Q4 2021 AutoNation Inc Earnings Call
It is also an objective constitute forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1095.
Such forward looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward looking statements.
Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K , and subsequent quarterly reports on Form 10-Q , and current reports on form 8-K.
And now I'll turn the call over to <unk>, Chief Executive Officer, Mike Manley.
I think Europe .
Hello, Good morning, everybody and thank you for joining us.
Obviously, the main places because it is cool is naturally the presentation of automation fourth quarter results.
Which could also touch on the full year, as well, which chairman I'm going to discuss in detail, but as this is my first call. I was also trying to think about what might be helpful.
You talked to them. In addition to the financial results and I am thrilled that firstly, let me give a brief overview of some of the things that I've been doing over the last three months and then I'm going to go through the highlights of the group's fulfillment and hand over to Joe.
So we'll give you more of a fine detail.
After that I'm going to touch on a number of the key topics that are kind of attention over the last few weeks and in closing before our Q&A I thought I might given most of the future, which will will Bridget, albeit just a summary of some of my preliminary observations.
So as you can imagine when you're joining the organization, particularly one that has a broad national footprint of retail locations and over 20000 people in the field you spent quite a lot of time traveling around the country and today I had the opportunity to visit a number of our franchise dealerships, including in our most recent acquisitions.
Many of our Autonation USA stores, our auction sites in a number of our collision centers from coast to coast.
Now obviously a need from a previous life automation was the largest automotive retailer in the United States and then it also have begun to build additional brands businesses and capabilities at scale.
The genuinely excited at reading about it on Python actually doesn't do it justice to what has been built and the talent that the organization possesses that could actually see fail and.
Get a sense of by actually visiting the locations.
I think when you get the opportunity to travel to our Davis shifts in business as you really start to recognize the incredible asset to the group has been able to build acquire and develop.
And I'm thinking about the 330 franchises are David shapes, not only do the brands who represent account for 99% of all new vehicles sold in the U S. But we're also fortunate to have a superb <unk> balanced portfolio of the best automotive brands in the world.
Located in some of the most exciting franchise territories.
In addition to visiting our retail businesses I've also met with a number of our OEM partners and Ssi unfortunate I haven't been able to get around all of that stuff of maintenance is a big.
Clear to do and finish list and I'm looking forward to meeting with.
With our partners that I haven't met yet, but I have to say the ones that have now been incredibly encouraged by our conversations we've.
We've had what I would consider very think exchanges of views and very important.
I've been out to see the brand and the product plans for.
For the future.
For me just makes represented some fantastic brands.
Even more exciting when you understand what's actually coming through the pipeline.
Now obviously our franchise dealerships are an important part of our growth and our scale gives us significant opportunities, but it is also clear is that we're also developing businesses and platforms that will significantly expand our reach I think gives us the opportunity to take advantages of things as they unveiled in the future.
As you know we are building a strong focused use call parameters autonation USA and as Joe will tell you in a minute all of the stores, we have including those added in 2021 are up and running they're profitable ahead of our expectations.
Having happy customers to our growing family on a daily basis.
And finally and I think this is really important.
The one thing you really do get a true feel of what the.
Inside on a day to day basis, as the quality and the passion of the Autonation team.
It doesn't matter, where I've been either in our dealerships on collision centers and our corporate office I think there's really play well to win and our customer and community focused culture.
So on this point as a reality check do have to say I've never heard an incoming CEO to say anything bad about the team.
She will tend to.
Certainly not at least on the phone first Vancouver.
And you know that probably expected me to complement not peso, but my comment actually goes well beyond platitudes.
Because you can imagine our strong performance, how pleased I am with the team's delivery of a seventh consecutive record quarter.
We have to remember this is still delivered during very unusual times with significant disruption from lack of supply winter COVID-19 spikes in competition everywhere.
My comments actually go beyond that they made as much for the performance the team delivered as they offer the less visible southwest work they do in our communities in the fight against cancer.
Donations drive Pink campaign was a true revelation to me.
Not in the center on the organization was involved in social and community projects with surety books, because actually I think that's what organizations are supposed to do.
Amazed to see just how many of our associates get involved on their own time to support drive pink and drive our concept.
To date, the favorable to nice to have raised over $13 million, which has been plowed into research treatment and care now that the team I can tell you I'm already very proud of.
Okay. So it just gives you a flavor of my first three months now going to turn to our results.
So you've seen from the numbers, we delivered another outstanding quarter, and a very strong year and today as I already mentioned, we reported our seventh consecutive record quarterly results with adjusted EPS of $5 76, which is an increase of $137 and revenue increasing by $797 million or 14% compared.
The prior year.
Now this was driven by robust growth in used vehicles sales consumer finance.
This is an after sales.
Total units for the quarter declined by 1% and that was driven by new vehicle sales down, 20%, which was largely offset by an increase in 21% of used vehicle volume compared to the prior year.
And with strong consumer demand, we continue to focus on ourselves still sourcing capabilities, who used vehicles, which further strengthened our franchise dealerships and autonation USA businesses.
When I look at that nearly 90% of all pre owned vehicles retailed in the quarter with self sourced from our acquisition.
<unk> strategy, which obviously includes all of the trade ins, but now increasingly we buy your car program, which purchases directly from customers.
And as a result used vehicle revenue increased 55% for the quarter.
Now as I previously mentioned Autonation USA and a successful part of our plan and in November we opened Autonation USA haven't download Phoenix and recently entered a new market with our automation store USA stores in Charlotte.
Now each new store opened in 2021 has exceeded expectations and as I said profitable in the first full month of operation and we remain on target to open 12, additional new stores over the next 12 months.
I think our focus on margin expense control significantly contributed to our performance with strong new used finance and insurance margin per unit up significantly year over year ending the quarter continued.
The improvement in our after sales business, which delivered an 11% increase in gross profit.
