Q4 2023 Autonation Inc Earnings Call
Presentation, you can register to ask a question by pressing star followed by one on your telephone keypad.
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I'll now hand over to your host Derek Fiebig, Vice President of Investor Relations. Please go ahead.
Thank you Bruno and good morning, everyone and welcome to Autonation as fourth quarter 2023 conference call, leading our call today will be Mike Manley, Our Chief Executive Officer, and <unk>, Our Chief Financial Officer. Following their remarks, we will open up the call for questions before we begin I would like to remind you that certain statements and information on this call including any statements.
Regarding our anticipated financial results and objectives constitute forward looking statements within the meaning of the federal private securities.
The litigation Reform Act of 1095, such forward looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward looking statements additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.
Hello, everyone and thank you for standing by.
The Autonation incorporation fourth quarter 2020 earnings conference call will begin shortly.
We currently waiting for more passive participants to join it please standby.
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SEC.
Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call reconciliations are provided in our materials and on our website at investors Autonation dot com with that I'll turn the call over to Mike.
Yeah, Thanks, Eric and good morning, everybody. Thank you for joining us today.
On slide three and I am going to provide some opening remarks before I hand over to Tom who is going to take you through our fourth quarter results in greater detail.
You may now that continues to be it makes it economic signals in the economy and concerned about affordability.
From our perspective consumer demand for new vehicles remained robust during the quarter. Our total new vehicle revenue increased 7% and unit sales increased 8% and this reflected strong import growth as well as the seasonal uplift in premium luxury sales.
New vehicle margins continue to decline, but the rate of moderation in the fourth quarter, which is approximately $120 per month was more modest than earlier quarters.
Total new vehicle inventory levels, a steady six days increased from 19 last year and 31 in the third quarter. We have 66 days of domestic brands 29 days of luxury in 24 days of import brands.
Inventory levels are expected to continue to grow in 2024 and as such we expect to see a continued moderation of new vehicle margin.
Yeah.
Hello, everyone and welcome to the Autonation and Corporation fourth quarter 2023 earnings Conference call.
Which we anticipate anticipate will be roughly the same pace as we experienced in Q4.
Bruno: My name is Bruno will be operating your call today.
Turning to used vehicles same store units decreased 8% a year ago, while total units were down 4%, which reflects the growth of iron USA stores in the year.
Bruno: This presentation you can register to ask a question by pressing star followed by one on your telephone keypad I'll now hand over to your host Derek Fiebig, Vice President of Investor Relations. Please go ahead.
A more recent sequential comparisons have a slightly better than the market now.
Now we're managing several critical variables in the used market at the moment. Firstly, we continue to see tight availability and this has been with us throughout 2023 and will no doubt continue into 2024 and notwithstanding the inventory availability was saying used vehicle depreciation which is boldly back to normal and historical levels.
Derek Fiebig: Thank you Brenda and good morning, everyone and welcome to Autonation as fourth quarter 2023 conference call, leading our call today will be Mike Manley, Our Chief Executive Officer and Thompson our.
Derek Fiebig: Our Chief Financial Officer following their remarks, we will open up the call for questions before we begin I would like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1095.
Mix between price bands is also normalizing and as a result, we've seen lower demand and higher price used vehicles, partly because of affordability and partly because new vehicles are becoming more available with lower net transaction price.
Derek Fiebig: Such forward looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward looking statements additional discussions of factors that could cause our actual results to differ materially are.
Which is often accompanied by subsidized lending rates, which makes new new product more compelling for a number of our customers.
Tom is going to give you some of the specifics on unit sales by pricing band or.
Derek Fiebig: And in our press release issued today and in our filings with the FCC.
Our inventory turns on used vehicles declined modestly during the quarter.
Derek Fiebig: Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call reconciliations are provided in our materials and on our website at investors Autonation dot com with that I'll turn the call over to Mike.
The mix change I, just noted combined with slower turns moderated our use PDL and we expect these market conditions to continue into 2024 and as a result, we expect our Q1 2020 full used margins to be in the same range as our Q4 results.
Mike Manley: Thanks, Eric and good morning, everybody. Thank you for joining us today.
We maintained our industry, leading performance in customer financial services in the quarter.
Mike Manley: I'm on slide three and I'm going to provide some opening remarks before I hand over to Tom Who's going to take you through our fourth quarter results in greater detail.
As the team continues to do an outstanding job to overcome a higher interest rate environment by maintaining solid growth in product sales per unit sold compared to year ago.
Mike Manley: Now as we know there continues to be mixed economic signals in the economy and concerns about affordability.
This performance combined with a 2% increase in total retail units sold resulted in higher CFS gross profit.
Tom: From our perspective consumer demand for new vehicles remained robust during the quarter. Our total new vehicle revenue increased 7% and unit sales increased 8%.
After sales delivered a record fourth quarter for revenue and margin total store revenue was up 11% and our gross profit was up 13%.
Tom: This reflected strong import growth as well as the seasonal uplift in premium luxury sales.
Growth came from all major categories. The greater complexity of vehicles is leading to higher values per repair order and this coupled with increased numbers of repower orders from a year ago resulted in what I think is an excellent performance.
Vehicle margins continue to decline, but the rate of moderation in the fourth quarter, which is approximately $120 per month was more modest than earlier quarters.
