Q1 2021 Asbury Automotive Group Inc Earnings Call

Ladies and gentlemen, good day and welcome to the Asbury Automotive group first quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to MS. Karen Reed. Please go ahead.

Thanks, David and good morning, everyone.

David mentioned today's call is being recorded and will be available for replay later this afternoon well.

Welcome to Asbury Automotive group first quarter 2021 earnings call I'm, Karen Reed, Asbury, New Treasurer, and head of Investor Relations and look for to engaging with our analyst and Investor community. The.

Press release detailing Asbury the first quarter results was issued earlier this morning and is posted on our website at Asbury automotive dotcom.

Participating with me today are David Hult, our President and Chief Executive Officer P. J, the Idaho, our Chief Financial Officer, and Dan Clara, Our senior Vice President of operations at the conclusion of our remarks, we'll open up the call for a question and I will be available later for any follow up questions that you may have sort of.

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 the rest of the star historical in nature, including those statements relating to the duration and contemplated impact of the COVID-19 pandemic on our business and financial apart performance the impact of the chip shortage as well as the financial projections and expectations about our product markets.

And growth.

All forward looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by these statements including potential impacts from the COVID-19, pandemic and the semiconductor chip shortage on us our industry and our customers suppliers vendors and business partners.

For a minute 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 2020, any subsequently filed quarterly reports on form 10-Q, and our earnings release issued earlier today.

We expressly disclaim any responsibility to update forward looking statements.

In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call as required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website.

We have also posted an updated investor presentation on our website Asbury Dot com highlighting our first quarter results. It is now my pleasure to hand, the call over to our CEO, David Hult, David Thank you Karen.

We're excited to have you on our team welcome.

Welcome to our first quarter earnings call. We have just reported record adjusted EPS of $4 68.

Of 160% over the prior year.

Dr continues to recover from prior year lows, despite supply chain disruptions due to the chip shortage in COVID-19.

The strong demand in the face of lower day supply helped us deliver a strong gross margin of 17, 5%.

An expansion of 60 basis points versus the first quarter last year.

We are also staying disciplined in managing expenses.

The thing in SG&A as a percentage of gross profit of 62, 7% in.

880 basis point improvement versus prior year.

Of note.

This result includes an estimated 22 cent negative EPS impact from the winter storm experienced in February the caused us to close stores in several markets.

Along with some structural damage.

Our total revenue for the quarter was up 36% year over year.

In total gross profit was up 40%.

Strong signs of recovery New unit sales were up 24% and used unit sales were up 16% with margin expansion in both segments.

Total F&I revenue was up 25%.

While revenue from parts and service was up 18% from last year.

We saw signs of growth in parts and service over this past quarter as drivers of returning to the road.

Our balance sheet remains strong due to our performance and cash flow.

Our pro forma adjusted net leverage ended this quarter at one seven times.

This leverage level will allow us to maintain a more active acquisition pipeline.

And grow our business by strategically deploying capital.

A couple of additional comments regarding performance.

We achieved an adjusted operating margin of six 1% up 180 basis points over last year.

We successfully launched click lane, which Stan will discuss further.

Regarding acquisitions.

It is a very active market and we are engaged in many conversations but remain disciplined in our approach. We are confident we will find deals that make sense for asbury.

Looking forward.

We are focused on our five year plan.

While we continue our disciplined approach to operating our business and allocating capital to its highest returns.

Finally, I would like to thank all of the hard working men and women who showed up every day throughout the past year with a positive attitude and a commitment to serving our guests.

Once again, you delivered great results for our company.

I will now hand, the call over to Dan to discuss our operating performance Dan.

Thank you David and good morning, everyone. My remarks will pertain to our same store performance compared to the first quarter of 2020.

Looking at new vehicles.

Based on current market conditions, we are focused on being opportunistic with our inventory and improving growth is to maximize profit.

Our new average gross profit per vehicle was up $640 per car for 39% from the prior year period.

All of segment margins were up significantly from the prior year period.

Dr <unk> and the acquisition of Barclays.

Luxury represent a 45% of our total revenue up from 34% in the first quarter of 2020.

Driving our all store, new vehicle, <unk> up $1114 or 67%.

At the end of March our total new vehicle inventory was $527 million and our day supply was at an all time low of 34 day down 71 days from the prior year.

Some of our brands were below 20 day supply during the quarter and experienced major challenges due to the lack of inventory.

With no clear understanding of when production will return to normal levels. We expect the day supply to remain low throughout the remainder of the year.

Turning to used vehicles.

Our gross margin was eight 1% of 100 basis point from the prior period.

Representing an average gross profit per vehicle of $1943 as the <unk>.

Result of our performance our gross profit was up 36%.

Our used vehicle inventory ended March at 193 million, which represents a 27 day supply.

The 115 days from the prior year.

We remain focused on sourcing inventory that will generate a fair return.

Turning to F&I.

Our strong consistent and sustainable growth in F&I delivered an increase of $114 to $1798 per vehicle retail from the prior year quarter.