I know it's been discussed.
Expense control, something which frankly I consider structurally in the business now helps contribute to an overall increase in total store profits by over 150%.
Now with that I'm going to hand, you over to Joe Who's going to take you through the details of the financials.
Thank you, Mike and good morning, everyone.
Today, we reported fourth quarter total revenue of $6 6 billion.
An increase of 14% year over year, driven by impressive growth in used vehicles, a 55% as well as double digit growth in both customer financial services and after sales.
This was partially offset by a 7% decline in new vehicle revenue due to the continuing supply chain disruption to new vehicle.
Production.
Strong consumer demand and tight new vehicle inventories continued to support new vehicle margins in the fourth quarter.
We expect demand to continue to exceed supply well into 2022.
In addition, many consumers have shifted to used vehicles due to limited availability of new which has been very beneficial as we continue to demonstrate exceptional growth supported by our self sourcing capabilities.
Growing expansion of our Autonation USA footprint.
For the quarter total variable gross profit increased 49% year over year, driven primarily by an increase total variable PBR of $2026 or 50% increase with a slight decline in total units of 1%.
As Mike mentioned, 21% growth in used units year over year, largely offset a 20% decline in new units over the same period.
We also demonstrated strong growth in after sales gross profit, which increased 11% year over year.
Taken together, our total gross profit increased 34% compared to the fourth quarter of 2020.
Moving to costs fourth quarter adjusted SG&A as a percentage of gross profit was 56, 7%.
710 basis point improvement compared to the year ago period.
As measured against gross profit on an adjusted basis, our metrics improved across all key categories with overheads, decreasing 370 basis points compensation, decreasing 230 basis points and advertising decreasing 110 basis points year over year.
Longer term, we expect normalized SG&A to gross profit to be in the mid 60% range well below our pre pandemic levels that were consistently above 70%. This.
This improvement is the result of structural changes that we've made to our business model.
Floor plan interest expense decreased to $5 million in the fourth quarter of 2021, due primarily to lower average floorplan balances.
Buying with a lower effective tax rate and fewer shares outstanding we reported adjusted net income of $380 million.
Or $5 76 per share a 130% increase year over year. This results our seventh consecutive all time high quarterly earnings per share result.
Our strong operating performance and cash flow generation continues to provide us with significant capacity to deploy capital.
During the fourth quarter, we closed on the previously announced acquisition of priority, one automotive group, adding $420 million in annual revenue.
We remain focused on identifying additional acquisitions that allow us to expand our current portfolio and offer attractive long term financial returns.
As Mike discussed, we continue to see a tremendous opportunity to capture a larger share of the used vehicle market by leveraging our sourcing capabilities rich data analytics and Autonation USA growth strategy.
We recently opened our 10th Autonation USA store in Charlotte, North Carolina, and expect to open 12 more stores over the next 12 months longer term, we continue to target over 130 stores by the end of 2026.
We also continued to repurchase our own shares during the fourth quarter, we repurchased three 1 million shares for an aggregate purchase price of $382 million.
This represents a 5% in shares outstanding from the end of the third quarter.
The company has approximately 776 million available for additional share repurchase at this time.
As of February 15th there were approximately 62 million shares outstanding.
We ended the fourth quarter with total liquidity of approximately $1 5 billion and our covenant leverage.
The ratio of debt to EBITDA of one five times remains well below our historical range of two to three times.
Looking ahead, we will continue our disciplined capital allocation strategy, leveraging our strong balance sheet and cash flows to invest in our business and drive long term shareholder value.
With that I will turn the call back over to Mike.
Yeah. Thanks, Jeff So strong results as you can see again congratulations to all of the automation same when they delivered fantastic.
So I just wanted to add a couple of points I think are important when I step back and think about the business and our results are linked to understand which are the key profit drivers.
Si circumstantial to varying degrees and which of the drivers in that structurally embedded in Italy I think.
This is important because it is clear to me that some of the spike in rig discounting all of the improvements in performance.
Totally temporary.
And that preferring to rely on 2019 is a more reliable baseline and I think this is wrong. Because now you can see that clearly structural improvements that should translate into long term value.
So the business drivers that I could fit in that category are improvements in F&I performance, which is more driven by our focus on product penetration rather than right now.
I used volume, which is more related to sales effectiveness operational focus as well as additional USA.
Stores and finally, the SG&A control that Joe just mentioned again and you can clearly see the benefits of that coming through in our net income margin and a <unk>.
We should continue to translate into value not be sufficiently discounted situation at this time.
So obviously that leaves one of the biggest variables, which is clearly new vehicle margin in naturally there is a lot of debate where this might go in the future.
In my opinion, even though we will see some mitigation in per unit margin of supply to return to normal I have to believe that given all the learning through the pandemic and supply and demand dynamics that we've recently seen in the clear messages coming from the manufacturers, we will not return to the excessively high inventory levels at depressed new vehicle margin. Despite the Davis Andy.
Oems.
Now I remember in my previous life.
Quarterly discussions on calls like this we spent a lot of time talking about breakeven points and what level of stock and you still make a profit will level stock and make a profit.
And if you look at the fourth quarter to deliver the sovereign debt paying dividends from my estimate well below anyone would've been able to forecast and the levels of profitability for both Oems and dealers clearly show the benefits of selling vehicles.
MSRP and water concept right southern MSRP southern faster. They are learning I think it's going to be that.
By the way, while we're on the subject of retail price, we've seen a number of comments about vehicles being sold above MSRP caught in the potential adverse impacts on brands and customers, which I understand.
And by the way last year less than 2% of all new vehicles sold by automation, we're above MSRP.
But.
This discussion on MSRP branded customers actually also adds to my optimism regarding new vehicle margins going forward because I think it is equally clear that significant discounting and high incentives can also damage of brands, which is another reason for our industry to balance appropriately supply and demand and another reason why we may expect higher.
