soften a little bit as the summer months came about at the auction, and because of that again, we retailed those vehicles at a much lower price, and that depressed the margins. So I think that's the two factors that caused our depressed margins in the third quarter. I hope that answered your question.

Yes, somewhat. And on the capital allocation, thank you for that. The share buyback authorization, so you doubled the authorization. You really increased the pace of buybacks in this quarter and year-to-date. How should we think in terms of your prior commitment, $30 million annually? Is that too conservative of an assumption at this point?

Yes, this is Craig. I think that would be a conservative assumption as we mentioned we now got to pass capacity to get much more aggressive. I think maybe a better way to think about capital allocation is from a broader perspective. As we mentioned, we're investing in the business, we've got a capital program that keeps our stores looking great. Q auto has required some capital, but as Keith mentioned, going forward certainly through the next quarter, next two quarters we don't see lot of capital needs there. But as a result, it leaves us with plenty of capacity to effectively either go out and buy stores or return that capital to our shareholders. And that's what we intend to do.

Got you, thank you. And then the last part of the capital allocation, the acquisitions, if you can just clarify. You previously targeted $500 million over the next 18 months. You announced this purchase agreement for $250 million, and then you mentioned $500 million again. Does the $500 million exclude this announcement today, or does it include this announcement?

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Excellent, thank you very much.

Thank you.

We'll take our next question from Rod Lache with Deutsche Bank.

Hey, guys. It's Mike Levin in for Rod. I just wanted to ask you sort of as we are starting to see pressure on the new and used margins with pricing kind of starting to come in there, you're really still executing well on parts and service. And I was wondering if you could talk through going forward whether it's a fair assumption that, that improvement in profit would actually translate to a higher throughput from EBITDA to EBIT going forward, or you might sort of think that, due to the outperformance in that business, you might reallocate some of that to supporting the used and new businesses on a go-forward basis, so it doesn't necessarily actually increase the total throughput.

Mike, this is Michael. I'll take a shot at it, and then Keith will go from there. The flow through on the parts and service side is better than the variable or the front size of the business, there's not a variable selling expense component, so as we continue to grow the fixed operations, that gross profit -- the incremental gross profit in fixed does flow through at a higher percentage rate than the front side of the business …

This is Keith Style. I'll jump in. We commented that we had a flow through of 46% during the quarter. Our target is 40% on an ongoing basis, and that's reflective of a large part of the increase in gross profit been derived from fixed operations.

Got it. Is there any way that you guys could give just maybe a little bit more detail around some of the costs associated with opening a Q auto store, whether that's CapEx, SG&A and inventory maybe comparing a Greenfield versus an existing facility that you already have?

Yes, I'll jump in. This is Craig. And Michael could give a lot more detail and Keith as well, but we're trying to control the amount of capital that we tie up in these stores as we work on these prototypes. So, the first one that we opened is in a leased facility. There is a limited amount of capital. We went into that facility. We spent some money to refurbish its signage, things of that nature. Then, the spent there is really people, advertising, and we're working with our partners, lot of them being technology partners to try to bring new technologies to bear in that store that we don't see anywhere else. There's a lot of work that's done on the web, if you go to the Q auto site on the web you'll see -- it looks very different from a traditional site. There's some spent on technology, but for us, that's primarily infrastructure, pipes, networks things like that we put in place, a lot of the software like I mentioned is being done by our partners. The second store is a facility that we owned. We vacated that facility when we moved a Toyota franchise into a new facility. Again, by moving into an existing facility, we're able to minimize both capital and expense. That's our view of the world. We think there's a lot to be learned in this space. One of the things that we've learned from others is that it seems to be -- the smart thing to do is to minimize capital and try to maximize throughput. And that's exactly what we're working on. Keith, Michael, anything to add?

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Great. Maybe one quick follow-up; is there -- how much of a new Q auto stores inventory might go through your recon and prep?

Our inventory on Q goes through their own recon and prep.

And is that booked in the overall recon and prep?

Yes it is.

Okay. But is there …

It's a very, very small number at this point of time.

Got it, okay, but all of it is going through that line?

That is correct.

Cool, thank you very much guys.

Most welcome.

And we'll take our next question from Jamie Albertine with Stifel.

