Q4 2022 Group 1 Automotive Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to group, one Automotive's 2022 fourth quarter and full year financial results Conference call.
Please be advised today's conference call is being recorded.
At this time I'd like to turn the conference call over to Mr. Pete The long shot group, one senior Vice President of manufacturer Relations financial services and public Affairs.
Please go ahead, Mr. Jalan shop.
Thank you, Jamie and good morning, everyone and welcome to today's call. The earnings release, we issued this morning and a related slide presentation that include reconciliations related to the adjusted results will be.
Let me refer to on the call. This morning for comparison purposes have been posted to group one's website.
Before we begin I'd like to make some brief remarks about forward looking statements and the use of non-GAAP financial measures.
Except for historical information mentioned during the conference call.
Statements made by management of group one automotive are forward looking statements that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.
Those risks include but are not limited to risks associated with pricing.
Volume inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages.
This is a markets and adverse developments in the global economy, and resulting impacts on demand for new and used vehicle and related services.
Those and other risks are described in the company's filings with the Securities and Exchange Commission and.
In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call.
As required by applicable SEC rules the company provides reconciliations of any non.
GAAP financial measures to the most direct comparable GAAP measures on its website.
Participating with me on the call today, Daryl Cunningham, our President and Chief Executive Officer, and Daniel Mchenry, Senior Vice President and Chief Financial Officer, I'd now like to hand, the call over to Darryl.
Thank you Pete good morning, everyone.
2022 was a record year for group one automotive driven.
Driven by outstanding after sales growth strong margins.
All time profitability record profitability in our UK operation.
And disciplined expense control.
Adjusted net income grew 15% to a record $729 million adjusted EPS grew 32% to an all time high of $45 71.
2022 was also another strong year of external growth for Groupon.
We acquired nearly $1 billion of revenue in 2022 and are now acquired over $3 billion in revenues over the past 15 months.
We also returned meaningful capital to our shareholders by repurchasing $521 million in shares during the calendar year.
Over the past 15 months, we've now repurchased over 22% of the company's outstanding shares.
Our strong cash flow and leverage position, which Daniel will cover in a moment.
We will continue to allow for significant capital allocation flexibility in 2023.
Turning to our fourth quarter results.
I am pleased to report that for the quarter performed generated adjusted net income from continuing operations of $158 million or $10 86 per diluted share in EPS.
An increase of 15% over the fourth quarter last year.
Our adjusted results exclude non core items totaling $1 $7 million of after tax losses, which primarily resulted from the pending disposition of two U S franchise points.
Starting with our U S operations as of December 31, we had 8000 new vehicles in inventory, representing a 21 day supply up six days from September .
This inventory increase was primarily in our domestic brands as.
Import brands remained very constrained.
30% of our U S business is Toyota and Lexus, which continues to be very tight at a combined four days supply.
We expect a gradual decline decline in new vehicle margins over the course of 2023.
As inventory continues to recover.
We do however, expect normalized new vehicle margins to eventually settle above our pre pandemic levels.
One of the continued challenges we faced in the quarter was a decline in industry used vehicle pricing.
Which resulted in a used vehicle sequential margin decline of $235 to roughly <unk> hundred $50.
Partially offsetting this was an 8% increase in same store used vehicle unit sales.
Our organic sourcing efforts, including the acquisition of over 10300 vehicles from individuals through accelerate continue to minimize our reliance on public auctions.
We maintained our discipline with a 28 days supply of used inventory, which is within our target of 30 days.
And the F&I business has remained strong at 2300 $69 per unit.
<unk> only a minimum minimal sequential decline.
Looking forward, we do expect some modest headwinds due to pressure on finance penetration rates.
Turning to after sales our U S performance was outstanding once again generating double digit same store revenue growth following high teen growth comps a year ago.
Our customer pay business generate 13% same store growth collision increased 14% warranty, 8% in wholesale parts, 3%.
Through our technician recruiting and retention efforts, we increased our same store technician head count by 16% in 2022.
We foresee after sales continuing to be a strength over the course of 2023 for Groupon.
We continued to maintain cost discipline. Despite the decline in new and used vehicle margins, our fourth quarter U S. Adjusted SG&A as a percentage of gross profit was 61%.
An increase of only one percentage point from the prior year and down from 71% and pre pandemic 2019.
A material portion of these cost savings will be permanent as we continue to leverage technology to drive customer and employee efficiencies.
In the fourth quarter, we sold an all time record 10100 vehicles through accelerate.
15% of our total U S. Retail sales also an all time record.
Over 75% of our customers use accelerating their transaction in some way in the fourth quarter.
A percentage that continues to increase.
