Q1 2022 Asbury Automotive Group Inc Earnings Call
Good day and welcome to the Asbury Automotive Group Q1, 2022 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Karen Reed. Please go ahead.
Thanks, Mary and good morning, everyone.
Today's call is being recorded and will be available for replay later this afternoon and welcome to Asbury Automotive group first quarter 2022 earnings call.
Really detailing upgrades first quarter results was issued earlier this morning and is posted on our website at Asbury audio Dot com participating with me today are David Hult, Our President and Chief Executive Officer, Dan Clara, Our senior VP of operations and Michael Welch, Our senior VP and Chief Financial Officer.
At the conclusion of our remarks, we will open the call up for questions and I will be available later for any follow up questions that you may have.
Before we begin we must remind you that the discussion during the call today is likely to contain forward looking statements forward looking statements are statements other than those which are historical in nature, which may include financial projections forecast and current expectations each of which are subject to certain uncertainties.
For information regarding certain of the risks that may cause actual results to differ materially from these statements. Please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2021 and any subsequently filed quarterly reports on Form 10-Q , and our earnings release issued earlier today, We express.
We disclaim any responsibility to update forward looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call as required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures.
An hour.
[noise] website, we've also posted an updated investor presentation on our website Asbury auto dot com highlighting our first quarter results. It is now my pleasure to hand, the call over to our CEO , David Hult David.
Thank you Karen and good morning, everyone welcome to our first quarter earnings call. Our first quarter results were an all time record for any quarter at Asbury history.
We continued to experience strong consumer demand, although our ability to meet this demand was constrained by very low new vehicle inventory.
For the quarter, we grew adjusted EBITDA by 195 million to $336 million and.
And adjusted EPS from $4 68 to.
To $9 27.
An increase of 98%.
We delivered eight 2% adjusted operating margin.
210 basis points.
We increased revenue by $1 7 billion to $3 9 billion and increased gross profit by 409 million to 792 million.
We drove F&I gross profit per vehicle to a record 24 81 up $742.
You used to have a disciplined approach around SG&A, resulting in a decline of 520 basis points from the prior year's first quarter.
This was the first full quarter, reflecting all of our 2021 acquisitions under the Asbury umbrella and the strategic fit is clear.
We are excited about our team and our ability to execute on our 25 plan.
We see tremendous opportunity ahead of us as we rollout quickly to all acquired dealerships and integrate CCA into the legacy Asbury stores.
Due to our record performance and strong cash flow our balance sheet remains strong.
Adjusted operating cash flow for the first quarter was $406 million.
An increase of $290 million over the first quarter of 2021.
Our net leverage ended this quarter at two two times during.
During the quarter, we repurchased $200 million of our stock, which completed our share repurchase authorization.
As we announced in our earnings release this morning.
Our board of Directors has approved a new 200 million share repurchase authorization.
Our near term priority is to continue to integrate our recent acquisitions.
And use our strong free cash flow to lower our net debt level and return cash to shareholders through opportunistic share repurchases.
At the same time, we will continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio.
Due to the strong pace of acquisitions last year, we exceeded our five year acquisition target in the first year of the plan.
Today, we will be providing an update to our strategic growth plan that I will briefly discuss later in the call.
We continue to operate in an unusual macro environment and experienced strong demand across all of our revenue streams.
We do not anticipate a meaningful recovery in inventory levels in 2022 and believe these levels are unlikely to fully normalize until 2023.
In these unusual times, our industry has benefited which is reflected in our first quarter results and demonstrates the value and the resilience of the franchise model.
We look forward to continuing to deliver strong results for our shareholders.
Outstanding partners with our Oems, So stupid, they're great brands and offer an environment, where our team members can thrive.
Providing the most guest centric experience and automotive retail.
Yes.
Thank you David and good morning, everyone first.
To all of our dedicated teammates who work so hard to fulfill our commitment to being the most guest centric automotive retailer.
This quarter was a busy one for Asbury as we continue to integrate acquisitions made in the fourth quarter of 2021.
Work to close on our divestitures and the <unk>.
I love the plan to expand click lane to acquire stores and TCA to legacy Asbury stores now.
Now I'll turn to our same store performance compared to the first quarter of 2021 unless stated otherwise.
Starting with new vehicles.
In the first quarter, new vehicle inventory remained well below normalized levels.
And consumer demand continues to outstrip supply at.
At the end of March our total new vehicle inventory was $207 million.
And our day supply was it 10 days down 24 days from the prior year quarter.
Given this dynamic our new vehicle volume declined 20% year over year. However, we experienced a significant increase in our new average gross profit per vehicle, which increased $2995 from the first quarter 2021.
To a total of $5750.
We anticipate new inventory levels to remain low through 2022, and we are focused on maximizing profitability. While also remaining steadfast in our commitment to our guests and our mission to be the most guest centric automotive retailer.
Turning to used vehicles, our used vehicle retail volume increased 6%, which contributed to a 32% increase in used vehicle retail revenue.
<unk> gross profit PBR increased by $209 to $2228 compared to the first quarter of 2021, resulting in a 17% increase it used retail gross profit.
Our total used vehicle inventory ended the quarter at $378 million.
Which represents a 28 day supply hub.
Up one day from the prior year.
Our used to new ratio for the quarter was 114%.
Shifting to F&I, our strong consistent and sustainable growth in F&I delivered an increase of $634 two $2376 per vehicle retailed from the prior year quarter.
I'd like to thank our F&I team for this tremendous result.
In addition in the first quarter, our total front end front.
