Q4 2022 Asbury Automotive Group Inc Earnings Call
Greetings welcome to Asbury automotive group's fourth quarter 2022 earnings call.
This time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during todays conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Karen Reed, Vice President and corporate Treasurer.
You may now begin.
Thanks, Rob and good morning, everyone.
I've noted today's call is being recorded and will be available for replay later this afternoon.
To Asbury automotive group's fourth quarter 2022 earnings call. The press release detailing Asbury fourth quarter results was issued earlier. This morning and is posted on our website at investors thought Asbury auto dotcom.
Participating with me today are David Hult, our President and Chief Executive Officer, Dan Clara, Our senior Vice President of operations and Michael Welch, Our senior Vice President and Chief Financial Officer at the conclusion of our remarks, we will open the call up for questions and will be available later for any follow up questions.
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 significant uncertainties.
Uncertainties for information regarding certain of the rest of 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 and just Didnt ended December 'twenty 'twenty. One any subsequently filed quarterly reports on Form 10-Q.
And our earnings release issued earlier today, we expressly disclaim any responsibility to update forward looking statements.
In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call as required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website.
We have posted an updated investor presentation on our website investors dot Asbury auto dot com, highlighting our fourth quarter and full year 2022 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 fourth quarter and full year 2022 earnings call.
2022 was a record year for Asbury.
<unk> generated $15 4 billion in revenue of $5 6 billion from 2021.
Our adjusted EBITDA for the year was $1 3 billion, an increase of over $500 million and we expanded adjusted earnings per share by 38% to $37.66.
We sold over 300000 vehicles in 2022.
It hit a milestone in number of cars, we serviced at over $3 million.
All of this is a result of our long term trajectory to manage effectively through our growth even at a much larger size.
Looking back to 2017, we were a company with $6 5 billion in revenue.
We have grown responsibly to over 15 billion in 2022.
We have refined and maintain our operational discipline throughout this period.
Going from an adjusted SG&A to gross profit profile of 69, 1% in 2017 to 56, 8% for 2022.
We will continuously enhancing our execution.
Mining our portfolio, we have been accretive and efficient while more than doubling the size and power of the company.
Turning now to our results in the fourth quarter.
We grew adjusted EBITDA by 71 million to $319 million, an increase of 29%.
Expanded adjusted EPS from $7.46.
The $9.12 an increase of 22%.
Delivered an eight 2% adjusted operating margin.
Increased revenue by $1 1 billion.
<unk> three 7 billion.
And grew gross profit by 196 million to $738 million.
Our gross profit margin was 19, 9%.
Our adjusted SG&A as a percentage of gross profit was 56, 7%.
For the full year 2022.
We generated 987 million of adjusted operating cash flow and.
An increase of 355 million over last year, which speaks to our robust business model.
At the end of December we had $1 5 billion in liquidity.
Even with large acquisitions in recent years, we have been diligent about our debt levels to support our long term growth.
Adjusted net leverage has decreased a full turn from two seven times at the end of 2021.
To one seven times at the end of 2022.
Our strong cash flow liquidity and.
Balance sheet allows us flexibility in muscle to deploy our strategy.
It enables us to be opportunistic with potential acquisitions or share buybacks.
As announced we repurchased one 6 million shares during 2022.
For approximately $300 million.
Our board has approved an increase to our share repurchase authorization by 108 million to $200 million.
We continuously evaluate acquisition opportunities that make sense for Asbury.
We believe based on the last several acquisitions that we have shown discipline and hold ourselves accountable to our robust criteria for opportunistic growth.
In December we.
We divested the North Carolina stores as part of our continuous portfolio optimization.
These nine stores represent an estimated annualized revenue of $590 million.
We are opportunistic strategic and thoughtful regarding our capital allocation and maximizing our returns for our shareholders.
Okay.
Our guest centric model.
So relies on providing a high level of commitment to our team members.
The offering best in class benefits, including equity awards to our teammates in our stores.
Which is unique among our peers.
Our team members have also been giving back to their communities as volunteer hours were up nearly 70% year over year, two our volunteer time off program of up to 40 hours per team member.
Finally, I would like to thank all of my team members for an incredible year and a strong start to 2023.
It is your hard work and dedication that provides a great guest experience and strengthen the performance of our business, but the best is yet to come. Thank you I'll now hand, the call over to Dan to discuss our operating performance Dan. Thank.
