Q1 2022 AutoNation Inc Earnings Call
Good morning, My name is Alex and I'll be your conference operator to stay at this time I would like to welcome everyone to the auto nation first quarter 'twenty to 'twenty two earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star two thank you I would now like to turn the call over to <unk>.
So manager of Investor Relations you May begin your conference.
Okay.
Good morning, and welcome to the Autonation is first quarter 2022 conference call and webcast. Please ensure that your lines are muted until the operator announces your turn to ask a question.
Leading our call today will be Mike Manley, our Chief Executive Officer, and Joe Lower our Chief Financial Officer.
Following their remarks, we will open up the call for questions I will be available by phone following the call to address any additional questions you may have.
Before we begin let me read our brief statement regarding forward looking comments.
Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995.
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 in 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 will turn the call over to Autonation, Chief Executive Officer, Mike Manley.
Yeah. Thanks, Andrew.
Good morning, everybody and thank you for joining us.
Firstly I am pleased to report that the momentum with which showed a nice you named the 2021 continue through to the first quarter of this year.
From all of your consumer demand for personal vehicle ownership remained strong across both our new and used channels and our service and parts business is clearly showing the benefits of price increase miles traveled and a focus on increasing our penetration into the office sales market.
And maybe as a result, the diodes are nice to report record first quarter performance with earnings per share of $5 78.
Which is an increase of 103% and revenue of $6 8 billion, which increased $849 million or 14% compared to prior year.
From a new sales perspective outperformance reflects the effect of continued tight supply basically with volumes down a new margin stable from the end of last year.
Year to date, I can say compared to prior year, we have not seen any reduction in demand for new vehicles or really any perceivable segment shifting as a result of current economic conditions.
He used car performance, reflecting good volume growth on a same store basis and the continued expansion of our Autonation USA business and this helped maintain our revenue and total gross profit.
During the quarter, we sharpened our analytic capabilities, which are increasingly educating our buying placement and pricing decisions in the used market.
And these disciplines are work in progress, but I think you can clearly see that gonna have a beneficial impact on our business. For example, during the quarter, we recognize the need to rebalance some of our used vehicle inventory to help improve turn and margin and as a result in the quarter. We saw a temporary reduction in year's margin per unit sold but because of these actions as we.
Entered the second quarter margin turn it already improved.
As we all know succession the used car market is basically dictated by your ability to manufacture great quality well priced desirable used cars and this clearly covers key elements of the business, including efficient and effective reconditioning for example, but it will start fundamentally with your ability to competitively acquire used inventory and with strong consumer.
Demand, we continue to focus on our self sourcing capabilities, we used vehicles, which I think the strength of both our franchise dealerships, but also all autonation USA businesses.
Now as I've mentioned before in nearly all of our pre owned vehicles retailed to self source, which includes our growing we buy your car channel, which purchases directly from consumers.
And when I look back at the first quarter, we self source, 94% of our pre owned vehicles that we acquired.
As previously announced the company into two new markets this quarter with Autonation USA Charlotte North Carolina.
No nation USA in Charleston, in South Carolina, and our Autonation USA stores continued to exceed our expectations and these two new stores with less profitable during the first four months of operation.
And we remain on plan to open 12 additional stores over the year and our target as you know is to have over 130 for these stores in operation from coast to coast by the end of 2026.
Now these stores will continue to leverage the Autonation brand the scale that we have in our proven customer centric processes to capture a larger share of the used vehicle market.
Moving on to office hours as I mentioned earlier, our team delivered what I consider to be a tremendous quarter with an increase in after sales gross profit of 19% and I'm going to come back. So that's a little bit more in my closing comments.
We continue to build a compelling customer value proposition through the combination of our digital tools and physical assets aren't going to leverage.
Our existing business, but also what's nice USA growth plan and our embedded instruction improvements coupled with the rich data analytical capabilities that we continue to build on this is going to help grow and strengthen our business and the Autonation brand.
But before I hand over to Joe He is going to take you through our results in more detail I'm going to briefly touch on a topic that we discussed last quarter. When we reviewed our year end results.
