Q2 2023 Asbury Automotive Group Inc Earnings Call
Yeah.
Greetings and welcome to the Asbury Automotive group second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host George those Hannah.
Senior Vice President and Chief Legal officer. Thank you Sir you may begin.
Thank you operator, and good morning as noted today's call is being recorded and will be available for replay later this afternoon wells.
Welcome to Asbury automotive group's second quarter 2023 earnings call.
The press release detailing Asbury second quarter results was issued earlier this morning and is posted on our website at investors Dot Asbury auto Dot com.
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 forecasts and current expectations each of which are subject to significant uncertainties for information regarding certain of the risks that may cause actual results to differ materially from these statements. Please see our filings with the SEC from time to time.
Including our Form 10-K for the year ended December 2022, any subsequently filed quarterly reports on Form 10-Q, and our earnings release issued earlier today, we expressly.
We disclaim any responsibility to update forward looking statements.
In addition, certain non-GAAP financial measures 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. So the most directly comparable GAAP measures on our website.
We also we also have posted an updated investor presentation on our website investors dot Asbury auto dot com, highlighting our second quarter results now.
Now it is my pleasure to hand, the call over to our CEO David Hult.
David.
You George and good morning, everyone welcome to our second quarter earnings call.
I am proud of the team's performance in Q2, our strong cost discipline and continue work to maximize our gross profit streams generated strong results this quarter.
We've also been opportunistic utilizing our strong cash flow from operations for share repurchases.
We repurchased over 1 million shares year to date.
With 960000 of those shares repurchased in the second quarter alone for $190 million.
Within this current macro environment, we are well positioned due to our diversified business model, our strong balance sheet, our focus on profitability and our newest star to be the most guest centric automotive retailer.
Now I'll turn to our consolidated results for the second quarter of 2023.
We delivered $3 7 billion in revenue.
We had a gross profit margin of 19, 1%.
Our adjusted SG&A as a percentage of gross profit was 57% Jeff.
<unk> generated an adjusted operating margin of seven 8%.
Adjusted EBITDA was $307 million and.
And adjusted EPS was $8 and 95.
Looking forward, we are optimistic about the future of automotive retail.
We operate in an environment, where the average age of the car is 12 and a half years the highest its ever been.
I'll start levels have been trending higher there is still well below historical levels.
The combination of all the cars complexity of new cars and the transition to Evs.
Enables consistent growth within our parts and service business.
With our strong balance sheet and robust liquidity.
We are looking to deploy capital through opportunistic share buybacks and acquisitions.
We continue to aggressively pursue acquisitions that will be accretive to asbury.
We are disciplined stewards of capital we have strategic when the capital allocation opportunities arise such as our recent share repurchase activity.
Again, I am pleased with our second quarter results, especially with regards to our expense management.
We have been and continue to be thoughtful operators with an eye towards efficiency and strong profitability, while integrating over 50 stores from our acquisitions.
Finally, I would like to extend a thank you to my fellow team members for a terrific first half of 2023.
I'll now hand, the call over to Dan to discuss our operating performance Dan.
Thank you David and good morning, everyone I.
I would also like to say thank you to all our team members for their hard work dedication and commitment to be the most guest centric automotive retailer.
Now moving to same store performance, which includes the dealerships and TCA unless stated otherwise.
Starting with new vehicles.
Our new vehicle inventory ended the quarter at $766 million, which represents a 32 day supply.
There was significant variation among brands and models.
Our new vehicle revenue grew 8% year over year, New average gross profit per vehicle was $4832.
New vehicle gross margin was nine 5% this quarter.
Turning to used vehicles.
Used retail revenue and unit volume were both down 15% comparative prior year quarter.
Used retail gross profit per vehicle was 2085 for the quarter. Our used vehicle inventory ended the quarter at $358 million, which represents a 35 day supply.
Shifting to F&I.
We delivered on F&I, PBR, $2369, which is a slight decrease of $42 compared to the prior year quarter.
In the second quarter, our total front end yield per vehicle was $5959 a decrease of $605.
Moving to parts and service.