Thank you David and good morning, everyone.
I'd also like to extend my thanks to all our team members for their extraordinary results in 2022.
Their commitment to consistently delivering an exceptional guest experience.
My remarks will pertain to the same store performance.
Unless stated otherwise.
Starting with new vehicles.
Our new vehicle inventory ended the quarter at 254 million, which represents a 20 day supply.
Our day supply fluctuated by segment with domestic being a 30 day.
The airport at 13 days and luxury at 21 days.
Even at Mist continued supply constraints, our new vehicle volume was flat year over year, while we grew new vehicle revenue by 3%.
New average gross profit per vehicle decreased $704 from the prior year quarter.
For the full year of 2022, we increased new vehicle gross profit by 7% year over year.
On a DVR basis, it increased by $1348 or 30% to $5815 for the full year.
Turning to used vehicles.
Used retail revenue was down 5% from the prior year quarter.
Or do you expect that choppiness to the market persistent.
Used retail gross profit per vehicle was $1842 for the quarter, a decrease of $840 from the prior year quarter.
Our used vehicle inventory ended the quarter at $202 million, which represents a 26 day supply.
Our used to new ratio for the quarter was 101% down from 108% from the prior year quarter.
Shifting to F&I.
We delivered another strong quarter with an S. N ITV are $2233, an increase of $241 compared to the prior year quarter.
In the fourth quarter, our total front end yield per vehicle decreased on a year over year basis by $474 per vehicle to $5984.
Moving to parts and service.
Our parts and service.
Parts and service revenue increased 12% in the quarter.
Customer pay revenue build upon its momentum with a 13% growth and we expanded its gross profit by 14%.
Now turning to Cleveland.
Please note that we're clearly we're reporting on an all store basis. As a reminder, this was the first quarter, which include a L. H M M. Given some sales it seems our full rollout.
We sold an all time record of over 8400 vehicles through Cleveland in the fourth quarter.
A 67% increase year over year, and a 24% increase over the previous best which was last quarter.
For the full year of 2022, we generated approximately $1 $1 billion of revenue from Cleveland.
With over 27500 vehicles sold via our fully transactional online tool.
We expect to generate $2 5 billion of revenue for 2023 from Cleveland across all stores.
A key differentiator for our Cleveland is our loan marketplace, which works with 51 different lenders banks and credit unions.
The consumer their power to select their finance offerings that are best for them.
In the fourth quarter, we optimized our after nine menu to 2.0, representing a bundle of suggested products, which are tailored to the vehicle the location and the customer's usage.
Allows the Cleveland consumer to be informed and let them select the best choices for protecting their as it.
We are also adding functionality in the first half of 2023 to bring in new features including enhanced integrations with OEM captive finance arms.
During the fourth quarter over 92% of our transactions were with customers that were incremental to our network.
Average transaction time remain roughly in line with prior quarters eight minutes for a cash deal.
In 14 minutes for finance deals.
Total front N P. B R a $3518 and F&I P. D R a $2001, which equates to $5519 total front end yield.
The average clear clean customer credit score increased quarter over quarter to 726.
Which is higher than the average credit score at our stores.
87% of those that apply we're approved for finance.
77% of customers received an instant approval.
While an additional 10% of customers who require some offline assistance.
The average distance of our Cleveland delivery from our dealerships was $18 six models, giving.
Giving us the opportunity to retain our new customers in our parts and service departments.
Cleveland customers are converting at more than double the rate of traditional internally.
And while we won't see the full potential until inventory levels normalize we are seeing strong early results.
Our top conversion rates among individuals stores were executed at 20% for domestic vehicles.
28% for imports and 48% for luxury.
And our journey to become the most guest centric automotive retailer we know the most important differentiator. We have is the level of service we provide.
Incidentally delivering an exceptional guest experience.
Trust amongst our clients, who in return reward us with loyalty and retention.
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 the call good morning.
I would like to provide some financial highlights for our company for additional details on our financial performance for the quarter. Please see our financial supplement and our press release today and our investor presentation on our website.
Overall compared to the fourth quarter of last year, adjusted net income increased 24% to $202 million and adjusted EPS increased 22% to $9 12.