New vehicle margins and we have historically seen pre COVID-19 .
So finally, let me briefly turn to the future I think everybody recognizes the industry will go through a significant transformation and thats not just in terms of product and powertrain, but in many other ways as well.
When COVID-19 is behind US, we will see the emergence of additional mobility models and choices, we will see changes in the way customers approach vehicle ownership and usage and we will progressively see changes and how dealers and Oems traditionally competed.
And for me. This is an exciting time at offers many more opportunities and downsides and now are more convinced than ever haven't seen under the hood of automation that the group can be well placed and positioned to continue to grow and thrive.
And automation in the past has been known for its innovation and progressive approach and you can be set and begin to be taken this approach to the next level.
As we said today, we have over 11 million customers in our family already and every year, an additional 3 million interactions.
So we have the opportunity not only to leverage our brand our scale, our strong bricks and mortar footprint, but also to build on our growing digital capabilities and expand our business model to ensure we have greater autonomy and control on our future.
So let me say a lot more to come in the coming months, but I would like to make one announcement that will help indicate some of what the future may helpful to nation.
And that is now, creating a new executive role and I am delighted to announce Chan Luke capital loan will be joining the group from March to fast and assuming the position of EVP head of mobility business development and strategy and COO precision parts.
This role will report directly to me.
Jean Luc <unk>, an executive committee.
Sure.
Several of you will already know Jan Luca, but for those who do not know him.
Joins autonation from Mckinsey, where he was most recently serving as senior partner and leader of the exhaust industry global practice and private equity industrial practice in North America Gen. Luca orchestrated a companywide 1 billion digital.
<unk> building program and he spearheaded a global team of multiple billion dollars mergers in the automotive sector has led to major dealer performance transformation, a leading north American commercial vehicle manufacturer.
And in addition, very relevant we redesigned the multibillion dollar used car business and multichannel environment for global auto manufacturer.
So obviously you can tell I'm incredibly excited about the future I'm, absolutely delighted that Jay buth physically to join our executive team and I think as you can tell it bodes well for some of the things that I've sat in automation and we can do that not only will give us a great future, but as I said it.
It gives us a lot more autonomy and control over where are we counting.
So let me close I think demand for vehicles continues to be strong used vehicle growth is robust.
They are going to continue as Joe said, Autonation USA store expansion and obviously, we've done quite simply opportunities to expand our customer centric personal transportation solutions. So with that I'll end my prepared remarks.
Well I think we can open up for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Rick Nelson of Stephens. Your line is open. Please go ahead.
Okay.
Alright.
Great quarter.
Right.
Some of it.
Alright.
To follow up on capital allocation.
Priority is historically.
Favorite stock buybacks.
Act research.
My God luck ticket.
Get your feel for that.
Okay.
Yes. Thank you you asked a great question and it's interesting as you look back and say that it's value that.
Share repurchase I think I would put it that share repurchase has been the largest deployment of capital. It's not necessarily that's been cited because that's the group has developed there is no doubt that that continue to invest in maintenance capital on their existing businesses because they have looked to grow those businesses and continued to build the brand and I think that added.
Some significant.
Some significant businesses to the portfolio, but it is something that when you've done that although it's a nation has a great track record of returning capital to our shareholders. So when I think about 2021 familiar was bit of an exceptional year and I.
Towards the job added obviously when I came into the organization and Joe has been very clear I think on calls and discussions that while the company went through a transition obviously, we're going to make sure we make those maintenance investments in the group, we would be we would make growth capital acquisitions, but really on very specific very high quality targets and.
With the program of share repurchase.
So that's why I think when you say the tremendous results in terms of the deployment last year.
For me and I think in August in Dice number one we'll always be make sure that we're spending the right level of capital not assesses the right level of capital on the maintenance of our business and that frankly includes the transformation of our dealerships with full electrification facilities, making sure that our formats.
Were they all support and our OEM partners. So that we are we as a network and after the great. We're ready for the transformation of our business that will happen.
Very focused on growth. So I think you will say to a large extent some rebalancing of our capital deployment towards growth.
Both organic with Autonation USA, but also inorganic growth not necessarily.
The percent within our traditional sectors, but we are certainly looking for that and as you know we've been very clear and I think our shareholders.
I've appreciated it we've also allocated capital going forward after those two things to maintain our strategy of repurchase so to some extent you will see a rebalance in terms of percentage capital allocation.
As Joe said.
I think the discipline that's been there in the past, we will remind we have significant headroom to be able to do things and.
At this time and to make sure that we set them up for the future.
Okay.
Thanks for that.
Color.
Curios, how so how do you see it.
Model X.
Next.
Five to 10 years.
It was.
A view out there that the Oems are.
Chart going direct.
Consumer because hey, Jim.
Model, if you will.
Sure Yes.
Thoughts on that as well.
Yes. So it's interesting that every time I've been asked that question has always been it's always been pitched in the sense of what's the what's.
What's the structure between Oems and dealers and what do you think construction is going to be I'm going to repeat that question to you because.
Well the way that I think things are going to evolve they're going to be involved because customers customers buying patents and the way they want to buy a vehicle the way they want to experience servicing is challenging.
So with dealers and our Oems, obviously have to make sure that we adapt to that and that's going to change relatively quickly, but it's still a large portion of the population that will very much enjoy bricks and mortar experience. So what I'm trying to think of it necessarily as you know the Oems is going to go direct to the government.
Our direct to the market is clearly clearly there is an infrastructure in the United States with the franchise regulation that means we work in conjunction hand in glove and I think the model will change, but I think that has been proven in the past Oems working with that data to create a seamless purchase experience. It also gives Greg.
Transparency on pricing that is delivered with superb service, whether it's service to someone's house that rock within the dealership frankly, where did all of that said this debate that's for Oems and that data is need to design I think the franchise model is alive and well I think as always it needs to be.