Tom: Total new vehicle inventory levels of 76 days increased from 19 last year and 31 in the third quarter.
The strength of our balance sheet and cash generation, which Tom will discuss allowed us to deploy an additional $150 million towards share repurchases during the quarter repurchasing more than $1 1 million shares.
Tom: We have 66 days of domestic brands 29 days of luxury in 24 days of import brands.
Now aside from the solid quarter from a financial perspective, there were a few other highlights I would like to touch on we continue to focus on our customers and are working to garner a greater share of customers' wallets as such during the quarter. We continued integrating autonation finance across our portfolio, including the launch into nearly all of our fans.
Tom: Inventory levels are expected to continue to grow in 2024 and as such we expect to see a continued moderation of new vehicle margin.
Tom: Which we.
Tom: We anticipate will be roughly the same pace as we experienced in Q4.
Tom: Turning to used vehicles same store units decreased 8% a year ago, while total units were down 4%, which reflects the growth all Diane USA stores in the year.
Our stores.
We also continued with the rollout of our ion USA stores opening locations in Plano, Texas and Fort Myers, Florida during the quarter and we opened additional solar in Florida early this year with Wesley chapel of San further in Jacksonville, adding to density in these markets.
Tom: A more recent sequential comparisons have a slightly better than the market.
Tom: Now we're managing several critical variables in the used market at the moment. Firstly, we continue to see tie availability and this has been with us throughout 2023 and will no doubt continue into 2024 and notwithstanding the inventory availability was saying used vehicle depreciation which is broadly back to normal and historical levels.
Our business model is resilient working well and we continue to deliver strong financial performance.
While this performance is of course made possible by 24000, plus Autonation associates, who take care of our customers every day.
Tom: Mix between price bands is also normalizing and as a result, we've seen lower demand and higher price used vehicles, partly because of affordability and partly because new vehicles are becoming more available with lower net transaction price.
And I think the team efforts continued to be recognized by outside parties because of this initiate autonation. Once again made fortune's most admired list jumping four spots to number three in the specialty retailer section.
Tom: Which is often accompanied by subsidized lending rights, which makes new new product more compelling for a number of our customers.
Congratulations to everybody. Thank you for the things that you do for us.
With that Tom I'm going to hand over to you. Thank you okay perfect. Thanks, Mike I'm, turning to slide four to comment on our fourth quarter P&L co.
Tom: So I'm just going to give you some of the specifics on unit sales by pricing bad.
Tom: Our inventory turns on used vehicles declined modestly during the quarter.
Total revenue increased slightly as growth in the vehicle and after sales revenue more than offset lower used vehicle revenue.
Tom: The mix change I, just noted combined with slower turns motivated I use PD L. And we expect these market conditions to continue into 2024 and as a result, we expect our Q1 2020 full used margins to be in the same range as our Q4 results.
As expected gross profit was down 5% and margin was 18% for the quarter.
Strong growth in after sales, partially offset declines for new and used vehicles, which well, which I'll address in a later slide adjusts.
Tom: We maintained our industry, leading performance in customer financial services in the quarter.
Adjusted SG&A increased 5% to $791 million with stable core spending and incremental costs related to our growth initiatives. This resulted in adjusted operating income of $368 million for the quarter, which decreased 2% from a year ago.
Tom: As the team continues to do an outstanding job to overcome a higher interest rate environment by maintaining solid growth in product sales per unit sold compared to year ago.
Tom: This performance combined with a 2% increase in total retail units sold resulted in higher CFS gross profit.
Below the operating line, our fourth quarter results were impacted by higher interest expense for both for plan.
Tom: After sales delivered a record fourth quarter for revenue and margin total store revenue was up 11% and our gross profit was up 13%.
Non vehicle debt and benefited from lower income tax expense.
Tom: Growth came from all major categories. The greater complexity of vehicles is leading to higher values per repair order and this coupled with increased numbers of repair orders from a year ago resulted in what I think is an excellent performance.
The fourth quarter Floorplan interest expense of $47 million was up from.
From $20 million, a year ago, a reflection of higher rates and inventory levels as expected as a reminder, we reflect floor plan assistance received from Oems and gross margin and in the fourth quarter. The increased assistance helped to offset partially the increase in floorplan interest expense.
Tom: The strength of our balance sheet and cash generation, which Tom will discuss allowed us to deploy an additional $150 million towards share repurchases during the quarter repurchasing more than $1 1 million shares.
Interest expense for non vehicle debt was $46 million for the quarter up from $38 million a year ago.
Tom: Now aside from the solid quarter from a financial perspective, there were a few other highlights I'd like to touch on we continue to focus on our customers and are working to garner a greater share of customers' wallets as such during the quarter. We continued integrating autonation finance across our portfolio, including the launch into nearly all of our fans.
Increase reflects increased borrowing and higher rates.
Income tax expense for the quarter was $62 million compared to $91 million in 2022, reflecting.
Lower taxable income and a modestly lower income tax rate all in this resulted in adjusted net income up $216 million compared to adjusted net income of $319 million a year ago.
Tom: Stores.
Tom: We also continued with the rollout of Orion USA stores opening locations in Plano, Texas, and Fort Myers, Florida during the quarter.
Tom: We opened additional solar in Florida early this year with Wesley chapel of San further in Jacksonville, adding to density in these markets.