Our parts and service business revenue increased 6% in the quarter.
Customer pay revenue also grew 6% and we expanded its gross profit by 6%.
As a reminder, when we acquired La <unk>, we stated that full integration will take five years.
We are now in year, two and we're implementing significant changes from a process and systems perspective.
This significant degree of change does have an effect on our operations.
This quarter, we saw that the average repair order or the battery Evs was over one five times higher than the average internal combustion vehicle dollars per hour.
For reference today.
About 95% of our Roes are internal combustion vehicles.
While the proportion of Bvs, we service is much smaller than internal combustion cars. The number of arrows for Evs has increased sequentially since Q2 of 2022.
As the market prepares for increased penetration of Evs, we feel our parts and service business is in a strong position for growth to accommodate this vehicles for years to come.
Now turning to Cleveland cliffs.
Please note that for Cleveland, we are reporting on an all store basis.
We set another all time record of over 11400 vehicles that are clearly in the second quarter, a 74% increase year over year, and a 6% increase over the previous best which was last quarter.
16% of our second quarter, new and used retail sales were powered by quickly.
We're pleased to see that 48% of <unk> sales in Q2 were new vehicles and 52% for us.
We generated $500 million in clicks lane revenue for the quarter.
And we're now tracking to approximately $2 1 billion in revenue in 2023 slide.
Slightly behind our original estimates for the year.
Moving onto some kpis for the second quarter.
Total front end CVR of $3333 and on F&I, PBR of 2000, and $408, which equate to $5740 of total front end yield.
The average <unk> customer credit score was 717, which is higher than the average credit score at our stores.
91% of those that applied were approved for financing of which 78% of those customers received instant approval, while the remaining customers require some offline assistance seven.
74%, where lender finance sales and 26% for cash sales.
The average distance of a clear clean delivery from our dealerships was 44 miles.
A natural increase from prior quarters as the Western states utilize the convenience that craigslist has to offer.
Once again I would like to thank our teams for providing a high level of service, which defines us and drives us to constantly do the right thing.
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.
Our largest part of the 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, adjusted net income was $188 million and adjusted EPS was $8 95 for the quarter.
Adjusted net income for the second quarter 2023 excludes net of tax.
Gains of $11 6 million related to a $10 $2 million gain.
On the sale of a dealership and $1 $4 million gain from a legal settlement.
Adjusted net income also excludes a $3 $2 million loss due to hail damage.
These items decreased 2023 second quarter diluted EPS by <unk> 40.
Adjusted net income for the second quarter of 2022 excludes losses net of tax of $21 5 million or 97 per diluted share related to the losses on the sale of dealerships and our collision center.
Our effective tax rate for the same quarter of 2023 was 24, 8% in line with the same quarter of 2022.
We estimate our tax rate for the full year 2023 or 24, 9%.
Excluding real estate purchases, we spent $41 million in capital expenditures year to date.
We expect full year 2023, capex to be $185 million as we continue to rollout planned capex related to our 2021 acquisitions.
Of this $185 million about 22 million is related to replacement of leased properties.
Year to date, TCA made $51 million of pre tax income.
We are still on track to deploy TCA and to the rest of our stores by the end of 2023.
Due to the deferral of the income associated with the store Rollouts in our larger states, we had considerably expected TCA to generate $25 million of pre tax income for 2023.
The amortization of higher deferrals from prior years replaced by lower deferral in the current years.
Due to lower unit sales in 2023 has increased TCA income above our previous expectations. We now expect pre tax income for TCA for 2023 to <unk> $75 million.
For the second quarter 2023, we generated 174 million of adjusted operating cash flow driven by our robust business model as David mentioned earlier, we repurchased 960000 shares for $109 million in the quarter.
In June we also prepaid our 2013 and Bofa mortgaged for $24 million.
Our pro forma adjusted net leverage was one seven times at the end of June reflecting the use of cash to repurchase shares.
Our balance sheet remains strong as we ended the quarter with approximately $1 6 billion of liquidity comprised of cash excluding cash atone Corrado.
Floor plan offset accounts and availability on both our youth line and revolving credit facility.