We're also looking to our full integration of accelerated with our Dms CRM and credit software. We continue to test it in several dealerships and expect a full rollout this year.
Our early results are very positive and we expect this will provide faster and more transparent transactions for our customers.
Now turning to the U K.
Vehicle demand remains steady and new vehicle availability is still constrained.
Our new vehicle order bank at at year end was approximately 16000 units over six months worth of sales.
Which remained fairly consistent with the prior quarter.
As a reminder, our UK business mix is predominantly luxury.
And those consumers are more resilient during times of economic uncertainty.
We continue to believe that pent up demand built over the past several years due to both Brexit and a very strict pandemic lockdowns will help drive strong UK vehicle demand throughout 2023.
Our after sales growth in the U K has been just as strong as the U S. With same store gross profit growth on a local currency base of 13% for both the fourth quarter and the full year of 2022.
And finally, we expect the accelerate platform in the UK to be fully integrated in the second quarter of this year.
Now to provide a balance sheet and liquidity overview I will turn the call over to our CFO Daniel Macquarrie.
Thank you Daryl and good morning, everyone.
As of December 31st we had 48 million of cash on hand, and another $154 million invested in our floor plan offset account, bringing total cash liquidity to $202 million.
We also had $437 million available to borrow on our acquisition line, bringing total immediate immediate available liquidity to $639 million.
In 2022, we generated $916 million of adjusted operating cash flow and $803 million of free cash flow after backing out of $113 million of Capex.
This capital was deployed through a combination of acquisitions share repurchases and dividends.
And 2022, we spend $521 million repurchasing approximately 3 million shares at an average price of $172 54.
And in the months, we spent an additional $13 7 million repurchasing 76300 shares.
The result of this repurchase activity, it's just over 22% reduction in our share count over the last 15 months.
Our share count as of today is down to approximately $14 2 million.
Our rent adjusted leverage ratio as defined by our U S. Syndicated credit facility was one nine times at the end of December .
Our strong balance sheet will continue to allow for meaningful and balanced capital deployment.
Our quarterly Floorplan interest of $9 6 million was an increase of $2 4 million from the prior year Gen Charlie to higher vehicle inventory holdings.
Non floor plan interest expense of $22 million increased $6 million from prior year, both due to the debt raised in conjunction with the prime acquisition as well as higher interest rates.
As a reminder, the majority of our debt that has been fixed through interest rate swaps.
As of December 31, approximately 70% of our $3 1 billion and floor plan and other debt with space.
Therefore, an annual EPS impact is only about 50 for every 100 basis points increase in the secured overnight funding rate, which is the benchmark rate referenced in our floor kind of mortgage debt instruments.
For additional detail regarding our financial condition. Please refer to the schedules of additional information attached to the news release as well as the Investor presentation posted on our website I will now turn the call back over to Dow.
Thank you Daniel.
Related to our corporate development efforts, we expect to find additional growth opportunities in 2023.
Growing our U S and UK businesses remains our top capital allocation priority.
However.
Our balance sheet cash flow generation and leverage position will continue to support a flexible capital allocation approach.
Which will likely also include serious consideration of share purchases.
This concludes our prepared remarks, I will now turn the call over to the operator to begin the question and answer session.
Operator.
And ladies and gentlemen, we will now begin the question and answer session.
I'll ask a question you May press Star and then one on your telephone keypad. If you are using a speaker phone. Please pick up your handset before pressing the keys.
So with your all your questions you May Press Star then two.
We do ask that you please limit yourselves to one question and one follow up.
At this time, we will pause momentarily to assemble the roster.
And our first question today comes from.
John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys. Thanks.
Thanks for all the info.
One one or one quick question and one follow up just on new Gpus to Al you mentioned, you expect them to its normal normalize over time.
But but still be higher than they were pre pandemic.
Curious what timeframe you think that happens in I know that's a tough question, but if you could give us some idea of your thought process. There and then also just the corollary.
Savings on SG&A to just called out.
As growth has come come down, meaning what part of that goes out to the sales comps. So I mean, either sort of just a natural sort of hedged your savings those gpus come down.
John This is Daryl.
You know I can't.
Tell you with any specificity when we think it will.
Normalize other than what we've seen is a real steady glide path really since middle of last year.
The gross profits.
Decline and we expect we will see something similar through this year.
And.
In some brands are grosses are holding up quite quite well because there is still very tight inventories are still very tight.
And a couple of brands, we saw our grosses increased during the quarter.
Then a couple of brands that we got quite a bit of inventory in our domestics, we saw the most erosion but.