The impact of our share repurchase activity, partially offset the EPS effect of the lower net income.
Total shares repurchased over the year decreased our average shares outstanding by 14% to $42 9 million shares in the fourth quarter.
Tom: I think our business model is resilient working well and we continue to deliver strong financial performance.
Tom: Performances of course made possible by 24000, plus Autonation associates, who take care of our customers every day and I think the team efforts continue to be recognized by outside parties because of this.
Our adjusted EPS was $5 <unk> for the quarter.
Starting with slide five I would like to build on the color Mike gave on the performance of our various revenue categories for the quarter.
Tom: These shareholders in Asia. Once again made fortune's most admired list jumping four spots to number three in the specialty retail section.
New vehicle volumes were up 8%, which includes increases of 16% on imports of 3% on premium luxury and flat domestic to it.
Tom: Ratchet patients so everybody. Thank you for the things that you do for us.
New vehicle gross profit <unk> continued to moderate while selling prices were stable vehicle costs were higher the rate of decline for the fourth quarter and gross profit <unk> was about $375 per unit, which slowed from the approximately $600 per unit sequential decline in recent quarters. This.
Tom: Tom I'm going to hand over to you. Thank you okay perfect. Thanks, Mike I'm, turning to slide four to comment on our fourth quarter P&L total revenue increased slightly as growth in new vehicle and after sales revenue more than offset lower used vehicle revenue as expected gross profit was down 5% in margin was 18 per.
What did the higher seasonal premium luxury mix and a more stable, although still that's an ideal environment for battery electric vehicles.
<unk> for the quarter.
Tom: Our strong growth in after sales, partially offset declines for new and used vehicles, which well, which I'll address in a later slide adjusted SG&A increased 5% to $791 million with stable core spending and incremental costs related to our growth initiatives. This resulted in adjusted operating income of $368 million for the quarter.
New vehicle inventory levels, including vehicles in transit have increased from 18100 units in 2022 to 35300 units at the end of 2023.
Moving on to slide six and used vehicles, we had a unit volume of the <unk>.
Tom: <unk>, which decreased 2% from a year ago.
That volume decline of 4% from a year ago as Mike mentioned on a total store basis and 8% on a same store basis.
Tom: Below the operating line, our fourth quarter results were impacted by higher interest expense for both for plan.
Tom: Non vehicle debt and benefited from lower income tax expense.
Okay.
There continues to be a shift to lower priced used vehicles are same store unit sales of used vehicles priced under $20000 increased 7% while.
Tom: The fourth quarter Floorplan interest expense of $47 million was up.
Tom: From $20 million, a year ago, a reflection of higher rates and inventory levels as expected as a reminder, we reflect floor plan assistance received from Oems and gross margin and in the fourth quarter increased assistance helped to offset partially the increase in floorplan interest expense.
While used vehicles over $40000 increased 20% and used vehicles priced from 20000 to.
$40000 were down 11%.
From a segment standpoint used unit volume performance was strongest in our import brands.
Year over year unit sales and gross profit PBR.
Tom: Interest expense for non vehicle debt was $46 million for the quarter up from $38 million a year ago.
Used vehicles were adversely impacted by the pricing band mix I mentioned and reflect an overall softer used car pricing environment.
Tom: Increase reflects increased borrowing and higher rates.
Tom: Income tax expense for the quarter was $62 million compared to $91 million in 2022, reflecting.
Used vehicle inventory levels increased sequentially and year over year, reflecting our stepped up buying activity in anticipation of the customary spike in first quarter used car volume.
Lower taxable income and a modestly lower income tax rate all in this resulted in adjusted net income up $216 million compared to adjusted net income of $319 million a year ago.
As Mike mentioned, we expect our first quarter <unk> to be at or slightly below fourth quarter levels, reflecting a conscious effort to align inventory levels and turn right with the market.
Tom: The impact of our share repurchase activity, partially offset the EPS effect of the lower net income.
CVR improvement is expected late in the first quarter as the fourth quarter inventory is full return.
Tom: Total shares repurchased over the year decreased our average shares outstanding by 14% to $42 9 million shares in the fourth quarter, our adjusted EPS was $5 two for the quarter.
Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing pricing and speed, while optimizing customer satisfaction.
I'm now on slide seven and customer financial services.
Speaker Change: Starting with slide five I'd like to build on the color Mike gave on the performance of our various revenue categories for the quarter.
DFS remained strong and would have been even stronger absent the shifting of economics related to Autonation finance lending.
Speaker Change: New vehicle volumes were up 8%, which includes increases of 16% on imports of 3% on premium luxury and flat domestically to it.
Up front fees previously received from Nonrecourse third party lenders is now deferred over the life of the Autonation finance loan.
Speaker Change: New vehicle gross profit <unk> continued to moderate while selling prices were stable vehicle costs were higher the rate of decline for the fourth quarter and gross profit <unk> was about $375 per unit, which slowed from the approximately $600 per unit sequential decline in recent quarters.
New vehicle product attachment and client penetration and CFS remained strong and increased from a year ago. We.
We have seen an increase in leasing which represents 23% of new sales in the fourth quarter compared to 13% last year. This is a minor headwind for CFS DVR as lease vehicles, historically have a lower CFS attachment rate.
Speaker Change: This reflected the higher seasonal premium luxury mix and a more stable, although still less an ideal environment for battery electric vehicles.
