Q3 2021 Asbury Automotive Group Inc Earnings Call

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Okay.

Good day and welcome to the Asbury Automotive group Q3, 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Karen Reed. Please go ahead.

Thanks, operator, and good morning, everyone. As noted in todays call is being recorded and will be available for replay later this afternoon.

Welcome to Asbury automotive third quarter 2021 earnings call. The press release detailing Asbury third quarter results was issued earlier. This morning and is posted on our website at Asbury audio Dot com participating with me today are David Hult, our president and Chief Executive Officer.

Dan Clara, our senior Vice President of operations, and Michael Welch, Our senior Vice President and Chief Financial Officer at the conclusion of our remarks, we will open the call up for questions and I will be available later today for any follow up questions you may have.

Before we begin we must remind you that the discussion during the call today is likely to contain forward looking statements forward looking statements are statements other than those which are historical in nature, which may have which may include financial projections forecast and current expectations each of which are subject to certain.

Certainties.

For information regarding certain of the risks that may cause actual results to differ materially from these statements. 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 Ernie.

The 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've also posted an updated investor presentation on our website Asbury auto dot com highlighting our third quarter results. It is now my pleasure to hand, the call over to our CEO, David Hult, David. Thank you Karen and good morning, everyone welcome to our third quarter earnings call.

In our earnings release. This morning, we reported adjusted EPS of $7 36, a record third quarter up 80% over the prior year.

The one new car inventory levels continue to be challenged due to the chip shortage. Our team delivered strong results and enabled us to deliver an impressive gross margin of 20%.

All time record and an expansion of 180 basis points versus the third quarter last year.

These results demonstrate the resilience and strength of the franchise model with its full suite of services through the car ownership journey from sales to service contributing to sustained profitability.

We've also stayed disciplined in managing expenses, resulting in SG&A adjusted SG&A as a percentage of gross profit of 55, 3%.

A 580 basis point improvement versus prior year.

Our total revenue for the quarter.

It was up 30% year over year and total gross profit was up 43%.

Due to this record performance and strong cash flow our balance sheet remains strong our net leverage ratio ended this quarter at one two times.

A quick update on our five year strategic plan.

Same store revenue growth, assuming 2020 annualized revenue for park place is up 10% and is exceeding expectations regarding click claim our unit sales are pacing ahead of our projection for year one.

And we've made great strides this quarter on our acquisition pillar.

We expect to close on the transformative acquisition of the Larry H Miller dealerships and total care auto in the fourth quarter.

With their strong name and brand mix and the right states and our aligned cultures, we look forward to jointly deploying our capabilities and growing together.

In addition, we closed two acquisitions recently really Subaru in the Denver market.

Kalo, Chrysler Jeep Dodge and Indianapolis.

We're on schedule to close a wrap a whole Hyundai Genesis and the Denver market today.

With another acquisition is still under contract and expected to close in the fourth quarter as well in total in 2021, we anticipate that we will close on $6 6 billion of annualized revenue from acquisitions.

With these results we maintain full confidence in the execution of our growth strategy.

And we will update our five year plan during our Q1 earnings call in 2022.

Now I would like to welcome Michael Walsh, our new CFO to the Asbury team. He brings his vast knowledge of the auto retail business along with his broad experience in finance.

We worked together at Groupon for many years and I'm excited to be working with him again.

I'm also thrilled to welcome our new team members in Indianapolis and in Colorado into the Asbury family.

And finally, I would like to address all of my teammates at Asbury.

Our ability to add quality stores, who like us care about serving our guests and being highly engaged in our communities could not have happened without you.

You all have given us the ability to thoughtfully grow our core business because you in line behind our vision and you are executing each and every day.

I appreciate all of you and I'm thankful to be part of this team.

People make the difference in any organization and you are making us the best place to work do business and grow your careers.

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

Thank you David and good morning, everyone My.

My remarks will pertain to our same store performance compared to the third quarter of 2020 unless stated otherwise.

Looking at new vehicles.

Based on current market conditions, we continue to be focused on being opportunistic with our inventory and improving grosses to maximize profit.

Our new average gross profit per vehicle was $4808.

<unk> thousand $369 or 97% from the prior year period.

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

At the end of September our total new vehicle inventory was $121 9 million and our day supply was at 12 days down 35 days from the prior year.

We still no clear understanding of when production will return to normal level, we expected day supply to remain low throughout the remainder of the year and into 2022.

Turning to used vehicles.

Our U S retail volume increased 27%, while gross margin was eight 4% representing an average gross profit per vehicle of $2402. As a result of our performance our gross profit was up 45%.

Our used vehicle inventory ended the quarter at $236 4 million, which represents a 28 day supply down seven days from the prior year.

Our used to new ratio for the quarter was 113%.

Turning to F&I, our strong consistent and sustainable growth in F&I delivered an increase of $155 to $1955 per vehicle retail from the prior quarter.

In the third quarter, our front end yield per vehicle increased $1400 per vehicle to an all time record of $5487.

Turning to parts and service.

Our parts and service revenue increased 10% in the quarter.

The warranty revenue dropped 18% our customer phase revenue continues its healthy recovery posting a 13% growth.

Overall, our total fixed gross profit increased 10%, while total fixed margin was 69%.

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

Our digital marketing team continues to do an outstanding job generating traffic to our websites.

Our commitment years ago to Google organic search continues to drive efficiencies in times, where inventories shrinking, allowing us to increase traffic with all spending media dollars.

In Q3, we had over $6 3 million unique visitors, a 12% increase versus Q3 2020.

Another initiative is to increase online service appointments.

We achieved over 143000 online service appointments and all time record and a 12% increase versus Q3 2020.

This component positively impact service retention and increases the dollars per repair order.

Now with two full quarters of click link at all stores under our belt, we would like to share some performance metrics.

We sold 6000 vehicles through click lane in Q3 of which 47% of them were new vehicles and 53% used.

93% of our transactions this quarter were with customers that were new to Asbury dealership network.

Average transaction time continues to be consistent with previous quarter.

Eight minutes for cash deals and 14 minutes for finance deals.

Total front end yield of $5400.

Average credit score is higher than the average credit score at our stores.

Total front end yield of $4396 on trades taken through Cleveland.

We continue to expect annualized volume through <unk> of approximately 30000 vehicles by year end.

As expected, particularly in customers are converting at greater rates than traditional internet leads.

We remain quite excited about the performance of Cleveland, Thus far as it is tracking ahead of its targets.

And finally.

I would like to thank all of our teammates in the field for their hard work dedication and commitment to delivering an exceptional guest experience.

In addition, I would like to extend a warm welcome to our new team members from Greening Subaru Carlos C. D J R and a rabbit hole Hyundai Genesis.

All of you have built tremendous organization properly along with our North star being the most guest centric automotive retailer.

Our future is bright and I look forward to meeting all of you.

Michael Welcome to Asbury your depth of knowledge in the automotive business is already making a significant impact on our company I'm enjoying working with you and look forward to growing up or together.

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

Yeah.

Thank you both for the warm welcome I am excited to be part of the Asbury team and had the opportunity to work with David again, I look forward to working with the team.

On our growth journey.

To our investors analysts and other participants are call good morning.

I would like to provide some financial highlights, which mark had another record quarter for our company.

For additional details on our financial performance for the quarter. Please see our financial supplement and our press release today.

Overall compared to the third quarter of last year, our actions to manage the gross profit and control expenses resulted in a third quarter adjusted operating margin of eight 5% an increase of 190 basis points above the same period last year and an all time record.

Adjusted operating income increased 69%.

$204 5 million a third quarter record.

And adjusted net income increased 81% to $143 6 million another third quarter record.