Great. Thanks for taking my question. Good morning. I wanted to ask you very quickly on the parts and service capacity side. We talked a little bit I think about the scarcity of talent and technicians last quarter. I maybe wanted to get an update, given the trends that you noted in the third quarter, maybe an update on where you stand from a capacity perspective and how it can scale, assuming these trends persist into the fourth quarter and beyond.

Jamie, this is Michael. I'll start out with that. As you know from a facility standpoint, I don't see any hurdles for capacity even in those facilities that we have reached maximum capacity on a standard 10-hour day. Lot of those cases, we've extended hours. In some cases we've gone and expanded our dream service concept which is two full shifts. And we'll continue to explore that on an as needed basis. In terms of technicians, as we've talked about it last time, we feel that we have been able to hire them as we need them. We started a project in Atlanta, a number of months ago, our own training center, we graduated our first group of technicians; 14 technicians about 45 days ago. Second class is in place. We've got another one of those schools getting ready to start. We believe that we're out on the edge in terms of being able to produce our own technicians. And at this point in time, don't feel that that's a limiting factor for us to continue to grow our business.

Very good. And just a quick follow-up to some of the prior questions on Q auto; I just wanted to get sort of caught up here versus your initial expectations for headwinds in the second, third and fourth quarter, where do you stand? Are you adding sort of incremental headwind as you sort of learn from your first two stores and now are planning a third store, or is it more a reiteration of what you thought initially? Thanks.

Yes. This is Keith. I'll jump in on this. When we first launched the Q auto initiative back at the end of the first quarter there we talked about $0.08 to $0.12 loss for the year. That's what we expected for the year end. And very much in line with what we saw in the third quarter a $0.03 loss, is right in the middle of what we expected and we're expecting potentially a $0.04 to $0.06 loss here in the fourth quarter and then that loss pattern continuing into the first quarter next year.

Had you thought about continuing into 2015 before?

So, we think this share with the $0.4 to $0.06 plus $0.03 with loss so far. We're in there like $0.07 to $0.09 range. So, it was a little lighter than what we thought.

Did you anticipate it continuing to 2015 initially?

Yes. I think it's -- I mean the way we look at this is we're going to learn as we go. That's why we're giving projections essentially out through the next two quarters, because we'll learn a lot between now and even February when we get into the call next time. And then we'll update you where we are and what we see from there. But we're not in position to give long-term projection because there is so much learning that's going on every day.

And do you anticipate ever splitting that business out in your results?

Well, I think we have a long way to go before we get there. We only have three stores. I think we just need to keep working on this and see where it goes.

Very good. Thank you so much and good luck in the fourth quarter.

Thank you.

And we'll take our next question from Bret Jordan with BB&T Capital Markets. Bret Jordan - BB&T: Hi, good morning. A question on parts and service, the 25% growth in warranty; could you give us a feeling for where we are in this warranty cycle, what inning we are, sort of catching up on those historic recalls? And then maybe did the customer-pay growth benefit from these warranty vehicles being in and being sold customer-pay services at the same time?

So, Bret, this is Michael. As I mentioned on -- I think every call for the last five years or so, it's very difficult to predict warranty business. We are in the middle as you mentioned of a seemingly a historic amount of recall. They're across the board, they're across all manufacturers. I cannot predict, won't even try to predict whether that will continue or not, but we do handle that business and we move it to our shops as quickly as we can, as effectively as we can. To answer your second question, yes, there is some customer pay associated. When the customer brings the car in, we of course want to take care of their maintenance needs or any other repair needs. That applies particularly to recalls of older vehicles on a standard warranty inside the first 12 to 36 months. We don't see as much of that customer pay being added to our repair for that point in time. But to answer your question directly, yes. You will see some benefit to the customer pay side when you have that kind of warranty work done, assuming you have capacity and technicians which we do. Bret Jordan - BB&T: Okay. And then one question on the used vehicle inventories; you commented that Q2 ending quarter inventories were pretty high. There might be some pricing pressure given new vehicle incentives. Is your bias to hold less used inventory perhaps passing through off-lease or trade-ins to option more than you were a quarter or two ago, given maybe some deflation in that inventory, or will you generally hold those vehicles for resale?