On used vehicles, there was slight decreases from a year ago on both the finance and product side of CFS as higher interest rates consumed more of our customers monthly payment capacity.
Speaker Change: New vehicle inventory levels, including vehicles in transit have increased from 18100 units in 2022 to 35300 units at the end of 2023.
As Mike mentioned in addition to fully supporting all Aon USA stores, we now have Autonation finance present in nearly all franchise stores in the fourth quarter, we originated approximately $110 million in loans up from $63 million in the third quarter.
Speaker Change: Moving on to slide six and used vehicles, we had a unit volume.
Speaker Change: Volume decline of 4% from a year ago as Mike mentioned on a total store basis and 8% on a same store basis.
The Autonation finance business continues to improve in all dimensions.
Speaker Change: There continues to be a shift to lower priced used vehicles are same store unit sales.
<unk> penetration in our stores profitability and delinquency rate, let's move to slide eight after sales represents about 44% of our growth. Our total gross profit per quarter and continued to grow with total store revenue, increasing 11% to $1 1 billion.
Speaker Change: Used vehicles priced under $20000 increased 7%.
Speaker Change: While used vehicles over $40000 increased 20% and used vehicles priced from 20000 to $40000 were down 11% from.
Speaker Change: From a segment standpoint used unit volume performance was strongest in our import brands.
Or 9% on a same store basis.
Customer pay warranty and internal all experienced double digit year over year growth the.
Speaker Change: Year over year unit sales and gross profit <unk>.
The value per orders improving in our total number of repair orders has also increased.
Speaker Change: Used vehicles were adversely impacted by the pricing band mix I mentioned and reflect an overall softer used car pricing environment.
Gross profit grew 13% year over year on a total store basis and 12% on a same store basis.
Speaker Change: Used vehicle inventory levels increased sequentially and year over year, reflecting our stepped up buying activity in anticipation of the customary spike in the first quarter used car volume.
Total gross profit was up double digits for customer pay warranty and internal and our gross profit margins were up more than 70 basis points to 47%, reflecting higher repair orders.
As Mike mentioned, we expect our first quarter <unk> to be at or slightly below fourth quarter levels, reflecting a conscious effort to align inventory levels.
Our value repair orders and scale benefits from the increase in the number of repair orders.
Speaker Change: Turn right with the market.
Speaker Change: Use CVR improvement is expected late in the first quarter as the fourth quarter inventory is full return.
For the full year, our after sales gross profit was more than $2 1 billion.
This is up more than $500 million from 2019.
Speaker Change: Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing.
This high margin business is a key part of our continued engagement with our customers and we're focused on capacity utilization technician development to support the continued growth of the business importantly, our total technician workforce increased 6% from a year ago on a same store basis and 11% in total.
Speaker Change: Reising and speed, while optimizing customer satisfaction.
Speaker Change: I'm now on slide seven and customer financial services, our industry, leading performance continued.
As you can see gross profit <unk> for CFS remained strong and would have been even stronger after the shifting of economics related to our relation finance lending.
Moving to slide nine our adjusted operating income was five 4% for the quarter down from last year, but up more than 150 basis points from pre pandemic levels.
Speaker Change: The upfront fees previously received from Nonrecourse third party lenders is now deferred over the life of the Autonation finance loan.
The decrease from 2022, mostly reflects the moderation in new vehicle unit profitability, which was expected and is consistent with the industry as well as higher SG&A.
Speaker Change: New vehicle product attachment and finance penetration in CFS remained strong and increased from a year ago.
Speaker Change: We are seeing an increase in leasing which represents 23% of new sales in the fourth quarter compared to 13% last year. This is a minor headwind for CFS D. Var at least vehicles historically have a lower CFS attachment rate.
The growth in SG&A reflects investments for growth increased advertising spend and inflation.
Normalized SG&A as a percentage of gross profit is expected to remain lower than pre pandemic levels.
Speaker Change: On used vehicles, there was slight decreases from a year ago on both a finance and product side of CFS as higher interest rates consume more of our customers monthly payment capacity.
During the fourth quarter, we recognized about $7 million of severance expenses as we streamlined our regional field team and rationalize the support functions.
Speaker Change: As Mike mentioned in addition to fully supporting all and USA stores. We now have Autonation finance present in nearly all franchise stores in the fourth quarter, we originated approximately $110 million of loans up from $63 million in the third quarter. The Autonation finance business continues to improve in all dimensions.
On Slide 10, you can see that our adjusted free cash flow for the year was $969 million.
$969 million compared to $1 5 billion a year ago.
The change year over year is consistent with our change in EBITDA a reconciliation for adjusted free cash flow is included in the appendix of this presentation.
Speaker Change: Including penetration in our stores profitability and delinquency rate.
Year over year, our total inventory increased by approximately $1 billion, which was largely funded by higher trade floor plan financing and non trade floor plan financing, which increased $424 million from a year ago. While we expect the continued normalization of new inventory levels. We are focused on the velocity with which.
Speaker Change: Move to slide eight after sales represents about 44% of our growth. Our total gross profit per quarter and continued to grow with total store revenue, increasing 11% to $1 1 billion.
Speaker Change: Or 9% on a same store basis.
Speaker Change: <unk> pay warranty and internal all experienced double digit year over year growth.
We turn our overall vehicle inventory.