Net income for the third quarter 2021 was adjusted for acquisition expenses of $3 5 million or 13 cents per diluted share and a gain on dealership divestitures of 8 million or <unk> 31 per diluted share.

Net income for the third quarter 2020 was adjusted for a gain on dealership divestiture of $24 7 million or <unk> 96 per diluted share acquisition costs of $1 3 million or <unk> <unk> per diluted share and 700000 or <unk> <unk> per diluted share for our real estate related charge.

Our effective tax rate was 23, 7% for the third quarter of 2021 compared to 24, 8% in 2020.

Floorplan interest expense for the quarter decreased by $1 5 million over the prior year driven by lower inventory levels.

With respect to capital deployed this quarter, we acquired a Subaru store in Colorado, utilizing approximately $16 million of cash on our balance sheet.

In addition, we spent approximately $15 million of capital expenditures.

We paid approximately $9 million of debt.

Also as part of our strategy to optimize our portfolio, we divested of our BMW store in Charlottesville resulted in proceeds of $18 million none of its mortgage payoff.

As a result of our operational performance our balance sheet is quite healthy as we ended the quarter with approximately $780 million of liquidity comprised of cash floor plan offset accounts and availability on both our use line and revolving credit facility.

Also at the end of the quarter, our net leverage ratio stood at one two times well below our targeted net leverage of three <unk>.

With our announced acquisitions under contract we are working towards financing the exciting growth of Asbury.

As announced in late September we plan to raise a combined a combination of permanent debt and equity financing prior to the closing of Larry Miller acquisition.

We are working with our supportive lender group to upsize, our credit facility and syndicate, the real estate mortgage finance.

With plans to close both ahead of our acquisition of worries Miller dealerships later this year.

Although the transaction was initially expected to take our net leverage above our targeted range of three times. We believe that we can deleverage of approximately three times during 2023, given the highly accretive nature of the deal from viral strong free cash flow generation.

As we look forward to the remainder of 2021, we anticipate similar conditions to what we've seen this quarter.

Vehicle inventory suppliers will likely remain low and unpredictable until next year.

In closing I would like to thank our teams across the businesses, who continue to work tirelessly during the unprecedented times to ensure our current and long term success.

I would also like to welcome our new team members from our recent acquisitions.

I look forward to working with you and continue to build on the strong cultures that youre, bringing to asberry.

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

Later.

Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question.

For just a moment to allow everyone the opportunity to signal for questions.

Thank you. Our first question comes from Rick Nelson with Stephens.

Hi, good morning.

Current quarter.

I guess Curt could be there for them.

Our balance sheet standpoint.

You see the pro forma leverage.

In Polish.

The 6.6, Bellingham, and Robin Hood that you're acquiring.

How should we think about.

Capital priorities going forward.

Can you elaborate Malibu.

The health care to cover their near term Polish Oh.

Great. Thank you for your question Yeah from a leverage perspective. After we close the deals we expect leverage to be in the high threes.

From a capital deployment perspective, just allocation in the future we will be in a deleveraging mode in 'twenty, two and 'twenty three just to bring that leverage back down to our three times target.

But we can also take the cash flow for deleveraging perspective, neither payback debt RFP caused some acquisitions that provided EBITDA does that require additional leverage that would also provide some deleveraging ability as well.

Okay great.

Sure Michael.

Yeah.

900 million.

Met coal.

Rather than it hurts you.

You could talk about the rig count per se.

Sure.

Chubb's, maybe what kind of Mark I'm, sorry, I meant yeah.

Those hires.

The group.

Yeah.

Rick This is David.

We discussed this morning Kalo the Greer.

Subaru and Arapahoe Hondo today, when you take those three out it Lee.

He has a balance of about $740 million in revenue, which is all in one group.

Because it hasnt been fully announced yet we don't want to say it but the brand mix as well.

About 50% luxury.

And then mostly import with one domestic store as well.

It really a very strong growth with the right brand mix in a market that we've been trying to grow.

Oh, great. Thanks for that might be it was kind of a follow up to that if you could speak to.

The multiples that you're looking at for those stores.

Yeah. So on the one that we haven't announced yet.

Off the top of my head I believe its about an eight multiple between seven and eight multiple.

Theres good upside in the stores and an opportunity to grow them within the marketplace and there's a little bit of capex involved as well.

Alright.

And Larry Miller.

Oh I'm sure. There are you know, bringing some digital allows hubs.

What type of growth.

If you could speak to any potential challenges integrating.

That group ended quite clear and the opportunity that's there.

Sure absolutely.

Yeah, I would tell you.

It's a the integration should go pretty smooth and we're all on the same software is St.

Same dms, we're retaining all of the senior executive management team.

And really kind of like you did park place, let it operate in its own silo.

They are extremely strong.

Brands, Great leadership in the stores perform extremely well.

A lot of capabilities there for us to enhance their digital side theyre extremely strong operators, but there is an opportunity for digital I don't think that'll be a focus the first few months it'll be mainly more integrating the folks and getting to know one another and creating that trust and relationship.

Then starting to integrate the software.

But like anything there's always potential in every acquisition to grow.

Oh, great Thanks for that.

Finally, if I could ask just care about total wood care.

You have the opportunity to bring that down.

Sort of financial are important.

Importations that has heard me up at night.

Potential risks.

But that does try to drink burdens.

Yes, Rick this is David I'll start and then Michael can jump in.

You know I would tell you, it's a very stable business.

Miller organization has had it over 30 years, it's a M. Best rated they do an extremely great job of paying claims a strong balance sheet.

Really we see it is very accretive to us margins significantly higher than our operations.

They're essentially just high level, making about $50 million a year EBITDA on 115000 car sales when you integrate asbury at over 200000 car sales into that you can kind of see the upside potential there.

So we're excited about what it can do and the other was huge benefit that a tad for that organization. They have extremely strong service retention numbers.

It's a true hand in glove relationship between TCA in the Miller organization.

Yeah, Rick one thing that will cause a little bit of I guess.

Loan is on how we integrate is from accounting perspective that caused a little bit of noise moving dealership profits from our.

Day, one profit to a kind of.

We have to kind of deferred and amortized over the life of the contract business and insurance business. So because of that it will take us a few years to be able to bring in asbury at a measured clip. The other thing is that business to bring in Asbury has to just <unk>.

Size itself, a little bit for the additional business and obtain some insurance licenses in some states that they don't do business right now and so we just have a little bit of leg work to do to be able to get asbury fully.

Brought into their mix.

Got it.

Okay.

Hello.

So two to three year period.

Okay.

Thanks for that good luck.

Thank you Rick.

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

Good morning, everyone. This is aileen Smith on for John.

First question on the new vehicle business can you talk about the trends persist accident rate in the quarter on gross margins in Gpus.

Specifically is it fair to assume that growth is improved through the quarter as the inventory environment tightening or rather dropped off with sales trends.

Trying to think about what the launch question Firstly came into <unk> and then further into 2022.

Yes. Good morning, this is Dan.

The margins as we enter into our Q3.

Sorry accretive stable throughout the quarter, although I would say productivity a bit of an uptick as we were exiting the quarter.

Mainly driven.

Due to the supply and demand.

As we move forward.

As I said it on my script, we see the.

Tori constraints continue well into 2022, so we expect our margins to ride right along the inventory.

Okay, Great and then can you talk a bit about the prioritization if at all for the used vehicle business.

Same store sales comps or things.

Yes.

Relative to the new vehicle business quarter on quarter gross margins are down, but the offsetting factor for this is obviously a material acceleration in same store sales growth.

Is this something we should look out as a structural trend going forward as you continue to focus on the used vehicle market for class opportunity or is this purely a function of broader market dynamics, namely the inventory shortage, that's more transitory in nature.

I think that.