Finally, I would like to join David and Dave I think you for Asbury team members. Thank you for your dedication to superior service and delivering strong results.
This concludes our prepared remarks, we will now turn the call over to the operator and take your questions operator.
Thank you.
We'll now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Daniel <unk> with Stephens. Please proceed with your question.
Hey, good morning, everybody, thanks for taking our questions.
Good morning.
Or actually on the expense side of the P&L.
Growth was really impressive in the quarter actually stepping down sequentially can you talk about just what drove the leverage is it savings from quick Lane is it some of the divestitures you guys have done and then maybe taking a step back what opportunities still remain to optimize SG&A to gross understanding there'll be some deleverage.
<unk> was normalized.
Thank you for the question Danielle.
We've always you know for a lot of years now we've led the aerospace with SG&A.
And we try to operate as efficiently as we can we do think going forward, we have opportunities to lower our expense a little bit more over the next couple of years.
But I think part of it and the court so we maintain pretty healthy margins.
It certainly kept SG&A in check as well, but I would think for the next 12 to 18 months as we were working on our software efficiencies and productivity.
There's opportunities for us to improve.
Quick clean is growing a little bit it was a little bit over 16% of our sales.
It's growing at a consistent pace, but as that picks up there will be tailwind with expense there.
Right now there.
Really no benefits from an expense standpoint with quick line the way we are compensating today.
Yeah.
Got it and then maybe shifting to the new side of the business you know inventory built a couple of days, but you maintain gpus nicely. Despite the domestic exposure can you just talk about GPU trends through the quarter and were there any notable weak spots within the portfolio was profitability.
You know I would tell you to your point on the domestics were back to what I would call a normal day supply of domestic vehicles or pretty close to it.
And we are still well over 4600 a car.
I think all of our peers and ourselves have been talking about it we're not going to go back to 19 levels.
We certainly don't see that anytime in our near future and we thank our folks in the stores are doing a really great job of ordering the right inventory.
And maximizing the gross profit per transaction.
We anticipate as we sit here today that that to continue into the near future.
Perfect and then last one for me.
On the balance sheet, Michael wrapping up you guys deploy more cash from ops towards buyback, but it does still feel like there's an appetite for M&A could you talk about what you're looking for.
What are you looking to expand your brand mix with certain Oems and then I know today TCA is not a use of cash but when we look at the longer term targets, if they're going to need to be any cash infusion to get there or is there going to be self funding from its own cash.
I'll take the TCA question first and then let David take the acquisition question on TCA.
If you think about the customer before TCA the customer paid us with a dealership we kept a percentage of that income and kept it as cash at a dealership and then took the rest of the cash and set it off to a third party provider and so all of that cash that kind of funds TCA is from our customers and so we're just taking the cast and the customers part of it stays at the dealership level, we can use.
For operating purposes share buybacks acquisitions divest of it goes into the investment bucket.
TCA, so theres no cash that we have to come out of pocket to support that it's all it's all customer driven.
From the acquisition standpoint, we divested one store in the quarter and it was mainly due to logistics there was a market where we only had one store we couldnt find acquisitions in that market that we're going to strengthen that market. So we decided to sell that one store and we also avoided a large capex project in <unk>.
That so we thought it was the best use of cash we're very focused on portfolio management.
The brands that we have and where the stores sit within which states. We are aggressively in conversations with acquisitions now we've seen a lot.
Obviously, we haven't announced anything because we haven't been able to land something that meets our criteria and the states and brands that we want.
We're hopeful with our current conversations that something will come together, but as you know these things take time and you just have to play them out.
Perfect well I appreciate all the color this morning and best of luck.
Thank you.
Our next question comes from the line of John Murphy with Bank of America. Please proceed with your question.
Oh, good morning, guys I just wanted to ask about parts and service. It's a very interesting comments about you.
Your experience with EV, so far and what we've heard just from a on the GM call to $792 million charge. They took four.
Bolt recall, so it seems like theres going to be opportunity for warranty work, our payer work on evs it might be far hires youre seeing five times on the euros versus the average is equal I. Just what are you expecting there is there a.