During that time I talked about a number of key profit drivers and disciplines that now a structurally embedded into the groups such as our used to new sales volume focus our customer financial service performance are off the shelves penetration and margin expense control and I'm pleased to recognize that when I review the results for Q1, and you kind of Guy and see the benefits of this focus and discipline commentary.
Strongly.
Performance from ourselves and CFS, James growing I'll use business and I'll tell you in at CFS performance.
Service and parts teams led by our technician satisfying advisors, a and a plus teams delivered strong performance improvement.
And as you can see all of our associates and frankly that whether they work in our dealerships collision centers all channel support functions around the country demonstrated the continued focus on margin, but also expense control discipline.
So I think these things are important and I'll touch on them again, because performance efficiency and effectiveness in these areas might view as sustainable.
As such we do help they talk about a company from the more circumstantial elements that could be viewed as transitional such as supply and demand driven constraints.
These embedded structural improvements in our performance should not be discounted because ultimately they do translate into long term sustainable value and they provide us with more control over where we go in and the opportunity to focus on expanding and developing our customer centric personal transportation solutions, while driving results for our manufacturer partners.
I just wanted to end this introduction by congratulating all of the people that bought the Autonation for the results. They delivered in the quarter thanking them for what they do with that Joe I'm going to hand over to you.
Thank you, Mike and good morning, everyone.
Today, we reported first quarter total revenue of $6 8 billion, an increase of 14% year over year.
This increase was driven largely by used vehicle revenue up 47% over the same period.
Supply chain disruption continues to govern new vehicle availability as we saw a 6% decline in new vehicle revenue as we effectively sold every new vehicle received.
With inventory falling below year end levels.
We continue to see demand exceeds supply during the first quarter with this we remain focused on optimizing new vehicle margins and sourcing used vehicle inventory to support sales and our Autonation USA expansion.
For the quarter total variable gross profit increased 31% year over year.
Driven by an increase in total variable PBR of $1671 or an increase of 38%.
A decline in new units at 19% was partially offset by growth in used units of 11%.
Our after sales business continues to gain momentum with after sales gross profit increasing 19%.
Year over year basis taken together total gross profit increased 27% compared to the prior year.
Shifting to cost we continue to deliver significant SG&A leverage due to strong cost discipline and robust vehicle margins first quarter SG&A as a percentage of gross profit was 56, 6%.
610 basis point improvement compared to the year ago period.
As measured against gross profit metrics improved across all key categories with overheads, decreasing 210 basis points compensation, decreasing 340 basis points and advertising decreasing 60 basis points.
Combination of strong growth in gross profit strict cost discipline and opportunistic share repurchase generated net income for the quarter of $362 million or $5 78 per share.
<unk> was up 107% versus prior year adjusted EPS of $2 79.
This reflects our eighth consecutive quarter of all time high adjusted EPS.
Turning to the balance sheet liquidity, our cash balance at the end of Q1 was $608 million, which mainly consisted of proceeds from our recent notes offering.
Combined with our additional borrowing capacity.
Quarter end liquidity was $2 4 billion.
We continue to deploy capital to grow our business and drive long term shareholder returns during the first quarter. We entered two new markets with Autonation USA stores as Mike mentioned earlier.
We've also continued to repurchase our own shares.
During the first quarter, we repurchased three 5 million shares for an aggregate purchase price of $381 million. We purchased an additional one 4 million shares thus far in Q2 for a total year to date repurchase of $518 million or almost 8% of our shares outstanding at the beginning of this year.
The company has $376 million available for additional share repurchase under our current authorization and as of April 19, there were approximately 58 million shares outstanding.
We continue to maintain.
We maintain ample capacity on our balance sheet at the end of the first quarter. Our net leverage ratio was one three times net debt to EBITDA slightly lower than at the end of the fourth quarter and well below our historical range of approximately two times to three times leverage.
We continue to demonstrate strong operational execution and disciplined capital allocation going forward, we remain focused on leveraging our balance sheet and strong cash flows to drive long term shareholder value.
