Q2 2023 Group 1 Automotive Inc Earnings Call
Good morning, ladies and gentlemen, welcome to group, one Automotive's 2023 second 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 The long shot group one's senior Vice President of manufacturer Relations financial services and public Affairs. Please go ahead, Mr to long shot. Thank you Jamie 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 that 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 1095.
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.
These 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 some 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. 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 such non-GAAP financial measures to the most recently.
Terrible GAAP measures on its website.
Participating with me on the call today, Daryl Kingham, our president and Chief Executive Officer, and Dan Mchenry as senior Vice President and Chief Financial Officer, and now at the tail.
Turn the call over to Darryl.
Good morning, everyone in the second quarter of 2023 group one automotive.
Reported $166 $1 million and adjusted net income and record total quarterly revenues of $4 6 billion.
Led by all time highs in new vehicle parts and parts and service and finance and insurance revenues are.
Our parts and service team continued to deliver record revenue levels for nine consecutive quarters.
We also set an all time record for quarterly total gross profit supported by an all time record parts and service gross of $304 1 million.
We continue to deploy capital efficiently in the quarter to acquire the highly desirable backend mass in stores further strengthening our strong Texas footprint with an outstanding brand.
We also returned capital to our shareholders by repurchasing $31 million in shares during the quarter.
Our strong cash flow and leverage position, which Daniel Mchenry will cover in a minute will continue to allow for significant capital deployment flexibility and the remainder of 2023.
Now turning to our second quarter results.
Starting with our U S operations.
We ended the quarter sequentially flat with 27 days supply of new vehicles.
And 31 day supply of used vehicles.
Consistent with our comments on inventory last quarter, our domestic brands have improved slightly and import brands have remained very constrained.
<unk>, 28% of our U S businesses, Toyota and Lexus, which continues to be very tight at a combined five days supply.
Our new vehicle revenues increased an impressive 19% sequentially and 22% over the second quarter of last year.
We saw a slight moderation in Gpus.
New vehicle units sold reached the second highest level in company history, a 19% increase over the first quarter and 16% over the second quarter of last year.
33% of our new vehicle sales in the U S, where pre sales down from 40% in the prior quarter.
Used vehicles were challenged in the second quarter with sourcing more difficult from a lack of new vehicle supply.
We entered the quarter low on used vehicles. However, we picked up some ground as the quarter progress. Thanks in large part to trade ins from record low correct from record new vehicle sales.
The source used inventory, we continue to focus on organic sourcing efforts, including acquisitions through accelerated customer trades and service drive acquisitions.
Our finance and insurance business has remained strong with same store gross profit per unit at 'twenty $379, a sequential quarter improvement.
Despite this resiliency looking forward, we expect pressure on finance penetration rates driven by existing interest rates and slightly tighter lender requirements for some buyers.
Now turning to after sales our U S performance was outstanding.
<unk> sales revenues grew double digits in same store revenues were up over 8% led.
Led by strong customer pay same store growth of nearly 12%.
Technician head count grew 10% in the second quarter, and we continue to invest in new ways to reach our customers through one to one marketing technology and by using artificial intelligence.
We continue to invest in after sales and believe parts and service will be a strength through the rest of 2023.
Our second quarter U S. Adjusted SG&A as a percentage of gross profit was 61, 7%.
An increase of only 330 basis points from prior year.
And a decrease of one 4% sequentially and down from over 70% and pre pandemic 2019.
While we do see some pressure from reduced margins and inflationary costs, we expect that a material portion of our SG&A savings will be permanent.
Now to accelerate.
Our continued customers continue to vote, yes during.
During the second quarter, we saw deeper engagement through accelerated.
Over 80% of our customers engaged in some way in their transaction through accelerated and nearly half of our customers engaged accelerate on at least five steps of the car buying process.
We experienced significant year over year increases in trade ins creative applications F&I attachment is significantly more sales at.
At 12200 vehicles sold in the quarter that was up 78% year over year.
Turning to the UK vehicle demand remains resilient and new vehicle availability is still constrained keeping vehicle Gpus strong.
New and used Gpus outpace the prior year quarter by 7% and five 4% respectively.
We continue to see signs of production improvement by certain manufacturers as demonstrated by the 10% increase in same store new vehicle units sold.