In the first quarter, our front end yield per vehicle increased $637 per vehicle to a first quarter record of $3932.

Turning to parts and service.

Our parts and service revenue increased 1% in the quarter with business exceeding pre COVID-19 numbers in March.

We continue to see this trend thus far in April.

And now I would like to provide an update on our only channel initiatives.

In December we launched <unk>, which is the latest evolution in our own the channel strategy that we began more than five years ago.

We are excited to announce that we have completed the rollout of <unk> to all stores in this quarter.

As a reminder.

Click lean is a complete transactional tool, which allows for a true online car buying and selling experience.

It feels many of the gaps that exist with online automotive retail platforms. Currently on the market, which basically are lead generators and unable to fully complete an online transaction.

Features that are unique to click cleaning fluid.

Perfect trading values and loan payoffs.

The real payment figures based on local taxes and fees a loan marketplace, which now includes more than 30 lenders the.

Specific finance and insurance products customized for the vehicle and consumer.

The ability to sign all documents online via <unk>.

The aim tool service and collision of appointment scheduler, and we just added parts and accessories.

Although police lane just fully launched in all stores, we have some promising initial metrics to share.

Average down payment is more than double our in store average.

F&I PBR is 17% higher when compared to our stores.

Nearly 50% of customers chose to take delivery of at home.

Credit scores on average are higher than our stores.

On average nine out of 10 customers out of ply for alone are approved through <unk>.

50% of transactions had a pay off with their trade.

Craig it's taken through <unk> debt, where retail are averaging higher front end of <unk> when compared to our stores.

Trade through click lane are turning in less than 15 days.

We are certainly excited about these early indicators.

And finally, I would like to take this opportunity to express appreciation to all of our teammates in the field for their continued focus on the guest experience the commitment to continuous improvement and the perseverance.

I will now hand, the call over to P. J to discuss our financial performance P. J.

Thank you Dan and good morning, everyone I'd like to provide some financial highlights which marks yet another record quarter for our company for additional details on our financial performance for the quarter I would refer you to our financial supplement and our press release dated today April 27 2021.

Overall compared to the first quarter of last year total revenue was 36% higher than last year gross margin expanded by 60 basis points to 17, 5% driven by our focus on maximizing gross profit in a market where demand continues to outweigh supply.

Moving down the P&L, we saw SG&A as a percent of gross profit decreased by 880 basis points to 62, 7%. We estimate the SG&A would have been approximately 100 basis points lower absent the impact on gross profit and expenses of the winter storm that resulted in store closures from several.

Markets and also caused damage to a few of our Texas stores.

Our actions to manage gross profit and control expenses resulted in a record first quarter adjusted operating margin of six 1%.

An increase of 180 basis points above the same period last year.

Adjusted net income increased 161% to $90 7 million and adjusted EPS increased by 160% versus the prior year period, maintaining our momentum coming out of 2020.

Net income for the first quarter of 2021 was adjusted for the following pre tax items gain on legal settlement of $3 5 million or <unk> 14 per diluted share gain on real estate sales of $1 1 million or <unk> <unk> per diluted share and real estate related charges of $1 8 million for seven cents per diluted.

Sure net income for the first quarter of 2020 was adjusted up up for pre tax items totaling $20 4 million or <unk> 79 per diluted share for specific details on 2020 adjustments. Please reference this morning's press release.

Our effective tax rate was 22, 3% for the first quarter 2021, compared to 19, 1% in 2020.

Floor plan interest expense for the quarter decreased by $4 1 million over the prior year quarter, driven primarily by lower inventory levels and lower LIBOR rates.

With respect to capital deployed this quarter, we spent approximately 17 million of on store improvements and real estate and we repaid approximately $14 million of debt.

As a result of our operational performance our balance sheet remains in a very strong position and we ended the quarter with approximately $550 million of liquidity comprised of cash floor plan offset accounts and availability on both our used line and revolving credit facility.

Also at the end of the quarter, our pro forma adjusted net leverage ratio stood at one seven times well below our targeted leverage range of three point of all the times.

As we look forward to the remainder of 2021, we anticipate similar conditions to what we have seen the last few quarters inventories are likely to remain low and there will be continued opportunity to drive gross margin.

Overall as we did in Q1, we are still planning two of 16 million Saar environment, but we'll keep our business nimble and flexible with an emphasis on gross margin and SG&A expense management.

One ship worth noting is that as the economy opens up more we expect to see higher growth and the bigger contribution from our parts and service business.

With regard to our five year plan, we are only one quarter into it but are off to a great start.

Our <unk> platform is up and running across all of our stores are same store sales revenue in Q1 was the strong 18% and we are building an active acquisition pipeline to pursue those deals that make the most sense for Asbury.

As we progress we will provide regular updates on the five year plan and how we are delivering.

In closing I would also like to thank our teams across the business to continue to work tirelessly. During this unprecedented time to ensure our current and long term success.