<unk> capital investment that needs to go on in the service base to get ready for that and then also maybe Conversely, just no more traditional santee I mean, how much pent up sorry.
You must work do you think there still is as good people.
Finally come back and actually we are doing the work they need to do out there.
Hi, John Good morning. This is Dan just before I answer your question just a correction.
The EV.
<unk> customer <unk> was one five.
Got it.
Sorry about that no maintenance direction no no no.
Our first question.
And as far as the <unk> and any infrastructure investment that is that is require yes.
It does require and I'll start first with a technician training tremendous amount of training that goes into that.
We're technicians go to their local Oems outside of the market or in a lot of cases inside of a market. But then also got to have the proper equipment and as you can imagine tremendous amount of infrastructure being invested in the charging stations for these vehicles, because we see that.
Now to transition we need to make sure that not only service.
The guests that are acquiring the cars, but also they were able to fully charge them. While they are in our service departments are while we are preparing them for delivery for a lack of a better term.
As far as the pent up demand you see the average.
Asia ballpark car is 12 and a half years.
Definitely and we also see some consumers keeping cars longer based.
Based on those numbers so the pent up demand is still there.
We feel that in the near future we'll continue to.
Positively impact us.
And just to add some color to the sales.
It will probably come up later, but I'll just mentioned now we.
We're still sitting at a point, where 30% of our vehicles are pre sold.
That's very helpful, but I am just sorry back to the parts and service same store I mean, this is kind of thing that with this pent up demand and what's going on with E vs that you're seeing sort of a mid single digit growth rate on a same store sales basis is reasonable sort of in the near term for parts and service to assume I mean, it seems like it's pretty sticky in it.
It's trending there, but I'm just curious what your views on that.
Yes, we really do.
I think.
Up until 2030, and maybe beyond parts and service is going to be pretty strong.
It was a bumpy quarter for us with parts and service, we have a lot going on with all of our acquisitions out west integrating new software.
<unk> processes, so that takes a period of time and it's all in your business that you can become efficient with it.
But we definitely think.
Mid to high single digit numbers are certainly very conservative.
Foreseeable future.
And then just lastly in Floorplan interest expense I mean, obviously great performance. There you guys are managing that growth very well with I guess a lot of hedging instruments can you can you just explain to us what's going on there and how successful you think you'll be at mitigating the rate rise along with.
The actual unit rise over time as the industry recovers.
So on the floor plan side most of that's just the floor plan offset account, we negotiated the ability to put.
To basically offset 100% of the floor plan. So all of the excess cash we have right now is parked against that Floorplan balances.
So it's not hedging is just new.
Okay. That's very helpful. Thank you very much guys. Thank.
Thank you Jackie.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Rajat Gupta with Jpmorgan. Please proceed with your question.
Great. Thanks for taking the question.
Just wanted to follow up on the previous question on new car GPU.
Curious if you could give us a sense of.
How youre electric Waco make sense today.
In terms of unit sales in our inventory.
And was there an outsized impact from you know a moderation in growth.
I wanted to touch a ice that had an impact in the quarter.
The case, you know when do we expect.
And to flush out of the system and get back to a more normal level. Thanks.
A follow up.
Good morning, Rajat This is Dan.
Address your last question first and then if I forget one please remind me but.
Yes.
What we're seeing with the Evs from a pricing standpoint, and also from a margin standpoint, yes, yes. It does have an impact.
When when you see the.
Client demand, but I will tell you the biggest impact that we see as the level of support from.
The tax credits that you that might be available out there when the tax credits are readily available for those cars those that inventory much faster pace.
And also.
The need for discounting is is not as much needed is when.
When the credit is not there so we see that in different pockets that.
That we operate.
Positively impacted and then negatively impact.
Can you remind me what your second question was please.
Just like we do.
Quantify like what that GPU and back.
From from electric vehicles.
And then any color on like the day supply of E sports device today.
And your Oh and your.
Inventory on the ground.
Yes.
This is David I would tell you that the gross profits when you look at our <unk>. So we've put in the tables.
