Q3 2023 Group 1 Automotive Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to group, one Automotive's 2023 third quarter financial results Conference call.
Please be advised that this call is being recorded.
At this time I'd like to turn the floor over to Mr. Pete The long shot group, one senior Vice President of manufacturer Relations financial services and public Affairs. Please go ahead, Mr Dong Shah.
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. We will refer to on this call 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 when they use 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 manufacturer production level.
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.
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 directly comparable GAAP measures on its website.
Participating with me on the call today, Daryl Kenny Hamm, 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.
Good morning, everyone.
In the third quarter of 2023 group, one automotive reported a $169 $8 million and adjusted net income.
Total quarterly revenues of $4 7 billion, an all time quarterly revenues across all major lines of business.
Our teams also delivered record quarterly adjusted diluted EPS from continuing operations of $12 seven.
An increase from the third quarter of 2022.
Starting with our U S operations are inventory levels remained relatively flat from the second quarter of 2023, no major shifts in mix, including from our brands affected by the UAW strike.
Third quarter still Anthos was 4% of our mix, 47% and general Motors, 10%.
On a same store basis, our used our U S new vehicle unit sales.
During the third quarter, 30% of our new vehicle sales in the U S were pre sales down a bit from 33% in the prior quarter.
Also important to note and a tough to used vehicle environment. Our used vehicle sales were up both year over year and sequentially in our gross margins were up year over year.
We saw strengthening throughout the quarter and our used vehicle margins. In addition, we saw strengthening in our CPO business to nearly 25% of our mix CPO is a key driver of loyalty in after sales and repurchase and we continue to focus on organic sourcing including acquisitions to accelerate.
Customer trades, which were up in the quarter and service drive acquisitions.
Our outstanding F&I team also achieved record quarterly revenues capitalizing on the opportunities to sell products that are both good for our customers and good for their vehicles.
Our gross profit per unit sold of 2300 $67 only minimally declined on a same.
Same store sequential basis.
We expect some continued pressure on finance penetration due to existing interest rates and slightly tighter lender requirements for some used vehicle buyers.
Now shifting to after sales we focus on the after sales impact on the customer journey by increasing customer retention through more convenient service hours training of our service advisors selling service contracts with vehicle sales and improve customer relationship management software that allows us to.
Provide targeted marketing to our customers.
We continue to believe that after sales is an area of underinvestment in our industry and we invest heavily in without reservation, when we acquire new stores.
With this focus our parts and service team.
Continues to achieve record results Notching.
<unk>, the 10th consecutive quarter of record revenues at an all time quarterly high in gross profit.
We continue to focus on the hiring and retention of technicians in this challenging labor market. Our four day work week benefits our customers by extending our hours of operation during the week and a return in return leads to higher technician productivity in our shops.
We continue to explore avenues to increase our capacity and drive more incremental productivity.
We also continue to invest in new ways to reach our customers through one to one marketing technology and by using artificial intelligence and.
In the third quarter, we sent over 360000 service appointments digitally and through our customer development Center.
So generated over 10000 customer appointments suggest six brands using artificial intelligence. We believe these AI customers to be incremental and expect this expect this initiative to grow and generate more incremental service business in the future.
Now, let's shift to SG&A.
U S. Adjusted SG&A as a percentage of gross gross profit increased only 88 basis points year over year and improved sequentially.
Reflecting our focus on controlling cost in this inflationary environment and the structural cost improvements made since the pandemic.
Current adjusted SG&A as a percentage of gross profit of 61, 4% continues to be down from 75% and pre pandemic 2019.
Now a quick look at the U K.
The UK achieved record quarterly revenues, thanks to record used vehicle performance.
Vehicle demand remains resilient and new vehicle availability is still constrained keeping vehicle pricing and Gpus strong.
We continue to see signs of production improvement year over year by certain manufacturers as demonstrated by the near 10% increase in same store new vehicle units sold.
Despite this increase in same store units sold we experienced vehicle delivery shortages from BMW mini and Volkswagen in the third quarter of 2023.