It's just it's just a product of the market. If you look at our cost of sale of average selling price of used cars.

It increased 16% and that is something that we're seeing.

As inventories dropped down a new cars or cost of sale for us of course is going up.

A lot of people customers that have purchased cars in the recent years, therefore is not going to be worth more than today, so they're often to trade that corrine or sell it back to us.

So I believe that that's part of the issue. The other the other aspect is we expect this to continue.

As long as the market conditions stay the same.

And to be honest, we're not we're not saying that.

Lets grow the used car business from a volume standpoint, and sacrifice margin. We believe that we can get both in this market.

Got it and one last one if I may I know you referenced youre going to update your five year plan next year.

Which I think we can reasonably assume as a function of Larry Miller acquisition, and obviously driving acquired revenue much higher than the target you've previously outlined where the other key component of your five year plan as quickly.

Also be thinking about quickly and organic growth in that business as having upside versus your prior targets or would you say the rollout on this front is coming more in line with expectations.

Yeah. This is David I'll try and address it.

You hit it right please come back.

When we looked at quickly for the next five years, we did it on a monthly basis by store.

With conversions, increasing each and every year to get to that that valuation.

As it relates to year one.

From a conversion standpoint, we're about two percentage points below where we expect it to be but because there's been additional traffic we're exceeding our volume target I would tell you, it's a little bit tricky with clinically right now because of the lack of inventory there's a lot of.

Traffic, but theres not a lot of inventory to purchase from so it's hard to fully assess the conversions right now with lack of inventory, but we're real happy with what we've seen.

How it's being treated and the consumer response to it.

And our belief is next year in 'twenty, two and certainly in 'twenty three 'twenty four each year, we're anticipating that conversion rate to go higher as the consumer becomes more comfortable transacting online and the tools continue to get.

To become more sophisticated and easier to use.

Got it that makes a lot of sense. Thanks for taking my questions.

Thank you.

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

Yeah.

Good morning, a nice quarter and thanks for taking my questions.

Thanks Ryan.

Curious are.

On mobile mechanic can you talk quick clean a lot, but how much opportunity is there from a parts and service standpoint to really digitize that and go closer to the consumer and bring it to them.

Yeah, It's a great question.

I would tell you over the last five years between different things, we've done to enhance it on our own.

And adding a service tracker element.

We're seeing higher conversion rates than we've seen in the last four or five years, meaning consumers.

Our approving more work than they had in years past.

And they are spending more dollars per repair order that has a lot to do with the age of the car as well, we do see more opportunity to be more digital and more engaged and transparent with the consumer.

And that will that will come over time, but tremendous benefits.

So far from what we've seen.

Mainly our sources text messaging.

We're communicating through text message.

<unk>.

The multipoint inspections on how the car is doing their ability to communicate directly with the technician.

And then being.

Being able to pay for the service via text as well so.

Continues to grow a great feedback and with the consumer's converting at a higher rate that tells us their level of comfort and transparency is there as well.

Yeah.

Gotcha, and then just on the inventory I know not to belabor the point, but 12 days supply on the new side I guess, how has that trended amongst subsequent to the quarter end and then also comment on used as well.

So David Good morning. This is Dan by the way the day supply around the quarter, we have been around that 12 day supply.

The beginning of the quarter and we remain consistent.

The stores are doing a great job and I think I've mentioned is <unk>.

Call doing a great job of pre selling.

Income in units so we've adjusted to the market demand and again the stores and the operators are doing a fantastic job from a used car perspective.

I'll tell you our day supply.

You can see it is lower than where we were operating a year ago.

But we continue to acquire inventory for more main stream, which will be your trade in your lease turn ins and direct to consumer purchases.

Approximately about 79% of our inventory are coming from.

From those three.

And use.

Last question from me and I'll turn it over the others, but Mercedes.

They're cutting dealer trade margins by 50 bps to help pay for Evs any commentary or any concern I guess with other Oems doing this and potentially squeezing the dealer margins.

Yeah. This is David so the quick reaction is no as it relates to Mercedes.

We really enjoyed the partnership with them in the brand we have high margin business with them consumers really appreciate the brand as well.

We look at this as a partnership.

Small cut into the margin to setup for the future as an investment for both of us to make.

And we're proud to represent the brand as it pertains to other manufacturers that might do it.

Hard to comment on something that you can't see and not aware of yet.

But certainly we look at the relationship as a partnership and we have to have skin in the game as well, but we don't see that margin.

Sent with Mercedes materially affecting us.

Thanks, guys. Good luck. Thank you.

Thank you. Our next question comes from Grace Chen with Morgan Stanley.

Hi, Thank you for taking my question and congrats on the quarter on behalf of Adam Jonas.

Sustainable do you expect SG&A to gross should be going forward taking into account your digital strategy and recent acquisitions.

Sure. Greg This is David and I am sure as to what I say, Michael jump in and try and clean up.

I would tell you the SG&A is impressive right now.

Different reasons, the obvious supply and demand high margins as helping dramatically, but as the pandemic started we really got our production per employee at a much higher rate.

We're of the belief as you look three to five years out the.

The retail franchise model changes, a little bit and how you compensate and what that looks like so we think that the current SG&A is certainly there is here to stay for at least the next year.

And then with improving software and capabilities and click lane growing we think there's future opportunities to strengthen the SG&A.

Sure.

Heightened up for lack of a better term.

Got it that's really helpful and shifting gears a bit how would you characterize high quality strategic acquisitions going forward.

Yeah, It's a great question.

When we came out with the five year plan for $5 billion in revenue.

You're never going to get $1 billion each year, but the thought process is what are we generating cash flow and what can we take on.

Not knowing that an acquisition like Larry H Miller, we'd be out there.

Theres a lot of stores for sale, there's a lot of stores that transact, but every store is not the same even though the brand name might be the same.

Some groups in the culture that they have are pretty strong and align really well with us when we find a group that we think aligns really well with us and the synergies are there we try to be very aggressive and go after it and the other stuff. We just simply don't go after it not that it's a bad asset, but it just might not aligned with us I think in the last three and a half years. When you look at the acquisition.

We have done they've shown to be extremely accretive to our group with extremely low turnover numbers.

So that tells us that we're finding the right acquisitions were properly aligned.

And we're making good investments with the shareholders' money.

Got it thank you very much and congrats again.

Thank you.

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

Okay.

Hi, good morning, Thanks for taking the questions.

I had a follow up question on productivity savings could you remind us.

We are head count level currently.

Well.

Before the couple of acquisitions, we just did with our head count was right at 8300.

Got it got it so it looks like you were at 8500 before Parcplace Youre roughly at 83 onwards today.

Volumes are up meaningfully versus 2019 levels on a combined basis.

So just yes.

Anyway to parse out these productivity benefits across.

Apartment and head count reductions.

Move to digital.

Likely claim and then may be just lower inventory level as we are dealing with at the stores today.

Just trying to get a sense.

Inventory starts to come back and who knows maybe 2023.

Where does your like for like head Count go Kevin.

<unk> levels of productivity once we're there.

I'll follow up thanks.

Sure. This is David Yes, we believe we can maintain these productivity levels are per employee.

Mainly because of the software.

Applications that we've had is making it easier for our folks to become more productive.

We think the current numbers were add productivity per employee probably stays stable for the next 18 to 24 months and then we think at that point, we have another opportunity to increase the production per employee and that's where our focus is and the reason why it's 18 to 24 months out quite honestly its software related.

Understood great.

That's encouraging.

Just shifting gears completely due to parts and services.

Can you give us a sense of you know how the exit rate was for that business now and in the third quarter.

In the fourth quarter is shaping up there in terms of improvement in that trajectory.

And I also would have thought to ask on the warranty business, specifically given the supply shortages, but also.

