Q1 2023 Group 1 Automotive Inc. Earnings Call
Good morning, ladies and gentlemen, welcome to group one Automotive's 2023 first quarter financial results Conference call. Please be advised that this call is being recorded.
I'd now like to turn the floor over to Mr. Pete along Shaw group one's senior Vice President of manufacturer Relations financial services and public Affairs. Please go ahead, Mr Dong shop.
Thank you, Jamie and good morning, everyone and welcome to today's call.
The earnings release, we issued this morning and the related slide presentation that include reconciliations related to the adjusted results. We will refer to on this call for comparison purposes have been posted a 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 $19 95.
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 manufacturer production levels due to component shortages conditions of markets and adverse developments in the global economy, and resulting impacts on demand for new and used vehicles and related services.
Those and other risks are described in the company's filings with the Securities and Exchange Commission.
Additionally, 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 such non-GAAP financial measures to the most directly comparable GAAP measures on its website.
Participating with me on the call today, Daryl Cunningham, our president and Chief Financial Chief Executive Officer, and Daniel <unk>, Senior Vice President and Chief Financial Officer allowances and hand, the call over to Darryl.
Good morning, everyone in the first quarter of 2023.
One automotive reported a $156 $1 million and adjusted net income and a record first quarter adjusted diluted earnings per share of $10 93.
This exceptional performance was led by record breaking performances yet again.
Our outstanding after sales teams in both the U S and the UK.
We also set new first quarter records in new vehicle revenues, and new and used vehicle unit sales.
We continued to return capital to our shareholders by repurchasing $35 million in shares during the quarter.
Our strong cash flow and leverage position, which Daniel Mchenry will cover in a minute.
Provided us an opportunity to add high performing Chevrolet store to our Florida footprint.
We will continue to allow for significant capital deployment flexibility and the remainder of 2023.
Now turning to our first quarter results.
Starting with our U S operations as of March 31, we ended the quarter with 27 day supply of new vehicles at a 25 day supply of used vehicles.
Inventory is a bit higher than our domestic brands and import brands remained fairly constrained.
Approximately 27% of our U S business is Toyota and Lexus, which continues to be very tight at a combined five days supply.
Our new vehicle sales increased 2% right in line with the retail industry.
During the quarter, 40% of our new vehicle sales in the U S, where pre sales down from 46% in the prior quarter.
We've seen indications of manufacturer production discipline, which we believe points to slower margin normalization over time.
We do expect new vehicle margins to eventually settle above our pre pandemic levels.
We experienced a sequential quarter improvement in used vehicle margins and vehicle unit sales.
The source used inventory, we continue to focus on the organic sourcing efforts, including acquisitions to accelerate.
Customer trade ins and service drive acquisitions.
Our F&I business has remained strong with same store gross profit per unit at $2259 showing only minimal sequential decline.
<unk> forward, we do expect some continued moderation in F&I gross profit due to pressure on finance penetration rates.
Driven by existing interest rates and a slightly tighter lending requirements for some buyers.
Now turning to after sales.
Our U S performance was outstanding customer pay generated 15, 9% increase same store growth.
<unk> was up 17, 5% warranty up nine in wholesale parts of seven 7%.
We increased our same store technician head count by 10% in the quarter.
And in the first quarter, we said over 300000 service appointments digitally and through our customer development Center.
We also continue to find ways to reach incremental customers through our one to one marketing initiatives and by using artificial intelligence.
In the first quarter, we generated nearly 8000 customer appointments in just three brands using AI.
We believe these customers to be incremental and expect this initiative to grow and generate more incremental service business in the future.
We continue to continue to invest in after sales and believe parts of service will be a strength through the rest of 2023.
Our first quarter U S. Adjusted SG&A as a percentage of gross profit was 63, 1%.
An increase of only three 1% from the prior year and down from 74, 2% and pre pandemic 2019.
We do see some pressure from reduced margins and inflationary costs, we expect that a material portion of these SG&A savings will be permanent as we continue to leverage technology.
And now to accelerate.
Customers continue to vote, yes.
During the first quarter, we sold an all time record of 12500 vehicles through accelerated 19, 2% of our U S. Retail sales also an all time record.
Just as important is that over 78% of our customers engaged with accelerated in some way in their transaction.
The percentage that continues to increase.
To further validate our confidence in accelerate J D. Power recently completed an assessment of the digital retailing customer offerings.
Group one's accelerate to be the most complete end to end digital shopping and buying experience among nearly 70, OEM dealer and third party solutions.
Now turning to the U K.
Vehicle demand remained steady and new vehicle availability is still constrained.
We are seeing signs of production improvement by certain manufacturers as demonstrated by the 19% increase in new vehicle units sold.
As of March 31, our new vehicle order Bank was approximately 17600 units, which represents more than a six month backlog based on our current sales pace.