Front end yield per vehicle increased to $96 per vehicle to a record of $6253.
Moving to parts and service.
Our parts and service revenue increased 14% in the quarter.
The warranty revenue, which is outside of our control dropped 12% our customer pay revenue continued its strong rebound posting 17% growth, which is triple our normal growth.
We achieved over 176000 online service appointments.
29% increase over the prior year quarter.
Benefits of increasing online service appointments include enhancement to the customer experience.
Higher customer retention.
Higher conversion rates.
And higher dollars generated per repair order, which ultimately provides higher returns to our shareholders.
We now have four full quarters with Cleveland at all legacy stores.
We couldnt be more pleased with the results we're seeing.
We sold over 5600 vehicles through <unk> in the first quarter of which 38% of them were new vehicles and 62% were use in fact March was clear claims best month ever we believe sales of new vehicles were depressed due to a lack of inventory.
82% of our transactions this quarter were with customers that were incremental to Asbury as dealership network.
Average transaction time remain roughly in line with prior quarters as we saw a half maintenance increased to $8 five minutes for cash deals and about a half minute decreased to $13 six minutes for finance deals.
In Q1, click land deals had a front end yield of $3804 and in F&I per vehicle retail of $2291, which equates to a $6095 of total front end yield.
The average click lean customer credit score continues to be over $700, which is higher than the average credit score at our stores.
The average down payment for new vehicles was $8921 and for us was $6869.
81% of consumers seeking financing received instant approval.
While an additional 9% require some offline assistance, 90% are those that applied or approved for financing.
43% of <unk> sales had trade ins with 62% of such trades recondition and retail to consumers.
And 95% of our click lean deliveries are within a 50 mile radius of our stores those allowing us the opportunity to retain our new customers in our parts and service departments.
Cleveland customers are converting at nearly double the rate of traditional internally, but.
But we won't see the full potential until inventory levels normalize.
We are excited about the continued growth of Cleveland and the opportunity to accelerate that growth as we roll it out to our newly acquired stores.
I will now hand, the call over to Michael to discuss our financial performance Michael.
Thank you Dan to our investors analysts team members and other participants on our call good morning.
I'd like to provide some financial highlights which marked another record quarter for our company for additional details on our financial performance for the quarter.
Please see our financial supplement our press release today, and our Investor presentation on our website.
As Dan mentioned in the first quarter was a busy one with a number of internal initiatives going on.
Overall compared to the first quarter last year with.
We generated significant adjusted operating cash flow of $406 million, a year over year increase of $290 million, which combined with the proceeds from divested stores.
Allowed us to pay down $374 million of debt.
Our used vehicle Floorplan line.
We repurchased $200 million of our shares.
Adjusted net income increased 134% to $212 million.
And adjusted EPS increased 98% to $9 27.
Net income for the first quarter of 2022 was adjusted for onetime pre tax gains totaling $34 million or $1 11 per diluted share.
Primarily related to the sale of four dealerships in the quarter.
Net income for the first quarter of 2021 once adjusted for onetime pretax gains of $4 6 million or 17 cents per diluted share primarily related to gain on legal settlements and pre tax real estate related charges of $1 8 million or <unk> <unk> per diluted share.
Excluding real estate purchases, we spent approximately $21 million our capital expenditures in the first quarter, our balance sheet remains strong as we ended the quarter with approximately $805 million of liquidity.
Comprised of cash excluding cash a total care auto floor plan offset accounts and availability on both our usual on our revolving credit facilities.
Also at the end of the quarter, our pro forma adjusted net leverage ratio stood at two two times down from two seven times at year end.
As David stated today, we announced that our board has approved a new 200 million share repurchase authorization.
For 2022, we are planning a capex of approximately $175 million. This amount excludes real estate related purchases and potential lease buyout opportunities that we consider to be financing transactions.
One of them is a bit of a change in how we account for TCA revenue and expenses and we've included a breakout of TCA Brewers dealership operations in our earnings release.
This quarter was our first full quarter of Tcs for the quarter TCA made $16 million of pre tax income, which included $2 7 million of unrealized losses on equity investments.
Excluding the unrealized losses, TCA would've made a $19 million for the quarter.
We are currently working on the system integration and state licensing requirements for the Asbury rollout of TCA and plan to start a pilot for a rollout into Q.
In closing I would also like to thank all of our teammates throughout Asbury, who dedicate themselves to build a brighter future for ourselves our communities, our shareholders and all of our stakeholders.
I'll hand, the call back over to David to discuss the update to our strategic plan David Thank you Michael.
As we mentioned on our last earnings call. Today, we are providing an update to our strategic plan, which can be referenced on slides 12 through 25 of our investor presentation.
The acquisitions, we made in 2021 almost doubled our annual revenue.
De <unk>.
Automotive is a much larger.
More productive and financially sound company with more opportunities to drive top line growth.
One example, with TCA.
We are able to stay involved in the entire customer lifecycle as well as now benefit from the claims side, which was never available to us before.
Regarding click lane, given the metrics we spoke about earlier.
We see a significant opportunity to leverage the high conversion rate as we rollout to the stores, we acquired and provide a common digital platform.
Our original plan for revenue growth.
Our revenues was to grow from $8 billion to $20 billion by 2025.
Because of the significant progress we've made in 2021.
On a pro forma basis, we are now just over $15 billion in revenue.
Ill now simply refer to slide 24 of the presentation deck.
Our new revenue goal is $32 billion by 'twenty, five representing an incremental 12 billion.