This concludes our prepared remarks, we will now turn the call over to the operator and take your questions.

Operator, thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so now by pressing star one on your Touchtone phone. If you are using a speaker phone. Please make sure that your mute function is disabled to allow your signal to reach of our equipment again to ask a question. Please press star one now.

Our first question comes from Rick Nelson with Stephens.

Hi, Thanks, a lot of her.

Good morning.

Sounds like you're expecting inventories.

To remain tight.

Do you think you can maintain these gpus from <unk>.

The SG&A.

Penetrate as shown in the environment like the sudden.

Is there potential share of 34 days.

Supplied narrow.

You kind of where you see that going.

Could.

Potentially become even more.

For a more problematic.

You know Rick as we all know this is David its a fluid situation. It's a fantastic question.

As we sit here today.

We received far less cars in the month of April than we anticipated the.

But looking forward. It may we're anticipating more inventory to come in than we received in April so based upon what we have on the ground now and what we perceive we're going to receive in May which could certainly get pushed.

We think we're in fine shape.

To deliver what we need to from a unit perspective, but also keep the margins as well, it's really tough to look beyond a month out of time.

Not knowing what's going to happen with the chip shortage of inventory and what's going to come I mean, it's really really too hard to see how much beyond that but we have strong confidence as we're positioned in April and what we anticipate receiving in may.

Thanks for the color there, but are there Brian.

That are more impacted.

Semi conductor with shortage of the others are.

How does have looked for the crowd for the spectrum.

Good morning, Rick This is Dan.

Yes.

And every every brand has definitely impacted but I would say.

The domestics are more impacted.

And then some of the other ones that we're seeing out there.

Carriage for parents.

Thanks.

I'm curious from the used car.

Outside of that all of its what proportion of in vehicle. How are you sort of just hiring internally.

What kind of proportion of how are you going.

The auction of what do you see.

Calling on them the ultra market nowadays.

Yes, Rick.

Another great question. So we.

Sourcing.

Over 50% of our cars.

Coming from the trading perspective.

<unk> prices as you can imagine.

At an all time high.

And the availability.

As continues to be scarce at the auction.

Yeah.

The parts and service.

Quite a bit of French at all.

From a PE same store upgrade per sale warranty down 13% of carry of is what's driving that differential.

What type of outlook I guess for for those.

Two drivers to service from parts.

Rick This is David the.

The warranty.

It had some flows with the brand and what's going on with recalls and everything so across the board important domestic luxury we're just down everywhere in the warranty don't read much into that.

The kind of Pops up and down and we will continue to do that throughout the year. We're really excited about customer credit pay when you think about it we probably had close to 40% of our stores at one point out of another closed down in February. So we were dramatically impacted in February not only with sales, but in parts and service.

March came back so strong it was actually ahead of 19 pace numbers.

As we sit here in April we're experiencing the same so the customers of back on the road the.

Service business is back.

We always had a lagger in collision coming back in now pollution as back as well.

So while we're feeling it on the variable side with some shortages with inventory.

Thankfully parts and services picking up on that and just to go back and touch on what Dan said about the used cars and acquisitions of 50% coming from trade or other resources as buying directly from consumers off lease vehicles from the manufacturers.

Certainly within our service drive in Loaner car fleet. So we got a certainly a tight day supply, but we think it's one that the inventory turns quickly and we're creating great margins with it.

Craig.

Uh huh.

One more of it.

April Yeah, you talked about the inventory.

The challenge is.

True.

So how do sales look and J P is harder.

Alright, continuing to be all of it.

Yes, just what <unk> seen in the first quarter results were experiencing net as we sit here today in April as well.

Great.

Hey, good luck thank.

Thank you. Thank you.

Thank you. Our next question comes from John Murphy with Bank of America.

Hi, Good morning, guys I used today.

First question follow up on Ricks on on inventory.

The U N as well as the rest of the industry has done a great job of 'twenty inventory faster and it Hasnt had a significant impact on sales from short tenured it to some extent, but it's.

Not been of.

A major negative what point.

Or what inventory level.

You think you start running into constraints on supply of nimble deliver the consumer what they want.

And also on the inventory side, we all know often dog sit around and.

And the inventory I'm just curious if you think that you've kind of you in the industry of worked out a lot of these on attractive vehicles and now we're really just looking at really hot selling vehicles in inventory that attorney of fast.

John it's of Great question.

And the again, it's such a fluid situation and you don't have a long runway to look over the next 90 day, what's coming so my comments and I'm going to make of based on sitting here today. Our perception is we're going to receive almost double the inventory in may that we received in April.

I can tell you sitting here today, if we receive the same inventories levels in may that we received in April.

We would struggle to get to the new unit sales that we need to get to.

So.

No insight the June at this point.

But we're confident where we are sitting in April and we're confident with May assuming we received the production that we were told were going to receive.

As it relates to the the hot selling products as you point to the OE.

<unk>, a really great at this while the chip shortages, there they've really been shifting their production to the faster selling vehicles.