With that I'll turn the call back over to Mike.
Thanks, Jeff.
Just a couple of comments I made before we get into the Q&A session and that surround our structure and the people that we have you will have seen some announcements as we got into April are really finished last year and got into the first quarter of basic.
Basically some realignment of our existing businesses.
Couple of I wanted to touch on is obviously, the two new chief operating officer roles that we have with <unk> coming in.
David is going to look after our non franchise businesses. So that we can make sure. We have appropriate focus on that is going to be significant growth opportunities. Some of which you already identified some of which is work in progress, but Dave and his teams will be making sure that that gets the folks that it needs and then Steve Clark will look after our franchise businesses and that.
Again.
It remains our core business naturally and we'll get the additional focus of new roles that we brought into the organization, which basically a market brand president roles, that's going to strengthen our relationships with our manufacturers, but really get the focus so that we can work really alongside our manufacturer partners across Australia automotive segments of does.
<unk> import and premium luxury.
So what I think this will do is it will bring it will bring significant focus based upon individual brands within our own automation.
<unk> group, but also now tease out areas of the business that really do offer significant growth with the right level of focus and dedication. So now with that I think Jeremy can open up for questions. Please.
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.
Our first question comes from the line of Rajat Gupta from Jpmorgan your.
Your line is now open.
Great. Thanks for taking the question.
Just had a quick question on the used car.
Yes.
The GPU there normalized.
Faster than maybe what we saw at <unk>.
Pierre.
<unk> had pretty good margin there.
Just curious as to what drove that normalization.
Was it more of a prioritization on growth versus.
Margins or.
Or there's something else to highlight there that was more temporary.
Maybe if you could stop there thanks.
Yeah sure a J this is Mike not completely temporary as I mentioned in my comments.
Towards the end of last year and progressively through Q1.
I think strengthening our data analytics with regard to used vehicles not just in terms of being more precise.
And in what vehicles, what segments and geographies.
Moving in which direction, but also how that applies to our inventory levels and frankly I didn't like some of that as a result of that frankly I didn't like some of the profile that we have and I wanted to make sure. Whilst we are developing a very strong quarter that we took the necessary actions to realign it and I'm pleased to say that was completed in the quarter, our turn rates has improved and our margins.
Rebound and then the way that I hope they would.
I just think it was the appropriate action based upon our continued focus on us in terms of data and data analytics.
Understood <unk>.
Margins to move back higher here going forward, obviously, there are other than government was around like.
Scrap pricing and some factories that were probably not in our control but.
Maybe like.
If you could help us understand like where do we expect those used car and gpus to settle.
Relative to what they were pre pandemic.
So that's already moved out.
The actions, we completed but I wanted them to get down in the quarter. Southern has already moved up I think when I think about Gpus and even though we have seen some moves up from pre pandemic levels. The actual margin on the basis of sales prices remained relatively flat, but I expect as we bring additional efficiencies in the business in terms of the conversion of the rule purchase of a user.
Who can get expressed embedded with the style and the speed of getting it to market, but there's absolutely opportunity to us to improve margins beyond what you saw pre pandemic can use.
So that piece is very much a focus in ton ran it talks to some of the things that I commented on in terms of some of the structural changes that we're making.
But the rule margin that you see reflected in the quarter. It was driven by exactly what I said it was a.
It really was a realignment of some inventory that was completed in the quarter.
Hey, guys are delivering margins that.
Much better and heading in the right direction, but as I mentioned I still think there's even further upside. Thank you.
Got it got it great. Thanks.
Thanks for the color maybe.
You mentioned last quarter.
You have a captive and go.
In your mind that you plan to you know maybe at some point.
Curious Mike.
Talk to him on that has evolved.
Over the last couple of months.
Where are you.
In that planning process, you know when could we expect to see that.
And maybe like if you could comment on just the broader Europe .
Auto lending in hand, and today, you know is there any stress that youre seeing.
In terms of.
I believe.
Okay.
Amenity for lenders to pass on some of the interest rate increases.