Consistent with the expansion of Autonation finance, our net auto loans receivable increased by $230 million and we expect continued growth in this portfolio.
Speaker Change: The value per orders improving in our total number of repair orders has also increased.
Speaker Change: Gross profit grew 13% year over year on a total store basis and 12% on a same store basis.
Capex for the full year was $410 million compared to $329 million a year ago.
Speaker Change: Total gross profit was up double digits for customer pay warranty and internal and our gross profit margins were up more than 70 basis points to 47%, reflecting higher repair orders.
Reflecting primarily capacity growth that franchise stores.
Spending and facility electrification infrastructure.
This resulted in an adjusted free cash flow of $969 million and a strong conversion of 94% of our adjusted net income.
Speaker Change: Our value repair orders and scale benefits from the increase in the number of repair orders.
Speaker Change: For the full year, our after sales gross profit was more than $2 1 billion.
Slide 11 shows our capital allocation for the year 2022 and 2023.
Speaker Change: Which is up more than $500 million from 2019.
In 2023, we had a balanced mix of Reinvestments and return to shareholders.
Speaker Change: This high margin business is a key part of our continued engagement with our customers and we're focused on capacity utilization.
Capex of $410 million was about $80 million higher than 2022, as I mentioned M&A investments, which occurred earlier in the year totaled $271 million.
Mission development to support the continued growth of the business importantly, our total technician workforce increased 6% from a year ago on a same store basis and 11% in total.
With significant cash flow generation and a strong balance sheet, we returned $864 million to shareholders via share repurchases, reducing our shares outstanding by 13%.
Speaker Change: Moving to slide nine our adjusted operating income was five 4% for the quarter down from last year, but up more than 150 basis points from pre pandemic levels.
We have an additional $320 million remaining under our current board authorization for share repurchases.
Speaker Change: The decrease from 2022, mostly reflects the moderation in new vehicle unit profitability, which was expected and is consistent with the industry as well as higher SG&A.
At quarter end, our leverage was 219 times EBITDA the lower end of our two to three times target and we continue to maintain our investment grade credit rating.
Speaker Change: The growth in SG&A reflects investments for growth increased advertising spend and inflation.
Moving forward, we will continue to allocate capital to maximize shareholder value considering both near term market conditions.
Speaker Change: Normalized SG&A as a percentage of gross profit is expected to remain lower than pre pandemic levels.
The M&A landscape, particularly for core franchise operation and the longer term direction of the industry.
During the fourth quarter, we recognized about $7 million of severance expenses as we streamlined our regional field team and rationalize our support functions.
Now I'll turn the call back over to Mike to provide some commentary regarding 2024.
Yeah. Thanks, Tom.
Speaker Change: On Slide 10, you can see that our adjusted free cash flow for the year was $969 million.
Yes, we thought it'd be helpful. Just to provide some thoughts regarding 24 hour.
Speaker Change: $969 million compared to $1 5 billion a year ago.
A few things might be progressing.
On the new side of the business as we know basically supply is going to continue to return to pre pandemic levels and I think kind of leasing and retail incentives are clearly going to pick up through the year, but I think we'll remain below pre pandemic levels in total.
Speaker Change: The change year over year is consistent with our change in EBITDA a reconciliation for adjusted free cash flow is included in the appendix of this presentation.
Speaker Change: Year over year, our total inventory increased by approximately $1 billion, which was largely funded by higher trade floor plan financing and non trade floor plan financing, which increased $424 million from a year ago. While we expect the continued normalization of new inventory levels. We are focused on the velocity with which we.
Inventory levels will continue to increase over the course of 'twenty four, but we expect demand to be robust.
Actually electric vehicle product introduction and kept paying customer interest in these vehicles is clearly going to be a key dynamic this year as widely reported that PV honest consistently fell during 2023 and in most instances are lower than similar combustion engine vehicles and as with all things is about balance and it does appear Oems are adjusting their plans and actions to match.
Speaker Change: We turn our overall vehicle inventory.
Speaker Change: Consistent with the expansion of Autonation finance, our net auto loans receivable increased by $230 million and we expect continued growth in this portfolio.
Demand more closely and frankly this will be well received five <unk> in the marketplace and you have good exposure to this portion of the market based upon our brand mix and we expect <unk> margins to continue to moderate over the course of 'twenty, four but a somewhat slower pace than we experienced in 'twenty three.
Speaker Change: Capex for the full year was $410 million compared to $329 million a year ago.
Speaker Change: Reflecting primarily capacity growth at franchise stores.
Speaker Change: Spending and facility electrification infrastructure.
Used vehicle market will likely remain constrained as late model used vehicle availability remains limited and additional new vehicles are available.
Speaker Change: This resulted in an adjusted free cash flow of $969 million and a strong conversion of 94% of our adjusted net income.
He is going to be our effectiveness is amazing purchasing pricing and turning our inventory.
Speaker Change: Slide 11 shows our capital allocation for the year 2022 and 2023.
And we're going to remain nimble in our approach to those things in the market as it develops I expect our CSS to continue to perform well even with pressures coming from April monthly payment vehicle mix in OEM actions to support unit sales and as you've seen is a very consistent and clear strengths of our organization.
Speaker Change: 2023, we had a balanced mix of Reinvestments and return to shareholders.