Adjusted net income for the fourth quarter 2022 excludes expenses of $2 7 million related to a significant acquisition that did not materialize.
And gains on dealership divestitures net of $202 7 million, primarily related to the North Carolina stores.
All of which netted to $6 83 per diluted share.
For reference we received $322 million in cash proceeds for the sale of these divested stores.
Adjusted net income for the fourth quarter of 2021 excludes acquisition expenses and acquisition financing expenses of $28 $9 million or dollar and two cents per diluted share our effective tax rate for the full year was 24, 4% versus 23, 7% in 2021.
We anticipate our 2023 tax expense to be approximately 24, 5%.
For 2022, we generated adjusted operating cash flow of $987 million, excluding real estate purchases. We spent approximately 95 million on capital expenditures for the full year.
We expect this to be approximately $200 million for the full year 2023, as we continued planned capex related to our 2021 acquisitions.
Of this 200 million about $20 million related to replacement of leased properties.
For the quarter TCA made $28 million of pretax income, which included $4 million of net investment income.
TCA generated $80 million of pre tax income for the year.
We anticipate a full rollout of T C products to our remaining stores by the end of 2023.
For GAAP, we're required to defer the commission received its dealerships for Tcf products over the life of the contract to maintain comparability where.
We will continue to reflect the commission received for such sales in the dealership segment at the time of sale and recorded a deferral of that income and the TCA segment.
With the ownership of TCA, while the overall profitability of the transaction is higher the timing of income recognition is deferred and amortized over the life of the contract we expect a negative deferral impact of last two to three years.
Due to the deferral of income associated with these store Rollouts, we expect TCA to generate 25 million of pre tax income for 2023.
Our balance sheet remains strong as we ended the year with approximately $1 5 billion of liquidity comprised of cash excluding cash a total care auto.
Floor plan offset accounts and availability on both of our youth line and revolving credit facility.
Also at the end of the year, our pro forma adjusted net leverage ratio stood at one seven times down from two seven times at the end of 2021.
We generated robust cash flow.
By generating robust cash flow, we were able to quickly lower and debt leverage ratio. After a large acquisition in 2021 and strengthen our balance sheet to provide flexibility to achieve our strategic goals.
We'll continue to monitor the M&A market as we believe there are potential opportunities that would enhance our already strong dealership portfolio.
And we will look to return capital through share repurchases.
Since the start of 2022, we have repurchased approximately one 7 million shares for $308 million.
As David mentioned earlier, our board has approved an increase to our share repurchase authorization of $108 million.
The $200 million.
Finally, I would also like to join David and Dan and thanking our team members at Asbury for not only a strong quarter, but another strong year.
Your hard work and dedication drive our excellent performance I will now hand, the call back over to David to provide some closing remarks, David Thank.
Thank you Michael as we look to 2023, we believe we are well positioned in a market where the average age of the car is over 12 years old and day supply begins to build.
Also our fixed operations continues to be strong and we anticipate this will continue for 2023.
We are planning our business for us are in the mid $14 million range.
We believe with our disciplined cost management and agile expense structure heading into 2023, we can adapt to changing conditions, including one with a recovering if uneven day supply for the industry.
Finally.
Our robust cash flow and balance sheet enables us to have both the flexibility and strength.
To be opportunistic when it comes to well, our well diversified revenue streams and when it comes to acquisitions and buybacks.
This concludes our prepared remarks, we will now turn the call over to the operator and take your questions operator.
Thank you.
Now be conducting the question and answer session.
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One moment. Please so we poll for questions. Thank you.
Okay.
Thank you and our first question is from the line of Daniel <unk> with Stephens. Please proceed with your questions.
Yes, good morning, guys. Thanks for taking my questions.
David I wanted to start on the new vehicle side of the industry. Obviously earlier this week large Oems sort of reporting talking about carrying 2030 days lower inventory than historical levels.
Your inventory is slowly building up to the mid <unk> I guess could you update us on how your conversations are going with the OEM partners. How do you think about the trajectory.
Oh, the inventory maybe shed light on how you think that evolves through 'twenty, three and maybe into next year would be great.
Sure.
David I'll do my best.
I'll start with the fourth quarter, our volume numbers are a little deceiving because while the day supply was where it was in the quarter, our largest volume luxury and import stores had single digit days supply so that really cover and durability to grow what was there as we walk into 2023.