All that youre seeing on the benchmark side could you just maybe if you could.
Screamed that is well no longer just I'll be at the top of the captives.
Okay.
Yeah.
When you said my thoughts evolved on the <unk>.
<unk> costs out of the captive things.
Certainly solidified.
I view it as an important piece of the business for us going forward for our Autonation USA stores.
I think when I think about our business one of the reasons why I wanted to slightly restructure it was to enable us to put in place the tools that will mentioned USA needs to be successful going forward.
Obviously on the franchise side, we have relationships with our Oems and that's vitally important but we have a business that is in a growth phase. It will continue to grow it's proven that the model is working and it needs in my view to have the flexibility at a time thing could that thing kind of like most successful fin coast will not be responsible for picking up the whole book naturally yogananda remain.
We are in partnerships with people that have been supportive, Germany, appearing to growth before and I expect that to happen going forward.
You will absolutely hear more on this subject.
The year develops but one of the things that we will do is I think the group has always done is not rush to purchase I think that there are opportunities in the market that are interesting in this moment in time.
And as we find the right opportunity and the board agrees with that we will make the appropriate moves.
In terms of our conversion rate unused I can tell you it remains strong.
At this moment in time, we are not seeing a drop off in terms of conversion you can see from our CFS, our customer financial services performance and in fact is improving its been a strength of ours and continues to be a strength of ours. So at this moment in time, what I can tell you is when I look at both the top level of inquiries.
And also some of the conversion rates by mix.
We're not really seeing any dramatic shift except in this up I would say 'twenty 2000 dollar Mark where we are seeing a drop off.
It's not not rule or inquiries, but when they drop off of conversion and that's more to do with inventory as you know that that inventory is relatively tight across the industry and we're seeing the same thing, but it's being more than supplemented by an increase in plus $40000 requirements.
Did that help paints in California.
Yes, absolutely.
So much for all the color and good luck and I'll get back into Europe .
Thank you.
Thank you. Our next question comes from Adam Jonas of Morgan Stanley Adam Your line is now open.
Hey, Mike is there a precedent for Oems to raise MSRP intra model year.
That you've seen.
I have seen I have seen.
Mike what I would call inflationary pricing.
Inflationary price adjustments driven model years.
It's certainly something that I have seen on multiple occasions.
Typically in response to as we see in place rate pressures in the marketplace, but some of those might not be a pure MSRP, some maybe incentive adjustments in certain things changed in the marketplace.
So that is not unprecedented in my view will my experience.
Thanks, Mike another one on <unk>.
Ford and Kim.
Jim Farley I believe you have 42 Ford stores I here.
<unk> made some comments.
In February .
Fang and I'm kind of paraphrasing here, Mike Bear with me that dealers that would charge significant markups on the whitening wont be allocated now I'm not a lawyer, but that sounds like.
We're getting close to a different franchise meant talk is he able to is that legal is ford actually able to do on allocate someone that charges over MSRP for product.
In the current franchise agreement.
What I would say is that.
And I'm not I'm not on the tiny so I'm going to give you my view, but what I would say is that.
There are there are mechanisms.
As in the fluid thing by the way.
And I would tell you that Jim sentiment Jim sentiment in this area is probably going to be at Costar amongst the BMC is but I can tell you is that.
And in the current franchise agreement need to treat their dealers, where there's a large group of individuals broadly and assuming an assembler manner, that's in keeping with state franchise.
Now having said the obs, which that was obviously there are mechanisms that Oems want to undo employ to try and make sure that the value <unk> was passed on to their customers. So jim's reacting to a huge amount of demand for lightning, which is in the marketplace and as you noted is now shut off.
Now shut off reservations for that vehicle and what he's trying to do which I think is reasonable is to make sure the vehicle in the market.
And a price point that is supportive is the brand of the F 150 and.
There are many ways that he can eat many ways you can influence that and a lot of those ways.
Within the franchise regulations, some of which may be outside the there were a lot with it.
Okay, Mike if I can just squeeze in one more please I appreciate it our agency model it seems like the.
