Q4 2019 Earnings Call

Operations and Michael Welch or vice president and corporate controller.

Marks are the same prior. Unless otherwise stated now like to turn the call over to Earl.

Thank you. And good morning. Everyone 2019 was a record year for Group 1 Automotive despite a week or new vehicle industry in both of our key markets. We were able to achieve record adjusted net income of 203.6 million dollars in record adjusted earnings per share of $10.93 per share by concentrating on areas of the business office where we exert greater control used vehicles parts and service F&I and cost.

Our adjusted net income number represented a 13.4% increase and our adjusted earnings-per-share performance a 22.7% increase over last month.

The strong performance was driven by our us operations on the full-year same-store basis. We grew used retail unit sales by 8.4% and after sales gross profit by 9.5% too remarkable numbers.

along with

Four percent increase in appetite penetration this drove an overall increase of 8% in total same-store gross profit at the same time. We maintain good cost discipline in the US wage is evidence fire 70 basis point Decline and adjusted same-store sg&a as a percent of gross profit.

More powerful performance was able to overcome the serious challenges presented by brexit uncertainty in the UK market last year new and used vehicle margin declines of approximately 15% in the UK last year were the result of weak overall demand in the market and excess Supply. We also suffered from supply shortages of chemo in our biggest business Audi due to the latest round of new vehicle emissions regulations impacting the OEM Supply chains. However, we're optimistic about the UK Market in dog t as the new one used margin declines improved to approximately 4% in the fourth quarter. The Audi supply chain issues are mostly resolved and we've seen more foot traffic in many months following the December 12th general election.

Please note that all comparisons and the prepared.

We're also.

Optimistic that our 2019 cost-cutting efforts will pay benefits in 2020.

In Brazil, the auto market continued to recover in 2019. We were able to increase same-store used vehicle gross profit by 17% and after sales gross profit by 8.2% off local currency for the full year.

This is evidence of continuing maturation of this business.

Durable provide some more detail on both our us and Brazilian performances shortly.

Looking at the pool year in total, we sold approximately 170,000 new vehicles and 160,000 used vehicles which drove record revenues of $12 billion Thursday. We were also able to expand our overall gross. Margin while further reducing sg&a as a percent of gross profit, which was the key to achieving the record adjusted earnings-per-share off $10.93, which I mentioned earlier.

Turning to our fourth quarter results.

During the quarter. We retailed over 43,000 new vehicles total Consolidated new vehicle revenues increased 7% on a constant currency basis driven by a 4% increase in average selling price and a 3% increase in retail unit sales.

Additionally our new vehicle same-store unit sales increased 2.5% which outperformed the overall retail Market.

Our new unit sales Geographic mix with 74% 20% UK and 6% Brazil. Our new vehicle brand mix was led by Toyota and Lexus sales which accounted for 25% of our new units BW now D represented 15% BMW and mini represented 12% Honda and Acura 11% off in Ford represented 10% of our new unit sales.

During the quarter. We also retailed over 38,000 used units total Consolidated used vehicle revenues grew 8% and gross profit increased 13% on a constant currency basis often driven by continued strong performance in the US and Brazil.

the name

Jus same storage unit volume increase while expanding our per unit retail margins by 5% is another very impressive performance by the US operating team. And as I mentioned previously this growth did not come at the expense of our new vehicle sales.

Total Consolidated after sales revenue increased 7% on a constant currency basis driven by increases in customer pay of 11% Collision of 11%. 3% in warranty of 1% Gross. Margin expansion of 150 basis points helped increase our total Consolidated after sales gross profit off by 10% on a constant currency basis. And are you as same store after sales gross profit growth of 12% was an all-time company record.

Finance and insurance gross profit increased 5% on a Consolidated constant currency basis this growth was driven by a strong increase in US penetration as well as total retail unit growth of 5%

for

Starting our Geographic segment results. I'd like to turn the call over to Darryl Cunningham to discuss our us and Brazil quarterly results before I cover the UK.

Thank you girl. We were very pleased with our record fourth-quarter performance in the u.s. Due to strong growth in use Vehicles F&I and after-sales. We were able to generate a 9% increase in total same-store gross profit for the third consecutive quarter.