Develop into the future to make sure that the brands are great brands, we represent.
Great representation of the customers also want I'm not just as a reflection of changing buying patterns side that would kind of beta Wildwood reframe that question and I'm excited to work with the Oems to make sure that we do have that seamless journey because they win we win they win we win our customers win.
Hum.
Makes sense, thanks, a lot.
Good luck.
Okay.
Our next question comes from Rajat Gupta of Jpmorgan. Your line is open. Please go ahead.
Oh, great. Thanks for taking my question and congrats and grow the product Youre working with you.
Maybe.
Just to directly jump into F&I.
No.
$700 today.
Clearly pricing is playing a role on the finance piece of it but.
Once pricing do get back closer to normalized levels, particularly on the used vehicle side, what's a good normalized level, we should think about for <unk> and maybe relatedly.
Given the scale of the business today, along with the expansion of Autonation USA.
It does it does moving into a captive lending business start to make sense.
And I'll follow up.
So, let's just talk about used car prices because we are always talking about.
We're always talking about these windfall effects from basis, where we are at this moment in time. So I just want to break that number down a little bit and give you kind of my perspective on it. If you go all the way back to 2009 2019, and you actually look at used car margin as a percentage of revenue rather than an absolute dollar amount it hasn't moved.
It hasn't moved.
More than 1% really.
Between the periods has fluctuated up and down 1%, 1%, 1% and obviously, we have seen an increase in used car retail prices, but the reality is if I look at wholesale prices as well when you take the gap between the increase in a retail prices and used car and they increase.
<unk> wholesale purchase prices of the cost of sale and you use that as a proxy of a balance to fund that as well.
Really changed either over the period, so balanced funds and I know this is kind of a blunt instrument the balance to fund really hasnt changed molecule, maybe hasnt changed I do expect to put units to come down because it now it's not perfect math to be able to do it but I don't think it's going to be a devastating drop as we go into the future. So I think it was really driven.
And our business.
Is some improvement in the.
The actual income from the increasing in prices, but as I mentioned, I think where we've really focused.
And appropriately Saar is how do we drive more penetration of ancillary products.
<unk> insurance for example.
<unk> protection for example exterior protection for example, because these things I think are value added value add it to our customers I think these things that we can focus on really a immaterial to what's been happening with prices and that's what has driven.
Improvement in <unk>.
Improvement I think in our F&I income.
For sure I'm not being <unk> in this in this position, but we're going to see some drop I think annualized spread, particularly as we see increases.
Interest rates, which are absolutely going to happen, we all know that but I think for us or talk about any structural things that have changed in the business and those product sales. So long as we continue to train our people. So long as we can say that continues to be able to explain what they are to our customers in a way where they contributed seem to value shouldn't necessarily be hit Indianapolis.
So just because we see cross movement, although I don't know if you want to add any color to that might.
If you can elaborate I think remind folks that when you look at our F&I, 70% of it is coming from product.
From financing per se versus some of our peers that have frankly, the exact opposite mix, it's probably a bigger question.
Matt I'll turn it back to Mike on the question on the captive capability.
Yeah, Thanks, Joe so.
Very interested in catheter atrophy owned interest in a captive I'm going to cite pursue any captive I think it's important for I think it is important to the largest automotive retailer in the country to be able to offer.
Finance through a captive where we can tighten to make services, where we can make sure that the relationships that we build with our customers, where we can be flexible to make sure that we account for different cycles different changes in buying habits. So I'm strongly in favor of that and I think given the volumes that we're launching in our explorations, particularly.
About building out our Standalone used car site, particularly around building out our standalone used car slots between now and 2026, it's absolutely appropriate for our executive committee to not just be looking at these opportunities, but as I said.
And comments.
Group that has been used to not just innovation, but also in Houston, pushing our businesses and I think this is an area where.
Let me say aggressively looking it's probably as close as I would put it right now because it's something that I think.
Really could add value in multiple ways not just from not just from a profit contribution perspective, so hopefully that answers your question.
Great.
Really helpful color.
Maybe just as a follow up on you mentioned like some of the structural aspects that will change you know maybe around sales force productivity and disappoints them out with productivity.
In the slide deck, you mentioned mid sixteens normalized SG&A to growth.
A long term level.
Why is that the right number one.
What kind of.
GPU levels does that assume.
If you could strengthen metrics are online now.
For sales force productivity today anyway, it's tracking versus pre COVID-19 .
And how much opportunity there might be do into that even further even though even when inventory start to come back.
Yeah, I'll tell you that was Joe said.
Six days frankly, I think we can push that down significantly I think what he was trying to do is position. These budget for this year and it's not going to work on that.
Im going to work on the amount of the school quite frankly, I Couldnt give you the exact increasing percentage of productivity. What I can do is tell you that the deployment of some of the digital tools that.
Ben.
We have been discussed on previous calls.
Obviously coming in as CEO I look back at it and I talk to Marc Cannon.
No doubt that had happened with our productivity because the provision of let me say more detailed access to customer information for example.
At the fingertips of our data to make them more productive. The fact that we use single pricing for our used vehicles removes quite a long period of potential happening with our customers. So we have seen productivity improve but I expect as we continue and as customers get more used to digital channels e-commerce channels that that productivity will move forward.
I don't think there is a perfect number I think when people talk about this they do it in the context of their historical right and really I think we need to be pushing these things further but there has to be accompanied by tangible things in the business rather than just try and get off able to do even more because if you think about it and we go through a transition to electrification.
Sure.
Great quite a prolonged period of time of our salary executives will need to sit with our customers and talk to them about what is electrification named what does it mean to move from a gas engine. So a battery.
Power plant.