Given we have sold.

More than normal level of new vehicles, the last couple of years.

How do you see that playing through intelligence and back to the overall business and maybe 2022 2023, given the retention rates are pretty high in the first two or three.

Yeah. So.

Yes, if you could tie this together.

And also that's kind of the near term trends.

Yes.

Richard This is Dan good morning.

From a fixed operations business for the quarter.

As you can see the warranty business really pulled back.

<unk> got to do a lot and it's just really across all domestic import and luxury.

Just some of the campaigns that we saw last year, a fuel pumps to name a few of them may be a few dashboards.

Door actuators you name it we've seen a pullback from that perspective, and thats affecting obviously or warranty.

Traffic customer pay is.

Recovering.

Pretty good as you saw our.

Our customer pay.

Gross profit was up 10% and we continue to see the healthy recovery as.

As well.

As we move forward from a unit and operational standpoint from a warranty perspective.

It's hard to tell because warranty is not something that we forecast for it's really driven by if there's a recall if there is.

And issue a few pumps again you name. It so we don't control that to the extent that something like that happens, we expect warranty to come back up around.

And if not then we'll just we'll keep focusing on growing the customer base.

Touch on that Dan mentioned because of phase of the 10% growth, it's actually up 12% and gross.

It's the dollars per repair order going up and up.

If I heard you right.

New car customer hangs around for the first few years and winds up in our organization. The one metric that we track every day on the customer pay side is whats the average miles coming into our store.

And naturally the higher the miles that tells us we're retaining a much deeper into the channel. If you will and we're just under 70000 miles.

The average car from a customer base standpoint coming into the company. So we think that's pretty healthy and as the car Park continues to age.

And there is an availability really to product for everyone to keep up with the demand we see parts and service continuing to stay on this.

What I would call stable growth rate.

Got it.

Really helpful. Thanks, so much for all the color and good luck.

Thank you.

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

Hi, good morning, Thanks for the question.

Absolutely.

I wanted to touch on we're.

We're about one year into the park place asks a question so would love to get any comments.

About how that acquisition has performed maybe some areas that exceeded your expectations, maybe some that were a little below maybe.

Creation that you learned just any color there would be helpful. Thank you.

Sure Savi this is David.

Yes, I said this before the acquisition.

It was announced that if we could only buy one dealership group in the United States, what would it be and I would've said park place.

And it's not the brand mix the brand mix is fantastic, but it's the people tremendous leadership in that organization tremendous tenure dedicated employees. They just they're very disciplined well run group that truly care about their customer base and have earned their brand recognition that they've had.

When we look at it we're a year into it we're exceeding our year three targets from a financial standpoint.

But I'd say, they're oddly enough there aren't any surprises because theyre everything that we thought they would be they are just the best of the best at what they do they're carrying individuals' that execute consistently and we're proud to be associated with them and share ideas and how to get better, but it's been a phenomenal acquisition for us.

Absolutely. Thank you and then just switching to the F&I front.

There's obviously been I think that's an opportunity that you spoke on even earlier in this call coming out of that Larry Miller.

Acquisition and building on your F&I, but is there anything else you know taking that Atlas acquisition at the side that you could be focusing on just to increase.

Gross profit per unit on F&I standpoint, anything more organically that you're working on.

Good morning, Stephanie This is Dan Yeah from an F&I standpoint, we believe our top performers and others.

A little room for growth, we continue to focus on our bottom 20% bottom producers.

And to the extent that we continue to train and improve their performance, we see the growth coming from there for RF and <unk>.

We like the fact that 70% of our F&I number as product sales and only 30% is reserve.

And then Larry Miller group has better penetration numbers and we do.

So we're certainly excited to learn from them and grow as well. So we definitely believe there is upside in F&I and clearly we're certainly not at the top of the charts as it relates to our peer group.

Great. Thank you so much.

Thank you.

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

Hey, good morning, guys.

Good morning, a question on click way and I guess with a bit more experience now does the product SKU to a higher demographic or skew more to luxury you talked about higher repair orders and higher FICO scores.

But.

Does that does that channel really migrate to one segment of your mix luxury or import versus domestic.

Good morning, Brent This is Dan no, we're seeing consistent used across the brands.

From ultra luxury luxury import.

In domestic so pretty well received across the board.

And I would tell you that some of the brands.

Can't really explain it but some of the brands that are converting at a higher rate or have a high user Hyundai Kia.

And Lexus are.

Few of the brands that just do extremely well with the tool.

Okay, Great and then a question I guess on the M&A side, you said multiple started in that six to eight times are we looking at trailing 12 or are we adjusting startup for what we've seen in the surge in profitability recently and looking at a longer term to get to that six to eight.

Yes, no I appreciate that question I don't think anyone is pricing the multiple on the trailing 12 months you really have to do you have to look at the last three to five years in the market that it's in and the brand that it's in and then the performance within the brand within the market example would be if its stores, 200% sales efficient compared to 880% sales.

When looking at the upside in it so it's more based upon a three to five year look average.

When we refer to those multiples.

Okay. Thank you I appreciate it.

Thank you. Our next question comes from David Whiston with Morningstar.

Hi, everyone.

Going back to the quickly and demographic discussion from a second ago.

If youre getting it sounds like Youre getting a lot of exposure across all your brands, even the volume brands, but at the end of the day, it's more of the higher FICO credit customers that are transacting with the tool.

So why is that and can you get the lower FICO credit customers to engage more and actually transact.

David This is David I'll jump in and then Dan can certainly.

I would tell you on an average quarter.

Between eight and 10% of our business is what we referred to as lower credit or sub prime and the rest of it isn't.

It becomes a lot more complicated with subprime online transactions because of the documentations and what's needed. It's not impossible I think the reason youre seeing higher credit scores and higher down payments on the tool is it simplistically someone with a 750 plus beacon score on.

<unk>, they're not worried about financing and understand that they can get what they want.

So when you think about ease and convenience that consumer who knows they have the credit power and wherewithal to transact where they prefer to sit in the showroom for two and a half hours or do a 14 minute transaction online. So I think thats the gravity that's pulling it there.

We're certainly seeing lower credit scores as well on there it's not just simplistically, all 750, plus beacon score customers Theres, a broad mix, but again the score average is certainly higher and we credit that that's different than what we had with our prior tool.

And the main reason is that our belief is is because that high credit.

Score customer actually knows they can do the complete transaction that it's not simply a lead generator.

Okay and.

Compared to say a few months ago with this but the inventory continuing to be poor.

Are you seeing customers, especially new vehicle customers are would be new vehicle customers are they more likely to buy used compared to a few months ago are they at a point, where they're saying forget and I'll come back when inventories better.

Good morning, This is Dan again.

Customers, we're seeing the mix I mean, some customers are actually going into a used vehicle.

There are circumstances, where they got to have the car now they are willing to do that Theyre also seeing customers are willing to give up.

A particular package or an option and maybe settle for a car that is incoming in the next few days or one that might be seeing on the dealer's lot.

Okay, and finally are you guys worried at all about inflation for consumers' ability to buy a vehicle next year.

Yes.

David.

Clearly inflation is always a concern I would tell you.

This past quarter than in the past 12 months.

It's comforting to us to see the credit scores go up their down payments go up and the financing terms slightly go shorter term. So that tells us that theres a lot of cash in the consumer's pocket out there.

And they're using it to their discretion.

We've already seen an inflation in a lot of areas, but as it relates to automobiles.

I wouldn't call it in place and I would say the margin pressure is simply a supply and demand.

The inflationary pieces of the automotive cycle. If you will is not material from our perspective, it's not like food and that kind of thing.

Okay. Thank you.

Thank you very much.

This concludes today's discussion we appreciate your participation and look forward to speaking with you after the fourth quarter have a great day.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.