During the quarter our new vehicle same-store unit sales grew by two and half percent while the industry was down 2.1% The new vehicle sales increased did not come at the expense of used volume is our same-store use retail unit sales grew 8% and we're also able to expand our margins by $40 per unit with the shift the more business of the retail Channel along with our recently implemented big data-driven pricing strategies have been critical in driving used vehicle gross profit growth wage was up 12% over prior year on a same-store basis as we look forward to 20 20 or Focus will be on continued growth of the value line initiative Improvement and lowering discounts off as advertised pricing and further development of better sourcing all tournaments.

After sales revenue grew by 8% on a same-store basis and gross profit increased by 12% which again was an all-time record for the company same-store customer. Okay and collision gross profit both increased 13% with warranty up 5% and wholesale parts gross of 4%

is implemented or four-day work where you can $75 stores and are thrilled with the results is driving better employee retention and we increased our same-store headcount by over 300 technicians in 2019, a 13% increase looking forward to 20 20 would expect total after sales growth to continue to expand Choice least mid single-digit rates.

Fni income for retail unit for the quarter increased $57 per unit to $18.35 driven by strong product penetration and income per contract increases month full year USF and I pru was $1,782 and we expect twenty twenty-two. Once again the in the Seventeen hundred and fifty to $1,800 range Turning to an update on our digital efforts the accelerate platform. Our online retailing initiative is now in all of our dealerships and we remain pleased with the traffic gross margins and customer feedback during the quarter over 2,100 customers use accelerate as a tool and their vehicle purchase up from six hundred in the fourth quarter first quarter of 2019.

Closing rates are pacing it more than double our other lead sources. We look forward to more improvements and accelerate in 2020.

and your

In addition our omni-channel efforts and after sales are continuing customer scheduling service appointments online grew 15% versus Q4 2018 and in December 2019 nearly 29% of our service appointments were made online are Trends in digital traffic also continued on a very positive track as total website visits increased 27% and organic visits increased 19% both supported by a reputation management and SEO initiatives.

Lastly our team was able to leverage adjusted sg&a by 200 basis points from 71.4% down to 69.4%

We anticipate continuing to leverage sg&a as we increase gross profit from our used and after sales efforts.

In Brazil, we generated very strong year-over-year bottom-line growth behind impressive used vehicle after-sales and sg&a performance.

Same-store used vehicle gross profit increased 13% on a constant currency basis largely driven by the continued efficiencies from our centralized appraisal desk initiative wage.

Brazil after sales gross profit increased 10% on a same-store local currency basis driven by an increase in technician head count of 11%

Finally our local team delivered on our cost-reduction initiatives and lowered sg&a by 380 basis points to 77.8% We look forward to continued growth and twenty20 as we further Implement us learnings into our Brazilian business and benefit from the rebounding new vehicle industry sales environment. I will now turn the call back over.

Thanks.

As we previously mentioned market conditions in the UK remain very challenging in the fourth quarter primarily caused by continuing brexit overhang the total new vehicle industry was down 2% for the quarter, but we were able to increase same-store new vehicle sales by 4.8% and used vehicle sales by 3.5% new vehicle Market wage also resulted in continued downward pressure on vehicle margins as we saw same-store gross profit for retail unit declines of 6% for new vehicles and 4% for used vehicles on a constant currency basis.

As I noted earlier immediately following the election outcome in mid December. We have noticed an uptick in new vehicle inquiries and orders importantly. We are seeing that Improvement continue in January Thursday. We are somewhat optimistic about the UK Market in 2020. I'll now turn the call over to our CFO John wrinkle to go over some of our financial results in more detail off.

Thank you.

Good morning, everyone for the fourth quarter of 2019 or adjusted net income increased 12.5 million dollars or 28.6% over are comparable 2018 results to a fourth-quarter record of fifty six point three million dollars these 2019 adjusted quarterly results exclude eight point two million dollars of net after-tax charges more than a Plane by eight point eight million dollars of non-cash asset impairments primarily resulting from our annual franchise valuation modeling on a fully-diluted per-share basis adjusted earnings increase 30.3% to $3.01 a fourth-quarter record.