We're still have over 35% of our inventory coming in pre sold so it's still a robust pipeline.
I think it's gonna be a different year for all manufacturers I think some are going to come back a lot sooner what day supply and some of it will take most of the year to catch up to it. So I think it depends upon which brand you're talking about and amongst our peers and ourselves it's going to really come down to the mix of brands that we have.
So we anticipate a quick recovery in the first half of the year would still at it.
And then in another domestic but it's going to be a slower.
Uptick.
As it relates to say 200 and Honda.
And as we think about the GPU implications of that obviously I think new GPU is better than most expected this quarter barely barely declining sequentially.
What have you learned about the ability to price as inventory improved and how do you think that relationship the inverse relationship with inventory shake out through the year.
Sure.
You know what I'll say the last few years have been difficult to do.
Navigators from a prediction standpoint between Covid and supply chain issues and so on.
But I'll tell you.
All the conversations in the last few quarters have been when does it get back to 19 levels I just don't see that 19 have a 17 million Saar you know, we're forecasting less than a 15 million Saar.
You can look back over history, when Sars or below 16 million margins hold up pretty well.
We think a lot of the Oems have learned from their day supply, but that doesn't mean, you won't have spikes at certain moments in time, I think they've been real comfortable with not bringing large incentives to the market.
Inventory does back up on a day supply I assume they'll come forward with incentives and again because the average age of the cars over 12 years.
While we think it's not going to be a gangbuster year.
We anticipate margins to hold pretty well it will certainly vary by OEM, depending upon day supply.
As we look at Asbury as a whole.
We think it'll be a pretty good year for new car margins for us.
Okay. That's great and then last one for me, maybe Michael jumping over to the balance sheet you paid down a lot of dead I think buyback update was encouraging last week I wanted to ask for some color. I mean, you guys were active divesting stores in <unk>, how should we think about capital allocation, but also just the portfolio going forward are we done with divestitures are you back to being a net acquirer.
And in the market any update there on uses of capital as move forward.
This is David I'll start with and then Michael can jump in.
You know Michael referenced in the script that we had $2 7 million in costs from it from an.
Physician that didn't materialize.
I've said it for many quarters.
We're very focused on under our assets in our portfolio of stores that we have and we're always trying to maximize our opportunities in acquiring things that are accretive to our platforms and divesting of stores that might not necessarily be performing at the highest levels.
The divestiture of the North Carolina stores.
It was partly due to the anticipation of the new acquisition coming on and making sure. We maintained a balance of cash flow and kept our leverage proper.
And that didn't materialize, we had already been under contract to sell the North Carolina stores.
Yeah.
Yes, David.
I am David piece, you know it leaves us with a lot of capacity to $1 5 billion of liquidity.
And at very low leverage ratio. So we have plenty of capacity if acquisitions materialize. This year to deploy that capital or if I'm you know for share buybacks. So it leaves us in a good place for 2023 for capital deployment.
Great I appreciate all the color guys. Congrats on the results and best of luck.
Thank you.
Our next question comes from the line of John Murphy with Bank of America. Please proceed with your questions.
Hi, Good morning, guys maybe.
Maybe just to follow up on the GPU question, David and I and I know this is a.
A little bit unfair, but also kind of fair because it's important.
How do you see new vehicle Gpus progressing as we go through the course of this year.
Where where might they ultimately land.
As a corollary to that.
You know how much of the variable compensation that you paid your sales folks.
Is linked to that that dollar growth, meaning theres kind of a natural reduction in SG&A as that growth comes down over time.
Yeah, So John it's complicated right I mean every year no one predicted the year coming well, there's been a lot of unique things going on.
But what I will tell you.
In the fourth quarter, one of our domestic store one of our domestic brands. The day supply I would say it got back to close to normal levels and the gross margins with that brand we're significantly higher than what they were in 2019.
So we have confidence that our margins will be significantly higher in 'twenty three than they were in 19, but it's certainly you can tell it's fun, it's fallen off from prior year results. So we think it'll be healthy we think it'll be well above 19, but it's really going to be a story of <unk>.
<unk> particular brand comes back and when they come back, but because of our sour below $15 million in all of the things I've stated, we think it's going to be a pretty good year for new car margins.