As a reminder, our UK business mix is predominantly luxury and those customers are more resilient during times of economic uncertainty.
Also at this point, we've not seen a material impact on our Mercedes Benz gross margins due to the agency model.
And our after sales growth in the U K has been outstanding with same store gross profit.
Growth on a local currency basis of 21% for the first quarter in 2023.
I will now turn the call over to our CFO , Daniel Mchenry to provide a balance sheet and liquidity overview Daniel.
Thank you Daryl and good morning, everyone.
As of March 31st we had $21 million of cash on hand, and another $123 million invested in our Floorplan offset again.
Bringing total cash liquidity to $144 million.
We also had $528 million available to borrow on our acquisition line, bringing total immediate available liquidity to $672 million.
In quarter, one 2023, we generated 191 million of adjusted operating cash flow.
On $151 million of free cash flow.
After backing out $40 million of Capex.
This capital was deployed through a combination of acquisitions share repurchases and dividend.
During the current quarter, we spent $35 million repurchasing approximately 181000 shares at an average price of $191 85.
The result of this repurchase activity is just over a one 3% reduction in our share count over the current quarter.
Our share count as of today, it's down to approximately $14 1 million.
Our rent adjusted leverage ratio as defined by our U S. Syndicated credit facility was one nine times at the end of March our strong balance sheet will continue to allow for meaningful and balanced capital deployment.
Our quarterly Floorplan interest of $12 6 million was an increase of $7 4 million from the prior year entirely due to higher vehicle inventory holdings.
We effectively manage our floorplan interest expense by holding excess cash on our floor plan offset of guidance.
Reducing the balance exposed to interest.
As well as to our portfolio of interest rate swaps, which saves us $4 5 million of interest expense versus the comparable prior year quarter.
Non floorplan interest expense of $19 7 million increased $2 2 million from the prior year. However, our mortgage swap portfolio states of $5 $4 million breakfast to comparable period.
As of March 31, approximately 70% of our at $3 1 billion in Floorplan and other debt was fixed.
Therefore, the annual EPS impact is only about 55.
For every 100 basis point increase in the secured overnight funding rate, our sulfur, which is the benchmark referenced in our floor plan and mortgage debt instruments.
For further details 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 Daryl. Thank.
Thank you Daniel.
Related to our corporate development efforts, we expect to find additional external growth opportunities in 2023.
Growing our U S and UK businesses remains a 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 include serious consideration of share repurchases. In addition to pursuing external growth. This.
This concludes our prepared remarks, I will now turn the call over to the operator to begin the question and answer session Jamie.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a telephone keypad.
You are using a speaker phone, we do ask that you. Please pick up your handset prior to pressing the keys.
So it's all your questions you May press star two.
We also 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.
On parts and service I mean, it was a real positive in the quarter and has continued strength for you.
Outpacing a lot of your you know what.
Seems to be going on in the market I'm just curious how much.
Much greater an opportunity you think you have there structurally as opposed to what's just going on with market dynamics here in the short run what is the gating factor and how do you get after after it and fixing whatever those gating factors may be.
John This is Daryl.
We feel like Theres still opportunity for growth in our parts and service business.
When you consider our retention rates on our customers. We retained two thirds of our customers. We feel like we can do a better job retaining more of them.
When you consider the amount of work that our customers still elect to defer when we feel like that's an opportunity and we still have hundreds of open days in our in our shops that we can put technicians in and we've had some success.
Filling shops with technicians and in many cases, we have more technicians than we do base and some some dealerships productivity within the mill shop. So we feel like with a 13 year old car Park.
There is still plenty of opportunity out there for us.
So darrell would it be fair to say that the gating the real gating factor right now is getting your hands or hiring enough.
Next to fill those hybrids of open beta and what sort of the process for doing that.
Hiring, Texas, certainly a key piece of it driving productivity through our stores is certainly.
Another piece of it.
Reaching reaching customers in new ways I gave an example of that in my comments.
As a piece of it as well so we try to be creative with our compensation plans to attract people and we try to be creative with our scheduling to attract people and so far I believe we've seen some success with that.
We will continue to do that.
Our next question comes from Daniel <unk> from Stephens incorporated. Please go ahead with your question.
Yes. Good morning, guys. Thanks, taking my questions and congrats on the quarter.
I wanted to ask on thoughts on the used side of the U S market, we've seen demand headwinds for a while but the unit growth only down about 2% was better than the industry and I wanted to ask about the supply I mean, as you think about 2023 and 'twenty 'twenty four we should start to see supply headwind just from the dearth of young used cars out there. So I'm curious how are you.
About growing used units in this backdrop and how you'd be able to grow at a.
Given what looks like a lack of supply supply coming.
Well I think Daniel.
Key for us as a franchise dealer is almost 70% of our used car inventory comes from trade ins and so.