The Microsoft perspective that seems like a good development for a company like Autonation do got it just like you can focus on the areas where you are.
Or have greater capability in and where you win on service and efficiency I would love your thoughts on on that at a high level am I wrong that if if if if we are in some circuitous way ending up in some kind of fixed commission in or fixed percentage or whatever.
But that's not necessarily a bad thing I know, there's a lot of details there, but love your love your thoughts high level. Thanks.
Yeah no problem so.
Yes, you can say whatever words, you want to ask whether you call that an agency or whether you.
Dana ship agreement or data agreement one of the things that in my mind it absolutely.
As we move forward is that there needs to be much less friction in the sales process and has historically been and there needs to be more price transparency and I think that the reset that we have been through over the last two years is a good opportunity, particularly with the transition to new powertrains to make sure that that continues in the marketplace and to me.
What we've recognized is that there is opportunity to remove costs from the distribution channel and there is opportunity for us to encourage customers to maybe pre older than they've done in the past, which also add some efficiency.
I think given the increased price of <unk>.
Patrick powertrains that that should be passed onto the customer to make sure that this transition is as smooth as possible and autonation will be a part of that and that means reasonable margins for the work that we do and it means we'll continue to compete as a customer focused business. So in principle I'm agreeing with what you've said just don't particularly want to label, it and agency mobile or anything else.
Because frankly I think is good business.
I appreciate it Mike Thanks.
Thank you. Our next question comes from John Murphy of Bank of America. John Your line is now open.
Hi, Good morning, good morning, Mike.
Maybe just to follow up on the pricing and maybe the more important question is are you seeing Oems increased invoice pricing do you mean MSRP is a suggested price in the market, but what you get charged the invoice. So it seems like it might be more important thing to focus on because they are looking at the growth that you are making.
And you may can be grosses on news or is there any.
Kris there to maybe kind of claw back some of that in <unk>.
<unk> the wealth on GPU, a little bit more.
So John .
Apologize me with 30 brands.
I'm going to have to talk a little bit more general and if you want to circle back with US Please feel free to do so.
Yes, when the when.
And Mike the interim.
And Adam asked the question interim multiyear changes that had you really to inflationary pressures typically in the past that results obviously in an increase to us so they don't get any benefit from it and.
Ultimately therefore portion that gets passed into the marketplace.
It's interesting isn't it because what was actually happening today as vehicles are being sold at MSRP and the margins that we're getting out of as a result of vehicles being sold to MSRP I thought that fundamentally that was a business model. He was supposed to be achieving and I never was able to achieve it as a CEO of an OEM for all host of reasons, partly because the levels of <unk>.
And three that were in the retail network has to be timed and I have to be turned in a fashion that meant heavy discounting mineral in that position anymore, but last time I looked many Oems. We're also benefiting from improvement in terms of their margin and I think thats I think the frankly, that's going to continue so.
If you want more specific.
Details then feel free as I mentioned to to reach out to us, but if I look generally on new car pricing now on new car pricing is automation.
The quarter was very stable.
Very stable so I in fact so.
Downward in terms of our average.
Rice on new vehicles, which was driven by mix not driven by incentives will further discounting. So I think we've now seen a level of stability in new car pricing that we didn't have through the early part of last year. So obviously the year over year comps.
Quite large at this moment in time, but as we get into the second half you're going to see them stabilize down significantly.
Yes, I'm, sorry, Mike maybe to be clear I mean, right I mean your growth is a function of what you charge the consumer less your invoice price from the automaker that you charged net of any kind of floor plan financing assistance. So I'm just I'm. Just curious have you seen any actions by the automakers on the pricing to you an invoice.
It would change.
It seems like it's an increase relative to the MSRP, meaning are they are they narrowing the gap between the MSRP any invoices. They charge you write the MSRP is what's in the market invoices what starts to you I'm. Just curious is there a change in that gap.
And now I'll hand, the standard question, Jon So alright, so obviously.
Okay.
<unk>.
Yes, second question and because I can only do simple math, let's just put this in simple terms I mean, the buybacks basically improved your EPS by five 4% in the quarter. If you look at the 66 versus the $62 six from the fourth quarter to the first quarter.