As of June 30, our new vehicle order Frank was approximately 19400 units a 10% increase over the prior quarter.
As a reminder, our UK business mix is predominantly luxury and those customers are more resilient during times of economic uncertainty.
And our after sales growth in the UK has been outstanding with same store revenues and gross profit on a local currency basis, increasing 19, 8% and 17, 2% respectively.
Similar to our efforts in the U S. We've worked to grow technician head count experiencing an approximate 10% increase over the prior year.
We are also investing in improvements to our U K customer contact center streamlining operations and improving the customer experience.
I'll 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 June 30, we had $23 million of cash on hand, and another $268 million invested in our floor plan offset account, bringing total cash liquidity to $291 million.
We also had 338 million available to borrow on our acquisition line, bringing total immediate available liquidity to $628 million.
Through the first half of 2023, we generated $387 million of adjusted operating cash flow and $311 million of free cash flow after backing out $75 million of Capex.
This capital was deployed through a combination of acquisitions share repurchases and dividends.
During the current quarter, we spent $31 million repurchasing approximately 141000 shares at an average price of $221 52.
The result of this repurchase activity.
Just over 1% reduction in share count over the current quarter.
Our share kind as of today is down to approximately $14 1 million.
Our rent adjusted leverage ratio as defined by our U S syndicated credit facility.
Two one times at the end of June .
Our strong balance sheet will continue to allow for meaningful and balanced capital deployment.
Our quarterly Floorplan interest of $15 6 million with an increase of $9 7 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 accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saves us $4 7 million and interest expense versus the comparable prior year quarter.
Non floor plan interest expense of $25 $9 million increased seven 4 million from the prior year. However, our mortgage rate swap portfolio safe is $1 million versus the comparable period.
As of June 30th approximately 63% of our $3 4 billion in floor plan and other debt with Fig.
Therefore, an annual EPS impact is only about 69 cents for every 100 basis point increase in the secured overnight funding rate, our sofa, which is the benchmark rate referred to in our floor plan and 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'll now turn the call back over to Darryl.
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 a top capital allocation priority.
However, our balance sheet cash flow generation and leverage position will continue to support a flexible and efficient capital allocation approach, which will likely include serious consideration of share repurchases. In addition to pursuing external growth.
This concludes our prepared remarks, I'll now turn the call over to the operator to begin the question and answer session Jamie.
Ladies and.
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 we do ask you. Please pick up the handset before pressing the keys to ensure the best sound quality.
So withdraw your question you May press Star two.
We also do ask you please limit yourselves to one question and one follow up.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Daniel Umbro from Stephens incorporated. Please go ahead with your question.
Yeah, Hey, good morning, guys. Thanks, taking my question.
On the I wanted to ask on the used vehicle side of the house Gpus slightly better, but the units obviously had been like kind of across the industry.
Wondering if you guys, maybe expound on that kind of what youre seeing on the ground is it more of a supply issue with a lack of late model used coming back is it a demand driven issue because the financing rates and how do you think that kind of materializes in the back half of this year, given what youre seeing out of the market.
Hi, Daniel it's Darryl.
I don't think what we're seeing is any different than what you've heard from the rest of the industry.
There's we're kind of at the peak.
Also.
Our fastest selling and the lowest days supply of vehicles continued to be cheaper vehicles.
There is more pressure on those segments.
For affordability, but.
People tend to move down our average selling price move down.
Almost a couple of thousand bucks over the year over year. So.
It's I think more of a function of availability of inventory at the lower levels.
Expect that we'll see some of that we saw.
During the quarter, we saw it sequentially improve month over month over month.
And I expect we'll continue to see that improve a little bit as the year progresses.
Got it and then Pete I want to follow up on the on the U S. F&I per unit. It was up over 100 Bucks sequentially is that driven by higher product attachment I would think loan sizes down finance penetration is probably down year over year. So can you talk through what the drivers of kind of sequential growth are and maybe how sustainable this level could be on a per unit.
Sure Daniel Thanks, we feel good about the overall performance of F&I, our product penetrations were either up or held steady year over year and sequentially improved.
So I think theres been a lot of focus on the finance Penn, which we've seen an improvement in new and used vehicles still has a headwind clearly and I think thats as a result of rates our rates are up.
250 basis points.