The $12 billion is comprised of an additional same store growth of $2 billion, an additional 3 billion quickly in revenue.
And $7 billion from acquisitions.
In terms of earnings per share we.
We're targeting EPS to be greater than $55 per share.
This assumes a one times leverage.
If we were to increase our leverage to two times and use those proceeds to purchase additional stores or buyback our stock our EPS could exceed $70 per share.
Now referring to slide number 25.
Our free cash flow generated from our business of $3 billion and a modest increase to two times leverage for an incremental 3 billion.
Would have over $6 billion in cash to deploy between 2022 to 2025.
So in closing we believe that we have the right brands in the right states with the right people to execute our strategy to grow and improve our business.
We are generating strong cash flow that we will continue to lower our net leverage while allowing us the flexibility to balance acquiring additional assets and returning cash to shareholders through share repurchases.
Finally, I would like to acknowledge the hard work and dedication of my fellow Asbury teammates.
It is through your efforts that Asbury continues to produce strong results for our shareholders.
While bringing us closer to our goal of being the most guest centric automotive retailer.
Thank you all very much.
This concludes our prepared remarks, we will now turn the call over to the operator and take your questions operator.
Thank you if you'd like to ask a question at this time, please signal by pressing star one on your telephone keypad.
Function on your telephone please switch off to allow you guys. Thank you Anthony.
Again, Please press star one to ask a question.
And we can now take our first question from Daniel Umbrella Stephens Inc. Please go ahead.
Yeah, Hey, good morning, guys and congratulations on the great quarter.
Thank you.
David I wanted to start on the us direct business I mean, the organic user growth.
Near the best in the peer group and GPU really hung in there. So could you talk about maybe what youre seeing in terms of use demand and how you guys successfully capturing that use their while maintaining gpus.
Yes. Good morning. This is Dan I'll be glad to take that.
So we're pretty satisfied with the results, even though we continue to focus.
On the acquisition of the inventory that we all know about us and used cars, where the return is generated.
Close to 85%, 86% of our acquisition is coming.
Through the consumer whether it is in a form of a lease turn ins trades.
We're buying cars through directly from the consumer.
And we know when we believe that that is what is allowing us to continue to report the margins into PBR is that you are seeing today.
In addition to that.
The benefits that <unk> brings to be able to.
Provide a digital retail environment online.
We see the benefit of that as well from a used car perspective. So overall, we will continue to focus on that strategy and continue to execute as we.
We move forward.
I'll add to that.
Decoupled.
Our our trade tool inside of clinically to allow consumers to sell their vehicles direct to us.
We'll talk about it in detail at the end of the second quarter, because we were fully launched in the month of April .
And we had it going at pilot stores or half of our company. If you will in the prior quarter or the current quarter were talking about the first quarter.
We're seeing tremendous results.
At acquiring cars direct from consumers, which is helping stabilize our inventory, but most importantly, our ability to create margin or gross profit per vehicle on used vehicles is really all about the acquisition of the car.
The market dictates surprise, if you cannot acquire the car at the proper price you will dramatically be impacted in the margin is our belief.
So we're really trying to be opportunistic and really make it easy for consumers to sell their vehicles to us which we believe is this helping support our gross profit per vehicle.
Great. That's really helpful. And then my follow up I wanted to ask on the rollout of TCA. So I'm really bullish commentary on the slides about the opportunity, but should we expect this rollout to be linear or is there a training our store employees or some kind of infrastructure that needs to be stood up first at the Asbury stores before we can really accelerate.
The rollout of the product.
I'll start and Michael can jump in and clean up anything that I screw up.
I'll tell you the easiest piece of it will be the rollout of new stores.
Because the folks of the stores are used to selling the products. So that it'll be very quick and efficient.
We've really been working on the backside of the plumbing I mean, thats, a standalone insurance company.
To get it right at all the stores before we start to implement that Michael discussed in his script that in Q2, we will start to rollout the legacy Asbury stores.
Our goal is that the quarter to quarter races for long term vision of where we're going as an organization.
We plan to rollout the whole company within 12 to 18 months.
So somewhere in that timeframe, 100% of the Asbury stores will be on TCA.
And just a reminder from a.
David said 12 to 18 months for the rollout to the stores from the impact on our financial statement, because we have to defer the revenue.
There'll be a lag in terms of when you'll see those results kind of come through the financials, because we now have to defer that revenue over the life of the contract.
So from a P&L perspective, its you know its probably two to three years away before you start seeing the positive results through the P&L.
Got it that's helpful. Thanks, so much guys.
Thank you.
We can now take our next question from John Murphy with Bank of America.
Yes.
Hi, Good morning, guys, maybe just to follow up on the TCA to stay on the same topic.
I mean, the funding and the balance sheet, I mean, thats going to be in tax advantaged state our offshore I'm just curious how.
In addition to sort of the benefits of just the ongoing earnings potential tax.
The implications or the lack thereof.
Even more beneficial than what we just see in the earnings.
So currently TCA is set up in Utah entity and so that's the current setup. We're looking into the you know what kind of tax advantage pieces to kind of handle it with the bigger scale now and so currently we do not have any of those baked into the forecast, but its something we are looking out from a perspective of.
Currently, it's Utah and does it make sense to have any of it elsewhere.
I've got to imagine it makes sense to have it all.
We're right I mean.
B.
Meaningfully.
Meaningfully positive right the ongoing earnings distribution as far as cash versus.
What you would drive attach.
<unk>.
Okay. So thats, yes, there are some factors.
That's huge right.
Just the structure of that forget about the rollout isn't it.