You kind of drew a linear sort of.
Math on that that'd be equivalent are you acquiring 18, three franchises are $1 4 billion in revenue in the quarter. Obviously, it's a similar pay about five times, so where your stock is trading right now.
I mean, it just seems like buying back your stock all day long makes so much more sense and making any acquisitions.
And you bought it back at roughly 109 Bucks on average through the quarter Youre below that now do you just stay very aggressive or not aggressive I mean is it balanced right. It's the right thing to do on buying back your stock and not making new vehicle acquisitions, and then pressing that they used to use growth I just it seems like the exact right.
<unk> and Youre executing on it.
Comp versus what these splashy announcements are made on the acquisition side by some other competitors with smaller networks.
It just seems like Youre, having a much bigger impact an immediate return on your earnings per share structurally over time.
Yes, I think as we've seen over the last 24 months and we will continue to say the way that people are valuing companies is changing and we will continue to change, but the math that you did make was right with the exception of one thing and that is that some of the acquisitions that we're looking at and frankly pursuing will give us I think a multiple.
Higher than the historical business has been able to generate because our industry is going to change and with that change is going to come opportunities that.
Frankly will be more under our control as a as a as a retailer than we've been in the past.
Bring more incremental benefits to wash out in terms of value, but one of the things that <unk> done is I think that no.
There hasn't been a nice has been a strategy to try and maximize the benefit to the shareholders where capital has been and certainly in the first quarter with everything that was going on and the fact that we will.
Viewing and have reviewed some of our strategic priorities. It was best for us to maintain their activity and you've seen the results come through but that doesn't mean to say they're on attractive acquisition opportunities for us there are and as he goes through you'll hopefully see some.
And then just lastly on the Autonation USA stores 130 by 2026, I mean, you're making good progress there it seems like the business is working well.
Why is 130% the right number could it be significantly higher.
Yes, I think when they entered the study was done it was really looking at two things one was which is the most attractive markets that we are not necessarily in with our existing footprint and by that I'm talking about franchise business as well and then the second thing is with the group is thinking about is capital.
Capital allocation, what would be a reasonable allocation of capital over that period.
I can tell you that our thoughts on that have continued to mature partly because as they were putting in we know all the people putting in autonation USA stores. The modal was being tweaked to make more efficient and so today's autonation USA stores slightly difference in the past and secondly, I also think about these stores not just purely.
As a place we used causes sold eight stores in the future can do many other things for us so that 130 as our baseline today, it may well grow and we might get more aggressive or for other reasons.
Okay very helpful. Thank you so much.
Thank you. Our next question comes from Bret Jordan of Jefferies. Bret Your line is now open.
Hey, good morning, this is <unk> on for Brett.
Thanks for taking our questions.
Maybe just going back here to supply and maybe the cadence of supply I know new inventory came down to eight days from nine and used to 30 from 40, but could you maybe just provide a little bit of color on sort of the cadence of supply and whether things might have improved at all or are we just sort of bouncing along the bottom here.
Frankly, I think what we are doing is bouncing along the building, but I don't think is that as soon as he said one of the things that I wanted to do with our teams is to increase our turn rate.
Okay.
And we've been able to do that and I think that's why you've seen.
This is a supply.
11 out what's been interesting for me is.
As we've come into this year, obviously, none of this.
Really foresee the ongoing impacts of the things that are happening around the world and they are going to have <unk>.
The impact on People's original plans in terms of their production levels, but what I do know is.
Given this market, it's a key market for all of the Oems and I didn't know that.
The intent is there to improve it as soon as possible for my point of view, you're not really going to see anything until the third or fourth quarter, but.
I know youre asking individual Oems. So our focus is lets out more aggressively at the pipeline, which is a new skill for the industry in the U S.
And let's make sure with time and the inventory as fast as possible when it lands and then the two key things that we're not control and there's things we're focused on.
Okay. Great. That's helpful. Thank you and then and then maybe just here on the floor plan debt floorplan subsidies exceed expenses for the quarter.