Bret, this is Michael again. We generally hold our vehicles for retail. We have an active program in place and I have had it for a number of years to continually drive down the number of vehicles that make its way to the auction. Our aggressiveness in the second quarter, particularly in the month of May resulted in owning a lot more trades than we could get rid of. We saw a little bit of seasonality softening in vehicle sales because of the increase in volume in new sales, but again because of our internal practice and our internal process, we don't keep excess amounts of inventory. So, we retailed out our substantial amount and we did have to take some to the auction wholesale. But we drove our inventory down to be much more efficient. We like to keep in that 30 or 35-day range that keeps the pricing efficient, that keeps what we call, "the velocity theory efficient," allows us to maximize our inventory. But again, we have an ongoing program. We prefer to take as few vehicles as possible to the auction as we can. Bret Jordan - BB&T: All right, thank you.

And we'll take our next question from Ravi Shanker with Morgan Stanley.

Good morning everyone. This is Paresh Jain for Ravi Shanker. I had a couple of questions on used. Your used inventory has obviously come down a bit versus 2Q. But how do you feel about your mix today? Is it still a bit more CPO-heavy or would you say it's more balanced than 2Q?

This is Michael. It is a much more balanced inventory today. We did a lot work throughout the summer months. And yes, it is a much more balanced inventory than we had at the end of June.

Thanks. And as a follow-up, did you feel at any point in the quarter that either used unit sales or margins, especially for CPOs, came under pressure from affordability of new vehicles?

I think what we saw in the July and August particularly is an uptick in volume-based incentives on the new car side, which lowers the transaction price on those vehicles, which brings it closer to the transaction price of the use that we had in inventory at that time, because we had acquired those in a period prior to that where we paid more for them. And as one would expect, naturally that has to drive the pressure down on the use side, so that we can move the inventory. So I think the answer to question is yes.

Okay. And if I may, one housekeeping question on Q auto store. I'm not sure if you mentioned this in the previous call, but how much inventory can these stores hold once it's fully ramped up, and is the turnover going to be similar to your existing stores?

The inventory of each one, I think the question was how much inventory can these stores take? We have an internal model that works on the same day supply as our other brands do or other entities do. So you could expect it we would keep somewhere in the 30 or 35-day supply of used cars. So that's the kind of inventory that we'd maintain. Again, as I mentioned earlier, when you open one from the beginning, the first one or two months, you may see something a little higher than that because we have to acquire all one time. But on an ongoing basis, you could expect that Q auto would keep the same disciplines and day supplies as our other brands.

Thank you. Got it.

And we'll take our next question from David Whiston with Morningstar.

Thanks. Good morning. Keith, this first question on CapEx probably for you, I think you normally give that guidance excluding real estate purchases, but I was just wondering what are your thoughts on CapEx dollars spending, including real estate in a typical year.

Yes. We have our core CapEx program, which I mentioned, which is $45 million for the year. We have one, actually two properties that we're constructing additional real estate projects that are to move through dealerships out of leased facilities. That's up to 55. Then we have the incremental CapEx associated with our Q auto, which is a property purchased during the quarter that you'll see will show up in our Q. That is for future expansion of Q auto.

Okay. And following up, a little bit different version of an earlier question; what percent of your used vehicle inventory comes from trades, and then what portion of those trade-ins are wholesale? It sounds like very little.

So, this is Michael. So, in aggregate, because it is a franchise dependent and dealership size dependent answer. But in aggregate, north of 60% to 65% of our inventory comes from trade-ins. That is our best source of product, and that's where we focus on. Again, in aggregate, I can give you a number but it's somewhere in the very low single-digits of those cars that actually make their way to auctions. It varies franchise-by-franchise and market-by-market depending on the size of the store, but low single-digits.

Okay, thanks. And on used with the CPO, generally I assume a CPO vehicle is going to have a higher ASP relative to a non-CPO used retail vehicle, but what about gross dollar profit and gross margin?

CPOs generally carry a slightly higher margin on them, and of course with a higher gross profit dollar, there is however as you'd expect, a higher cost of acquisition, not only from the fact that you'd pay more than auction for those or at least trade-in. You have certification fees and the standard reconditioning costs that go on it, so yes, you're correct they do have a -- I'd say actually a significantly higher cost of acquisition.

Okay, thanks, very helpful.

Well, thank you everyone for joining us. We appreciate your participation, and look forward to talking to you again at the end of the fourth quarter.