So there's two pieces of TCA theirs.
Through our regulated insurance company and then there is a.
F&I products piece and so yeah, there's some tax benefits that we just got to weigh the cost of a setup in the different pieces and then what that is.
Worth all the tax basis. So I agree with you that there are some benefits there we just got to go through and kind of figure out.
The pieces are accurate it set up with a bigger company.
Got it.
Okay. Okay. Okay. So do you think there might be more upside and I guess the second question on slide 25.
When youre looking at.
This range I understand.
The benefit of leverage and being maybe more aggressive and expansion.
As you look at this.
How do you think about leverage I mean.
Going from one to two turns gone from $55 to 70 Bucks plus it seems like two turns is not you.
Aggressive or really risky.
So how are you thinking about leverage in general as Youre redeploying capital.
Gift for growth here.
Yeah, and just to clarify the Leverages you know 2025, so back to kind of a more normalized margin environment.
Two type of Leverages on a normalized basis I agree with you that two times is not an overly aggressive target I think that two to three times leverage is still kind of where we want to be in a normalized environment, but being below two times. Just allows you the flexibility to go after a.
Larger acquisitions.
Or if you're kind of up near that three times you don't have that same flexibility. So I think a one to two times leverage is the right place to be to have the opportunity to go after those larger deals.
I would just add.
I mean, our history is we're a conservative company and any targets, we put out there, we certainly hit or exceed and usually exceed them.
It's difficult to know what the environment is going to be at that moment in time. This was a conservative approach to us.
Certainly in this 25 year plan, we've normalized margins as well.
This whole plan is not based on current margins that we saw.
Certainly brought them back down to normalization.
In the future years coming up to 25.
Okay, and then I guess the base.
The question is what is.
What is normal mean.
Going forward is it 2019 and prior margin as what you what youre thinking there or is there some potential benefit from automakers.
We're being much more disciplined on supply versus demand and maybe getting a little bit better gross on the new side.
And then the mix of the business, obviously shifting to used in part more parts and service. It means that there could be switched from a mixed basis upside and in margins as that.
How youre thinking about it is it just get to 2019 levels and just get the benefit from.
The mix of what you're driving the business or or is there some potential slight upside from the 2019 levels.
Yes, no and everyone keeps referring to 2019 and are brought this up a few times I bring it up again.
We will never see 2019 margins again in our company.
We're a different company not because of our size because of the accretive acquisitions that we've done we sold off all of the specific which was our lowest margin platform.
We've increased through park place LH, Kevin Stevenson all of them are accretive and margins to where we were at <unk> 19.
We're also from a product from a productivity standpoint.
Under the legacy Asbury stores alone it hasnt been integrated at any of the acquisitions, yet, but from a productivity standpoint from 2019, we've had a 50% increase of the variable side for production per employee where sales advisors. So that's significant and we see more upside where technology is going and where.
Quickly is growing so I would tell you John I'll, just speak specifically to Asbury.
We are that high for a 5% margin business.
My belief is.
It will be somewhere in the 6% or higher range.
New car margins when things normalize.
Now as it relates to margins on used cars I would simply tell you the cost of sales of reflection of margin.
Gross profit now as of the 2200 range, we don't see that materially changing much.
When we get back to a normalized environment.
Got it and then just my last question on the SG&A front.
How do you I mean.
We always like to think of that as a percent of gross margin I mean, it's a reasonable way to think about it but then there is an absolute dollar level.
And then there's all this technological efficiency that you are you just kind of highlighted.
How should we think about SG&A going forward.
The dumb Guy's simple ways.
Mid 50% to 60%.
Maybe its higher than that maybe it's lower than that but but how do you think about that because it's much more complicated than just hey, as a percent of gross.
Good starting place to talk about it but I mean, how do you think about it.
Sure I'll start and Michael can finish it.
The way, we've modeled this and looked at it.
And we're tracking exactly where we expect it to be at this point so it gives us confidence.
That we're on the right track to execute the 25 year plan.
We believe that there is an opportunity to improve SG&A.
<unk> over where we were in 2019.
But somewhere around where we are today.
So I don't see it.
What's goes out of the macro sense, what's going out of the economy, but interest rates different things looked like at that moment of time, but as we sit here today and we forecast it out when you see our SAR player that we forecasted.
That does it assume a recession so assuming as we sit here today, we model. This out we have the opportunity.
Both through efficiency of our software production per employee to have a tailwind with SG&A.
So baseline, we should think about high fifties and with an opportunity to maybe grind better as grocers and improve and you get efficiency in the system is that a fair way to say it but youre not even really assuming that just yet.
Yeah, we still look at we haven't we did these five year plans, we don't aggregate the numbers, we do it literally by store by market.
I would tell you.
If things play out the way, we anticipate we should be in the mid mid fifties to upper <unk>.
Somewhere in that bracket.
Okay. That's very helpful. Thank you so much.
Thank you.
And we can now take our next question from Brian singer of Craig Hallum Capital Group. Please go ahead.
Good morning, guys. Congrats on the results progress. Thank you. Thank you.
I'm curious on.
<unk>.
I guess financial questions, one divesting seven stores, what's the annual revenue youre going to lose from those and then secondly on parts and service same store sales strong at 14%.
Even excluding TCA, but the gross margin was a bit weaker kind of year over year anything to call out there.
So on the on the divestitures just I'll give you just a quarter for the quarter those stores represented $162 million of revenue.
For the quarter subject kind of gives you a.
Run rate for the quarter.
That number up.