I can't give you a specific time other than as the inventories in total come back we expect it to be a gradual gradual change and I'll ask Daniel to address the SG&A question on SG&A are unfilled.
Expense in particular, John which I think you were referring to.
I think theres, a couple of things out there thats really going to help us going forward and clearly the reduction in profitability drive and SG&A as a percent of growth, but I think our use of the accelerated platform. How we've integrated that into our dealerships and I think importantly, the integration that we're going through and integrating accelerator Dms.
CRM and credit software, that's going to help us.
Further increased the utilization of our sales executives going forward and I think some of that will help reduce that SG&A impact going forward.
Okay, and then just one kind of follow up on parts and service you said, 16% growth in tech in 2022 am I correct to read the gating factor on same store sales growth in parts and service is is those texts and what was sort of the cadence of the hiring of those tax through the course of the year because I mean, if you kind of assume they happened during.
In the course of the year you might on a same store basis to have 8% more.
In 'twenty three 'twenty two rate, assuming you have or you know they.
They were hired smoothly through the year I'm, just kind of understand that that cadence. So we can think about where even capacity sits right now.
We picked up.
More in the second half of the year than we did in the first half John .
And I expect as they get assimilated.
Our belief is.
Adding capacity in after sales drives our ability to.
To service more customers.
They want not want to do business with us and.
So I expect we.
You will see the ability with these technicians we've added.
In 2023, and we're continuing to press to hire more tax beyond the number that you see there as well.
Okay, great. Thank you very much.
And our next question comes from Michael Ward from Benchmark. Please go ahead with your question.
Thanks, Good morning, everyone.
I Wonder if you can walk me through that slide 11 that you have in Europe .
And.
Just on what Youre doing as far as the floor plan swap layers and the impact of higher interest rates, because I think thats unique relative to the rest of the group.
Ed.
Hi, Mark its Daniel let me just pull up slide 11.
Yes, Youre correct, we have got layers of interest rate swaps.
All the way out.
Okay.
All the way up to 31.
We.
What that's enabled us to do is to fill.
<unk>, a big proportion of our <unk>.
Interest.
You can see that you can see the layers in the deck.
The rates that we expect and then add in the radar to 31 is six 7%.
So I think thats going to help with a differentiator for us versus our competitors.
So as interest rates go up on the floor plan.
The number that we see the nine six whatever it was in the quarter, we will see that increase at the same rate that we see others to the swap cost offset.
Methods that not as crowded correct, Mike 70% of our debt is at a fixed rate. So we will not see the same increase as our competitors.
Okay. So that's another element okay. Thank you.
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Our next question comes from David Whiston from Morningstar. Please go ahead with your question.
Hi, Thanks, good morning.
You mentioned, the really tight Toyota Lexus supply.
And I'm just curious if you think that the worst of their production stoppages from either COVID-19 absenteeism or more like more easier to predict maybe the chip shortage, but is there still.
Are you more of a much more comment about 2023 product allocation from them or is there still a little or no visibility on the factory on that.
We're more optimistic David.
Are you out of there.
There.
Telling us they are more optimism in their plans.
I think the thing that Toyota is really fighting is they have such a.
Pent up demand for their brand.
With customers and if you look at our pre sales typically pre sales.
Pipeline orders are typically kind of luxury brand kind of things, except for our Toyota stores and we have a.
Significant numbers of pre sales even in our Toyota store so.
I expect they will have a higher higher.
Reduction this year, but I also expect much of that will get.
Get soaked up by some of these pre sales that are still out there.
Okay.
And sorry, I'm on new vehicle affordability, there is a lot of attention given the core used vehicle variability, but all the automakers Ceos.
Don't seem too concerned about the high price of new vehicles, what about you guys at the consumer level or are you at all concerned.
Yes.
Well I think it's.
When you when you bundle everything interest rates plus the average selling price.
I think it's certainly something to think about the cost of vehicle ownership is probably down a bit given the gas prices are down.
Versus a year ago.
Quite a bit in some parts of the country.
And we're seeing a little more support in terms of incentives from the OEM. So I think maybe publicly some of them are seeing are saying, they're not worried about it but internally.
Internally, we are seeing more support I saw an announcement this morning from one of the Oems.
Interest rates support as a matter of fact some of their vehicles.
And I would expect you would continue to see that especially in those brands that have built.
Inventory.
Our next question comes from Rajat Gupta from Jpmorgan. Please go ahead with your question.
Great. Thanks for taking the question.
Can you give us a bit of a view into January .
That started particularly in both new and used Gpus.
And anything you're seeing in terms of impact on demand.
For your brands from a fairly sizable price cuts on desktop.
And I have a follow up thanks.