The year over year, so we're focusing on the product and.
We've had we've had I think really good.
Partnerships with our major lenders, which has been helpful.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys I, just wanted to touch on parts and service, where you're going to continue to outperform our expectations and it's a very.
Yes.
This is happening quarter after quarter.
Curious how sustainable you think that is if this is just an issue of getting more tax and you'll be able to continue to grow over time and how you are getting all these tax I mean, adding 10% in the quarter is pretty.
Impressive I know the four day flexible work, we just helping to some degree but it seems like there's some other.
The secret sauce that might you guys might be using here to get all those folks. So can you just kind of expand on the parts and service strength and the potential going forward.
John This is Daryl.
We're we invest heavy in parts and service and we find when.
When we acquire.
Dealerships, which we've done quite a bit of acquisition over the last couple of years, we almost always find underinvestment in parts and service and that is the first place we invest whether it's capacity equipment staffing training.
And we do that as quickly as possible with all the new acquisitions and given all the stores. We have acquired over the last couple of years I think thats part of the puzzle.
Another part of the puzzle is the technician recruiting we have <unk>.
Significant efforts underway there in 40 working for certainly part of it we have other other programs that we do that support tuitions and training.
Uniform sponsorships and.
Mentoring programs.
We have.
Career pathing.
Place for our technicians and so I think there's a whole combination of things I can't tell you. There is a secret sauce. It's we just trying to put a lot of focus on a number of areas.
Then.
We we really.
What I see happening right now is.
We're all benefiting probably from.
Some some pricing in the market over the last couple of years, which I think has come to an end and coming to an end.
I think the game is turning to throughput again here in the future.
A lot of our focus and efforts will be towards that and we still see a lot of demand out there car park is still really aged theres still a lot of repairs to be done on vehicles that have been.
Older units older vehicles.
So I believe that there is still the outlook is for parts and services still still Bryan so still really bright stroke opportunistic.
And just one follow up on accelerated you made mentioned that 50% of your.
Customers.
Going through five steps of the transaction.
With accelerate I'm, just wondering if you can kind of explain what exactly those five steps are how many steps there are that you count any transaction and when will this ultimately start.
You'll see the new costs are helping you maybe reduce head count and I don't know if you can quantify that but how do you. How do you think about that potential savings over time.
We saw we saw or we saw productivity improvements in the quarter.
We didnt mentioned them in the script, we did see productivity improvements with our sales teams year over year, and we attribute that to accelerate.
We also theres about 10 steps and accelerated.
The thing we want to do is engage customers as much as we can.
Through through accelerated so.
We're testing a few things around the country. We don't we've done some a few things here in the last six months or so where we are.
Focused on the way we've been using accelerating there. We're also trying a few new things in some markets.
Determined how that affects engagement, how it affects closing rates how that affects the customer.
Spirits as well so.
We're still in the early days of accelerated we feel like I don't I can't tell you what to.
Our number is I don't think we'll see a day, where 100% of our customers are going 100% of the time through accelerated.
We've designed it so that customers can choose where they engage and don't engage we try not to make it lock step and we try not to make it where they want to take another path they can and so it's flexible.
So long winded answer to your question, John but I think we're still learning as we go.
John just did Daniel here and just to add to what Darryl said.
To put it into perspective sales person productivity has increased by 32%. That's the average number of units to sales person would sell versus pre pandemic.
<unk>.
We see that continuing to increase.
Our next question comes from David Whiston from Morningstar. Please go ahead with your question.
Thanks, Good morning.
Going back to the service technicians, particularly the UK head count increase.
I know you've got some good initiatives like the four day work week and whatnot, but I'm just curious in the U K market.
What else May have helped there are people, perhaps more eager to work than they were a year or two ago, just any other labor market dynamics, you can share on that.
Market. Thanks.
We are experimenting with four day work week there David.
We are it's not nearly as in grain there as it is in the U S. The work schedules in the UK are different.
At retail so.
The value of a four day work week is different there than it is in the U S. But.
The things, we're trying to do or make sure that our our compensation is certainly.
Yes.
A competitive level.
We're working to try to ensure that we're kind of a workplace of choice for <unk>.
For our team. We've also added some significant resources in our after sales team at our corporate level in the UK, which has helped.