So to your point about some of the dogs that sit out there I'm sure. There's a few strays every now and then.

But it's really very light inventory and it's moving pretty quickly. The demand is very high which is obviously you can see everyone's benefiting from in the margins.

I can't see it slowing down anytime soon.

Does this also with.

With people coming back there's going to be of pent up demand on the fleet side as well.

Yeah.

Pretty encouraging.

Okay.

And then just second question Park place, obviously was a big acquisition or you guys didn't even mention it much in the quarter just curious if the it sounds like integration is going.

Very smoothly because theres no theres no noise about it so I mean debt that's a good sign.

And given the debt appears to be going so well.

You've got a $5 billion target for your five year plan.

Could you get more aggressive on acquisitions I mean, some of your peers here.

You are talking about that kind of number almost of an annual basis and we're doing the analysts at an annual basis I mean, it used their opportunity to get more aggressive in and even larger than what youre targeting at the moment.

Yeah, It's a great great question, John touch on Barclays for real quick.

The.

The largest acquisition in Asbury history from a dollar standpoint, but from a meaning standpoint, and really setting us up for who we want to be I mean, we looked at park place of the Crown jewel in the automotive industry the.

Professionals that we have there the general manager of the senior team that runs the business. There is everything we thought it was more but it takes a lot of communication and care to make sure of things go smoothly and we're looking at the long term relationships and runs so very very excited what we're seeing there and it kind of shows in our total numbers compared to the same store so that will continue to progress.

And the relationship is great and the acquisition transitions going great at this point.

As it relates to the.

Acquisitions in.

In the time that I've been with the company, we've never had more conversations going on and what we have now.

Everyone wants the prices based off of COVID-19 numbers, I don't think that Thats in the shareholders' best interest of by every acquisition based on COVID-19 numbers and there has to be some discipline and common sense of the numbers.

So while we feel the need to one of.

The acquire things right now, we're not going to go outside of our structure because it's about the long game and doing the right thing with the shareholders' equity.

We will stay disciplined we know deals will come our way, we like a lot of the conversations that we're in now.

There arent any deals being announced that we haven't looked at.

But we're really not just the into acquiring revenue, we really want to make sure. It's revenue that is meaningful for the company for five years 10 years from now and we're not just from buying at a moment in time when.

The earnings multiples of very high.

Okay and then the last question that you all kind of weave together with debt.

Leanne you gave us some metrics which were helpful. The.

The very curious what kind of geographic.

<unk> of our extension in your reach that is that is giving you. If you can tell us sort of early days and and even with that what kind of market share gains you may be seeing in your existing markets because of the ease of transaction for the consumer.

Sure it's of Great question and keep in mind every store in the company has it but some stores were rolled out in the last week of the quarter.

We're seeing the luxury customers really take advantage of the tool we're seeing the import customers really take advantage of the tool.

The senior at a little bit on the domestic side, but I think.

We're really hurting with inventory on the domestic side, which is making the difficult you can purchase what you don't have.

With the push start we were seeing 70, 80% used in 2030% no. It's about a 60 40 split used the new right now.

And we're certainly obviously acquiring a lot of customers.

With sales transactions that we never did business with before.

We're shipping a lot of vehicles, but I think that is somewhat normal as well right now with low day supply and people are really looking for their vehicles I think the key metrics to really focus on.

It's not of lead generation of the transactional tool most people's tools are seeing a lot of subprime and are struggling to get the financing of.

Our average credit scores so foreign quickly and is higher than the store average nine out of 10 people are getting finance.

Double the cash being put down on of quickly consumer compared to the in store. These are very strong metrics.

That said strong creditworthy people are buying these cars online trading vehicles with payoffs of taking delivery of them at home and I can't emphasize enough. It has just started so this is the only going to build incrementally over time.

And we believe we're the first in the space to have a full transactional tool not of lead generation not a piece of the sale a full transactional tool, which puts us in the driver's seat for really growing the tool and like I said, we launched all of the store at the end of the quarter, we have already launched parts and accessories.

On it now as well so we're going to continue to innovate with this tool and we're going to get better each and every month and we will certainly continue every quarter the share the information of what we're seeing but it's very very promising.

I'm sorry, David if I can follow up on that so if we think about quickly and your acquisition strategy. I mean, you could argue that.

The digital overlay means that you might not need to make any acquisitions. When you have a much farther reach so you can gain market share that way or Conversely, some of arguing that you need to build a greater national network to really leverage the digital overlay.

Which way do you think it is.

And how do you how do you approach the marriage of the two day.

It's an excellent question and look at Theres more than one way to climb of mountain, but from our perspective is brick and mortar is permanent and it's expensive and of the transaction happens online then it's really just the supply chain delivery.

Used. This example, before so I'll use it again as we sit here today. We currently don't have any stores in Phoenix, If we chose to put a ring around the city of Phoenix with $5 5 million population and start marketing quickly no differently than Carvana, we could start doing transactions within that marketplace, which would create.