What are the issues with charge and what are the issues with range. So the productivity gains that we're putting in place and not just to control a lot G&A also to free us up on our people up so that we can start having more detailed definitive conversations with our customers to support our OEM partners through this transition and electrification because.
It's coming we haven't reached inflection point, but we will as prices of electrified vehicles and plug in hybrids begin to drop so I fully understand the question are not made agreement with Jos.
5% plus.
That doesn't mean to say, that's not where we're going to add but I think our explorations obviously to drive it further.
John you want it's and correct me no no I didn't want to correct. It.
The negotiated spin will go on but what I didn't want to do just to add a little more detail to what structural means from our perspective. So as we always try to say if you take SG&A down to three buckets, let's start with compensation.
You look at compensation.
Deployment of digital tools and training has allowed us to operate on a same store basis with 3000 fewer associates than we had prior to the pandemic.
And obviously you can see as volumes have has return that we believe that is very sustainable if you look at advertising.
You can see that really no increase in advertising spend yet obviously significant increases in overall volume again reflective of the digital tools are allowing us to deploy those dollars much more effectively and then if you look at overhead again with $120 million increase in gross profit.
Actual dollars of SG&A only of overhead only went up.
$9 million, which was solely attributable to the acquisitions and the expansion of Autonation USA. So I think we've demonstrated our ability to control costs as the business has continued to grow quite significantly and that is clearly our model going forward, which we believe is quite sustainable.
Yeah.
Understood. Thanks for all the color and good luck.
Okay.
The next question comes from John Murphy of Bank of America. Your line is open. Please go ahead.
Hi, Good morning, guys and it Mike it's great to hear you witness new venue lots of opportunity here, maybe even more so and then in your old job.
You see I guess, Mike just on the on.
Jean Luc his role.
As you embark on this I mean is it sort of an early indication as you said it as to what you might do here is it fair to characterize that new role and what you're going after as greater optimization and incremental opportunity as opposed to any any kind of real tear up of the business.
I think thats, a really good characterization I think that.
I'm a strong believer.
Even though as we entered the pandemic we saw a pause in terms of the tissue of different mobility models from the emerging customers in our business I think when the pandemic is behind US I think with.
Different capability in the group, we are going to see opportunities in that area. Both on the retail side and also on the commercial side and I think that needs proper resource to be able to adequately fleshed that out to make sure. That's part of the business model going forward. The role will naturally have a big overlap in some of our core business, but from a core business perspective.
From what I've looked at what I've seen and worked with the team here and they have already made huge strides in terms of the optimization of that business and I think there will be overlap because some of the things that the ballots.
In terms of new businesses will be deployed through the infrastructure that we have.
Whether that is digital and call center infrastructure, all frankly, whether it's opex and more water in our footprint. So there's going to be an overlap that will benefit what I call. The coal business. The great thing about Autonation and the thing that really excites me is we have a very strong core business is an incredible record of being profitable in good times and in bad times and what we know.
Make sure we build our business outside of that it's very competitive.
510 Years' time, and then we take advantages of opportunities as they come on the table and we continue to maintain and grow our core business as we do that so that's kind of the initial response I'll get to your question John .
Okay, and then just a second question, obviously very good used vehicle performance, it's tough to get these vehicles right now as we as we all know.
But he did a great job in sourcing there.
Do you think though that as used vehicle new vehicle production ramps up and sales ramp up and they become more vehicles available.
The growth in volume will accelerate well beyond what you guys have been able to do in a very tough environment and that will dwarf any maybe small pressure on gpus. So if you think about the Lagrangian your marginal profit might go down a little bit but your marginal volumes can go up tremendously and I wouldn't call. It marginal it might go up a lot.
How do you think about that that balance sheet and that opportunity just as the market shifts back towards normal Mike.
Well I'm going to turn to our fourth quarter results I think our revenue was down 1%.
And that was off of a 20% drop in volume of new vehicles and it wasn't just price and it was a 21% increase in used vehicles and that's coming from two areas isn't just coming from the addition of the Autonation USA stores that we've got there has been an intense focus in our franchise stores to get ourselves to what I would call a basic level of new to used ratio because.
I think when I compare us against some other people that enjoy the better new to use ratio and I think we are accelerating and catching up quickly.
So we'll come back to the availability question, but I do believe that.
The volume of used vehicles that we could sell is clearly one of the leaders that we see stay out of the offset and mitigate any drop in used vehicle margin because the reality is if you get into the pandemic and the items all about what you need to look like at the end of the pandemic than youre going to be a year beyond where you need to be.
Alright, so thats why we think about structural changes and we try and be very honest with ourselves about windfall profit because if you try if you imagine that youre going to maintain all of your new vehicle margin is a windfall profit in the next two days if it happens fantastic work and planning for that there might be some downside. So we're not sure without stepping back at it.
And just made I think our management team step back I'm trying to say it.
Let me talk less sourcing.
Is that true so high it was strictly notwithstanding costs that years ago.
All of the good pace for that sell used cars are brilliant and buying them.
I'm going to add one thing to that there are other brilinta buying them or they're probably not making them.
Because it is possible to put in place strategies, where you effectively start making your used car inventory and I don't say that NSX in place resource to die, 90% in Q4 of our used car inventory and it came from.
<unk> Biopharma used sales are trading on a new sales, but also the work that's been put into that we buy your car program. So I was very pleased with that profile because.
Typically vehicles sourced from that carry a better margin not huge but a better margin than you would if you were in a competitive auction environment, particularly on that fourth quarter.
So what I think would happen is if we start to grow vehicles.
There will be a shift some of the we bought Youll Cogs will come into the trade channel I wanted to just come through that channel, but it's going to be a big focus for us because just signed we're going to drive our used vehicle volume up is meaningless, if we can't get if we can.
Get the inventory to sell so that's why those programs are important.
Okay and then just lastly, one very short term question, which you may or may not be willing to answer it sounds like it was a little bit of disruption in January in the used vehicle market around omicron.