Speaker Change: Capex of $410 million was about $80 million higher than 2022, as I mentioned M&A investments, which occurred earlier in the year totaled $271 million.
<unk> has been and will remain a significant area of focus for us.
Speaker Change: With significant cash flow generation and a strong balance sheet, we returned $864 million to shareholders via share repurchases, reducing our shares outstanding by 13%.
The results in our Q4.
And after strong growth in 2023, obviously, a year over year comps will moderate and we expect this area of our business to continue to grow attractively and we will as always be focused on managing the controllable varies variables, which includes cash flow and capital deployment.
Speaker Change: We have an additional $320 million remaining under our current board authorization for share repurchases.
Speaker Change: At quarter end, our leverage was 219 times EBITDA the lower end of our two to three times target and we continue to maintain our investment grade credit rating.
That Tom let's hand, it over to Derek to.
Get some questions, yes, Bruno if you could please.
Remind the audience targeting queue for question and answer please.
Speaker Change: Moving forward, we will continue to allocate capital to maximize shareholder value considering both near term market conditions.
Sure, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: The M&A landscape, particularly for our core franchise operations and the longer term direction of the industry.
Thats Star one on your telephone keypad.
Speaker Change: Now I'll turn the call back over to Mike to provide some commentary regarding 2024.
To withdraw your question Star followed by two and pleased to also remember too and mutual microphone when you should turn to speak.
Mike Manley: Yes, Thanks, Tom.
Yes, we thought it'd be helpful. Just to provide some thoughts regarding 24.
Could we do have our first question registered comes from John Murphy from Bank of America.
Mike Manley: We see things might be progressing.
Mike Manley: On the new side of the business as we know basically supply is going to continue to return to pre pandemic levels and I think kind of leasing and retail incentives are clearly going to pick up through the year.
John Your line is now open.
Good morning, guys.
I just wanted to ask the first question Mike on after sales I mean, it's obviously a bright spot it.
Mike Manley: We will remain below pre pandemic levels in total.
It seems like the efforts here to do higher taxes really paying off.
Mike Manley: Inventory levels will continue to increase over the course of 'twenty four, but we expect demand to be robust.
You keep talking about share of wallet.
Increasing it seems like the area where share of wallets and consumers is obviously, the most opportunity I'm going to get into the second half to return to the used vehicle. So as you think about this in 'twenty four and maybe even just beyond is from a strategic standpoint.
Mike Manley: Actually electric vehicle product introductions and customer interest in these vehicles is clearly going to be a key dynamic this year as widely reported that <unk> consistently during.
What do you think you need to do to continue to drive that significantly higher is it just a function of hiring more tax as an increase in connectivity is it getting involved in the second and third used vehicle autonomy, what's the key strategy, there and whatever the opportunities to drive that faster.
Mike Manley: During 2023 and in most instances are lower than similar combustion engine vehicles and as with all things is about balance and it does appear that Oems are adjusting their plans and actions to match demand more closely and frankly this will be well received five <unk> in the marketplace and you have good exposure to this portion of the market based upon our brand mix and we expect <unk>.
Further.
Mike Manley: Margins to continue to moderate over the course of 'twenty, four but a somewhat slower pace than we experienced in 'twenty three.
So John it is probably a combination of all of that.
All of the above if I think about our franchise business Firstly, we have.
Mike Manley: Used vehicle market will likely remain constrained as late model used vehicle availability remains limited and additional new vehicles are available. The key is going to be our effectiveness is amazing purchasing pricing and turning our inventory and we're going to remain nimble in our approach to those things in the market as it develops I expect CSS to continue to perform.
Our penetration in the vehicle park that we are responsible for SaaS our areas of operation.
Our franchises represented probably around 50% plus minus.
And what we know is.
That customers.
Move on to other sources for that service win win right.
Mike Manley: While even with pressure coming from April monthly payment vehicle mix in OEM actions to support unit sales and as you've seen is a very consistent and clear strengths of our organization.
Get seven years, although there are over 25 miles beyond the variety of so there's a lot of opportunity within the territories that we have and then we're providing channels.
Mike Manley: <unk> has been and will remain a significant area of focus for US we saw the results in our Q4.
Access to our customers.
Who would have migrated to a different source for the servicing and repairs through things such as our mobile service, which as you know is a new addition to us.
Mike Manley: And after strong growth in 2023, obviously, a year over year comps well model right and we expect this area of our business to continue to grow attractively and we will as always be focused on managing the controllable various variables, which includes cash flow and capital deployment.
I think partly.
In terms of our installed assets, we have we have.
Sufficient by capacity.
Speaker Change: And with that Tom, let's hand, it over to <unk> to.
We saw from memory I think it was a five 6% increase in our technicians during the period.
Speaker Change: We get some questions, yes, Bruno if you could please.
There is opportunity for us to continue to grow that adding services onto it and then we'll backfill with mobile services for those customers that down for you.
Speaker Change: <unk> audience targeting queue for question and answer please.
Bruno: Sure, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Whatever reason.
I've moved away from the franchise environment. So that's going to be a big focus for us. This year, there's plenty of opportunity, it's not easy to unlock because once our customers migrated they obviously form a relationship and that leads me to the last thing and that is we have a fantastic brand I think last time, we checked all Brian which we do relatively regularly it was the most down automotive brand.
Okay.
Bruno: Star one on your telephone keypad.
