Q3 2026 Asbury Automotive Group, Inc. Earnings Conference Call - ASBURY AUTOMOTIVE GROUP INC

Explicit Guidance:

• FY2027 SG&A: Expected to reach the "low 60%" range as a percentage of gross profit by the end of 2027, driven by post-implementation efficiency gains and gross profit growth.
• FY2026 CapEx: Updated full-year capital expenditure estimate to approximately $275 million (excluding real estate purchases).
• FY2027 Leverage: Target to reduce transaction-adjusted net leverage to below 3.0x by mid-2027.
• FY2027 Revenue/Unit Metrics (2027 Outlook):
  • New Vehicle PVR: Expected to stabilize in the $2,750–$3,000 range.
  • Used Vehicle PVR: Expected to remain near current levels, approximately $1,750.
  • Parts & Service Gross Profit: Targeting mid-single-digit growth in 2027.
• Fiscal 2028 and Beyond: Potential to reduce SG&A to below 60% dependent on the successful implementation of "digital vehicle transaction" processes, contingent on consumer adoption testing.

Business-Segment Outlook:

• New Vehicles: Expectation that same-store unit volume and PVRs will remain flat or similar to current levels in 2027; inventory management at Stellantis stores positioned for improvement in 2027 following reduced floor plan inventory.
• Used Vehicles: Strategic shift to growing volume while protecting profitability; expects used retail volume to increase year-over-year in Q4 2026 and continue growing into 2027. Anticipates continued headwinds from TCA accounting deferrals offsetting F&I growth in 2027.
• Parts & Service: Anticipates a return to consistent growth (mid-single digits) in 2027. Margin compression observed in Q3 is viewed as temporary due to Techia "muscle memory" ramp-up; margins expected to stabilize and improve as teams become proficient.
• Techia Platform Impact: Early adopter stores (Georgia, Kuhn's) have operated on the platform for >6 months, showing 7% customer-pay gross profit growth, 5% fixed gross growth, 4% unit increase per salesperson, and 9% gross profit per technician improvement.
• TCA (Total Care Auto): Full rollout to Chambers Group complete; evaluating three strategic options for the asset's future: maintain as-is, grow via external channels, or spin out to remove accounting noise.

Market and Competitive Outlook:

• New Vehicle Volume: EV sales declined 76% YoY in Q3 2026 (2.1% of total mix) due to the expiration of federal/state tax credits; expects this to normalize but acknowledges continued headwinds from imports (e.g., Hyundai) and Stellantis.
• Consumer Behavior: Noting a shift in mix from large V8 SUVs to hybrid SUVs due to fuel costs; no material evidence of work deferrals or increased declined service requests despite affordability constraints.
• Regulatory Environment: FTC administrative proceeding dismissed in October; views transparency in "doc fees" (bundled in price) as a permanent industry standard that levels the playing field, with no expectation for Asbury to lower fees.
• Competitive Position: Believes current share price does not reflect underlying value compared to private market transactions; holds 80%+ owned real estate and strong franchise mix as differentiators.

Macro / Industry Outlook:

• Interest Rates & Credit: Acknowledges negative equity from pandemic-era loan rollovers impacting specific brands; notes lack of major rate-driven shifts but anticipates OEMs may increase lease support to aid affordability.
• Wholesale Market: Softness noted but managed via 75–80% internal inventory sourcing (trade-ins, loaners, service drives) to protect PVRs.
• Consumer Affordability: Customer-pay ticket dollars remain flat or slightly up; consumer traffic (RO count) down 1.9% attributed to Techia transition efficiency loss rather than market share loss.

Strategic Initiatives:

• Techia Conversion: Completed conversion of all 57 stores to the single Techia platform (47 stores converted in Q3, final 10 in October). 35–40 stores have now reached the 6-month "muscle memory" threshold required for full efficiency.
• AI Integration: Leveraging AI to automate functions and improve SG&A efficiency, enabled by the unified Techia platform.
• Capital Allocation Priority: 1) Operational excellence; 2) Debt paydown to <3.0x leverage by mid-2027; 3) Share buybacks; 4) Tuck-in acquisitions (capital constrained until leverage target is met).
• Digital Transactions: Exploring "digital vehicle transaction" initiatives as a potential next step to push SG&A below 60%.

Risks and Headwinds to Outlook:

• Techia Transition Timing: Full benefits of the new platform are not expected until Q2 2027; Q4 2026 and early 2027 will remain impacted by stores in the 0–6 month learning curve.
• TCA Accounting Impact: Continued negative non-cash accounting impact from Total Care Auto deferrals expected to drag on reported F&I PVRs in 2027.
• OEM Volatility: Potential for PVR compression due to import pressures (Hyundai) and ongoing inventory challenges with Stellantis.
• Negative Equity: Pandemic-era high loan balances entering the trade-in cycle may restrict sales on specific brands where lenders tighten LTV ratios.
• Consumer Adoption Risk: Future SG&A improvements below 60% are contingent on successful consumer adoption of digital vehicle transaction tools.

Management Tone on the Future:

• Confidence Level: Highly confident in the long-term benefits of the Techia platform, describing the Q3 conversion as a "defining milestone" that clears the path for 2027 growth.
• Forward Outlook: Expresses caution regarding immediate (Q4) metrics due to the heavy lift of the rollout, but optimism for 2027 as the "muscle memory" matures.
• Strategic Discipline: Emphasizes a "no rush" approach to capital returns (buybacks/M&A), prioritizing balance sheet deleveraging before pursuing growth initiatives.