Limiting our upside potential for the quarter.
The lack of vehicle deliveries from these manufacturers resulted in higher than anticipated SG&A as a percentage of gross profit, giving our staffing levels, assuming the sale of these vehicles.
As of September 30, our new vehicle order Bank was approximately 17700 units.
As a reminder, our UK business mix is predominantly luxury.
And those consumers are more resilient during times of economic uncertainty.
And now to capital allocation.
We deploy a return focused capital allocation strategy that balances the use of our capital between opportunistic portfolio management share buybacks and the return of capital to shareholders in the form of quarterly dividends.
This approach continues to benefit our shareholders, allowing us to achieve all time high and adjusted diluted earnings per common share from continuing operations in the third quarter.
Successful portfolio management involves not only acquiring great assets, but also disposing of assets for which we believe are higher return proposition exists.
In the third quarter of 2023, we disposed of eight franchises and voluntarily terminated our ninth franchise.
We intend to benefit our shareholders by using the proceeds from these sales to either by additional dealerships or buyback additional shares.
Our number one priority is growing the company.
We evaluate all brands and geographies to expand our portfolio.
Seeking to acquire dealerships or dealership clusters and growth positioned or economically stable markets or that are economically accretive to our existing markets. In October 2023, we consummated the pending acquisition of a Subaru dealership in Manchester, New Hampshire, bringing the number of <unk>.
Franchise zoned in Manchester to five.
Our recent acquisitions of best second mass and GMC and Kia dealerships as well as the Estero Bay Chevrolet in Florida serve as a reminder of the strength of this portfolio optimization approach.
We continue to explore ways to consolidate our holdings and highly profitable scalable dealerships and dealership clusters.
We believe this is a critical element to our growth story, which leverages, our scale and proven integration capabilities Optimizes, our rooftop performance and grows the company in a meaningful and incremental manner.
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 September 30th we had $53 million of cash on hand, and another $211 million invested in our floor plan offset account, bringing total cash liquidity to one.
<unk> hundred $64 million.
We also had 463 million available to borrow on our acquisition line, bringing total immediate available liquidity to $726 million.
Yeah.
Through the first nine months of 2023, we generated $555 million of adjusted operating cash flow and $448 million of free cash flow after backing out of $107 million of Capex.
This capital it's deployed through a combination of acquisitions share repurchases and dividends.
During the current quarter, we spent 65 million repurchasing approximately 246000 shares at an average price of $261 89.
Okay.
The result of this repurchase activity, it's just over a one 7% reduction in share count over the current quarter.
Our share count as of today is down to approximately $13 8 million.
Our balance sheet cash flow generation and leverage position, we will continue to support flexible capital allocation approach, including serious consideration of share repurchases. In addition to pursuing external growth opportunity.
Our rent adjusted leverage ratio as defined by our U S. Syndicated credit facility was two times at the end of September.
Our strong balance sheet will continue to allow for meaningful and balanced capital deployment.
Our quarterly Floorplan interests of $16 5 million was an increase of $10 million from the prior year entirely due to higher <unk> inventory holdings.
We effectively manage our floor plan interest expense by holding excess cash in our floor plan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved the $3 4 million of interest expense versus the comparable prior year quarter.
Non floorplan interest expense of $26 5 million increased $6 9 million from prior year. However, our mortgage swap portfolio saved the $3 $5 million versus the comparable period.
As of September 30th approximately 65% of our $3 4 billion in Floorplan and other debt was fixed.
Therefore, an annual EPS impact is only about 66 for every 100 basis points increase in the secured overnight funding rates are so far which is the benchmark reference in our floor plan and mortgage debt instruments.
For additional detail regarding our financial condition. Please refer to the schedules have additional information attached to the news release as well as the investor presentation posted on our website.
This concludes our prepared remarks, I will now turn the call over to the operator to begin the question and answer session operator.
Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone telephone.