And John on the SG&A side, you you're right those a lot of the commissioning of all the you know the.
The pay in the stores is tied to the gross profit is generated and so there's a natural kind of falloff in the SG&A.
Match up with that fall off in the gross profit decline.
The only thing I would add John and you're talking about a new operating up used as well.
It cost us X number of dollars to do a transaction.
So to chase volume.
With lower growth.
Really deteriorates or hurts your SG&A. So we're very thoughtful about not necessarily chasing volume, but really looking at each one of these cars as an asset and trying to get a fair return for it well not letting agent catch up to us.
Got it okay.
That's definitely that's certainly helpful and then on quick clean.
I think you said two things.
We're kind of sort of opposite you said I think that 92% of the customers and transactions were new to Asbury. But then you said vehicles were delivered within 18 miles, which could indicate they are already in your market, but I'm just curious where they quickly customers are coming from it was that statement correct, maybe I misheard something there the 92% were incremental.
And if they're within 18 miles it sounds like they're just coming from another brand as opposed to another deal or maybe I'm just trying to understand where these folks are coming from because it.
It sounds like you're going to have a.
A good bump up here and in potentially incremental revenue from quickly.
So John I'll do my best to answer that if you add if you need a follow up please take it.
That 92% incremental means these are local customers that we're doing business with other dealer groups that chose to leave the brand or the deal that they were doing business with to come over to US. We believe they've made that decision because of the ease and transparency and being able to transact online instead of sitting in the showroom at some.
Over the years that number will fall off a little bit as the market catches up with transactional tools.
That 19th we love the fact that its local we don't want to sell a car 500 miles away, we will on certain occasions, but.
The parts and service business the retention the relationship is really what we're into so we focus on really a 50 mile radius around our rooftops and we try and do our quickly and transactions within that space, So that 92% new customers to us meaning they were doing business with other local competitors that we compete against in that market.
Okay. So just a follow up then I mean, you're saying one 1% to $2 5 billion on quickly year over year for 'twenty two to 'twenty three right. So $1 4 billion in incremental.
Just shy of 10% ask about 9% incremental coming from from quick Lane alone do you expect that to remain that that incrementally in 'twenty three because I mean, that's.
It's almost like a 9% increase in your base revenue for 2022.
A big statement.
Some of it's timing we added early chairman Stephen said in the fourth quarter, we didn't have them in the click clean numbers most of the year. We've been on quickly software for a couple of years anytime a store or market goes on quickly. It takes them a full year to get that conversion rate up right. So you're catching up to.
The conversion for the stores you added were assuming Saar is going to increase a little bit we're going to have a hard day supply of new at some points during the year, which is going to increase the sales as well as we're experiencing with the tool and then our sales incrementally going up.
Just logic based if you could spend 15 minutes.
Purchasing the car very transparently from your living room would you rather do that than spending two and a half hours in a showroom. So the additional $1 4 billion. If you will is the full company being on it for a full year the legacy stores, improving slightly on conversion and the other new acquisition stores, increasing their conversion rate.
Throughout the year.
Yeah, I appreciate you being humble, but it is 1 billion for incremental and it is a question of timing, but I mean, it is what do you think rental so it's pretty pretty impressive performance.
Just just lastly on the net leverage.
You guys. You said you were at one seven times at the end of 'twenty two you'd been at two seven times at the end of 'twenty. One how do we how should we think about where you want to target that and where that could go to if there was another large deal that became available to you.
So we're comfortable at three times, so we have the right deal out there.
But you know something that kind of two and a half times is probably our ideal place in this in this margin environment.
And I would say John .
We're not aggressively trying to acquire things.
80% of the things that are put in front of us we don't even look at.
We're really very disciplined about looking at acquisitions that are accretive for us. So we're not going to feel the force of having to acquire things to hit a certain target. It's more important that we add value assets to the portfolio. It certainly benefit our shareholders.
Great. Thank you very much guys I appreciate it thank you.
Yeah.
Our next questions come from the line of Brian <unk> with Craig Hallum Capital. Please proceed with your questions.
Good morning, guys, a wonderful sit on used vehicles, so pricing seems to be somewhat stabilizing here in January one do you think that's sustainable and then two what do you think kind of trends or as you look out over the next several months here.
Okay.
Good morning, Ryan. This is Dan Yeah. We are we are seeing.