Okay.

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No.

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Good day and welcome to the Asbury Automotive group Q3, 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Karen Reed. Please go ahead.

Thanks, operator, and good morning, everyone. I have noted today's call is being recorded and will be available for replay later. This afternoon welcome to Asbury automotive third quarter 2021 earnings call. The press release detailing Asbury third quarter results was issued earlier.

This morning, and is posted on our website at Asbury Auto Dot com participating with me today are David Hult, Our President and Chief Executive Officer, Dan Clara, Our senior Vice President of operations and Michael Welch, Our senior Vice President and Chief Financial Officer at the conclusion of our remarks.

We will open the call up for questions and I will be available later today for any follow up questions you may have.

Before we begin we must remind you that the discussion during the call today is likely to contain forward looking statements forward looking statements are statements other than those which are historical in nature, which may have which may include financial projections forecast and current expectations each of which are subject to certain <unk>.

Certainties.

For information regarding certain of the risks that may cause actual results to differ materially from these statements. 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 earn.

The 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 auto dot com, highlighting our third quarter results. It.

It is now my pleasure to hand, the call over to our CEO, David Hult, David. Thank you Karen and good morning, everyone welcome to our third quarter earnings call.

Our earnings release. This morning, we reported adjusted EPS of $7 36.

Record third quarter up 80% over the prior year.

So on new car inventory levels continue to be challenged due to the chip shortage. Our team delivered strong results and enabled us to deliver an impressive gross margin of 20%, an all time record and an expansion of 180 basis points versus the third quarter last year.

These results demonstrate the resilience and strength of the franchise model with its full suite of services through the car ownership journey from sales to service contributing to sustained profitability.

We are also staying disciplined in managing expenses, resulting in SG&A adjusted SG&A as a percentage of gross profit of 55, 3%.

A 580 basis point improvement versus prior year.

Our total revenue for the quarter.

It was up 30% year over year and total gross profit was up 43%.

Due to this record performance and strong cash flow our balance sheet remains strong our net leverage ratio ended this quarter at one two times.

A quick update on our five year strategic plan.

Same store revenue growth, assuming 2020 annualized revenue for park place is up 10% and is exceeding expectations regarding click Lane. Our unit sales are pacing ahead of our projection for year one.

And we've made great strides this quarter on our acquisition pillar as announced we expect to close on the transformative acquisition of the Larry H Miller dealerships and total care auto in the fourth quarter.

With their strong name and brand mix and the right states and our aligned cultures, we look forward to jointly deploying our capabilities and growing together.

In addition, we closed two acquisitions recently really Subaru in the Denver market.

Kalo, Chrysler Jeep Dodge and Indianapolis.

<unk> scheduled to close a wrap a whole Hyundai Genesis and the Denver market today.

With another acquisition is still under contract and expected to close in the fourth quarter as well in total in 2021, we anticipate that we will close on $6 6 billion of annualized revenue from acquisitions.

With these results we maintained full confidence in the execution of our growth strategy.

And we will update our five year plan during our Q1 earnings call in 2022.

Now I would like to welcome Michael Walsh, our new CFO to the Asbury team.

He brings his vast knowledge of the auto retail business along with his broad experience in finance.

We worked together at Groupon for many years and I am excited to be working with them again.

I'm also thrilled to welcome our new team members in Indianapolis and in Colorado into the Asbury family.

And finally, I would like to address all of my teammates at Asbury.

Our ability to add quality stores, who like us care about serving our guests and being highly engaged in our communities could not have happened without you.

You all have given us the ability to thoughtfully grow our core business because you align behind our vision and you are executing each and every day.

I appreciate all of you and I'm thankful to be part of this team.

People make the difference in any organization and you are making us the best place to work do business and grow your careers.

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

Thank you David and good morning, everyone My.

My remarks will pertain to our same store performance compared to the third quarter of 2020 unless stated otherwise.

Looking at new vehicles.

Based on current market conditions, we continue to be focused on being opportunistic with our inventory and improving grosses to maximize profit.

Our new average gross profit per vehicle was $4808 up to $369 or 97% from the prior year period.

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

At the end of September our total new vehicle inventory was $121 $90 million and our day supply was at 12 days down 35 days from the prior year.

Still no clear understanding of when production will return to normal level, we expected day supply to remain low throughout the remainder of the year and into 2022.

Turning to used vehicles.

Our U S retail volume increased 27%, while gross margin was eight 4% representing an average gross profit per vehicle of $2402. As a result of our performance our gross profit was up 45%.

Our used vehicle inventory ended the quarter at $236 4 million, which represents a 28 day supply down seven days from the prior year.

Our used to new ratio for the quarter was 113%.

Turning to F&I, our strong consistent and sustainable growth in F&I delivered an increase of $155 to $1955 per vehicle retail from the prior quarter and.

In the third quarter, our front end yield per vehicle increased one.

$400 per vehicle to an all time record of $5487.

Turning to parts and service.

Our parts and service revenue increased 10% in the quarter.

The warranty revenue dropped 18% our customer phase revenue continues its healthy recovery.

Posting a 13% growth.

Overall, our total fixed gross profit increased 10%, while total fixed margin was 69%.

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

Our digital marketing team continues to do an outstanding job generating traffic to our websites our commitment years ago to Google organic search continues to drive efficiencies in times, where inventory shrinking, allowing us to increase traffic without spending media dollars.

In Q3, we had over $6 3 million unique visitors, a 12% increase versus Q3 2020.

Another initiative is to increase online service appointments.

We achieved over 143000 online service appointments and all time record and a 12% increase versus Q3 2020.

This component positively impact service retention and increases the dollars per repair order.

Now with two full quarters of click link at all stores under our belt, we would like to share some performance metrics.

We sold 6000 vehicles through <unk> in Q3 of which 47% of them were new vehicles and 53% used.

93% of our transactions this quarter were with customers that were new to Asbury dealership network.

Average transaction time continues to be consistent with previous quarter eight minutes for cash deals and 14 minutes for finance deals.

Total front end yield of $5400.

Average credit score is higher than the average credit score at our stores.

Total front end yield of $4396 on trades taken through pipeline.

We continue to expect annualized volume through <unk> of approximately 30000 vehicles by year end.

As expected click link customers are converting at greater rates than traditional internet leads.

We remain quite excited about the performance of <unk>, thus far as it is tracking ahead of its targets.

And finally.

I would like to thank all our teammates in the field for their hard work dedication and commitment to delivering an exceptional guest experience in.

In addition, I would like to extend a warm welcome to our new team members from Greening Zillow Group Carlo CD, Jr. <unk> Hyundai Genesis.

All of you have built tremendous organizations that properly alone with our northstar or being the most guest centric automotive retailer.

Our future is bright and I look forward to meeting all of you.

Michael Welcome to Asbury your depth of knowledge in the automotive business is already making a significant impact on our company I am enjoying working with you and look forward to growing Alberta together.

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

Yeah.

Thank you both for the warm welcome I am excited to be part of the Asbury team and had the opportunity to work with David again, I look forward to working with the team.

On our growth journey to our investors analysts and other participants are call good morning.

I would like to provide some financial highlights, which mark had another record quarter for our company for.

For additional details on our financial performance for the quarter. Please see our financial supplement and our press release today.

Overall compared to the third quarter of last year, our actions to manage gross profit and control expenses resulted in a third quarter adjusted operating margin of eight 5% an increase of 190 basis points above the same period last year and an all time record.

Adjusted operating income increased 69%.

$204 5 million a third quarter record.

And adjusted net income increased 81% to $143 6 million another third quarter record.

Net income for the third quarter of 2021 was adjusted for acquisition expenses of $3 5 million or <unk> 13 per diluted share and a gain on dealership divestitures of $8 million or 31 per diluted share net.