What we are really focused on right now is how to do a better job with those customers trying to appraise those cars and.
Trade for those cars when a customer comes in.
We Fortunately don't have to rely on the open markets too much for inventory.
We have a much bigger source of used car inventory and those trades. So that's where a lot of our focus is right now.
Got it and then I wanted to follow up on John's parts and service question you know in the slides I think you guys add some data around service retention.
I guess, where do you think your retention stacks up versus the industry at about 68% and then what can you do to drive that higher and has that ever been something you've focused on driving higher or is it a new initiative that could maybe you contribute to additional parts and service growth relative to history.
Yeah.
We have OEM.
We have retention measures that every OEM that we're responsible for hitting and they all measure them a little bit differently to be honest with you Daniel so.
I don't know that we'll ever find an apples and apples comparison across all of the peer group on retention.
But within each OEM. We generally are ahead of the averages on a retention but.
We also feel like.
We should be two or more sophisticated we have better technology, we feel like with the professionalism of the training and the caliber of the people in the facilities the investment in after sales and equipment that we have that we should certainly be better our aggressive approach to wide open schedules, which is unusual our aggressive approach to full SATA.
<unk>, which is unusual.
We feel like we should be ahead of the industry on retention and we feel like there's still some more opportunity there for us Daniel Daniel here just.
To add what Darryl said.
A lot of this data.
It comes from.
Our source.
This is how the compares other dealer groups on ourselves.
We are well above.
The national average.
68%.
That's shown in the data in addition to that I think if you go back about five years that number would've been closer to 50% rather than 68%. So it's something I think is a company that we really driven.
Percentage up over the over the years.
I think there is just one more comment there Daniel.
As.
The transition to alternative powertrains happens I think that helps us with retention too I think.
That helps franchise dealers that helps those who are able to invest in and working on those kind of powertrains.
Our next question comes from Adam Jonas from Morgan Stanley . Please go ahead with your question.
Hey, Thanks, Hey, Darryl Hey, Daniel so.
Would love to see if youre seeing any sign of tighter lending either in new or used.
In the month of April after the close of the quarter and then I have a follow up thanks.
Adam This is darrel I'm going to let Pete get into that he has got some information you can share with you.
So it's interesting there has certainly been.
A lot of.
Lot of press and discussion around the lenders and.
Looking at the.
The first quarter and what's been happening there has been a slight shift amongst the lenders, where we've actually got some lenders who have our approval rates and our volumes are up and Theres also been some tightening with some other lenders, but I think when you look at our overall strategy.
Utilizing the big banks for all of our retail lending, it's paying off for us. So I would tell you as of right now we are seeing.
No headwinds with lender availability and retail credit.
Thanks, Pete just a follow up could you give and I. Appreciate the information you were given on.
The order book order preorder trends, that's really useful.
Wondering if you had similar information on lease returns.
Which I imagine you're starting to anniversary on the worst part of Covid, but just would love to see it.
Some numbers behind that in terms of lease volume returns in your stores.
Try and either sequentially or year on year and kind of your outlook on that.
I don't have a number to give you and maybe we can follow up facilitator, but.
Based on our just some bits of data I've seen is I agree with you it's at a low point.
Given the cycle on Covid.
Our next question comes from David Whiston from Morningstar. Please go ahead with your question.
Thanks, Good morning, just.
Curious, what's driving that nearly 10% decline in F&I P. R U.
That primary less attachment because your ETP that on new did go up four 5%.
I was just curious why F&I and then grow with it sure. David This is Pete I'll refer you to page 17 of our investor deck, but if you take a look.
Vehicle service contracts maintenance or other products penetrations are all <unk>.
Relatively flat or.
Are up but the real headwind has been in finance penetration on used vehicles and we've been talking about that throughout the first quarter with investor calls, but that is our biggest headwind right now is financed pan on us.
Okay and.
Can you talk a little bit about how accelerate customers are engaging deeper than before.
Well, we see every month, David they engage.
More on a deeper level.
The number of.
Customers that engage multiple times is up it's in the high 60% range now.
Almost 80% of our customers touch accelerate in some way.
And then.
19% of our customers.
Accelerated purchase of vehicles. So we're just seeing more and more engagement, we're doing more integration to accelerate.
Thats saving time for customers and our team.
It's driving some productivity improvements so.
We're trying to listen hard to our customers and just respond to what they asked for and how they how they want to shop.
Yeah.
Our next question comes from Rajat Gupta from Jpmorgan. Please go ahead with your question.
Great. Good morning, Thanks for taking the question.
I just have a first one on just the UK.
The Mercedes stores.
Which have moved to an agency model.
Could you give us a sense so.
What the Gpus were for those stores.
Maybe retail and F&I separately and have you also started to rightsize those stores.
For these new GPU economics.
And maybe like just broader comment on.
How the profitability of those stores are trending.