Bruno: To withdraw your question Star followed by two and pleased to also remember too and mutual microphone when you should turn to speak.
Bruno: Could we do have our first question registered comes from John Murphy from Bank of America.
In the United States, and I think we can do a better job.
John Murphy: Your line is now open.
Communicating all of the products and services to allow customers to help them understand that.
Good morning, guys.
John Murphy: I just wanted to ask the first question Mike on after sales I mean, it's obviously a bright spot it.
We can increasingly look after a broader set of needs.
John Murphy: It seems like the efforts here to do higher Texas really paying off.
Not just for themselves and their family.
Speaker Change: You keep talking about share of wallet.
Caller: Increasing it seems like the area. We're just you're awash with consumers is obviously, the most opportunity I'm going to get into the second and third return on the used vehicle. So as you think about this in 'twenty four and maybe even just beyond is from a strategic standpoint.
Okay. That's helpful. And then just a second question on the used car business.
<unk> are down it sounds like there's a little bit of mix going on also sort of a little bit of inventory management is this the kind of thing that you think is really a function of the next couple of quarters and then you get back to the normal Gpus or is there something happening here sort of cyclically or section here in a.
Caller: What do you think you need to do to continue to drive that significantly higher is it just a function of hiring more tax as an increase in connectivity is it getting involved in the second and third used vehicle autonomy, what's the key strategy, there and what are the opportunities to drive that faster.
Segment basis.
So we keep these numbers low.
No absolutely.
As Tom mentioned, I think one of the things that.
Caller: Further.
Speaker Change: So John it it's probably a combination of all of that.
As we came into 2023, our inventory levels were very low and we felt that we missed out on some of the marketplace. We put in place a number of initiatives middle of last year through the end of last year to enable us to source. The vehicles that we need that we did that very very effectively at the same time I think some of the market dynamics are changing and one of the things that.
John Murphy: All of the above if I think about our franchise business Firstly, we have.
John Murphy: Our penetration in the vehicle park that we are responsible for SaaS our areas of operation.
John Murphy: Our franchises represented probably around 50% plus minus.
John Murphy: And what we know is.
Had increased dramatically during the Covid period was the percentage mix of vehicles above 75000, Tom gave you that mix and we're seeing those customers that maybe came into the high end of the used car market because they couldnt get new now returning back to the new car market.
John Murphy: Customers.
John Murphy: Move onto other sources for that service win win right.
John Murphy: Get seven years, although there are over 25 miles beyond the radius. So theres a lot of opportunity within the territories that we have and then we're providing channels.
Lower transaction prices and more incentives for manufacturers and what we need to be is very very agile to make sure that as the market changes and I think youll continue to change that we are ahead of those mix changes and we have some work to do we did that we started that work in before the end of last year continued through January I think that work will be <unk>.
John Murphy: Access to our customers.
John Murphy: Who would have migrated to a different source for the servicing and we passed through things such as our mobile service, which as you know is a new addition to us.
John Murphy: I think partly.
John Murphy: In terms of our installed assets, we have we have.
We completed by the end of by the end of Q1 very early Q2 sites in my mind. It's transitory. The good news is that each one of those unit sales comes with.
John Murphy: Sufficient by capacity.
John Murphy: We saw from memory I think it was a five 6% increase in our technicians during the period.
John Murphy: There is opportunity for us to continue to grow that adding services onto it and then we'll backfill with mobile services for those customers that down for you.
Phenomenal CFS performance, and obviously is going straight into after sales.
After sales device for us to be able to look after themselves.
John Murphy: Whatever reason.
John Murphy: I've moved away from the franchise environment. So that's going to be a big focus for us. This year, there's plenty of opportunity, it's not easy to unlock because once our customers migrated they obviously form a relationship and that leads me to the last thing and that is we have a fantastic brand I think last time, we checked all Brian which we do relatively regularly it was the most down automotive brand.
Every customer comes now with from our perspective with a great opportunity not just in the south.
So Mike when you get when you get to turn and earn back.
Efficiently would it be fair to say that that <unk> thousand $800 range on PBR is something that we should think about sort of mid to long term as we get through the course of this year and beyond.
John Murphy: In the United States, and I think we can do a better job.
Yes, I think I think that's a very I think that's an achievable number for sure yes.
John Murphy: Communicating all of the products and services to allow customers to help them understand that.
Great Alright, thank you very much.
John Murphy: We can increasingly look after a broader set of needs.
Okay.
Thanks, Sean.
Our next question comes from Daniel <unk> from Stephens, Inc. Daniel You May proceed with your question.
John Murphy: Not just for themselves and their family.
Speaker Change: Okay. That's helpful. And then just a second question on the used car business.
Yeah, Hey, good morning, everybody. Thanks for taking my questions.
Speaker Change: <unk> are down it sounds like there's a little bit of mix going on also sort of a little bit of inventory management is this the kind of thing that you think is really a function of the next couple of quarters and then you get back to the normal Gpus or is there something happening here sort of cyclically or on a.
Michael I wanted to start maybe on the new GPU side, obviously, a little bit lighter moderation. Your commentary suggested that's going to continue into 'twenty 'twenty. Four curious if you can just update us how the OEM conversations are going are you seeing any change in tone, especially at some of the brands inventory maybe has bills and then I'm curious.
Speaker Change: Segment basis.
Speaker Change: So we keep these numbers low.