Used car valuation and pricing stabilizing you also got to keep in mind.
We are approaching our selling season for a lack of a better term.
And also you know what comes with will be.
Tax credits, so we feel that the the big valuations that we saw.
Q3 into Q4, we'll definitely stabilized and now there's still going to be pressure from an availability standpoint.
But we believe that the.
The market has stabilized and some capacity was still some depreciation still coming along.
And then for my follow up just curious on interest rates, if that's having any impact either favorable or not on attach rates in for the financing.
Ryan This is Dan again.
You know we have not.
We have not seen a major impact obviously there is always concern when you look at the average payment to own a car across the nation.
And when you try to add.
No.
Whether it is whatever you want to protect the asset with from.
From an ethanol product it does put pressure on our monthly payment, but we have not seen any negative impact that has.
As a concern at the store level.
One of the things that I mentioned on the call was.
We have our own marketplace, we not only deal with our captive lenders, but we also deal with local lenders and institutions in credit unions. So that gives us flexibility to be able to provide the best.
Right out there for a consumer.
Great. Thank you.
Thank you.
Our next question is from the line of Adam Jonas with Morgan Stanley . Please proceed with your questions.
Hi, This is Daniela Hagen on for Adam Jonas.
So Tesla came out with the 20% or so price cut and while that doesn't necessarily compete with all the nameplate youre selling and some of the stores you might have some comparable products. So we're curious to see whether you saw any real time impact on prices demand our showroom traffic whatsoever. After those cuts.
Yeah. Good morning, Daniela This is Dan.
You know when the first thing when we saw that announcement was take a real quick assessment of what kind of inventory that we have from a flow standpoint across the.
Hum.
The stores are the good news it was there.
Below 60.
So and in most cases they were frustrated we were able to adjust we did adjust the pricing of their cars to make sure that it was brought down to the current market condition.
Paying a close emphasis on retailing those cars.
Far as.
Impact on Evs that we sell you know respectfully I believe that that just.
Because of the strength of the franchise system.
And.
The integrity that we have within the system selling movies MBNA.
Good distributor for the end consumer we haven't seen any material impact.
On EV sales with any of our brands.
As of the repricing of Tesla.
Not to say it won't come at some point in time, but we also anticipate incentives that come out throughout the year as well.
Yeah.
Great. Thank you.
Thank you.
The next question is from the line of <unk> Gupta with Jpmorgan. Please proceed with your question.
Hi, good morning, Thanks for taking the question.
Just one follow up on the SG&A.
And I understand there was some seasonality from treating a <unk> typically.
But it looks like expenses were down $20 million quarter over quarter on a $40 million gross profit declined quarter over quarter.
Is this kind of generally as a rule of thumb to think about no when looking into 2023 and as Gpus moderate.
Particularly on the new vehicle side, just trying to understand like how should we think about that drop through.
Based on whatever assumptions you make on GPU.
Thanks.
What was that.
This is David.
I would say, we have a history of being very disciplined in payments.
Cost efficient.
We've been working for years and our legacy stores.
Productivity per employee and really getting our transactional costs down per sale.
All of our new acquisitions naturally on it at the same level that we are from an efficiency standpoint.
So we look to work in 'twenty three to really get all of those efficiencies that we have in the legacy stores, which we believe is a potential slight tailwind for us.
Got it.
And maybe on the parts and services.
Growth again here in the fourth quarter.
Curious, how we should think about the puts and takes for 2020 three.
What is likely to be the key limiter to grow.
Is it still a technician hiring and also pricing has been a key contributor to growth last couple of years.
And the part supply improving and maybe some cooling in inflation, how should we think about or how are you planning in terms of growth for that for that particular business segment. This year.
It's a great question.
I assume most like us.
We never have enough tax and we could always use more.
I think what youre seeing with the dollars increasing has more to do with the aging of the car.
As cars age they need more work.
Certainly parts costs go up every year. So as we look at 'twenty three from a growth standpoint.
At least at this point, we don't think it's going to look very similar to what our results were in 'twenty two as far as growth.
We don't see it slowing down or leveling off.
People are holding onto their cars longer.
And.
If you know.
The jobless rate increases over time.
That will certainly have an impact on parts and service.
But we believe that'll be a positive impact.