Net income for the third quarter of 2020 was adjusted for a gain on dealership divestiture of $24 7 million or <unk> 96 per diluted share acquisition costs of $1 3 million or <unk> <unk> per diluted share and 700000 or <unk> <unk> per diluted share for our real estate related charge.

Our effective tax rate was 23, 7% for the third quarter of 2021 compared to 24, 8% in 2020.

Floorplan interest expense for the quarter decreased by $1 5 million over the prior year driven by lower inventory levels.

With respect to capital deployed this quarter, we acquired a Subaru store in Colorado, utilizing approximately $16 million of our cash on our balance sheet.

In addition, we spent approximately $15 million in capital expenditures and we repaid approximately $9 million of debt.

Also as part of our strategy to optimize our portfolio, we divested of our BMW store in Charlottesville resulted in proceeds of $18 million net of its mortgage payoff.

As a result of our operational performance our balance sheet is quite healthy as we ended the quarter with approximately $780 million of liquidity comprised of cash floor plan offset accounts and availability on both our use line and revolving credit facility.

Also at the end of the quarter, our net leverage ratio stood at one two times well below our targeted net leverage of three.

With our announced acquisitions under contract we are working towards financing the exciting growth of Asbury as announced in late September we plan to raise the combined the combination of permanent debt and equity financing prior to the closing of Larry Miller acquisition.

We are working with our supportive lender group to upsize, our credit facility and syndicate, the real estate mortgage finance.

With plans to close both ahead of our acquisition of Larry Miller dealerships later this year.

Although the transaction was initially expected to take our net leverage above our targeted range of three times. We believe that we can deleverage of approximately three times during 2023, given the highly accretive nature of the deal from viral strong free cash flow generation.

As we look forward to the remainder of 2021, we anticipate similar conditions, where we have seen this quarter.

Vehicle inventory suppliers are likely to remain low and unpredictable until next year.

In closing I would like to thank our teams across the businesses, who continue to work tirelessly during the unprecedented times to ensure our current and long term success.

I would also like to welcome our new team members from our recent acquisitions.

I look forward to working with you and continue to build on our strong culture is that you are bringing to asbury.

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

Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity to signal for questions.

Yeah.

Thank you. Our first question comes from Rick Nelson with Stephens.

Thanks, Good morning.

Quarter.

I guess Kurt.

Yeah from a.

Balance sheet standpoint.

You see the pro forma leverage.

And post.

$6 6 billion in revenue here that you're acquiring.

How should we think about.

Capital priorities going forward.

Can you elaborate Malibu.

The carriers have been near term post this deal.

Great. Thank you for your question Yeah from.

From a leverage perspective after we close the deals.

We expect leverage to be in the high threes.

From a capital deployment perspective, just allocation in the future we will be in a deleveraging mode in 'twenty, two and 'twenty three just to bring that leverage back down to our three times target.

But we can also take the cash flow for deleveraging perspective, and either payback debt or.

We found some acquisitions that provided EBITDA that we provided additional leverage that would also provide some deleveraging ability as well.

Okay.

Sure Michael.

Yes.

<unk> 900 million.

On that call.

<unk>.

You could talk about rig count per person.

Chubb's, maybe what market paradigm.

Hi.

The group.

Yes.

Rick This is David we discussed this morning Kalo.

Greatly Subaru and Arapahoe Hondo today, when you take those three out it leaves a balance of about $740 million in revenue, which is all in one group.

Because it hasnt been fully announced yet we don't want to say it but the brand mix is.

About 50% luxury.

And then mostly import with one domestic store as well.

It really is a very strong growth with the right brand mix in a market that we've been trying to grow.

Great Thanks for that might be.

Follow up to that.

To the multiples that you're looking at for those stores.

Yes.

Yes.

The one that we haven't announced yet.

Off the top of my head I believe its about an eight multiple between a 7% EBITDA multiple.

Theres good upside in the stores and opportunity to grow them within the marketplace and there's a little bit of capex involved as well.

Alright.

Larry Miller.

Oh I'm sure there.

I'm, bringing some digital allows hubs.

The growth.

If you could speak to any potential.

Potential challenges integrating.

That group ended quite client opportunities.

<unk> terminated square.

Sure absolutely.

Yes, I would tell you.

The integration should go pretty smooth and we're all on the same software is the same.

<unk> Dms, we're retaining all of the senior executive management team.

And really kind of like we did park place, let it operate in its own silo.

Theyre extremely strong brands, great leadership in the stores perform extremely well.

A lot of capabilities there for us to enhance their digital side. They are extremely strong operators, but there is an opportunity for digital I don't think that'll be a focus the first few months it'll be mainly more integrating the folks and getting to know one another and creating that trust and relationship and then starting to integrate the software.

But like anything there is always potential in every acquisition to grow.

Great Thanks for that.

Finally, if I could ask you about.

Total wood care.

You have the opportunity to bring that in house.

Sort of financial.

Implications of that.

Okay.

Hi, Amit.

Potential risks.

Cut that strategy Barton.

Yes, Rick this is David I'll start and then Michael can jump in.

I would tell you, it's a very stable business.

The Miller organization has had over 30 years, it's a M. Best rated they do an extremely great job of paying claims a strong balance sheet.

Really we see it as a very accretive towards margins significantly higher than our operations.

They're essentially just high level, making about $50 million a year EBITDA on 115000 car sales.

When you integrate Asbury at over 200000 car sales into that you can kind of see the upside potential there.

So we're excited about what it can do and the other is huge benefit that it has had for that organization. They have extremely strong service retention numbers.

It's a true hand in glove relationship between TCA in the Miller organization.

Rick one thing that will cause a little bit of slowness.

Sloan is on how we integrate is from an accounting perspective that caused a little bit of noise of moving dealership profits from AR.

Day, one profit too.

We have to kind of deferred and amortized over the life of the contract wins in the insurance business. So because of that it will take us a few years to be able to bring in asbury at a measured clip. The other thing is that business to bring in Asbury has just.

Size itself, a little bit for the additional business and obtain some insurance licenses in some states that they don't do business right now and so we just have a little bit of leg work to do to be able to get asbury fully.

Brought into their mix.

Got it.

Okay.

Right.

Scott.

So two to three year period.

Okay.

Thanks for that goodwill.

Mark.

Thank you Rick and acute.

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

Okay.

Good morning, everyone. This is aileen Smith on for John.

First question on the new vehicle business can you talk about the trends versus exit rate in the quarter on gross margins and Gpus.

And more specifically is it fair to assume that growth is improved through the quarter as the inventory environment tightens or rather dropped off with sales trends just trying to think about what the larger question would be for <unk> and <unk> and then further into 2020.

Yes. Good morning, this is Dan.

The.

The margins as we enter into our Q3.

So pretty stable throughout the quarter, although I would say products under a bit of an uptick as we were exiting the quarter.

Mainly driven.

Due to the supply and demand.

As we move forward, we as I said it on my script, we see the.

The inventory constraints continue.

2022, so we expect our margins to.

Right right along the inventory.

Okay, Great and then can you talk a bit about the prioritization if at all for the used vehicle business between same store sales comps versus cost margins in Gpus.

Relative to the new vehicle business quarter on quarter gross margins are down, but the offsetting factor for this is obviously a material acceleration in same store sales growth.

Is this something we should look out as a structural trend going forward as you continue to focus on the used vehicle market for growth opportunity or is this purely a function of broader market dynamics, namely the inventory shortage, that's more transitory in nature.

Yes, I think that.

Thank you.

It's just it's just a product of the market. If you look at our cost of sale average selling price of used cars.

It increased 16% and that is something that we're seeing.