The kind of jam things up a little bit and on top of everything else Thats going on.
I'm just curious if you could comment on what you saw there and if that's something that was maybe more specific to some companies or was it sort of more industry wide. It just it just seemed like there was in that it seems like it's a short term blip, but just trying to understand your perspective on that.
No. That's absolutely right. There was a short term blip interestingly enough. The short term blip was the speed for us to get used vehicles refurbished and on the law because obviously when we had that sort of genomic home. We also saw an increase in terms of unplanned that absenteeism. So naturally for us what we did was we put.
Our technical support.
Customer.
Needs and customer requirements and as much as we didn't like it what it meant was we had to shift that resource to some extent of our own internal refurbishment. So for us I wouldn't say quite transparent. It was a place that was driven by omnicom in my opinion big.
Big focus now, particularly as we thanks for the comment away from that way, but I think it's a good observation.
One of the most precious resources, we have is our technical labor.
To cope with the world's largest customer pie, but those are in tunnel and we obviously saw an impact that we.
We track it daily it is improving.
Right.
But it is a reality and of course, we're paying a lot of volume tunnel work to prioritize our customer work, which I think was the right thing to do.
Is it fair to say that that's normalized at this point is or close to normalizing in mid February or is there still a little bit.
After effect thereafter.
Jim Jim Bender, and I'll have similar today.
Okay, Alright, thank you very much.
Yes.
Yeah.
The next question comes from Adam Jonas of Morgan Stanley . Your line is open. Please go ahead.
Hey, Mike.
I Echo what Merced, when I heard you were coming to Autonation.
And myself Holy <expletive> I got to upgrade this company right now.
We still got to me down in Florida, some time, but.
Welcome aboard Mike.
Let me, let me dive into the into the MSRP thing and thanks for the 2%.
A comment that you think only 2% of our sales are sold above MSRP.
Some of the Oems have made some very strong comments, saying that the practice of selling or MSRP is unethical.
Now while it is within your legal rights I'm curious if you agree with that.
That sentiment and does it hint to some other tensions between OEM and Autonation that you can help them work with end use to your advantage to my first question I just have one follow up I promise.
Yeah, no problems get the Toyota again.
By the way it wasn't approach on a number I can tell you exactly what the percentage was it was below 2% of sales because it's something that we religious we track here.
So I'm going to I'm going to answer. This question actually there's two categories I think that we should be aware of is the category of highly specialized vehicles, where demand as historically.
Outstripped any supply and that frankly has been engineered and planned by Oems because it created Halo vehicles special brands right and these vehicles are historically and always been sold at one point or another about their MSRP and they've been pulled by very very shrewd buyers. Because also people I used one is actually sold use.
Lee about new vehicle and it's I'll tell you and I think in this area. There is no issue customers are protected these are very special vehicles basically faithful in key categories. I think the issue is where you have got a short term temporary disruption in your supply and demand.
And what I would call general market mass market vehicles, where there is no history in these mass market vehicles all of used prices going significantly above for a long period of time again, new vehicles and I think that is.
What you have to be incredibly careful because in the first category. There is a degree of protection because of the pricing dynamics in the rarity of the vehicle and the second category there isn't that protection. So for me.
I would say that's something you should not be doing.
In terms of I'm, not listen to the Oems and as you know as you know I know.
It is a frustration around Oems, but I think what we're really talking about is that mass market short term imbalance in supply and demand, but one of the great things about the infrastructure and the agreements that are in place is there are plenty of mechanisms.
And to address this problem in one form or another and for sure I understand the public position and I think it's important too, but you know the best way to say this is existing mechanisms are in place, which they have also said that they're going to turn to some will do it more aggressively than others, but.
The reality is the framework agreements enables manufacturers and Davis to work through these things and I think that's what's going to happen.
Thanks, Mike just a follow up question what are you what's your view on M&A.
Securely M&A amongst the publics.
I guess I get frequently asked is Mike there to sell Autonation, obviously, youre not going to address that on this call.
But would be still curious your views on M&A within the six publicly traded franchise guys. Thanks.
Well, Firstly army SSL autonation to a whole host of investors.
Of course.
As an incredible value company.
Undervalued, so yeah I'm here for that.
See Sparks and M&A in the industry, obviously some of our competitors have been more active some of our competitors have recently they are going to become more active and there's always opportunity theres, probably more opportunity out there today, because obviously people are thinking this.
This business I'm, just coming off two years of world record profits and without doing this company. These profits are going to continue. So there are certainly good assets on the market place assets that we're looking at as we won't be the only people that look at those assets. There's a track record here of making sure that they fit from a geography perspective.
That we want them in our portfolio from a brand point of view.
So I think that we are competitive with the right assets, even at what might be considered temporary inflated prices because I think when you actually get down and discussed with the principal the reality that certain things will change in the business, particularly if we don't think thats structural there is still room for us to.
Get to a deal so.
I think that there is.
From a geographic perspective areas that we should be exploring and we already are exploring.
Still some areas where our portfolio.
The mix, but I think.
The organization has built in terms of premium in terms of mainstream in terms of input I think is really enviable I still think there's opportunity there as well, which is why when I was talking about at the beginning there is a whole category of business that we need to explore explore quickly that could be additive in our coal business today, but what's important as we can.
Keep that coal business Guy because as you know is generates a lot of cash, which will which will help fund and gave us.
Give us the liquidity, we need to make sure we add those other businesses so a bit of a long answer I apologize.
Yeah.
Thanks, Mike.
Okay.
The next question comes from Bret Jordan of Jefferies. Your line is open. Please go ahead.
Hey, good morning, I guess following up on that question you had set some rebalancing of capital to growth and maybe you could give us some color as to how you weighed investment in the used versus <unk>.
Franchise, new dealerships and then I guess other businesses, if you could give us some more color as to what.