Got it got it maybe just one last one you know you reiterated the 55 dollar EPS plan.
We're still in a somewhat weak used car demand backdrop no.
Mentioned $14 5 million Saar.
It seems like getting to 55 from $38 50 per cent EPS growth.
Hum it would need a pretty sharp recovery in the industry, both you and us.
I'll kind of quickly you know what.
What else gives you confidence in this current backdrop.
Prices are still high rates are high.
You know to do it.
Supply for used cars you get tighter in the medium term what gives you confidence in those targets.
Is it reasonable to assume that you see in reporting deadlines. This year before moving higher again or you don't see that happening.
To that five to $55.
Regina if I Miss a piece please come back.
We think that 90% of the market.
Our stores that are opportunities for acquisition.
It's really only 10% of the market that's owned by large groups.
<unk> like ourselves.
So there's plenty of potential for acquisitions. We also think naturally over time in the next few years as Shar will continue to grow.
So between the combination of the Saar growth over the next few years the opportunity with acquisitions.
The efficiencies with click lane, and our ability to lower SG&A over time.
I wouldn't say so much in 'twenty, three but overtime with the use of software and tools to become even more efficient. We think all those things still give us the potential and the opportunity to get there.
Fast forward out if acquisitions are great. The next few years and sorry doesn't recover your point is valid.
We just don't we think it's too early to make that call and we still see the next three years growing Saar and our opportunity to acquire more stores and get better with our software.
Got it maybe just under 83 three you know your comments on parts and services.
And Greg.
Half million Saar and still relatively strong gpus.
Is it is it safe to assume that earnings might not decline this year would that kind of background.
You know, it's a fair question.
The interest rates you have the floor planning cost.
You have different things that will come up on you naturally your health care costs go up every single year. So your cost per employees go up as well.
As I sit here today.
I don't have a guarantee timeline for 'twenty three how each manufacturer who's going to recover what they supply.
As we sit here today, we truly believe that the new car margins will hold up well throughout the year, but that could be altered I mean, it's been an odd last three years on the used car side, you've seen margin fall pretty good but we don't think it's going back to 19 levels because you still have a supply issue in the marketplace.
Where it's been depleted the last few years.
So while we think it may not potentially be quite as strong as it was prior year as we sit here today, we don't think it'll be far off of 2022.
Understood. Thanks for taking the questions.
Yes sure.
Our next question is from the line of Bret Jordan with Jefferies. Please proceed with your questions.
Hey, good morning, guys.
The parts and service could you talk about traffic versus ticket in the quarter sort of what was price versus versus volumes.
Sure Brett this is Dan.
Part of it was price, but we also saw an increase in our.
Customer pay Ro count throughout the quarter.
When you look out.
Just break it down by the different segments every segment saw an increase in.
Domestic was relatively flat.
Flat, maybe down 2% from Enel Ro count so we're seeing the traffic coming into the stores.
And we keep our schedulers online appointment scheduled errors.
Wide open for a lack of a better term so that we can service their customers when he benefits them and not when it benefits us and we're seeing the results out of that and Brendan pointed out.
Because we're a relatively small company here and a half ago.
In assembly, we almost doubled the number of rooftops, we have in a year and we spent years working on the legacy stores to really get up to production and efficiency within our shops. We now have that same opportunity with all of those acquisitions. So we think we've got a nice tailwind over the next couple of years working with our great teams out of that.
As markets, becoming more efficient in growing that business.
Thank you and then on Saar your forecast of mid Fourteens is that more production constrained or demand constraint I guess when you think about the puts and takes is it.
What is the normal salt with a natural Saar be higher if vehicles were available or do you just sort of see a phi a smaller group of buyers able to afford in this environment.
It's the question you asked and it's a tough one to answer.
I made the comment over 35% of our incoming product is pre sold.
Go back to 19 levels, you were nowhere near that number from a presale standpoint.
So it's still selling pre selling 35 plus percent of your inventory before it hits. The ground tells you that demand is still pretty good I don't want to be a broken record, but again that average age of the vehicle being over 12 years.
Creates an opportunity.
And you have a resilient.
Job market.
And with that average age of the car.
And then not being able to purchase cars. The last couple of years because of availability.
We think that there is an opportunity to continue that steady growth.
We don't think we get back to a 17 million Saar because production won't be there.