As inventories dropped down a new cars or cost of sale for us of course is going up.

A lot of people customer that purchased cars in the recent years their cars are going to be worth more than today.

Are often to trade their car in or sell it back to us.

So I believe that that's part of the issue. The other the other aspect is we expect this to continue.

As long as the market conditions stay the same.

And to be honest.

We're not saying that.

Lets grow the used car business from a volume standpoint, and sacrifice margin. We believe that we can get both in this market.

Got it and one last one if I may I know you referenced youre going to update your five year plan next year.

I think we can reasonably assume as a function of malaria Miller acquisition, and obviously driving acquired revenue much higher than the target is previously outlined for the other key component of your five year plan as quickly.

We'll be thinking about quickly and organic growth in the business of having upside versus your prior targets or would you say the rollout on this front is coming more in line with expectations.

Yes. This is David I'll try and address it.

<unk> hit it right please come back.

When we looked at quickly for the next five years, we did it on a monthly basis by store.

With conversions, increasing each and every year.

To get to that that valuation.

As it relates to year, one where typically six months fully into it.

From a conversion standpoint, we're about two percentage points below where we expect it to be but because there's been additional traffic we're exceeding our volume target I would tell you, it's a little bit tricky with click lean right now because of the lack of inventory.

There's a lot of <unk>.

Traffic, but theres not a lot of inventory to purchase from so it's hard to fully assess the conversions right now with lack of inventory, but we're real happy with what we've seen and how it's being treated and the consumer response to it.

And our belief is next year in 'twenty, two and certainly in 'twenty, three and 'twenty four each year, we're anticipating that conversion rate to go higher as the consumer becomes more comfortable transacting online and the tools continue to get to.

Become more sophisticated and easier to use.

Got it that makes a lot of sense, thanks for taking the questions.

Thank you.

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

Good morning, nice quarter, and thanks for taking my questions.

Thanks Ryan.

Curious.

On mobile mechanic can you talk quick clean a lot, but how much opportunity is there from a.

A parts and service standpoint to really digitize that and go closer to the consumer and bring it to them.

Yes, it's a great question.

I would tell you over the last five years between different things, we've done to enhance it on our own.

And adding a service tracker element.

We're seeing higher conversion rates than we've seen in the last four or five years, meaning consumers.

Approving more work than they had in years past.

And they're spending more dollars per repair order that has a lot to do with the age of the car as well, we do see more opportunity to be more digital and more engaged and transparent with the consumer.

And that will that will come over time, but tremendous benefits.

So far from what we've seen.

Mainly our sources text messaging.

We're communicating through tax message.

<unk>.

Multipoint inspections on how the car is doing their ability to communicate directly with the technician.

And then <unk>.

Being able to pay for the service via text as well so continues to grow great feedback and with the consumer's converting at a higher rate that tells us their level of comfort and transparency is there as well.

Got you and then just on the inventory I know not to belabor the point, but 12 days supply on the new side I guess, how has that trended on amongst subsequent to the quarter end and then also comment on used as well.

Good morning. This is Dan by the way the data apply around the quarter, we have been around that 12 day supply.

From the beginning of the quarter and we remain consistent.

The stores are doing a great job and I think I mentioned is in the <unk>.

Call doing a great job of pre selling.

Income in units.

So we've adjusted to the market demand and again the stores and the operators are doing a fantastic job from a used car perspective.

<unk>.

I will tell you our day supply.

You can see it is lower than where we were operating a year ago.

But we continue to acquire inventory for more main stream, which will be your trade in your lease turn ins and direct to consumer purchases.

Approximately about 79% of our inventory are coming from.

From those three.

<unk>.

Last question from me and I'll turn it over to the others, but Mercedes.

They are cutting dealer trade margins by 50 bps to help pay for Evs any comment there any concern I guess with other Oems doing this and potentially squeezing the dealer margins.

Yeah. This is David so the quick reaction is no as it relates to Mercedes.

We really enjoyed the partnership with them in the brand we have high margin business with them consumers really appreciate the brand as well and we look at this as a partnership.

Small cut into the margin to setup for the future as an investment for both of us to make.

We're proud to represent the brand as it pertains to other manufacturers that might do it.

Hard to comment on something that you can see and not aware of yet.

But certainly we look at the relationship as a partnership and we have to have skin in the game as well, but we don't see that margin.

Sent with Mercedes materially affecting us.

Thanks, guys. Good luck. Thank you.

Thank you. Our next question comes from Grace Chen with Morgan Stanley.

Hi, Thank you for taking my question and congrats on the quarter on behalf of Adam Jonas how sustainable do you expect SG&A to gross to be going forward taking into account your digital strategy and recent acquisitions.

Sure. Greg This is David and I am sure at what I would say Michael jump in and try and cleanup.

I would tell you the SG&A is impressive right now.

Different reasons, the obvious supply and demand high margins as helping dramatically, but as the pandemic started we really got our production per employee at a much higher rate.

We're of the belief as you look three to five years out.

The retail franchise model changes, a little bit and how you compensate and what that looks like so we think that the current SG&A is certainly there is here to stay for at least the next year.

And then with improving software and capabilities and click lane growing we think there's future opportunities to strengthen the SG&A.

Or.

<unk> tightened up for lack of a better term.

Got it that's really helpful and shifting gears a bit how would you characterize high quality strategic acquisitions going forward.

It's a great question.

<unk> with the five year plan for $5 billion in revenue.

Never going to get $1 billion each year, but the thought process is what are we generating cash flow and what can we take on.

Not knowing that an acquisition like Larry H Miller, we'd be out there.

There's a lot of stores for sale. There is a lot of stores that transact, but every store is not the same even though the brand name <unk>.

Some groups in the culture that they have are pretty strong and align really well with us when we find a group that we think aligns really well with us and the synergies are there we try to be very aggressive and go after it and the other stuff. We just simply don't go after it not that it's a bad asset, but it just might not aligned with us I think in the last three and a half years when you look at the acquisitions.

We have done they've shown to be extremely accretive to our group with extremely low turnover numbers.

So that tells us that we're finding the right acquisitions were properly aligned.

And we're making good investments with the shareholders' money.

Got it thank you very much and congrats again.

Thank you.

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

Yes.

Hey, good morning, Thanks for taking the questions.

I just had a follow up question on productivity savings could you remind us.

Our head count level currently.

Well I think before the couple of acquisitions, we just did with our head count was right at 8300.

Got it got it so it looks like you were at 8500 before Barclays.

We're roughly 8300 today.

Volumes are up meaningfully versus 2019 levels on a combined basis.

So yes.

Any way to parse out these productivity benefits across.

Apartment and head count reduction will move to digital.

Click claim and then may be just lower inventory levels, we are dealing with at the stores today.

Just trying to get a sense as inventories start to come back and who knows maybe 2023.

Where does your like for like head Count go Ken.

Do you maintain current levels of productivity once we're there.

I have a follow up thanks.

Sure. This is David Yes, we believe we can maintain these productivity levels are per employee.

Mainly because of the software.

Applications that we've had is making it easier for our folks to become more productive.

We think the current numbers were add productivity per employee probably stays stable for the next 18 to 24 months and then we think at that point, we have another opportunity to increase the production per employee.

And Thats, where our focus is and the reason why it's 18 to 24 months out quite honestly its software related.

Understood Great that's encouraging.

Just shifting gears completely due to parts and services.

Can you give us a sense of you know how the.

<unk> rate was for that business now and in the third quarter.

In the fourth quarter is shaping up there in terms of the P&I just improvement in that trajectory.

And I also want to ask on the warranty business, specifically given the supply shortages, but also.

Given we are soul.

Fewer than normal level of new vehicles to last couple of years.