Much higher SG&A numbers from what we're currently doing without that brick and mortar.

So we will continue to build out our markets, but because of the tool that we have in our ability to move vehicles around we absolutely do not believe we have to be in every market to do business the need in each segment of the country.

Okay.

Okay. That's incredibly helpful. Thank you very much.

Okay.

Thank you. Our next question comes from Ryan <unk> with the Craig Hallum Capital Group.

Good morning, guys. Thanks for taking the questions.

Just one quick follow up on a quick lane. So looking at the quickly website also looking at Asbury website.

Very similar between the two curious if you plan to run kind of side by side websites, there or if you plan to consolidate those the at any point in the future.

Sure Ryan.

As a reminder, with the franchise stores.

All of the Oems require of us.

Wire us to use certain vendors for web sites.

So we certainly had the stick to those policies.

<unk> will continue to grow.

Depending upon whether we have franchise stores in that market of not it'll grow in different ways.

When I talked about launching the parts and accessory piece, because we didn't want it to be of distraction during the purchase of the vehicle and people Accessorizing. The car, we actually put it in the back end of click lanes. So after the consumer purchases of the vehicle and we PDF from the.

<unk> signed documents they have access to the backend of the tool for service and parts and collision, that's where they have the ability to accessorize. It as well. So we have a roadmap we're not done innovating this tool.

And we have a long ways to go from where we see it but being the first with the lending marketplace and a full transactional tool and the only one out there in the market right now being able to do pay offs, we think where the competitive advantage and now we just need to scale, our products and get the word out there to consumers. The ease it is of doing business with us.

Great and then you mentioned the used versus new mix. It is higher on the used side on quick clean up do you think thats purely a function of inventory availability right now or do you think over time used will stay stronger online as far as the Mexico's.

Yes, it's an excellent question, it's hard to say I mean, we were close to 80% with push start in $60 40 to us is very promising.

We're selling $100000 land Rovers on the tool new.

We're selling pre owned that way as well.

Hard to judge when your inventories are so low.

Whether someone would transact that way or not we believe no differently than technology and any other space as the consumers become more comfortable in the tools actually get out there more often we believe that these numbers are going to double every year as far as juice because of the convenience factor and transparency is second to none.

And it's what the space has been craving for for years and seeing the our F&I results to be 17% higher per vehicle on click land compared to the actual stores is extremely promising.

Last one for me you mentioned you quantified the EPS impact from weather in Texas and closures there. The way you can quantify what the impact of what's the same store sales.

Yeah sure Ryan This is P J.

We estimated the total impact to growth split evenly between sales and service at roughly 5 million of.

Gross profit impact.

The stores our stores in Texas are park place in Mcdavid dealer groups were closed for nearly a full week.

And ours are plaza.

Group, Inc.

Group in Indiana, and our Crown group.

We're also closed for <unk>.

Full day.

So again, we estimate the total impact of that on gross profit at $5 million.

In addition to that we also had roughly $1 million worth of the damage.

Two two of our stores in Texas.

Our lexis inaccurate Plano stores so.

So we incurred the expenses associated with that and then lastly, we did guarantee pay for all of our associates in those markets for the time that the stores were closed.

That was approximately an additional 800000 of compensation expenses.

Great. Thanks, guys. Good luck.

Thank you.

Thank you. Our next question comes from Adam Jonas for Morgan Stanley.

Hey, everybody. Thanks, so much for your.

Of those kpis around quickly and that's really great I wanted to hone in on one where you said over I think you said over 50% preferred for chose home delivery is that correct is that what you said.

That's correct.

Okay can you tell us how many units that was in the quarter.

Adam we're not disclosing that at this point because again it was all of that was clearly the trial.

The 290 store that came on all throughout but I could tell you is as we sit here. The number is growing every week the.

When are we going to start seeing that stuff because of and the kpis for great I'm looking for the slide in your deck and of course, there is no slide of all the stuff and its important debt that the kpis are consistent. So obviously, we can if we can do the whole dog and Pony thing and check the transcript from talk with you after but it is nice if it's on the deck just from feedback when are we going to start seeing.

More of a more formal.

Unit volume that we can track. So we can start tracking digital comps sequentially and then eventually year on year.

I appreciate your passion and wanted to see the numbers and as I said, we will launch in the stores the last quarter for the last week of the quarter.

So I don't think its too much to say well, let's get a full quarter under our belt and we will be talking about it every quarter.

So it's certainly in supply we will be happy to share that information.

Last one company.

Auto companies are.

Starting to explore.

Direct to consumer with the with insurance.

The insurance has been even legacy guys are starting to do that GM using partners, where the onstar Tesla going themselves with partners, but then eventually themselves I'm wondering if what you think of that do you think this is does that make sense of that part of where you see the.

The digital expression of auto retailing and of Oems start to do more kind of cutting out the third party kind.

Kind of parasitic insurance for.

And I'm, saying that mainly because of the cars.

Because of the actuary in the and the.