Peripheral businesses you might be looking at that are synergistic with our current portfolio.
Yeah, So let me talk about balance.
Numbers dry pocket these numbers if I get these numbers wrong.
Just correct me after it but when I look back at 2021 because of the unusual circumstances of the business going through our <unk>.
In a changing CEO of otherwise.
You will recognize that.
What Mike and the team did in terms of setting the company up for the fourth quarter really does deserve the credit for it.
If you look at where capital was deployed last year I'm going to guess about 5% and what I would call maintenance side, probably 20%.
And growth in acquisition and then the balance was returned to our shareholders.
As we go forward I think that will be some rebalancing of that returning capital to our shareholders is share repurchase will still be important but.
When I sit and talk with Joe and the team about what's our thought processes. Obviously, there are things that we need to do it.
In terms of our existing business for example, 75% of our stores will have full electrified charging capabilities before the end of this year the balance were in discussions with our Oems because frankly, we need that format and that standard. So we can get that done because that's an important step for me, we will be fully ready and capable.
To be able to be ahead of that frankly, because we're going to provide an environment for our customers wherever they want to come in charge. There is lots of things. They can do with us. So those sort of investments are really important but outside of that we run numerous ways of looking at the returns. We think we are going to get from the investments we make.
A lot easier frankly for people. It was a business that had been used to for 'twenty is harder to do when you're thinking about a change in the industry and what that might look like so what we have to be flexible in terms of our approach. When we think about what is the real additive value of a particular business that you might go in.
It.
What does that look like and how will it make sure that group is moving forward.
Frankly, it is a really good debate that we're having internally in terms of how can we view the returns on returns on our investment and John If you want to if you want to add anything to that.
Mike you.
Characterized that very accurately.
As we've talked to you in the past the Autonation USA expansion.
Provided us and provides us a very attractive return.
As we've talked to you, it's actually exceeded our own expectations.
That will continue to be our primary focus, but we have capital well beyond that to deploy.
Going to use a balanced approach and we are always focused on the financial and strategic return.
And clearly with Mikes arrival, it provides us an opportunity to accelerate growth.
And with the arrival of Gianluca provides opportunities to do that in a more diversified way so I think.
What Mike is saying and what we've done in the past actually all falls into a disciplined capital allocation process focused on creating long term shareholder value.
Yeah.
Okay, and then a quick follow up question and this is obviously trying to get to whether it's the new normal GPU.
But I guess as you look at SG&A to growth returning to maybe mid <unk> or possibly less.
Is that how we should think.
If SG&A is relatively static should we think about the shift in SG&A to gross being that that's the proportionate decline in growth to expect.
Yes.
But I think now you're going to now you guys are not really a debate between Joe and.
Which means we will probably need to cancel the next two meetings we've got.
I've been fascinated by the used car margin only because the percentage of used car margin has been relatively static.
And.
It is purely a purely added lift as I mentioned earlier.
Because of the increase in increasing pricing and.
Even if that backed health and we were able to maintain that pricing, there's a chunk of there's a chunk of customers.
They've not been able to find what they're looking for which is a much lower price good quality.
Used car that suits their needs. So as you begin to bring those things and that will dilute youll growth, but it will come with the volume and that's the equation that we talked before so now when I think about our expenses I actually think about the not just as a percentage of gross but I also like to pull out those more fixed expenses and take them as a <unk>.
<unk> of revenue so that we can understand how a more variable expenses are going to move in line with that growth and apologies for the kind of a long answer but on our fixed expenses against our revenue should be controlled as well. So that's why I talk about trying to get even if you see some mitigation in margin trying to make sure the Argos doesn't.
So up to 65%, but as usual on these calls as people like to give ourselves headroom, so I fully understand Joe's point.
Okay. Thank you.
The next question comes from Stephanie Miller. Your line is open. Please go ahead.
Hi, good morning.
I wanted to continue on actually the last question because I think it brings up an interesting point I'm curious what your thoughts are in terms of near.
Near term just the overall strength of the consumer, particularly given the elevated price points on both new and used vehicles, but also as we kind of look ahead here is there.
A risk or how are you thinking about with this new adopt E. Then you need the new powertrain.
I mean for just the overall affordability of vehicles, and particularly new vehicles that have the technology and what it could also men name for the new vehicle market, which might end up being a substitute new with effectively.
Priced higher than the average consumer is willing to spend so really just trying to get engaged in your thought of the consumer and future price point the vehicles given new technology. Thank you.
I think that I think that is the biggest unsolved unsolved I think I think all of the Oems have a view of when you will truly see mainstream full battery electric vehicle that covers the full spectrum that we have seen with traditional gas engines.
And I think Thats why.
Adoption.
It really has not reached that inflection point because those vehicles are not available and for me, it's going to be a combination of the two things that <unk> talked about one is ours is.
Now.
How do I get to the next generation of battery chemistry that will give a reasonable range and a fast charging time linked to the infrastructure that means youre going to get people to move into those at a price that can be afforded.
I know I cant answer your question spin.
Specifically for a whole host of reasons, but it is it is one of the key issues and until then.
Clearly, we'll continue to see.
Lower cost gas engines in the marketplace.
That means that the penetration of these vehicles if the Oems in conjunction with that Dave is it going to abate.
Hey.
Emission standards, there's got to be very very happy.
A mid to high priced areas, which is why I think youre seeing some of the many premium brands.
Talking about significant expansion of their fleets into evs, because clearly they have a customer base that can't afford it in our customer base has a higher percentage of early adopters. So I'm not sure that makes it completely answer your question, but hopefully it helps a bit.
No that's very helpful. I really appreciate it thanks so much.
Yeah.
The next question comes from Colin Mccallum of Wells Fargo. Your line is open. Please go ahead.
Oh, great. Thanks for taking my question.