Airplane interest expense decreased by one point nine million dollars or 12% from prior-year to 14.6 million dollars primarily explained by lowering interest rates month. We should continue to see a year-over-year benefit from lower rates in the first three quarters of 2020 other interest expense increased by $600,000 or 3% from the prior-year off the $19 primarily reflecting higher acquisition line. Borrowings are Consolidated adjusted effective tax rate for the fourth quarter was 23.5% bringing a 2019 full year adjusted rate to 23%

This would be a rough.

dictation for 2020 as well

turning to our Consolidated liquidity in capital structure as of December 31st. We had twenty-four million dollars of cash on hand in another hundred eleven million dollars that was invested in our fourth set account bringing total cash liquidity to 135 million dollars.

In addition there was 265 million dollars of additional borrowing capacity on our syndicated acquisition line bringing total immediate liquidity to four hundred million dollars.

Are you a credit facility rentals adjusted leverage ratio decreased to 3.26 times at the end of the fourth quarter leaving plenty of flexibility for Capital deployment.

During the fourth quarter. We used five point five million dollars to pay dividends of $0.29 per share, which is currently an annualized yield of approximately 1.1% We also repurchased 163000 shares of our common stock at an average price of $98.28 per share during December and January for a total of 16.1 million dollars. We have fifty eight point nine million dollars of our board authorization remaining

total cap.

for 2019 came in at 95 million dollars and we're targeting 125 million dollars or less for 2024 additional detail regarding our financial condition please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website I will now turn the call back over to our own thanks John related to offer corporate development efforts has previously announced in the fourth quarter we purchased to Lexus dealerships in New Mexico and opened a Jaguar Land Rover dealership in North West London month for the full year 2019 we acquired 15 franchises that will generate approximately $430 million dollars in revenues

We also disposed of 12 franchises the generated 240 million dollars in trailing-twelve-month revenues.

Finally before I turn the call over to the operator for your questions. Let me update our Market Outlook for 2024 the us we expect to again see a slight pullback in the overall new vehicle in a total new vehicle sales in 2019 came in at $17 million units and we're anticipating about a 2% decline in 2022 around 16.7 million.

for the UK the new

Vehicle industry declined 2% in 2019 to 2.3 million units. We expect a 2020 industry to grow in the low single-digits to around two point four million units off cuz the industry recovers from emissions legislation related supply shortages and as we see the overhang from brexit finally start to ease

And her Brazil the market improved by nearly 8% in 2019. It's almost two point seven million units Kevin the positive signals. We continue to see in the economy. We expect trying to continue with an increase of another 5% or so to around 2.8 million units.

In this environment we remain confident that we can continue to grow earnings. We see opportunities to further grow after sales and used vehicles in all three markets in addition with a firm director for brexit We Believe significant improvements are available from our UK operations.

This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session operator. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And the first question will come from John Murphy with Bank of America, please go ahead. Good morning guys. This is your then on for John first question on the floor plan interest expense given it was much lower this quarter was this a function of lower rates or are there any specific actions you're taking in terms of inventory management, or or maybe it was something else.

This is the Improvement is all basically attributed to lower us labor rates as the FED has got rates. So we anticipate that that will continue into twenty-twenty least for the first three months. Okay, great. Thank you. And then for the used vehicle business, can you hear me talk about the key drivers of of the Improvement in the margins and to what extent was that practically value line?

Darryl Cunningham here one area of significant Focus for us is we price our vehicles to the market from the day that they are available for sale and and in concert with that we try to limit the discounts that we offer following that so the better you price your vehicles to Market and then the fewer discounts you offer the better your gross profit is and we saw some improvement in that during the quarter month. We continue to work on sourcing efforts and that's a that's a continual Focus for us as well. Those were those were two of the larger drivers in that in that gross profit Improvement off. Okay, and then just a quick follow-up given how well volume was doing for you guys last year. Would you consider expanding the two other regions as well?

expanding what other regions

5 value by your line. We're experimenting with it in Brazil.