And similar for the other three I guess are they all similar sized that that includes all of that includes the four stores sold in the quarter plus the three stores that we sold on April one so thats all southern stores, what they represented in the quarter.
Got it but puts us at a run rate in parts and services of $3 75 billion.
Ryan This is Dan I'll take the other parts and service so.
The parts of the service margin.
Direct reflection of just the mix that we're seeing as you see in <unk>.
On our tables, our wholesale parts grew up 25%, which carries your lowest margin and then in addition to that when you see some of the warranty pullback that we have experienced out there with some of the Oems.
The mix of that warranty pullback in the margin that we carried in there is what is bringing us down.
And I'll say with the Miller organization, we're happy to sacrifice that margin.
They are impressive as it relates to wholesale parts and many other areas, but thats just one that sticks out.
There's certainly a lot of learnings there for us from a legacy <unk>.
<unk> stores as well.
Great one more for me.
On quick Lane, a lot of good incremental progress there I'm curious on the traffic sources that you can break out kind of what percent of that is organic versus paid SCM or other paid channels.
So.
Ryan This is Dan again, I'll start it and then.
David can can clean it up but.
Since we launched click lane, we have not gone out there and spend.
The $1 advertising click lane, so and the vast majority of our advertising dollars go from a store standpoint goal for that.
Digital transaction and the digital traffic that we've pushed through our website.
So I will tell you that.
The vast majority of the traffic is coming from from organic growth and the traffic that were pushed to the website.
Just to put a hard number on it I would tell you about 25%.
As for paid search.
There just hasnt been a logical reason for us to really promote it without any inventory.
I can't stress it enough. The 5600 sales are simply the 90 Lexus.
The 90 legacy Asbury stores.
We haven't rolled it out to any of the acquisitions, yet again because of TCA, the performing click lane being a fully transactional tool.
Lead generator it takes time to do that.
We will start to rollout our first store towards the end of this quarter.
But none of the additional 70 stores that we purchased are in quickly at all so that growth that number is solely the legacy stores.
Great. Thanks, guys. Good luck.
Thank you. Thank you.
We can now take our next question is from Glenn Chin of Seaport Research partners. Please go ahead.
Hi, Thank you and good morning folks and congratulations on the Upsized plan. Thanks.
Nice to see such an ambitious plan very encouraging.
And thank you for all the detail around it.
Hey, David I, just wanted to probe your comment a little about normalized margins, what things might be going forward I mean.
Understood Day, you will benefit from these terrific acquisitions you've made.
But maybe just from a broader industry perspective, I mean is it save even to use or looked at 2019 as a baseline only because prior to that I mean, new margins at least.
It's not not as much on the east side, but new margins.
In secular decline for a very long period.
Is that to say that you're saying 2019 made it may have been 2019 may have been the bottom.
I would say the bottom and kind of the end of an era.
<unk> had a tremendous amount of acquisitions and growth.
Im consolidations since 19, you've had really.
Disruption of ILG.
Electric Evs coming in.
Consumers preordering.
It more.
More acceptable margins for lack of a better term.
The question is.
If you believe normalized margins are end of 'twenty three 'twenty four.
What does that mean, how many electric cars are going to be on the road.
The incentives going to be for the government the stronger the incentives the moral supports margins.
I, just don't think as an industry Youll see 19 again for a long time.
I think a lot has changed since then.
And you see the profit from our partners with the manufacturers.
They found ways to be more efficient in what they do.
So I think between technology finally, catching up to an archaic space meeting automotive retail.
The introduction of Evs.
The consumer perceptions demand and their comfort level of acquiring online.
I believe it up when you go online and what price it for lack of a better term you end up at a better margin place than letting someone negotiated so I just think it's.
Our industry has been hampered in the last year or two with what happens with EV as a franchise model go away.
I sit here today and I worry about the franchise model I feel better everyday about the franchise model and know the meaningful role that we play in the strong partner that we can be.
Just looking at some of these startup electric companies and how they're struggling and what they're going through and the quality of the products that are manufacturers make it our ability to present those products and sell them I just think we're in a different space and now you add technology to it and you add efficiency to it and you changed how you compensate people I just see this as a.
Much better value proposition.
Use this term around here, so I'll use it again.
Right now, we're a plane taking off and where the clouds, it's a little bumpy and everyone can see above the clouds, yet, but when we get above the clouds in the next 18 to 24 months I think things are going to look really good for our industry as a whole that's my belief.
Mhm.
Okay, Yeah understood and appreciate the thoughts.
And then next I apologize if I missed it but did you guys talk about how the Upsized plan will be funded do you think it can be funded internally or organically.
Or do you anticipate.
To access the capital markets.
If you look at the one times leverage number that is all the acquisitions are paid for out of free cash flow.
No additional debt or equity needs to be raised.
Okay very good also good to hear and then lastly, just on acquisitions and dispositions.
Any thoughts gentlemen.
Are those acquisitions will be or the types of stores that should kind of be looking at you are looking to build out the network or really just bulking up in markets, where you already exist.
Yeah.
In doing this for 36 years on the retail side, you created a lot of relationships and a lot of friends.
And a lot of dealers see value in partnering with us.
We have the ability through relationships today to go out and purchased another $5 billion. If we wanted to do today.
Our goal isn't to grow quickly our goal is to grow thoughtfully it'd be great capital allocators for our shareholders. So I think that the timing cadence and pace is important I think the states where you see this grow in our thought process of balancing the brands with the right States.
And acquisitions going forward will be accretive for us. The one thing I don't think our space gets a lot of look at is portfolio management.