I believe you mentioned youre going to expand into use digital platform. So how does that align with the autonation USA expansion I mean, do you really need a physical footprint as we're moving into more of a digital world.
<unk>.
Plan of 130 still on track or is that something that might get revised down the line.
Autonomous dominant incredibly strong believer that you need to combine.
I've seen listen smooth digital platform as.
With bricks and mortar fulfillment centers.
Because I could also provide some necessary infrastructure and refurbishment work on new vehicle Saar.
Just purely from a logistics perspective, and where those vehicles can be bought and where those vehicles need to be sent to get to consumers I think that combination of both in my view is the most is the most powerful because.
I still I still know people that go into the store to look at our coffee make it before they buy it.
And there's nothing wrong with doing that and that will still continue refine used costs with some people notwithstanding the fact that I think the guarantees that are there in terms of exchange periods and everything else.
And everything else haven't tremendously helped.
The adoption of pure online and fulfillment at your house, but I believe the combination with.
Good.
Particularly when I think about.
Electrification strangely not in that.
And such a connected way, but one of the other things that we will clearly be doing is putting electrification charging station deny and USA stores, even though they used vehicle businesses.
Yeah.
And just secondly.
You've been there three months.
What is your current assessment on the online strategy I mean, where is sort of the biggest opportunities for improvement does there a lot of rework needs to get done or is this just more of an enhancement and what's already available online.
I'm going to talk in general.
If I may because.
I think that some of the hurdles as could be.
Some of those of that to be corrected as there is still too many clicks and touch points.
And we still need to get to full acceptance of digital signatures for certain documents, which obviously include finance and includes the targeting and everything else because.
What we're having to combine and I think what people do sometimes struggle with is that you're still combining both the digital intends to get everything done in sorted in a virtual world, but the reality, depending on which state you're in off the need for physical documentation to be signed two leases. They said and I think what we need to do it.
We work very closely with the various authorities to just try and reduce all of our different friction points and points of frustration along the way and thats not a specific comment of Autonation functionality.
Plus site, but it is just an observation of what I think.
Need to continue to push for both the banks frankly.
Quite frankly on the on the <unk> side, but also on the new side.
Okay, Alright sounds interesting. Thanks for your thanks for taking my questions.
Okay.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
We have a question from David Winston of Morningstar. Your line is open. Please go ahead.
Yeah.
Thanks, Good morning.
Mike I'd love to hear your opinion on this.
In my opinion Theres been a lot of our consumers the past couple of years since the pandemic, who have had to buy a vehicle and you didn't really want whether they wanted maybe they wanted to do when they can only get used then you have the right tremor color and so I'm. Just wondering if you think there will be a lot more people.
Wanted to get rid of a vehicle sooner than normal perhaps in 2023 and 2024 to get the vehicle. They want once inventory better negative equity keep them out of the market for really long time instead.
Yeah.
Yeah, No I think it's a good question and I'm not going to give you a perfect answer, but I'm going to repeat something that that I that I said before.
Yeah.
If I look over the last two years at the difference between the wholesale purchase price.
Although used vehicle and the retail sales price of a used vehicle based upon the data that I have.
Access to.
With a relative accuracy that let's call. It that's a theoretical balance to fund.
That really hasnt changed that really hasnt changed.
Over that over that period. So if you see the same dynamics working their way out.
On the downside I think there are going to be wise to mitigate potential negative equity in vehicles wherever I think your question is very relevant as those people that have entered.
The market either as a first time buyer or adding to their fleet, where they havent benefit.
<unk> benefited from the rise in rising that trade price and.
For me I think it's guided to be wrapped up into a couple of things firstly really what they've done at the interest rate environment that we go into I think everybody's forecast a whole host of dish.
Right rises number of rate rises tends to be a bit more optimistic because I think there are other dynamics at play that will that will reach the end result will have to push that too far.
I think that is.
Certainly will be a consideration that people might want to go into the market earlier than they would have normally done because they did Mike.
A decision to stay multiple anti vehicle rather than no idea, one incredibly difficult to call that number.
One of the things I talked about earlier was the Saar used to represent the demand in the industry right New Cross Saar was the demand in the industry and now new costs are.
And that represents as production ability now so yeah.
There's been a lot of paradigm that have been broken in this period and how they how they unwind difficult to call, but as I said you got to be looking at.
Your business inside Okay. What is what are the benefits, we're seeing we're going to make sure we lock in on on the outside of this.
What are those are risk and what can we do about it. So I think it's a really interesting question. One I can give you a better answer and I apologize.
Yeah.
No. That's all very helpful. Thank you.
On any possible future mobility investments.
It, possibly you'd be willing to do something where the mobility vehicles or other device, we'd never actually interact with an autonation Saar percent service and in other words would go into a pure investment or would it be more something like what you guys did with wame up years ago.
I think that is I think that there's going to be options at some point in the future where.
Where the vehicle or the consumer never interacts with any physical point of contact and that things are done around that.
But to get exactly what they want at the time, they want and just do it for a few weeks earlier than they normally would have and I only mentioned that because I think wholesale customers are learning to experience things in different ways. During this pandemic, Ryan and not all of those things are going to go back to the old way and potentially service and maintenance will be one of them.
Okay that makes sense I was just one question for Joe and to wrap up.
The slide five talks about F&I DVR up due to higher margins on service contracts is there a mix shift going on until those contracts are with a higher pricing.
It's primarily higher higher pharmacy penetration and content.
You had a slight mix shift, but its primarily penetration.
Okay. Thank you.
Yeah.
There are no further questions at this time, Mr. Monday, I turn the call back over to you.
Yes, Thank you and thank you for being on the call and thank you Phil. Thank you for your questions.
To.
Some some voices from the some voices from the past and.
As I said, thanks for Dana Nicole we really appreciate it and enjoy the rest of it I think.
Yeah.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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