It has helped us significantly put somewhere more focus and emphasis on technician recruiting.
Thanks, Dan on used.
Obviously, it's a circle for everybody, but your metrics to me they didn't.
But year over year Delta so it didn't seem as large of a decline as I remember seeing in.
Some of the other dealers and I'm just curious.
Maybe are you not cutting prices right now quite as hard there as prices are coming down or are you just procuring inventory smarter than in the past.
Yes.
Well I love to say we're smarter.
Yeah.
I would say, we're trying to be disciplined we implemented some new technology about a year ago that I think is really helping us with is one of our partners.
Helping us stay more disciplined on our pricing and I believe that's.
Its helping us quite a bit.
The old days of where our used car manager will go and price their inventory, where we're kind of trying to get away from that because we want the technology to help us lead that.
We implemented some things about a year ago to help us do that and I believe that's paying some dividends.
Sure.
Our next question comes from Rajat Gupta from Jpmorgan. Please go ahead with your question.
Great. Thanks for taking the question I just wanted to ask a broader picture question just on in terms of consumer health and consumer obviously, you talked about the interest rate impact.
How thats impacting us like financing, but.
In general we have seen new car volume.
Hold it much better than expected so far year to date and I'm curious.
What do you think might be driving that context of the pricing and the rate environment and what is your sense us.
And how it can persist through the course of the year.
And tied to that.
Is there a range you can give us in terms of how youre paying the new card Gpus.
For the third quarter and maybe into the fall.
Thanks.
Resort and <unk>.
Terms of the consumer.
We see consumers just looking at the order banks in the U K looking at the pre sales in the U S.
So it indicates.
A pretty healthy strong consumer.
Looking at the after sales pull through.
<unk>.
We see evidence of a pretty strong consumer.
We're seeing a little pressure in F&I, but it's just a little bit honestly.
It's a $100.
No.
From a consumer perspective, we see good things there and I don't.
I don't know that that will change in terms of the gross profit trends you asked about on new cars I don't believe we will see anything different than what we have seen over the last couple of quarters three quarters, where it's a gradual decline.
No.
From where it's been.
We don't see any cliffs out there at all.
Got it that's helpful and maybe just on capital allocation priorities buyback buyback, how do you put a little lighter.
The CRE relative to what you did last couple of years, obviously, you spend a little more on M&A here.
Curious, how youre thinking about balancing that in the second half maybe any comments around just the M&A environment.
What kind of deals are flowing into the pipeline or how the multiples are.
Just like how the activity is and willingness for deals to close.
That would be helpful. Thanks.
We believe.
We want to deploy capital efficiently.
Sure.
We want to buy the right kind of deals and if you look at our last five or six deals thats really.
Indicative of the kind of purchases were looking for.
And Toyota North Austin, and our fixed Chevy deal, we did in Florida, and the Big Macs acquisition here.
And in Houston and down in South, Texas. So.
Those are the type of <unk>.
Acquisitions, we want to do that.
Those are the kind, we're looking for in growth markets.
We.
If we can't find those then we will deploy capital towards.
Stock buybacks, which you saw a great example of that last year.
We bought quite a bit of a company so.
We believe that that's.
It's still an opportunity, but we want to grow the company.
<unk>.
That's a priority for us so.
That comes first but not at any cost.
Once again, if you would like to ask a question. Please press star and one our next question comes from Daniela Higgins from Morgan Stanley . Please go ahead with your question.
Thank you all so I wanted to ask you about rising EV inventory do you have any comments around incremental demand for <unk> from the start of the year now any sense of change in recent weeks.
Or just any commentary on inventory levels rising overall.
Our EV.
Days supply is 61 days.
<unk>.
So it's a little higher.
<unk> universe for US we have 11000 roughly units in stock.
700 of those seven or 40 of those are evs. So.
And it's hard to draw conclusions about general trends based on that smaller number but.
We have.
And it's concentrated in just a few brands and.
And some of the brands.
There is.
Little more support for sales to sell them and other brands.
Just a bit of a struggle, but that's the difference between our easy in our inventory levels at this point.
Thank you.
And ladies and gentlemen, with that we will be ending today's question and answer session as well as today's presentation. We thank everyone for joining today's conference call. You may now disconnect your lines.
Okay.
Yeah.