I can give you my gut reaction that Jos just double checking the mainstream it doesn't give you the wrong data point.
It did slightly.
Did slightly to ewen.
I mean, obviously now floor plan is relatively low from an expense perspective.
Because obviously you can see by the days turn that our actual expenses relatively modest but incentives has also come down marginally for the same reasons.
Thanks, Tim.
Okay. Thank you and then just sort of lastly here on the service category. You know a 15.5 comp was solid there can you just sort of help break out.
The difference in traffic versus average ticket.
Yeah could you just be a bit more specifically question. Please Nathan.
Sorry.
Could you be more specific with your question are you asking me.
Youre asking me to our service departments, how is that changing and growing what is what is it specifically you are looking for yeah. Just in the service category did you see you know the comp of $15 five was that primarily primarily driven through inflationary pricing and increased prices or is it.
Pick up in sort of traffic.
What we're saying, we're saying two dynamics there firstly, we are seeing an improvement in traffic from a customer perspective.
And an improvement in tunnel work slightly offset by a.
Decrease in warranty because obviously the vehicle new vehicle are already park is dropping but it's been more than offset by an increasing.
Sure.
Volume and a slight increase in ticket and in tunnel work because I use volume increases.
Okay, great. Thank you very much.
Thank you. Our next question comes from Stephanie More Trust Stephanie Your line is now open.
Hi, Good morning, I wanted to touch on the new vehicle side of your business and maybe you can speak to if you're seeing any change in that.
My profile of your of your new vehicle buyer.
A credit quality standpoint, our median average income on that kind of thing.
These forward and as we go through what it could be a potential recessionary environment, certainly a rising interest rate environment. How you think your new vehicle business is positioned now.
Prior cycle. Thank you.
Okay.
No I'm, not saying any perceptible change in terms of the profile of customers coming through new vehicles in fact, if you'd look at.
If you look at the traffic that's coming through our digital and all of our web pages as well as walking into our stores. It is it is.
In fact up.
And continues to grow year over year, our conversion rates, obviously with the level of inventory and the demand that we've got a remaining strong.
Outside of that it's difficult because of the environment that we're in to really pinpoint. If there is something underlying that is happening in terms of the way I think that with new vehicles going forward.
If you look at the Saar.
Three months of this year, it's bouncing around 13 million $14 million and typically those numbers would have been associated with recessionary period, obviously, so even if you say.
US because of economic conditions consumer confidence whatever.
See a reduction in that demand I think the levels that we're at now would still be maintained going forward because as I said that historically more associated with periods of recession than where we sit right at this moment in time.
Yeah.
Got it so I guess, maybe said another way given the rise we've seen in just new vehicle MSRP or you seeing affordability issue with the average consumer or do you find that they're trading up before that the benefits of the vehicle or do you think it's more of a shift to the used market.
Angle I'm looking for.
Okay, well I'll try and give you an angle on the answer and then if you look at the increase in used vehicle wholesale prices an increase in new vehicle prices the gap between them actually narrowed over the period of last year. So that's the theoretical cost to change in my mind. So if you are trading in a vehicle then youll youll position really has been.
Not materially impacted by rising prices because you've got it on both sides that obviously doesn't apply to people that are buying a vehicle for the first time in the marketplace outside of that I can't really give you much color because I'll turn rates are so high is difficult disease, what may be a slight movement in terms of affordability, because we frankly had customers with basic.
Everything that's coming.
Right.
Got it no that makes sense I appreciate it thank you.
Thank you. Our next question comes from calling Langton from Wells Fargo. Colin Your line is now open.
Oh, great. Thanks for taking my questions just wanted to follow up on the thing.
Your comments you said something you are in no rush to purchase I mean is the plan to acquire ethylene co oriented something about or are there thoughts to really more to it organically.
From my perspective, if there is if there is the right target in the marketplace that would be by far my preferred route to do it.
By far my preferred route to do it.
Got it okay.