What did they buy what they sell.
What does that do from an accretion standpoint, not from a top line revenue, but what does that really do to them as a whole.
And so I think you'll see us really managed the portfolio well, you'll see more divestitures over time, probably at some point in the future and you'll certainly see more acquisitions as well, but thats just really maximizing the portfolio to generate the highest returns and create the most stable company one for our employer.
And our shareholders.
Mhm, Okay very good and then lastly.
Our scale and acquisition and disposition can you confirm these.
There's a bunch of seven stores that you disposed of.
Is that portfolio management are fine tuning David oriented Guy.
Comply with OEM framework agreements.
Yeah.
This particular case.
Without getting too much into the weeds.
It had nothing to do with framework.
Every manufacturer.
And we're thankful.
Represent the Toyota and Lexus brand, and we love them and the relationship.
Senior management teams.
But when we went into this it's a timing situation.
We were competing to by IHS with a group of people, we didn't know who we're competing against that didn't know where to get the deal the Stephens and deal.
It was in my 20 group in the Ninety's when I was the GM of a Toyota store there was a relationship there that came together quick.
Didn't want to pass on that opportunity not knowing if we've got to get the Miller organization.
Fast forward, we cited Stevenson and then we've got the Miller one so we knew we had an issue.
Because the manufacturer has a limit to how many stores you can order to reach it.
So we knew that we would have to sell some stores that we want to sell any of them of course not.
But we had to comply.
And respect the relationship.
That we do with the manufacturer and we fully aligned quickly with what we needed to do their.
They were tremendous partners in working with us to divest of those stores. So we think it all happened quickly and timely because of the strong relationship.
<unk>.
We were happy with where we are today with our portfolio.
Okay terrific. Thank you for all the feedback.
Thank you.
We can now take our next question from Rajat Gupta of Jpmorgan. Please go ahead.
Hi, good morning, Thanks for taking the question.
The first question was on just the used car.
Used vehicle unit growth trajectory.
Youre currently run rating roughly growth to 150000 annual units.
With the acquisition targets in the in the four year plan you probably.
That drove it becomes like 220000.
And by 2025, we are expecting that to move from that to 20000 to like 340000.
Just roughly like a 15% CAGR.
How should we get conviction around that.
Didn't even suppliers a bit tight here in the near term.
Just seems like a bit of a hockey stick around in the out years. So maybe if you could like have reached out and I'd also like to put that in context of them quickly.
How much conviction do you already have with ads.
That incremental contribution is going to come through.
I have a follow up.
Yes. Good morning. This is Dan I'll take I'll take the first part of the question and then David can clean it up.
Let's let's.
Look at the Big picture from a market level, we talk about a 40 million used cars that are sold on an annual basis.
45% to 50% of those transactions happen between private parties.
We believe that is.
The digitization of our industry continues to evolve.
And with us having being one of the very few of those that have a fully transactional tool is that consumer continues to adopt and accept the.
The digital transaction online.
Those private party customers are not going to want to transact between private parties because that is not going to be available for them. So that is going to give us.
Our competitive advantage that we will certainly take and go after so we see being able to pull from that market share for a lack of a better term that is out there.
I'll add to it.
And if you look at slide 19, I don't know, how well its showing up but theres a hockey stick arrow in there so I'd like your terminology.
I would tell you.
<unk> cars that are out there now.
Clearly won't be a problem in the future.
When you normalize Saar and you get the fleet back up to normal levels and you get those cars coming back to market that arent coming back to market that will make it much easier.
When you go from 91 stores to 225 new stores.
While I understand the CAGR comment in there you've got $40 million.
Typically on an average year plus of used sales. So when you talk about incremental growth through market share gain.
On the franchise side somewhat restricted because of your PMA, but youre unrestricted as it relates to pre owned.
So we looked at our growth from 2019 2020, our average per store, where we're at where we're going and again I'll say it again I know, it's repetitive, but the 5600 was with 90 legacy stores, none of the acquisitions going forward.
No new car inventory to have on there and when we originally launched towards selling more to do than us on quickly. So.
We've done this exercise by store.
We're looking at SAR, and making our assumptions, we understand and we will talk about it next quarter. The number of cars were acquiring directly from consumers.
This isn't an overly aggressive number for us.
We feel like this is logical to be at and I made a comment earlier. The Miller organization is phenomenal at a lot of things in wholesale parts is one of them.
Employer with Ted to take care of the guests are others, but a huge opportunity for them is the used to new ratio.
EBIT in the quarter and it shows between our total and our same store.
They are a pretty good distance behind us and used to new ratio.
So we will work with that very talented team over time to dramatically improve that used to new ratio. When you take their size of an organization.
We get them up to our used to new ratio, there's a meaningful tailwind there as well.
Got it got it that's helpful color.
And then maybe just last one on parts and services.
You have mid single digit growth.
Dialed in for the next next few yards.
It seems though it seems a bit conservative.
Covid.
Average franchise dealer average five 6%.
And you.
So I will end.
With inflation and you know what.
With customer pay and.
While Germany continued around back in.
I would just opportunity to gain share from those smaller independent just curious as to.
What's the learning that mid single digit target.
That conservative or.
Theres more of what's factored into that but it would be helpful. Thanks.
Yes, it's an excellent question.
Quite honestly when we debated for a while there's a lot of factors.
I'll start with the answer and then Apple for a minute.
Answer is it's extremely conservative.
We had a 30% growth rate in the last four years for consumers as far as what their spending with us per transaction.