The agent and just makes sense to do that how do you see that.

Acting your role in the on the eye part of F&I.

So I think it's an excellent question.

And I don't want really want to.

Talk too much about things, we're working on in innovation, but I mean for $35 40 years within the dealership people refer insurance business to other locations.

It's a natural to assume.

That this would be logical down the road.

To have it be one stop shopping and everything available one location.

But I really don't want to get into any details at this point, but it's an excellent point, it's only logical that altogether.

The.

Alright with that answer the part of the question. Thanks, David I appreciate it.

Thank you. Our next question comes from Rajat Gupta with JP Morgan.

Hi, good morning, Thanks for thanks for taking the question.

Just had the question on the used vehicle unit growth.

You talked about.

Now the overall $5 million gross profit impact overall for the company.

I mean suggests something like two to three points of unit growth impact.

I am I close on that and then just relatedly.

Obviously pretty strong numbers.

We are in the two year basis, but.

It seems to be lagging some of the peers that have reported recently.

Are you are you satisfied with the performance there do you think theres more of you could do in terms of sourcing or.

The mix of the vehicles that you're selling.

To grow that business even faster.

I had a follow up thanks.

Yes, it's an excellent question no we're not satisfied.

It's more than fair to say, we're not performing at the level, we should with pre owned.

It's hard to quantify P. J talked about some of the markets that we're close but we literally had 40% of our stores closed.

And while they were physically closed for a week the hyper storms they closed down before and closed down after so I would think it's probably fair to say looking at all of the stores. The markets that were closed for some periods of time and the effect on business. It has to be somewhere in the 4% to 6% range in volume.

But it's really hard to quantify it's really just the guests at that point, but the answer to your question Simplistically, we're not performing at the level, we need to with pre owned we think in every other category.

More than holding our own.

And this is an area of opportunity for us we need to get going.

Got it.

Really helpful.

Just to follow up on the M&A the.

The M&A environment, you've talked about like unreasonable other names and probably not appropriate multiples right now of the market.

I mean.

It looks like the gross margin tailwind as good job the last for another year of meeting.

Like mid 2022 of our lead to enjoin the two.

So when do you make the decision.

To start deploying the capital finally because of.

It's already being six months since you announced the plan.

For the 18 months from now in the earnings might still look elevated.

So I mean, what do you book would you continue to sit on the cash of the balance sheet or.

Just trying to understand like how the capital might be deployed the now and then and then.

When would be the right time to finally make the decision.

The two walk the woods.

The plan.

Thanks, Yes, hey, rich it's P. J, so I'll I'll start and then maybe hand, it off to David but.

It's actually Ben.

Three months since we announced the.

Plant in December and as we've said before we're very disciplined in our approach.

The two acquisitions.

We do we book when we evaluate.

An opportunity we're looking at EBITDA multiples and then factoring in the.

The synergies we think we can achieve and then we look at.

The IRR relative to our cost of capital.

And we need to see a margin of error to.

To deliver an accretive deal.

We are evaluating deals it's on the deal by deal basis.

So we'll continue to to fill the pipeline but.

We're only going to look at or execute on those deals that make the most of that's for Asbury.

And I'll just follow up on that.

Talk about the.

Two points when you look at the.

2020.

Prior to 2020 of dealer was making $5 million annually.

And then in COVID-19, they started making $10 million.

They want to work off the $10 million and they want a multiple that is higher than what the brand has ever run.

That makes it difficult while I agree with you the way margins in this space is going to be for the next year.

And again, it's one person's opinion this isn't a forward looking statement, but you have to think about 'twenty three and 'twenty four.

The amount of <unk> that are going to be on the market, where the infrastructure is going to be for that in the country at the time and where supply and demand going to mix.

So I don't think you can get caught up in the hype. It just buying at the moment of time and you have to look out of few years to really see what the value and trend is going to be and as we talked about when we launched the five year plan, which is no doubt we will hit it.

That $5 billion doesn't all have to come in one year that it doesn't have to be $1 billion of year.

We have to be disciplined we've been doing this a long time of been in automotive for 35 years.

Theres always highs and lows.

We're talking to more acquisitions today than we ever have since I've been employed here, so I think things will happen but.

But I think we should be judged in the long run by the acquisitions that we did and how accretive they were for the company instead of just having nervous energy buying revenue and then may be struggling with performance over time.

Got it got it that's really helpful. One last one just following up on quickly.

You don't want to give out like the unit numbers, but.

Had it not been for click Lane.

What do you have grown slower than what you did in the first quarter I'm just curious if it contributed to incremental volumes of not just.

Not just replacing one for one.

No. It's an excellent question.

And I can't stress this enough.

We only had a few pilot stores on it in December so we essentially have no. Other public group really has this full transactional tool, notably habit and all of their stores, we rolled out 86 stores and two five months.

So the numbers are but I mean, the week over week youre, adding so many stores. There's a lot of incremental sales that we would not have received and I make that comment because looking at the information, we werent doing business with them before but when you are adding 40 stores in the last three weeks of the quarter. Its just not of.