Versus pre agency or worsening premium pre pandemic I don't have a problem.
Okay, Hi, Rajat. This is Daryl I'll answer.
Some of that Daniel has anything to add he'll he'll jump in.
On agency in the UK, we have five Mercedes stores in the U K at a 61 dealerships.
And actually two of them are very small so it's.
Not a huge part of our business there admittedly.
What we have seen we saw that the gross profit change that we saw in our Mercedes business in the UK was not any different than what we saw it in among the rest of our brands we had.
Some brands that sell a little more and we have some brands that fell a little less so we didn't we didn't see.
A material difference between our best stores and the rest of them.
In terms of profitability of the dealerships, we haven't seen really any difference.
And we've only been at it for three months out.
So.
Over time, we may see something different.
I can tell you my impression from our OEM.
Contacts in the UK and the discussions we've had with them.
They're listening to their retailers on this and they are paying a lot of attention to what's happening.
At retail on it and they're willing to make adjustments Daniel anything you would add yes, I think Ed.
<unk> strong.
A relatively small drop in Gpus, I think you need to take into account the offset there.
Is it the big expense, primarily been Iran, Floorplan and.
Demo duration cars that youre expected to run in the U K I think Donald variety says the profit of the dealership.
It's not really being impacted because those costs are effectively gone.
So all in all I think we're still in the same position as we were before feeling pretty neutral about it.
And that is versus.
Mike.
Are you doing.
You got to bring that versus like 2022 or versus 2019.
The price of 22, the same quarter of 2002.
Got it okay. That's helpful.
Just a follow up on capital allocation.
Broadly, how you're thinking about deploying cash in this current macro backdrop.
All right.
Your peers seem to be taking different approaches.
Some are being more aggressive even levering up to buy back shares now.
Some are looking to be a little more conservative waiting for more certainty around the macro.
Before doing buybacks or M&A just curious.
How are you.
How are you strategizing, Bob and then just maybe specifically on M&A.
Can you give us a sense of what the pipeline is looking like and you know what.
The multiples are looking like for all of our assets out there.
I would say that.
There's opportunities out there for acquisitions.
Looking at.
Quite a few are coming in.
I would say there is a certain portion of sellers.
<unk>.
To unrealistic expectations.
I always like to tell people will never win a bidding war, but.
We try to stick to our discipline with what we will pay for a for a group of stores.
And we've continued that.
Want to grow the company that is true and.
That's always our first choice however, as we've shown over the last two years really year and a half we will buy back shares when we feel like there are.
A better value than going to the external markets to buy to buy stores. So that's still.
<unk> option for US were dropped and that's something we'll continue to keep on the table that has not changed for us.
And our next question comes from Seaport Research Partners. Please state your name followed by your question and follow up.
Hi, good morning folks Glenn Chin.
Good morning, Glenn.
Good morning, So just some quick follow ups first on the drivers the service and parts growth.
It was impressive by the way can you just share how much was related to the increase in the volume of repair orders and how much is attributable to the size of them in.
In both markets Glenn.
A third of the lift was related to customer count increases and two thirds of the lift was pricing or.
Per.
Customer.
Both Martin and <unk>.
Okay, and then just sorry, Glenn just thought.
If you look in the deck youll.
Youll see that as vehicles are getting older or average.
<unk> Prior report for power order is increasing and I think that goes back to the real emphasis that we're putting on customer retention.
That's exhibited in the deck that we have in there because I think ultimately that's really helping us grow our parts and service business.
Okay, and just out of curiosity.
Repair order count.
Is that how does that compare to pre pandemic just trying to get a feel for it are we back to normal already or ahead of normal.
I would have to look.
I don't want it okay.
Okay follow up.
Alright.
Okay, great Great and then sorry, I hopped on the call late but did you mentioned what warranty did same store basis year over year warranty was up nine correct.
Collision was up 17.
And our next question comes from Michael Ward from Benchmark. Please go ahead with your question.
It's very much just a quick follow up on the F&I side on the used vehicle you mentioned that the financing partly explained the decline year over year and F&I per unit is that because more people are buying out vehicles.
No. Mike This is Pete I think that what's happening is we're not getting the attachment of we're losing that business the cash buyers or possibly credit unions.
Okay, well, just talking about sort of cash buyers or credit unions, okay to get cheaper rates its all based on rate.
Okay and then.
Do you have any indication of what percentage of your current.
Incoming orders or the U K you gave us the six months it sounds like they're sold out what about the U S are you still seeing these high 40% to 50% type take rates on vehicles expected to come in.
In the quarter, we added 40% of them were pre sold.
We're trying to use that.
Sure.
That's been pre Covid that was below 10%.
Probably 10, 15, maybe something like that.
And ladies and gentlemen, with that we'll be concluding today's question and answer session as well as today's conference call and presentation. We do thank you for joining you may now disconnect your lines.