And then you also in your intro comments talking about costs and SG&A was quite low in the quarter are there any notable actions I'm sure you're aware of that are kind of drive that structural cost I mean, what what really are some of the key drivers that you're kind of getting out in terms of structural costs coming down coming out of this crisis.
Okay.
Yes, I'll address that it's really the same we've talked about in the past, but it starts with really starting to leverage the digital capabilities. We have both in the sales and stores operations.
Well as the back office. So you go back to the beginning of 2020, I mean were 13% down on head count on a same store basis right that has continued to kind of drive through the operations. Our digital tools have allowed us to be more efficient in advertising.
And so these are in my perspective structural changes we've made.
It had reduced if you will the fixed cost cost structure of the business.
We're maintaining that discipline going forward so we.
We expect that we will continue to have a much more favorable SG&A as a percentage of gross going forward.
By maintaining that discipline and ensuring that we continue to leverage the tools most effectively and we continue to invest in those tools to make sure that they are state of the art.
Yeah.
Great Alright, thanks for taking my questions.
Thank you and as a reminder, if you'd like to ask a question star one unearned telephone keypad.
Our next question comes from David Whiston Morningstar, David Your line is now open.
Thanks, Good morning.
First on the USA stores as you go into new Metro areas from a marketing perspective, how are you introducing.
The stores in our brand to consumers is it mostly internet or radio television.
Yeah.
And frankly, it's a combination of over the above I think what Joe didn't touch on is one of the efficiencies that.
Mark and his team have been able to generate is the widest that are communicating and the use of different media.
Immediate channels and I think that.
Typically what we would do is really use the data that's available to see how the demographic that we're targeting in that particular area is consuming information and then he has basically built an optimum plan to try and make sure that we hit communication goes and moms and goes in the timeframe that we need to launch.
I mean does that individually by each and every market, even though there's obviously a lot of commonality and then and then effectively rolls it out.
Yeah.
And on the SG&A, if we were to have a recession.
Later.
Obviously, a lot of it was already caught in 2020 other than reducing advertising in a downturn or you guys already close to the bone or do you think there's more costs you could come up with if you had to.
Yes.
Sure.
We are continually evaluating the cost structure and we have a number of initiatives underway to continue to operate the stores more efficiently. So we today have a large share service center in Dallas, We continue to look at ways to optimize that and make our stores more and more efficient and that is an ongoing journey that will have ongoing benefits. So the answer is I don't like to think of.
Cutting to the bone I'd like to think about optimizing the organization and Thats clearly something we see additional opportunity going forward.
Okay and finally on.
It was inflation, perhaps sticking around short term or even long term if it were to be a longer term problem would that change your M&A strategy at all in terms of would you want to be more towards volume brands due to their lower prices or more focused more on the premium side, because those customers, perhaps arent and bothered by inflation.
Okay.
Well I mean, thank you Brandon.
Cyclical business right. So.
Obviously from a license to blend that we have in terms of brands I think it's.
It's a really good blend.
Particularly when I'm thinking through the plan for the individual Oems have put in place because ultimately the product that they are working on today really is guiding to the type of success on the new car side of the business going forward and having reviewed now across many of our Oems and our product lines.
Firstly I'm encouraged by the level of investment that's been made and secondly, it doesn't really change my view on the talent that we have in our portfolio I think it just reinforces we have a good balance.
Okay.
Okay. Thank you.
Thank you.
The questions at this time, Mr. Manley I turn the call back over to you.
Thank you again, thanks for being on the call today as I said before I think it's good that the momentum that we had finished up last year continued into the first quarter I really got to just end by saying and we touched on it in some of the questions as well I think there's a number of changes that have been structurally nights of the growth that will continue.
Keeping in place that for me will make us more efficient I think the focus on costs that we discussed with Joe and his answer the question will continue going forward.
I look forward to say in our Q2 ends for us.
And then you will be on our call in a few months' time. So thank you for your time this morning.
Right.
Thank you for joining today's conference call you may now disconnect.
Yeah.
Sure.
Okay.
Yeah.
Okay.
Yeah.
Okay.
No.
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