We see a lot of where it's coming from and why and we see how it's going forward and as we sit here today and I've said this before every quarter. We track the dollars per repair order on combustible engine hybrid and fully electric vehicles.
And we didn't talk about it but this quarter was no different.
<unk> values are significantly higher on the fully electric vehicles.
The question will be as cars become the average age of the car. We all know how old. It is right now does that start to change in 'twenty four 'twenty five with the availability of all the cars that are going to be out there in the heavy what we believed to be February incentives to buy these cars and if theres a lot of car transactions in those years.
Will that materially change the dollar spent in the service department, because maybe the average miles come into the shop for lower.
$270 million plus cars on the road again the average age is much older approximately the average age of a car that come through our service Department is 70000 miles.
So we've made a lot of it again this five year plan is it's almost like a balance sheet statement. It's a moment in time as we sit here today and we plan out through 'twenty five we've put together what we believe is a conservative plan and we've literally looked at it by store by market and what our potential is to grow.
So it's a very fair comment it is extremely conservative there potentially is outside of that there's just so many factors that come into play.
We just didnt feel confident enough to raise it without being able to back it up.
Got it got it makes sense so it looks like it looks like your win either way either more units automotive service.
It shows it shows the resiliency of the model.
And we can now take our next question from Stephanie Morris. Please go ahead.
Hi, good morning.
I think just continuing on the same kind.
I had a question Tahira and.
Maybe you could talk a little bit about the conversations you're having with the Oems right now about the introduction of Evs over the next several years I think you have nice perspective, given your breadth.
Brand coverage, so maybe what are expectations from the Oems in terms of capital investments on your end.
Everything from Jess.
The stores to charging stations.
That's about agency models or direct to consumer preorders.
To get just general general color on EV introductions.
Sure.
No.
I think we do a good job in running the business day to day and the manufacturers do a great job at looking ahead and planning for the future getting us ready for the future billing building quality products, we've been installing charging stations for four years at our dealerships in very mature with that at this standpoint.
I would tell you Tesla has done extremely well they've been a great disruptor.
But.
They haven't had anyone to compete against.
No one has really been in that space offering a lot of products are going at them over the next couple of years youre going to see that change materially as far as what comes to market.
In my seat I get the opportunity to drive a lot of cars that are either just came out are uncovering off for a year or so.
I would just say from a fit and finish and a quality standpoint I'm extremely excited.
With the electric products that are coming out from the manufacturers and I believe that they are better than the fit and finish of quality of the Tesla product everyone has their own opinion, it's just one person's opinion knocking them.
But that again excites me more about the future and what's happening and like anything else like our software and I'd like to battery technology everything is going to improve over time. The government wants to go down. This road. So we believe the incentives are going to be there for a while so we think we're really well positioned.
What I would call a mature supply chain, meaning that brick and mortar is out there.
See Carvana UC Tesla you see all these startup electric companies or direct to consumer companies, realizing the need for brick and mortar.
That is already mature thats already out there the investments have already been made.
Where we're at and where we've been at the last couple of years is making significant investments in our team.
Training, our folks to sell electric vehicles and training them on the technology. Most importantly trading our technicians to work on these very complicated and quite honestly dangerous cars to work on.
So again extremely optimistic about the space Havent seen from almost every manufacturer from a quality standpoint, what they're coming out with for electric cars I think it's going to be a fun time to see how these legacy Oems really stand tall.
Against the Disruptors.
Great No. That's really helpful. And then I think switching gears.
A topic, that's been coming up I think more as of late has just been the affordability of vehicles in this environment, obviously, new prices are quite high.
<unk> also increased pretty meaningfully now you had rising interest rates, what do you what do you view kind of where it stands and just overall affordability and just on the <unk> side and do you think that changed at all during the quarter or April .
Sure.
The reason, we quoted that the average down payments.
$10000 Im rounding numbers $9 down payment on a new car is significant we didn't see that prepaid debit.
Almost 7000 on a used car.
What that tells me is the consumer has a lot of cash to spend and even though inflation is running high.
Their incomes have gone up dramatically and they've been sitting on cash and the age of the car is there.
So we've had zero interruption.
With raising rates.
As it relates to the consumer side of things or the desire and demand to buy vehicles.
I can't predict the future.
No what's going to happen in Ukraine, It certainly affected us on the supply chain issue with some brands. So there's a lot of variables still out there, but we're optimistic where we sit today, how strong and resilient to consumer is how much cash that they have and their propensity and willingness to want to buy.
90% of our business a little bit over 90% is prime business. So we're a very small player in the subprime business I am sure it affects subprime more than folks living paycheck to paycheck, which where the inflation would affect them more.
But we're not seeing any issue at this point.
Great I appreciate all the color today. Thank you.
Thank you.
And we can now take our next question from Bret Jordan of Jefferies. Please go ahead.
Hey, good morning, guys.
On the 17% customer pay growth could you tell us what was price versus traffic.
Yes.
I would say it was.
60% price.
Meeting the coupe consumers are spending more and probably almost 40% traffic.
As far as the like for like same SKU price like it inflation number in there or is it just that obviously the 60 would include mixed shift as well, but is there a feeling for like what pricing on a same job would be.
Yes, there is no inflation in there at all.
Sure.
We haven't adjusted our prices as it relates to that.
<unk> aligned with inflation.
And then I think investor perception is of battery electric vehicles don't need any service and you are saying that they have a higher repair bill is that something you see going forward or do you think this is just because these are new vehicles with bugs that will be worked out over time I mean as you look at the <unk> population are they additive to your service business long term or.
We're negative.