<unk> number.

I can tell you every single week, the number of gross and the transactions of growing on the tool.

And we haven't hit our stride with marketing, we really just start marketing now.

We really want to perfect. The tool make sure everything was rolled out properly and it was efficiently working and I know it sounds crazy to roll. It out it's just plug and play software, but when you think about all of the different counties and different tax codes and making sure that it's perfect and everything is working correctly theres, a little bit of discipline and time to make sure. It's right you just don't want to invite people.

For the tool and not have it be of great experience.

And what we quoted last time with the pilot stores is still holding true.

It's a 14 minute transaction if theres the payoff in the financing needed and if someone's paying cash it's eight minutes.

Is hard to beat that kind of time, and it's very encouraging for us from our perspective, and I'm not saying it won't change over time, but it's information was sharing.

Coming 50% of the people who are taking delivery at home that didn't happen in the heat of COVID-19 with push start.

So we're very excited about what we're seeing we're also seeing the higher credit score.

With click land compared to the push start so it's very very encouraging and I promise, we'll talk about it in great detail every quarter.

But it's not just the unit sales that is the type of person that's using the tool and transacting on it that is most encouraging to us.

Got it got it makes sense. Thanks for all of the color good luck.

Absolutely. Thank you for yourself.

Thank you. Our next question comes from Stephanie Benjamin with Trust.

Hi, good morning.

Good morning, good morning.

We really appreciate all of the additional color that you've given on the claim but the question I understand that.

Pretty.

For the large task to roll this out to all of the at your stores. This quarter. So how should we think about any kind of incremental advertising investments as the new to the year is should there should we expect the step up as you kind of look to get the name out there a little bit more on some of your markets.

Is that something we should just kind of expect.

Not only in store, but maybe I'll start on the local level just sell customers know what what the options are.

The Stephanie it's a great question, yes, we've allocated several million dollars between now and the end of the year.

And we spread the dollars by market, depending upon unit sales and traffic counts and density of population.

Of the numbers may change.

Our plan is depending upon what happens with inventories, it's too hard to predict sitting here today, what things are going to look like in July and August from an inventory standpoint, but our intent is to get that out. There. We think we have some interesting marketing things coming out that will help us and again, we're sitting here the third week in April.

For the fourth week, I should say and were talking about first quarter of data.

I can't stress it enough its incrementally growing every week.

So we're very excited to talk about it in the future as it comes we're hoping that the marketing really sticks and it's noteworthy and I can't stress. This enough. This is different than a lot of the other transaction or the a lot of the other tools that are out in the market right. Now this was built on a chat platform.

And what that means is the ability to walk people through the tool if theyre getting stuck or if there is an issue at the moment in time and Theres also the ability when they leave the tool to send them a length of start right back where they were so theres no starting over.

So it's not just the incremental sale or the conquest sales when they go through the whole tool, but it's also the follow up and recovering the sale and bringing them back and we're very hyper focused on tracking all of the kpis and as we accumulate more we'll certainly share that as well.

Absolutely and then just to follow up on that when you speak to the increments of advertising is that going to be just in your existing markets or will you also look to maybe you mentioned need of Phoenix of that as an example kind of entering of new market as well with some of these investments our advertising investments.

He is chair of Stephie.

I'll say this.

Our intent.

Soon we'll be to test this product in markets, we don't do business in.

I really don't want to start talking about specifics.

But.

It'll be in short time debt, we experiments in markets, where we don't currently do business that is the fact.

Got it and then lastly for me just for the acquisition.

Mentioned that it's pretty apparent that as part of its pretty active market right now so I'm just curious.

Yes.

For what you're targeting I think in the past looking to expand a little bit more luxury so maybe in terms of brand concentration or geography has that changed at all just of new opportunities. Maybe you have come up as of late.

<unk> you.

You can't really consider than in years past, the trying to kind of gauge as youre looking at M&A environment, what's the most appealing at this stage.

No. It's a great question, Stephanie again 35 years of doing this brand strength come and go.

Certain luxury brands are hotter than heck in years later, they slowed down and I think it's really about having a balanced portfolio.

You don't have to do on the park place deal we.

We had a lot of conversations where dealers in other parts of the country. One of the same multiple debt we paid park place.

And now I'll just pick of brand just for a conversation if you have one luxury brand the.

The multiple is different even though its the same brand, whether you're talking, Massachusetts, California, Michigan, or Texas or Florida.

Because of the franchise laws of different within each individual state.

Seasonality of the business density of population of business for friendly state or not so we really spend a lot of time looking at each individual acquisition.

Where it sits within the market.

Do we think that this is the proper return for US I mean I've. Just recently had this conversation with someone else asking why we would not for them. The same as what we paid for park place in just simply Simplistically said, it's not Texas to meet the different market with different franchise losses, if one state of the franchise law no franchise within 15 miles in another state of five <unk>.