January tougher tough for us to comment on January and Roger.
But what was the second half of your question you cut out on our speaker.
Alright, any any impact on demand for our brand from the sizable price cuts on the desktop.
Not that we can tell.
Got it.
Maybe on the used car business.
The question is really strong GPS.
Still about pre pandemic levels in inventory under 30 days.
Can you give us a sense of how you're managing the current pricing environment, maybe any comment.
On your approach on Gpus versus volumes.
Do you see Gpus.
Falling below pre pandemic levels temporarily.
During this pricing transition period at all.
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And the <unk>.
Tradeoff on volume in Gpus.
We want to make air on the side of volume.
Not that its volume at all costs Thats never something we want to do we price based on.
Market value of those vehicles and we repriced constantly.
Daily more often the daily in many cases and.
We want to be at the market or better.
All the time and then we want the volume because of the F&I attachment, which is a real strength for US also that puts more units in operation out there for our for our stores and another opportunity for us to do parts and service business with those customers. So philosophically we.
Like that.
Volume versus GPU tradeoff for that reason.
Moving forward if you look at on a macro basis over the next couple of years.
What.
Firms like Cox are saying, which I tend to agree with them is.
I believe we're going to see somewhat of a shortage on used cars.
Because of the pandemic related Saar declines that we saw for three years and that will take some used cars out of the out of the market.
For the coming three or four couple of years anyway, and I believe that could could support PR use over the next couple of years. So that's <unk>.
Something we we think is probably going to happen is.
Where we see it.
And our next question comes from Daniel <unk> from Stephens, Inc. Please go ahead with your question.
Hi, guys. This is Joe <unk> on for Daniel Thanks for taking my question.
I'm just looking at the UK vehicle backlog it sounds like that took a slight step down this quarter. Just wondering do you think demand remains relatively consistent there have you seen any noticeable changes in the consumer backdrop from last quarter.
Hi, Joe.
No we haven't seen any material change at all.
And we've seen strength.
And the and that.
And that backlog and just minor minor changes I wouldn't take the changes quarter over quarter as anything anything meaningful or anything indicative of a different trend than what we've seen.
Got it thank you.
As a follow up looking at the slides it looks like customer attention has increased from about 70% to 88% using accelerated over the course of this year could you maybe provide some color on how mature you think that platform is how much optimization you have left and then if you have any goals for next year.
We believe we are.
Were in the first couple of innings of.
The accelerated baseball game.
And we feel like it's a.
Customer platform that will help us drive retention.
And drive value and transparency for customers in a number of areas of our business.
Not just in buying new cars or used cars put in buying.
But in them selling their used cars to us transacting with us digitally payments. We believe there is there is so much more we can do.
With our accelerate to make that customer experience, even better and we believe that retention number youre looking at is just indicative of how how much.
Customers value that that experience with accelerated and we continue to see the usage go up every month almost just.
Every single month, it's going up 75% of our customers use accelerate now in their transaction in some way so.
We believe there is still a long way to run with accelerating.
But we're really happy with where we are.
And our next question comes from Adam Jonas from Morgan Stanley . Please go ahead with your question.
Oh, Hey, everybody just a couple of questions first.
Tesla those price cuts I don't remember anyone cut in price like 20%, that's that's kind of a.
Maybe your degree pretty unusual situation and I don't want a while it doesn't necessarily compete directly with.
With all the nameplates that you guys are selling some of the stores you might have a little more head to head with that type of products I'm curious if this wasn't already covered whether you.
Sorry, any real time impact after those cuts.
Follow up Adam this is Daryl.
We looked at our use Tesla as an inventory immediately after their announcements and yeah. We.
Price. So we didn't have very many honestly.
And but we did reprice and.
So I would say there was an impact from that perspective, but the numbers are like less than 100 for us across the country and then.
In the segments, where we do sell evs or re sell luxury cars and there is some cross shop between Tesla and luxury ice vehicles we.
We haven't seen a material impact yet.
Matt.
Per se, but.
That was it was a bold move they made thats for sure.
We're watching it every day with what Theyre doing.
Okay. I appreciate that just a couple of little housekeeping ones for me.
Any comments on interest expense either on the floor plan side or other.
<unk> expense, just kind of seeing where we are today versus pre COVID-19 and given the rate environment.
Not asking you to guide, specifically, but something directional.
In particular, particularly on floor plan as you kind of get the unit three built where the rates kind of kind of creeping up.
Sure Adam it's Daniel.
Moment, we have then 70% of our EM debt swapped out.
Thanks.
Fixed mortgages as well as floor plan.
And the <unk>.
Florida.