Yeah, we we do we do test a bit of that in the UK, but it's the used car market is structured differently with dealerships generally retail used cars of the brand they represent with a new car franchise. So what we've tested is put up our non-franchise used cars into a separate location. So for example, if you have a Mercedes dealership, you put your BMW and Land Rover trades off to a separate lot. And so we're we're taking a look to see if that makes sense as opposed to really focusing on low price used cars. I'm most of our franchises in the UK are luxury brand franchises. So our used vehicles.

tend to be uh

more luxury Brown

Okay. Thank you very much. That's it for me.

And the next question comes from Gupta with JPMorgan, please go ahead are you doing well? Thanks for taking my questions. I just had a choice, you know, the beginning, you know on the 20/20 moving Parts on the earning Bridge, you've talked about, you know, your expectations for new vehicle sales. I think you briefly mentioned your expectations for parts and services. But and clearly you're seeing a lot of strength, you know on the used vehicle side as well on from a gross traffic perspective based on all the initiatives, um, in 2019 off, you know economics seems to be used to continue to you know, grow from a Jeep your perspective. You have to give them some floor plan and interest I mean is it would it be unreasonable to expect similar to better earnings growth you earlier in 2020 vs 2019 or is there anything different that we should be expecting? You know, just just just broadly.

am I

This is my recollection in my assumption so far with only one month under our bill is the market is quite stable and I don't see any major shifts occurring at the moment. So the way we're approaching the business is kind of Steady As She Goes relative to what we did last year. There was a great used car market been out there for more than a year. And a lot of that has to do with the relative value of a used car compared to the rising prices of new cars and there's still massive service rep capacity for us and potential. So we we don't see a big change in the market as we sit here today the biggest change in our business overall is we think we'll have a lot more potential in the UK in the year ahead.

Got it. And from an engine. It's a gross perspective. Is there any range we should be expecting for 20 20? I mean obviously pretty good performance in 2019. Despite the headlines in UK. You can expect us to continue to step down further in 2020. Yeah, right. This is John Regal.

Able to continue to grow gross profit, you know, Darryl outlined, you know, the the opportunities in the US continue to be in parts and service and used we think we can certainly level that if we're able to to gross profit. They're clearly with our outlook for the UK. We definitely anticipate being able to deliver some sg&a leverage there as well. You know, I would think that if you get the market rebound and the cost-cutting that we're working on we ought to be able to get that back to at least 2018 levels and then the Brazilian team you saw, you know a good progress in the fourth quarter there. So, you know when you add all that together, I do think we'll be able to continue to show Leverage in twenty-twenty on sg&a as percent of gross.

Got it. Just this one last one for me. And we believe this question to the earnings but you know a lot of lot of the oems or you know set to launch some electrical actually able to see our next year. I mean you already had the experience with you know, the neutron is there already stores. What kind of you know, how are you preparing for the surgery in terms of you know, like when you got backs Investments That might be required or you know like to link capacity OR technician training would we expect this to move the needle significantly from birth or engine in perspective, you know just to get a few prepared for the surge. That's it. Thanks. This is I don't see any material capex or investment required to to move with the auto manufacturers as they shift toward more electric vehicle offerings. Yeah, we put in charging stations. We trained technicians and there are some tools.

And such but but this is kind of a slow steady migration and it's been under.

Way for for more than a year of we can go back to the Nissan Leaf good number of years ago. So we we don't see that as an obstacle in our business.

Got it. Thank you.

The next question will come from our mental Cinco vicious with Morgan Stanley, please go ahead great. Thank you for taking the question as I look at the same Parts and Services growth in the US the same Source sales revenue growth. There is a bit of a diesel in the in the fourth quarter relative to the third quarter of the cops roughly similar just juice was hoping for more color on that and then you know, what gives you confidence into 20 20, some of the diesel was a little lighter.

Warranty work in the fourth quarter, then we'd seen in the last three quarters. So that was the main driver behind that. We're we're happy with our customer Pedro and we continue to see benefits from the four-day work week and the capacity we're adding there we continue to see I'm setting and and how do you think about the the the various wage growth components or the various business components? You know how they project to grow in 2020.

Oh.