Miles I don't know how you don't factor that in when Youre looking at the pricing.

Absolutely that's really helpful. I appreciate all of the additional color today.

Thank you.

Thank you. Our next question comes from Bret Jordan with Jefferies.

Good morning, This is mark Jordan non for Brett.

Well. Thanks, a lot of good questions have already been asked but I guess I have two quick questions. You may have touched on both already but.

Thinking about the part of service segment and in particular, our customer pay can you talk about how it trended throughout the quarter and many of trends have continued to accelerate through April kind of what youre seeing there.

Sure.

I would call of January pretty promising and stable it wasn't.

Pre COVID-19 numbers, but it was continuing to come back in I would call it close to being flat.

Just because of the way of February played out it really varied by market because of weather, but I'll call February step back, but I think was more of due to weather than anything else in March was just the full acceleration forward.

And all of the numbers specifically around customer pay we're ahead of pre COVID-19 numbers going back to 19, we're seeing that same result, as we sit here in April and we anticipate that for the rest of the year that we think theres a lot of pent up demand now if something happens in the fall of the virus comes back.

Yeah.

I can't obviously comment on that I'm, just saying as I said in my comments earlier people of back on the road the collision businesses back the customer pay business is back warranty being down I don't look at that as anything. It is what it is you can't do warranty work if it's not needed.

So thats just the reactionary thing.

Okay great.

And then it seems like competition for sourcing attractive used vehicles is very high right now.

The trade ins might be down in terms of unit volume you havent of shift more to purchasing vehicles directly from customers and if so kind of how competitive would you say that channel is right now given bank competitors might be increasing sourcing from the same channel.

It's an excellent question.

We're taking in less trades, because we're selling we're.

We're not selling the cars, we should be selling based upon the demand right now.

But we're still from a percentage standpoint, we're still taking in the amount of trades, we always did prior.

Different volume levels were.

We're having to seek other avenues and some of those avenues of dried up theres a lot of it's kind of like the residential real estate market. I mean, there is an awful lot of buyers out there and theres not a lot of sellers out there so it's a little bit more difficult getting inventory.

People are certainly paying up for that you see it at.

At the auctions and you certainly see it in the Manheim data that comes out we.

We don't think that thats going to change anytime soon, especially with what's going on with the new car inventory.

And then you want to comment around for that then or no I think you've covered it well David.

Okay, great. Thank you very much for taking my questions.

Thank you.

Thank you our last questioner is David Whiston with Morningstar.

Thanks, Good morning.

I guess, how do you guys want higher inventory or at the risk of of giving up some of your pricing power. You are now enjoying do you want a lot more of a little more kind.

Can it stay where it is even.

Yes.

Yes, we're smiling over here in this and because it's such a fair ingredient question to ask.

Yes, that's of Great question the.

Problem is it look at it as all everyone looks great everyone's reporting good numbers everyone's showing high margins, we didn't all of a sudden get that much better it simplistically supply and demand.

There is the point, where youre missing a lot of sales because you just don't have the inventory domestic truck for us was brutal in the quarter, we were really down in trucks.

Meaning we didn't have the inventory to sell.

So we wanted a lot more than what we had.

I would tell you of the industry performs well and stability exists when there's probably a 60 to 70 day supply in the market.

And right now with all of the government spending that's going on and people coming out the demand is going to be high right now and the fear is the inventory won't be there to match the demand.

Okay.

What happens now when the customers coming in.

Really sat on buying of new particular, new vehicle you have to tell them you don't have the duty inventory does that customer agenda of the buying another new vehicle buying used vehicle or delete the lead.

Hi, Good morning, David This is Dan so in a lot of cases, we have really become even more efficient on.

<unk> taken a preorder for a lack of of better term. So perhaps the car that has an income of unit.

It's actually being built or already on the transportation.

And a lot of cases, we're seeing a lot of cars that are being delivered by the trucking company and they're going in for a pre delivery inspection getting detailed and coming right out for delivery. So.

The.

In a lot of cases, you know.

We're we just don't have the debt availability of that particular model.

Customers are a little bit more flexible on maybe given up a particular package or maybe taken an additional package debt.

They were not considering at the beginning.

Okay and.

Shifting over to the rise of the Tesla in particular model volume just curious of that hurting your Toyota Honda or your premium brand stores at all and do you have any customers essentially at the park place group wanting to pay in bitcoin.

No.

The answer to all your questions no not yet not at this point now.

Havent had the consumers come to us with the bitcoin and request yet.

And haven't really felt.

Our strong competitive.

Point from Tesla I think of lot of their sales come from California, and certainly other parts of the country, but it's not a real dominant player in the markets. We currently transacting.

Yes.

Okay I appreciate the detail that's helpful and just for PJM for Karen just real quick for the three special items were they booked for GAAP.

The booked in other income David.

Okay, Alright, thanks, guys.

Thank you very much appreciate it.

This concludes today's discussion we appreciate your participation and we look forward to speaking with you off in the next quarter have a good.

Good day.

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