How do you see that playing through intelligence and back to the overall business and maybe 2022 and 2023, given the retention rates are pretty high at the first two to three years or so.

Yes, if you could diagnose together that that'd be helpful and also some of the near term trends.

Okay.

Yes.

Richard This is Dan good morning.

From a fixed operations business for the quarter.

As you can see the warranty.

<unk> really pulled back.

Thats really has got to do a lot and it's just really across all domestic import and luxury.

Some of the campaigns that we saw last year fuel pumps to name a few of them may be a few dashboards.

Door actuators you name it we've seen a pullback from that perspective, and thats affecting obviously or warranty.

Traffic customer pay is recovering.

Pretty good as you saw.

Our customer pay.

Gross profit was up 10% and we continue to see the healthy recovery as.

As well.

As we move forward from a unit and operation standpoint from a warranty perspective.

It's hard to tell because warranty is not something that we forecast for it's really driven by if there's a recall if there is.

Sure.

An issue a few pumps again you name. It so we don't control that to the extent that something like that happens, we expect warranty to come back up around.

And if not then we'll just we'll keep focusing on growing the customer base.

Touch on that Dan mentioned because of phase up 10% growth, it's actually a 12% growth.

It's the dollars per repair order going up.

If I heard you right.

The new car customer hangs around for the first few years and winds up in our organization. The one metric that we track every day on the customer pay side is whats the average miles coming into our store.

And naturally the higher the miles that tells us we're retaining a much deeper into the channel. If you will and we're just under 70000 miles.

For the average car from a customer base standpoint coming into the company. So we think that's pretty healthy and as the car Park continues to age.

And there is an availability really to product for everyone to keep up with the demand.

See parts and service continuing to stay on this.

What I would call stable growth rate.

Got it that's really helpful. Thanks, so much for all the color and good luck.

Thank you.

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

Hi, good morning, Thanks for the question.

Absolutely.

I wanted to touch on.

We're about one year into the the park place acquisition, So would love to get any comments.

About how that acquisition has performed maybe some areas that exceeded your expectations, maybe some that were a little below maybe anything on integration that you learned just any color there would be helpful. Thank you.

Sure Savi this is David.

Yes, I said this before the acquisition when it was announced that if we can only buy one dealership group in the United States, what would it be and I would've said park place.

And it's not the brand mix and brand mix is fantastic, but it's the people tremendous leadership in that organization tremendous tenure dedicated employees. They just theyre very disciplined well run group that truly care about their customer base and have earned the brand recognition that <unk> had.

When we look at it we're a year into it we're exceeding our year three targets from a financial standpoint.

But I'd say theyre oddly enough there aren't any surprises because theyre everything that we thought there would be they are just the best of the best at what they do they are carrying individuals' debt execute consistently and we're proud to be associated with them and share ideas and how to get better, but it's been a phenomenal acquisition for us.

Absolutely. Thank you and then just switching to the F&I front.

There's obviously been I think there is an opportunity that you spoke on even earlier in this call coming out of that Larry Miller.

Acquisition and building on your F&I, but is there anything else taking that axis acquisitions at the side that you could be focusing on just to increase cross.

Gross profit per unit on F&I standpoint, anything more organically working on thanks.

Good morning, Stephanie to Dan, Yes from an F&I standpoint, we believe our top performers and others.

Middle room for growth, we continue to focus on our bottom 20% bottom producers.

And to the extent that we continue to train and improve their performance, we see the growth coming from there for RF DVR.

We like the fact that 70% of our F&I number as product sales and only 30% is reserve.

And then Larry Miller group has better penetration numbers and we do.

So we're certainly excited to learn from them and grow as well. So we definitely believe there is upside in F&I and clearly we are certainly not at the top of the charts as it relates to our peer group.

Great. Thank you so much.

Thank you.

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

Hey, good morning, guys.

Good morning, a question on a click way and I guess with a bit more experience now does the product SKU to a higher demographic or skew more to luxury you talked about higher repair orders and higher FICO scores.

But does that does that channel really migrate to one segment of your mix luxury or import versus domestic.

Good morning, Brent This is Dan no, we're seeing consistent used across the brands.

From ultra luxury luxury import.

In domestic so pretty well received across the board.

And I would tell you that some of the brands.

Can't really explain it but some of the brands that are converting at a higher rate or have a high user Hyundai Kia.

And Lexus are.

Few of the brands that just do extremely well with the tool.

Okay, Great and then a question I guess on the M&A side, you said multiple started in that six to eight times are we looking at trailing 12 or are we adjusting startup for what we've seen in the surge in profitability recently and looking at a longer term to get to that six to eight.

Yes, no I appreciate that question I don't think anyone is pricing the multiple on the trailing 12 months you really have to do you have to look at the last three to five years in the market that it's in and the brand that it's in and then the performance within the brand within the market example would be if its stores, 200% sales efficient compared to 880% sales.

When looking at the upside in it so it's more based upon a three to five year look average.

When we refer to those multiples.

Okay. Thank you appreciate it.

Thank you. Our next question comes from David Whiston with Morningstar.

Yeah.

Hi, everyone.

Going back to the quickly and demographic discussion from a second ago.

If you are getting it sounds like youre getting a lot of exposure across all your brands, even the volume brands, but at the end of the day.

It's more of the higher FICO credit customers that are transacting with the tool.

Why is that and can you get the lower FICO credit customers to engage more and actually transact.

Hey, David This is David I'll jump in and then Dan can certainly.

I would tell you on an average quarter.

Between eight and 10% of our business is what we referred to as lower credit or sub prime and the rest of it isn't.

It becomes a lot more complicated with subprime online transactions because of the documentations and what's needed it's not impossible.

The reason youre seeing higher credit scores and higher down payments on the tool is simplistically someone with a 750 plus beacon score.

I understand they're not worried about financing and understands that they can get what they want.

So when you think about ease and convenience that consumer who knows they have the credit power and wherewithal to transact where they prefer to sit in the showroom for two and a half hours or do a 14 minute transaction online. So I think thats the gravity that's pulling it there.

We are certainly seeing lower credit scores as well on there it's not just simplistically all 750, plus beacon score customers. There is a broad mix, but again. This the score average is certainly higher and.

We credit that that's different than what we had with our prior tool.

And the main reason is that our belief is is because at high credit score.

Score customer actually knows they can do the complete transaction that it's not simply a lead generator.

Okay and.

Compared to say a few months ago with this with the inventory continuing to be poor.

Are you seeing customers, especially new vehicle customers are would be new vehicle customers are they more likely to buy used compared to a few months ago are they at a point, where they're saying forget and I will come back when inventories better.

Good morning, This is Dan again.

Customers, we're seeing the mix I mean, some customers are actually going into a used vehicle. It depends on the circumstances. We've got a how the car now they are willing to do that Theyre also seeing customers that are willing to give up.

Particular package or an auction and maybe settle for a car that is incoming in the next few days or one that might be sitting on the dealer's lot.

Okay, and finally are you guys worried at all about inflation for consumers' ability to buy a vehicle next year.

Yes. This is David <unk>.

Clearly inflation is always a concern I would tell you in this past quarter than in the past 12 months.

It's comforting to us to see the credit scores go up their down payments go up and the financing terms slightly go shorter term. So that tells us that there is a lot of cash in the consumer's pocket out there.

And they're using it to their discretion.

We've already seen an inflation in a lot of areas, but as it relates to automobiles.

I wouldn't call it inflation I would say the margin pressure is simply a supply and demand.

The inflationary pieces of the automotive cycle. If you will is not material from our perspective, it's not like food and that kind of thing.

Okay. Thank you.

Thank you very much.

This concludes today's discussion we appreciate your participation and look forward to speaking with you after the fourth quarter have a great day.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.