Inventory continues to rebuild and we will see some increase in interest expense.
But at the current rate we see that.
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<unk> of EPS per 100 bps increase in interest.
Our next question comes from Glenn Chin from Seaport Research Partners. Please go ahead with your question.
Okay.
Great. Thanks, good morning, gentlemen.
So just some more follow up on pricing I understood that.
Fourth quarter was up for the task for price cuts came in but.
Some third party providers suggests that Asps continue to increase through the quarter can you confirm that that they continue to reach new highs through December .
And then is that a function of price mix or both.
When you're talking about I assume you're talking about new cars.
Correct.
We didn't necessarily see an increase through the quarter.
On.
On new car pricing.
Okay.
Yeah.
And then just on parts and service margins ticked down slightly is that a function of mix.
Yes.
Ali.
I'd have to look at it more to see if parts drove some of that which probably did but we can take a look at that and get back to you.
And our next question comes from John Murphy from Bank of America.
I'm, sorry, I just had one follow up one on leverage Daniel you mentioned, one nine times as your current leverage I'm. Just curious if you saw a good acquisition either in the U K and the U S where you could.
Potentially.
Take that up to you and what kind of capacity you think you have to do potentially a small mid or even large acquisition.
For us and I think what we've said is that we would be prepared to go to three and a half time.
Average our credit facility allows us to go to 575, it was a really big acquisition.
Or something that we were really interested in doing we would be prepared to go to four times, but that would be on the proviso that we would reduce that back down again to three are under three times pretty quickly.
But youre comfortable at three.
So you can jump to three five to four on an acquisition you would want to grind that back to three but youre very comfortable III, meaning there's a turn of leverage here that's up for grabs spending on on upfront. That's the best way to go absolutely drawing we would be happy to go to go to three clearly pre pandemic, we were above those levels.
We were okay at those levels as well.
Our next question comes from Rajat Gupta from Jpmorgan. Please go ahead with your question.
Great. Thanks for taking the follow up question.
Are you going to comment at all.
The consumer backdrop.
It does remain weak.
The entire interest rates.
Income delinquency default picking up.
Have you don't see any improvement in new and used car you that.
Are you able to comment on what you would see US trough earnings for the company based on today's revenue base and the new share count.
Any puts and takes or guardrails around that if you could provide graduate we'd owned as you know we don't give guidance.
I guess you've modeled it.
Within your model and I think the model is that you have put out there effectively goes back to 2019 levels, but that's as far as we would be prepared to comment on that.
Got it thank you.
And our next question comes from David Whiston from Morningstar. Please go ahead with your question.
Hi, Thanks, I wanted to go back to the 16% increase in Tech head count.
You talked a couple of years ago about how you were if I remember right. It was doing some new initiatives to get more talent like a 14th week.
Could you just briefly summarize what are the main things <unk> been doing to have success in getting people.
And then also all of the things Youre doing what has been the most top one or two things that candidates are.
Our are saying they like the bathroom I think chosen worker group one.
Oh.
We pay at market or above market is a real.
The key thing for us we keep our technicians.
Full of work busy.
Because philosophically.
We keep our schedule is wide open for our customers, we don't make our customers do business with us when it's convenient for us we do it when it's convenient.
For the customers, which usually means they want to do business right now.
Puts pressure on our on our stores because it creates a lot of traffic in the stores.
But.
And then the four day work week, we continue to work that we're in 80 stores today.
Which is about half of our rooftop count in the U S.
That's an important thing we are looking at.
Different comps.
Compensation schemes.
Say schemes compensation plans across our footprint to determine ways too.
Make it an even better place to work.
We're not ready to comment on those specifically, but thats something that.
Is front and center in our thinking right now as well so.
Also we have mentoring programs that we have in.
A number of markets in a number of stores across the country.
And relationships with a number of technical skills and training schools that helped.
Help us feed techs to us.
So we are.
We have a number of different things that we do a number of different things.
Since never end and on continuous you said to 40 workweek isn't about a half of stores do you see that getting drastically higher overtime, yes, we continue to.
Find ways to put that in more and more stores over time.
And we invest one of the things that when we we bought.
$3 billion in revenue in the last year and a half.
Inevitably what we find when we buy a store is theres underinvestment in after sales.
That usually means equipment.
That means training that means staffing.
Facilities and one of the very first things, we do when we integrate a new dealership as we invest in after sales and all of those areas and we think that pays off for us and tech recruitment tech retention as well.
Yes.
And ladies and gentlemen, im showing no further questions, we will be ending today's question and answer session as well as todays presentation.
Now concluded.
Thank you for attending you may now disconnect your lines.
Okay.