Yes.
Again.
One person's opinion.
Belief is the propensity or the frequency of them coming to the shop will be less.
But the time and dollars will be greater.
Not just what they spend but what we ended up charging because of the sophistication to work at it.
<unk>.
Putting an electric aside and not talking about autonomous there is some technology features in cars today, breaking where your car can break with someone in front of you lane changing shifting it alerting you. That's all technology that could have bugs in them.
So while the cars really get heavy content with technology not just the battery piece.
It allows for more opportunity for things to go wrong.
When you talk about driving a 5000 pound vehicle at 60 miles an hour down the road, there's a lot of liability and touching those cars.
So you really got to be thoughtful and think about what you're going to do over the airwaves.
That are nice to haves and what you're going to do that may have a real liability issue in driving the vehicles. So.
We see that we're really positioned well.
We're not surprised by the additional dollars to your point technology will get better over time.
It's going to take a while and then you factor in the roads in the pot holes and the weather.
They all play a role with the software and technology in these vehicles as far as their performance.
Alright, thank you.
Thank you.
We can now take our final question from David Whiston of Morgan Morningstar Equity Research. Please go ahead.
Yeah.
Thanks, Good morning.
On click lane is the conversion rates, so much higher versus traditional or digital.
Because the tool itself being so good which I think it is or is it because these customers already more committed to buying than other customers would be just because they do enter the claim portable.
Yes, David Good morning. This is Dan I'll start and then turn it over to David.
So.
If you look at our.
At our data from click Lane.
The average credit score being over 700, <unk>, you think about that consumer that consumers at the very.
They know that we have a fully transactional tool, which gives us a competitive advantage.
From that perspective.
No.
That consumer does not want to go through the traditional process Ingalls has been three or four hours in a store and are taking full advantage of the technology that we have out there that makes it a lot more efficient to buy and acquire that inventory, where they want to how they want to and at the time of the day that the.
The best benefits the guest.
So we believe that it is that the tool is attracting a are very good.
Credit score customer, but in addition to that just the fact that it is one of the very very few.
Fully transactional tool has given us the better results as well.
And I would say just to add on top of that.
You know.
We had prior tools.
What I would call more lead generated to what a lot of the tools that are out there now we saw a lower credit score customer we saw lower down payments.
I think the consumer appreciates their time.
And to be able to do a transaction 14 minutes instead of sitting in the showroom for two hours is meaningful.
If you have a fully autonomous transactional digital platform you don't have a need for a call center if.
If you have a call center that only frustrates the consumer more thinking about if you try to buy any kind of product online and you can finish it you need to get on with the call Center figure things out that's not upfront experienced its frustrating.
So we don't have a call center.
We believe that the tools speaks for itself, but it's only going to continue to grow and Thats all stupid adage, we're all consumers we.
Love to buy things, we don't love to be sold things.
So the ability in your own safe environment to go through a tool select which lend do you want to use decide what F&I products. If any you wont be able to sign in your home and pay for it is meaningful.
This software called invite to pay which people pay via text and email.
2018.
We did $12 million annually on this invite to pay tool online or via text, we did over $100 million last year.
Because it's convenient so we're constantly focused on that north star.
Not about what's what's best for us to generate the most money what's best for the manufacturer for them. It's what's best for the consumer and our logic is if we give them the best tool of Bmo's transparent.
Logically they will want to transact with us more and again go back to that concept people like to buy we believe that's why the F&I numbers. So high we're not re pitching we're not selling theres no interruption of that F&I prices that almost 2300 <unk> in F&I is the customers' self selecting themselves we.
That's the power and no different than the first smartphone already technology. This is year, one as people become more comfortable with the software. The software improves later in this quarter, we will rollout our circuit.
Iteration of our of our F&I platform on clinically it's a significant improvement to our current version. So we're constantly working on and we will continue to improve the tool as well, but it's just logic base.
Convenience time transparency is going to win out every time for the consumer.
Yes, I totally agree with you.
I see what you mean by the efficiency and the convenience and subtracting, perhaps a more wealthier what the higher credit quality customer, but at the same time it doesn't the.
Digital and snacks also attract wont make it easy for some people who have lower credit quality, who are afraid to go to the store.
Doesn't sound like that's happening with clock Lane I'm, just curious as quickly maybe crowding out that lower credit quality customer.
Well, that's a great comment and it's one that we've really never talk about.
I'm going to.
We all journey through life, we have our ups and downs.
We never judge anyone situation and why they might be affected by a low credit score. So this isn't to disparage anyone but I wouldn't and I entered the car business in the mid eighties from the mid eighties till today anyone that is in a position of need as it relates to being assistant with financing. They are the first.
People to reach out for help that was pretty web sites, and then showing up at the store and disclosing this situation after websites them, reaching out via leads saying help me.
That business has been there for decades, it will always be there and it doesn't.
It doesn't stop with click lane.
We didn't get everyone finance, we got 90% of the people finance, 90% of the people needed assistance, 10% of the people, we could not get financing, but I would tell you is.
Most people that have a situation.
Wanted to personally talk about it.
And so that's one more human intervention at understanding and an empathy gets involved to understand their situation.
Best Assistant.
Software is it a machine learning tool at this point to where it can identify that had worked through a subprime customers issues.
Okay. Thanks Thats helpful.
Yes.
And we have no further question at this time I would like to hand, the call back to David <unk> for any additional or closing remarks.
Thank you very much operator. This concludes today's discussion we appreciate your participation today and look forward to talking to you at the end of the next quarter have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].
Yeah.