The supply constraint issues that are out there.
And you still have a lot of Oems converting R&D and working on a lot of launches of EV vehicles over the next 12 to 18 months. So I think it's a combination of a lot of things.
Certainly the economy could shift and change with demand drops dramatically. We're just not seeing that at this point.
Okay and then one quick question on leasing something that obviously has not been a hot topic in the last couple of years, but you know as affordability from an outright purchase.
Standpoint, it gets to be more challenging do you think there's likelihood the oes sort of step in and.
Facilitate more leasing to drive volumes or is that just not a topic lately.
Yes, selfishly I certainly hope so.
Leasing business is important to us because we retain the customers.
In the brand and it is important to the Oems because they retain it within their brand as well.
There hasnt been that.
Incentive in leasing because the product hasn't been alternate it hasnt been available and it's been away from the manufacturer to retain the earnings which was great. We think over time leasing has to get feathered back into it when is it happened by what brand, it's really going to depend upon availability, but naturally your luxury set.
<unk> would be the first to benefit from leasing returning.
Great. Thank you thank.
Thank you.
Our final question is from the line of David Whiston with Morningstar. Please proceed with your questions.
Hi, everyone.
Going back to Hum.
David you had talked about wanting to get the most of them every vehicle, but just looking at the new vehicle category.
The three new vehicle categories as I'm looking at imports it looked like more of the opposite happened there in that only important had unit growth with GPU percentage wise fell the most and just given the tight inventory I was little surprised by that are you not going as high end pricing there could you want to preserve some important volume.
Yeah, I wouldn't say it plays out that way you have a lot of brands within the segment.
The brands with the single day supply had extremely high margins.
So we don't think that was a major issue.
I get your point is as far as the gross profit falling off.
But we still think for import that's $3800 or in that vicinity.
It is a very strong number on imports.
So again it.
It's going to be a competitive market.
Don't see Toyota and Honda, having a high day supply this year, so that will equate to higher margins.
But there may be some other brands within that important segment that have a hard day supply.
But again as you can see to your point with the falling margin like that.
Still generating over 8% operating margin and we still have a very.
Efficient and healthy SG&A percent.
And with with Toyota Honda their inventory has been an issue for a long time now industry wide I'm area, how much communication or are they giving you and is it is it is it purely chip shortages at chip plus still some COVID-19 absenteeism.
What do you think is driving it mostly.
Sure you don't look at it.
Frustrating to us it's frustrating to our consumers that it's quite honestly frustrating for them.
Fortunate to represent these brands.
They communicate really well with us.
As best they can and it's you know typically in 30 day increments.
So what we'll see.
Then there's conversation and talk about what potentially we could see in the first half of the year.
Sometimes.
Sometimes they don't unique things come up with supply chain issues a lot of these parts come from all over the world and depending upon what's going on it could have a negative impact at a moment in time.
And.
I know you said demand is still strong but I'm just curious how worried are you maybe back end of the year due to high interest rates become an issue at that point.
Yes, it's a great question.
I can only answer it this way if the fed raises one or two more times at 25 basis points, we think we'll be just fine.
I think something catastrophic would have to happen in the marketplace.
For us to alter our belief and what's going on.
If there was another war out there or something significantly got worse, if COVID-19 came back to extreme levels like it did when it launched.
Would dramatically change things, but as we sit here today with all the things we've already discussed.
Age of the car park the job market, we believe it's not.
Not that you know retail automotive won't be affected like other industries, we think will fare better than most throughout the year.
Okay, and just one more if you don't mind on acquisitions, you referred to that deal with pull through is significant in size and just generally speaking how do you can't comment on a specific deal, but when you say when you tell us something like we're pursuing large acquisition or significant acquisitions should we still assume minutes significantly smaller than Larry Miller size.
I'll try and navigate this one of the best.
Most opportunities on the size of L. H M. They are extremely rare.
So you have everything between one rooftop and 60 rooftops this probably would've been somewhere in the middle of the two.
It was it was a very healthy sized acquisition, but not the size of Miller.
Yeah.
Okay I appreciate it thank you.
Okay.
This concludes today's discussion we appreciate your participation and look forward to speaking with you. After the first quarter have a great day.
This concludes today's conference. Thank you for your participation you may now disconnect your lines at this time.
Yes.