You are using a speaker phone we do ask you. Please pick up your handset prior to pressing the key is to ensure the best sound quality.
You all your questions you May press star two.
We do ask that you. Please limit yourselves to one question and one follow up. Please note that you may rejoin the question queue.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from.
John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys.
Darryl I just wanted to ask a.
A question on inventory levels, you mentioned that they are tightened constraining.
Sales in the U K, but I am just curious what your take is on inventory levels here in the U S and are they sufficient or are they constraining sales and maybe kind of secondly to that.
Where do you think inventory levels are going so that we can understand where floor plan interest expense.
May go.
John Good morning, I think you know.
The surprising I guess surprising maybe not so surprising thing about the inventories Q3 over Q2 as they didn't change much on a day supply basis I think we were up two days in.
The mix.
Between brands didn't change very much we saw science has come down a little bit we saw a little bit of remax with some of the some of the luxuries.
But.
<unk>.
I think that it's constraining sales and probably the import brands and when you look at.
Our day supply is still almost single digits and those brands and you look at the sales growth Thats, there and we still had 30% of our of our mix was basically pre sold which at this point I'm a little surprised by.
So I think theres probably.
More inventory coming in those brands I think the luxuries are probably in about the right place I think they've got some mix issues to deal with between <unk> and non EV.
And then.
The domestics I think R. R.
Are fine in terms of their total we'll see what happens with.
The UAW impact, especially with the plants that were announced this week.
And if I could sneak in one follow up on F&I.
It sounds like it's a slight pressure point still doing fairly well, but could you just remind us what part of F&I PDR as product and what is it is spread based in and what your sort of thoughts of that going forward I mean, there's a lot of good product in there.
The consumer benefits from so I'm just curious what you think the risk or even opportunity is going forward there.
Hi, John It's Pete along sure so the.
We were very pleased with the overall F&I business and I think it continues to be the headwind with used car penetrations, we're down about 400 basis points year over year.
Third of our revenue and gross profit comes from the spread and the originations two thirds from product and I'll tell you.
When I look at the overall results.
Our product penetration is haven't varied more than 100 basis points either way on any of our product penetration. So we're really pleased with the with the product sales that we've had which has certainly helped keep our <unk> numbers in line.
John One thing we do see is.
As Pete mentioned, even though we're we're not we don't over rely on rate.
When we do lose some attachment on on financing oftentimes, we're able to preserve.
Some some incremental <unk> on the product sales. So as an example, we don't take this literally but if we lose three points of finance penetration on used cars, we might only lose a point and a half or so of product penetration. So there's still some we are able to preserve.
And our next question comes from Rajat Gupta from Jpmorgan. Please go ahead with your question.
Great. Thanks for taking my question and congrats on the execution.
Yes.
Question on parts and services.
Could you help us.
Understand or help us gauge any potential impact.
From the part shortages.
Especially in general more room forward.
A little higher exposure.
Any way to quantify what that impact could be when should we start to worry about shortages.
Stores.
Any color on that would be helpful and I have a follow up.
John This is Daryl.
So far the impact has been minimal.
Sure.
<unk>.
Purchase.
Ahead, and stocked up on the fastest moving parts.
In advance of the strike.
Advanced the contract negotiations I should say.
And so we're still able to.
Yeah.
We're still living off of some of that extra stock. We also were able to.
Leverage our other stores around the country when we do have a part shortage.
I don't think its.
Unreasonable to think that in the next quarter, we will start to see more parts shortage issues.
From the two brands you mentioned.
I don't know that there'll be significant the Oems have been.
Fairly responsive with being able to to supply us.
But I don't I don't know that it's.
I think.
Be a bigger issue for us in Q4.
And then it was in Q3, but I can't say it'll be severe.
Have you already started to feel that impact in the fourth quarter or.
Striking to continue for another week or so before you start to feel that.
Yes, we wont have a full picture until after the quarters over so it's hard to say right now.
Got it got it.
On SG&A then.
Helpful color in the slide deck around the productivity improvement.