I think our menu says you look at if you're talking about parts and service, you know clearly, you know, we're going to continue to drive customer pay we have a lot of success there in 2019 with the capacity. We've added off the expansion of hours, you know, we think there's certainly more to go their Collision continues to also be a bright spot for us. So we think there's opportunities to grow that warranty. You're somewhat at the you know, the the the manufacturers Mercy is the recalls are announced that there seems to always be some of those coming up and then Wholesales another area where we can continue to to move the needle but you know, I'd say our primary focus is on customer. Okay, and then you know when when you mentioned 13% growth in technician count, you know, what's the reason that Parts and Services can't grow 30,000. Is it just the mix of you know customer pay, you know, the proportion the customer pay makes up relative to the rest of the business or you know any other moving pieces to be mindful of

Yeah, I mean, that's some of it there's also.

Wrap up with getting the technicians fully productive and then one last one here with regards to the UK. You mentioned that that um, you know that there there's there's opportunity here and in the cost-cutting benefits, you know will will pay in in in 2020 that you you know, just trying to think through are there any initiatives that you are looking to take now that we have more certainty around the environment that you know what had been put on hold and you know now now you're able to sort of move forward with them.

I would say the the biggest change is we should have a better environment to trim our portfolio up a bit. There's probably some dispositions. We need to make based on some large Acquisitions. We made in the previous three years and there hasn't been much of a seller's market in the UK the last year or two. So we're still in a consolidating mode in I'm in the UK. We need to right-size our portfolio bit, but what we're encouraged by and it's probably too early to go crazy on this is simply the order taking our major breakdowns for the last six weeks or so. March will be the key as it is in in the UK for us to see you know, how how much true growth there is in the market but we're fairly optimistic at the moment.

Great. Appreciate it.

The next question comes from Rick Nelson with Stevens, please. Go ahead.

Thanks, good morning. What to ask you about the acquisition of our much acquired two stores in this number fifteen stores and bought a 2019 how you see, you know, the environment the multiples your appetite in the US UK sounds like you're consolidating in the UK is forces acquiring but maybe Brazil commentary as well. Yeah. Hi Rick, it's Earl. There is a a good supply of Acquisitions in the however. We we are very cautious about Acquisitions in the US clearly, we found some that meet our own needs and hurdles in the last year or so, but it's very, you know, it's very possible that you can destroy capital in a market that settling down as the new vehicle Market.

Crispin

Last three years plus so we're we're opportunistic and we're interested in growing in the US but you know, we we don't we're not going to be too aggressive. We we want to make sure we get a good return on our Capital when the pricing I see in most of these deals wouldn't make that possible the UK. I wouldn't say we wouldn't expand because we have some of our OEM partners that want us to expand but as I mentioned a few minutes ago, where more in a right-sizing mode there right now, we probably do. We need to do a couple of dispositions more than we need to do Acquisitions and relative to Brazil. You know, we'll we're willing to grow there with the cash flow. We generate in that market which we are generating cash there, but you know Acquisitions are more difficult in Brazil because asset purchases are unusual and you frequently in Harrisburg.

Liabilities from the seller and and we don't we don't do that.

So so yeah, we want to grow the company and we clearly have the financial wherewithal to do it, but we are very cautious these days on that.

Thanks for the color and then her Darryl gpus in the US. We were over here Improvement on the new car. I appreciate the used Side earlier, you know, if you take we've set of floor here, is it specific brands that drove the performance or dead and you call her around that would be helpful. Good morning, right? It was across the board on Brands and geography and what I attributed to was a lot of the digital efforts that the team has worked on to drive. We we quoted some of our our our traffic counts on organic traffic and website traffic and that's that's really really helping us drive up more people in our dealerships. And and and so that that that's what I truly did too.

And then any comments.

Within the US on taxes would would be interesting.

I'm sorry. I'm not that perform for taxes how that perform versus the rest of the Texas was basically in line with with what the rest of our operations did but you know, since we are pretty heavy with detectives footprint that kind of gives you some idea and we clearly outperformed the US market with our results.

Such a great. Thanks and good luck. Thanks. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Earl hesterberg for any closing remarks. Okay. Thanks to everyone for joining us today. We look forward to updating you on our first quarter earnings call in April. Have a good day.

The conference has now concluded thank you for attending today's presentation. You may not disconnect.

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