They are pretty much similar to what you see there it does vary by model or.
Or by brand I should say, but our luxury stores with their evs are moving pretty well and the gross profits are pretty close to what the combustible engine gross profits are.
And with some of the midline imports same scenario.
Some of the brands with Hyundai Mercedes.
Two examples with vehicles, we're doing a nice job of turning that inventory and we feel the gross profits are very much in line with what you see with the rest of our.
Combustible engine gross profits.
Got it got it that's helpful color and then also following up on John's question on Boston services.
No the first quarter to second quarter.
Thoughts on the deceleration in <unk>.
Early or late.
You talked about some of the operational.
Integration and Backstrom I'll, let Jim was that a driver of that deceleration or was it like this is where you had expected to land irrespective.
Think about like why that would decelerate it or was it like embark streets, that's very corvette.
Whether it's company specific because some of your peers like kind of a higher number there.
It's an excellent point.
It's an excellent point, we certainly.
Most of the deceleration is with the convert conversion stores out west.
Changing software I mean, we have a lot of tenured folks out there are hard working people that were used to doing things a certain way.
When you go through some Dms changes that we've had and changed the software that we're using in parts and service, which also changes processes at the same time it has a cause and effect.
From a performance standpoint, and it takes a little bit.
It's probably foreseeable for the next quarter or two to.
To see similar results.
But then we're hoping right after that we should be starting to see the efficiencies and folks getting used to new software.
We'd be back to normal if you will just when you think about it.
You know in that brief period of time between the Stevenson Miller acquisition.
Wrap a host of we almost doubled the company within 30 days.
That was a significant size impact to our company as a whole so theres a lot of transition that were going through last year was more of a year, where we kept things sustained and didn't really go through a lot of conversions and change and this is the year that we've chose to really tackle that.
So our folks out there are probably frustrated with us a little bit with some of the change and implementation of software, but once everyone gets used to it we think we'll be at a much better place and more efficient out there like our legacy stores are.
Got it got it great. Thanks for taking the two questions and I'll get back in queue for follow ups.
Thank you.
A final reminder, if you would like to ask a question press star one on your telephone keypad.
Meanwhile, we poll for additional questions.
Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys.
Your comment on domestic GPU still holding over 4600 is there a lot of dispersion. The domestics I mean does that include Atlanta, where there is the highest inventory level or do we ultimately were 46.
Brett It's a good question and Atlantis as you can see is our highest percent of domestic.
It is our highest day supply as well.
We were really pleasantly surprised all three manufacturers are very similar to <unk>, where they are.
So theres no huge disparity between any of the three.
Okay, Great and then sort of big picture question on the five year plan. It looking at it and obviously a lot of talk about the integration plans for 'twenty three what's the biggest risk is it sort of a saar supply demand volume risk score or integration of acquired stores I mean, it's sort of.
How do you bucket the challenges to the five year plan.
Yeah, I would say threefold, finding the right acquisitions.
Make sure we can hit our target.
<unk> five year plan was based on a 17 Saar. So we haven't seen that for a while and may not see it for a little while as well.
We think the conversion piece really differs.
System with click Lane.
I really think we have something there that we can build on it continues to grow.
It's a good percentage of our business.
And we want it.
Wanted to see that become a larger percent of our business. We think that has great opportunities to grow as well.
Okay, Great and just you said, 30% of the vehicles were pretty sold could you tell us what percent were sold at MSRP.
So when you when you think about that I don't have the exact percentage for you, but when you think about it most of the pre sold vehicles will be sold at or very close to MSRP.
And you think about our luxury and import.
50% of the volume come from Lexus, Mercedes Toyota and Honda.
All of those brands, we have a low day supply.
So you could imagine that a lot of those vehicles are pre sold in those lines, which are going to garner high <unk> okay great.
Alright, thank you.
Yes.
Thank you we have no further questions at this time, Mr. Hull I would now like to turn the floor back over to you for closing comments.
Thank you operator, we appreciate everyone's participation in today's call. We look forward to our next conversation after our third quarter earnings have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.