In the past you've given us some color around how much permanent SG&A to gross reduction.
You expect to see I think you'd mentioned like 340 basis points in the past I guess, it was probably more than a year ago.
I'm curious.
As to if you have any update to that based on what youre seeing in the business.
Even in the U K.
Any new guide rails, Zimbabwe, we shouldn't be thinking about in terms of what a normalized SG&A to gross should be for the business.
Hi, John Good morning, it's Daniel here.
I think an important statistic to note.
I don't think in our Investor deck is that we're still 7% dine in terms of head count in the U S versus 2019 on a same store basis.
And with that we have added 11% more more technicians. So the element related to SG&A is done even more than 7% then in terms of head guidance and at this time I I don't see any of that head count regarding.
Clearly a 30% additional productivity.
Per sales person.
Again, I I don't see us going back to the way that we were pre pandemic. So I think all of that cost reduction.
People had time, that's I did is I would permanently.
In terms of.
The guidance I guess that we have given pre pandemic a whole company we were at <unk>.
74% and SG&A as a percent of gross I don't see that ever been above 70% and all subject to recession are our major changes in the industry.
Our next question comes from David Whiston from Morningstar. Please go ahead with your question.
Thanks, Good morning.
Really impressed by the used vehicle performance.
I wanted to just look at that both.
Both sides of it really like how are you convincing.
The consumer who is really struggling with use of affordability to pay over 30 Grand.
But then on the procurement side, how are you keeping the GPU.
Up as well.
David Good morning Darryl.
I think we're being smarter about.
What we're sourcing and how were sourcing we implemented some new technology about a year ago.
Which helps us with acquisition and it helps us with pricing.
And it's much more responsive it takes more of our.
Got it.
For lack of a better word our gut instinct out of it and realize much more heavily on on data and market intelligence on a mass basis not just.
On a car by car basis, and we're I believe leveraging that better today than we ever have.
I think we're probably getting some incrementals will be out of our our used car performance that we have not seen in the past.
<unk>.
So I think thats the results of what you are seeing.
I believe that's really the difference we added.
Some additional training in our dealerships around the country and some staffing around the country to try to help with the execution on used cars about a year ago as well.
Some of that is coming to fruition. So.
I believe those are things that are helping us get weaker.
I mean.
This week.
The advantage, we have of being able to source things organically is just a real advantage for us and so were compared.
Compared to the used car pure plays and so we're extremely fortunate to be able to do.
And staying on that topic on the consumer side, though they're really struggling or they or have you changed your mix in a way to make it worthwhile for them to pay up or is.
Okay.
The asps are down a little bit almost $2000 I believe year over year.
So we are we are seeing.
The pricing is coming down some.
And we are responding with the right stock to be able to do that and that's how we were able to preserve our gross margins and so I think we're being more responsive with what were stocking given the market today that there is more pressure on it from a price and payment perspective.
Our next question comes from Michael Ward from Benchmark. Please go ahead with your question.
Thanks, Good morning, everyone.
First of all.
Quick one are you seeing any change at all in credit availability for consumers.
And then the second question is more kind of strategic it seems like youre selling off some of the smaller stores and you're growing some of the bigger ones.
Im guessing.
That should imply that the parts and service departments get bigger and my reading that correctly.
Michael I'll take your second question and then Peter will take your first question. This is Daryl.
Youre reading it correctly, Yuri and exactly correctly, we're looking for.
Our portfolio, we want to.
Generally operate in clusters, and generally with higher revenue rooftops source where are we.
We can build and develop scale on a better basis.
Certainly.
Helps us speed, our parts and service business, which for US we consider.
One of our real strengths and something we invest heavily in so yes, absolutely and when you look at our acquisitions over the last couple of years, whether it's second mass sooner Toyota North Austin or Cerro base Chevrolet there are large high revenue.
Stores and.
For Becker masks and Toyota North Austin that are right in the middle of a cluster of other stores that we own so ability to leverage scale and our ability to grow and leverage our SG&A base and drive more parts and service are all key benefits in that case and then on the F&I question on the buyer.
And the lending environment I'll ask Pete to speak to that Mike what we've seen with credit is it's certainly available and I think that our strategy of partnering with the big banks and in all different credit tiers is certainly paying a dividend for us right now.
There has been some tightening clearly on loan to value in some of their metrics, but with the way we run our business with audit and compliance our loss ratios are in line or better than with all of our lenders. So we've had great partnerships.
I ask our operators all the time when we lost car deals due to credit and it said that is a resounding no.
We're also seeing the OEM captives.
Really really get more aggressive right now.
Thanks.
That really helps us as new car dealers, obviously gives us an avenue to.
To be able to rely on support from them that.
They've stepped up with some additional programs will support as well.
Daryl if I could follow up on the dealership issue you have a couple of good charts and slides in there about the parts business and the growth and the benefits accelerate in EV sales as vehicles become more complex, especially on the battery electric side.
The service has to be done with the dealers because there is no way independent aftermarket.
Your stores able to service some of these other startup companies that are service constrained call it like Arabian.
Wow.
You know I hope that we have all of the work we can we can do with our own brands.
We haven't had any discussions with anybody like <unk> or anything like that around any any for us.
Pair work, our warranty work or anything like that could we see.
Certain that if we work.
The brands, we do we could work on those but we're our focus is on the brands that we have relationships with today mine.
Like can I, just add one thing to that it is an annual here, we do do collision work for the EV.
So we are approved that.
Some of our collision centers for work in those startup company or a more established.
<unk> operators.
Once again, if you would like to ask a question. Please press star and then one.
Draw your questions you May press star two.
Our next question comes from Daniel <unk> from Stephens incorporated. Please go ahead with your question.
Yeah, Hey, good morning, guys and congrats on the quarter.
Thank you.
Daryl I wanted to follow up on the service side. It's obviously trends remained strong there you talked about parts availability all the talk about the labor side, so you've been able to hire and retain for a while here with the four day work week, but I think you guys have been testing some new comp plan just curious how the reception has been is that helping you kind of maintain your lead on the hiring side.
Change materially on the technician availability or retention.
Daniel Thank you yes.
We are still focused on attracting.
Technicians and have had some success over the last year, attracting them our turnover rate with technicians is down year over year and then we are also.
Piloting some different compensation plans that are.
We hope will make us a more attractive place to work and we hope will give.
Technicians more certainty in their compensation.
Right now we've got that in about four stores that we're piloting in measuring we want to make sure we maintain our productivity and our throughput.
Well as employee retention and engagement, obviously are super important there. So yes, we're testing that we're also taking a hard look at our shop productivity Daniel.
There is a.
Traditional metrics around how how much work, we can put through our.
Our existing shop base, but then are there some other levers we can pull to either increase the capacity of those shops or increase the throughput and productivity of those shops and so we're taking a look at some things you might be able to do there. So we at the end of the day, we still see lots of room to run and after say.
We see lots of opportunity in after sales and <unk>.
We continue to want to invest there and think that there's going to be continued growth there for <unk>.
A long time into the future.
But curious what you're seeing are our seller multiples continuing to compress in the M&A market as we move further from peak same store earnings and I guess with the stock multiple compressing in and the cash flow generation, where does share repurchases just kind of fall in your capital priorities from here just as you look at how to spend that free cash.
Daniel as Daryl said, our key priority is to continue to grow the company.
I think it's fair to say, there's a lot of <unk>.
Potential acquisitions on the market at the moment I think.
The market is more buoyant at the moment than than probably it has ever been.
Quality acquisitions are.
Still more expensive.
And I think that the.
Prices will continue to compress.
We're going to remain balanced in terms of capital allocation.
As and when we think it's opportunistic to.
Buy our stock back will continue to buy our stock back and I think that with clearly messaged in our prepared remarks.
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 everyone for joining today's conference you may now disconnect your lines.