Speaker Change: No absolutely.
Given your experience on the OEM side, what levers do you think Damian Paul do you see them cut MSRP kind of how do you think they navigate through some of the heavier inventory situations out there.
Speaker Change: As Tom mentioned, I think one of the things that.
Speaker Change: As we came into 2023, our inventory levels were very low and we felt that we missed out on some of the market place. We put in place a number of initiatives middle of last year through the end of last year to enable us to source. The vehicles that we need that we did that very very effectively at the same time I think some of the market dynamics are changing one of the things that.
Okay. Thanks Daniel.
Well.
Even though and I mentioned this in my opening commentary until you tell them, we're seeing some increases in terms of retail incentive rates and leasing back up to 23%.
Speaker Change: Had increased dramatically during the Covid period was the percentage mix of vehicles above 75000, Tom gave you the mix and were seeing those customers that maybe came into the high end of the used car market because they couldnt get new now returning back to the new car market.
Still not at the levels that we had seen before and I think as you as we begin to see inventory build we will see.
Continued action in that area from from the Oems.
Leasing in my view by the end of this year early next year, we will be back to pre pandemic levels.
Speaker Change: Lower transaction prices and more incentives for manufacturers and what we need to be is very very agile to make sure that as the market changes and I think youll continue to change that we are ahead of those mix changes and we have some work to do we did that we started that work in before the end of last year continued through January I think that work will be <unk>.
And I think we've seen much more subsidized finance with obviously with the interest rates that we have and that that will continue as we as we get deep into 'twenty four.
<unk>.
When I think about overall days of supply I would say, it's very different depending on the manufacturers and the brand partners that we have but clearly still well below <unk>.
Speaker Change: We completed by the end of by the end of Q1 very early Q2 sites in my mind, it's trying to say the good news is that each one of those unit sales comes with.
Any instances the level we saw.
And from my point of view as the industry develops this year.
Speaker Change: Phenomenal CFS performance, and obviously is going straight into after sales.
We will truly see hopefully.
How the manufacturers are thinking about the balance of their inventory.
Speaker Change: After sales stood device for us to be able to look after themselves.
Providing market conditions, because we talked a lot about this when we would deepen the pandemic I think this year, we're going to see how each OEM is going to address that and some will be more disciplined and some will be less.
Speaker Change: Every customer comes now with from our perspective with a great opportunity not just in the south.
Speaker Change: So Mike when you get when you get to turn and earn back.
Okay.
Speaker Change: Efficiently would it be fair to say that that <unk> thousand $800 range on <unk> is something that we should think about sort of mid to long term as we get through the course of this year and beyond.
Got it.
That's helpful and then maybe Tom on the finance side.
Mike and you both mentioned the rollout Autonation finance into all the franchise stores I'm curious if you could maybe remit to provide some stats around the loan growth in the quarter, maybe people reserves youre, taking your provision for losses and then how the loans are performing and we think about the changing consumer credit backdrop today.
Mike Manley: Yes, I think I think that's a very I think that's an achievable number for sure yes.
Speaker Change: Great Alright, thank you very much.
Okay.
Speaker Change: Thanks Scott.
Thanks for the question Daniel.
Speaker Change: Our next question comes from Daniel <unk> from Stephens, Inc. Daniel You May proceed with your question.
Yes.
As everybody knows we bought.
Our nation for that.
October 2020 until we close.
Daniel: Yeah, Hey, good morning, everybody. Thanks for taking my questions.
It started out entirely as a third party lender mostly to subprime.
Daniel: Michael I wanted to start maybe on the new GPU side, obviously, a little bit lighter moderation in your commentary you suggested that's going to continue into 'twenty 'twenty. Four curious if you can just update us how the OEM conversations are going are you seeing any change in tone, especially at some of the brands inventory maybe has bills and then I'm curious.
Over the course of the last year completely converted that too.
Now supporting Autonation exclusively both in USA stores as well as the franchise stores.
Very little in terms of subprime. So it's it's really gone through a nice transition and we love the platform.
Daniel: Given your experience with OEM side, what levers do you think Damian Paul do you see them cut MSRP kind of how do you think they navigate through some of the heavier inventory situations out there.
We love the team the trends have been very very strong.
Got it.
The improvement in the origin mix.
Yes.
All autonation customers FICO scores have improved between 50 and 100 basis points in terms of what we're originating on the credit quality trends at 30 day delinquencies have been really strong I mean in the third quarter, we were proud et cetera, and a half percent delinquent.
Okay. Thanks Daniel.
Daniel: Well.
Daniel: Even though and I mentioned this in my opening commentary until you tell them, we're seeing some increases in terms of retail incentive rates and leasing back up to 23%.
Daniel: Still not at the levels that we had seen before and I think as you as we begin to see inventory build we will see.
Improved by about 200 basis points.
Through the through the end of January so it seem to do a nice job in what is not an easy environment for consumer credit.
Daniel: Continued action in that area from from the Oems.
Daniel: Leasing in my view by the end of this year early next year, we will be back to pre pandemic levels.
So we're happy with that.
The penetration rates amongst our stores, where we're present.
Daniel: I think we've seen much more subsidized finance with obviously with the interest rates that we have and that that will continue as we as we get deep into 'twenty four.
As Ben has been growing has been very strong so it's about a $450 million portfolio.
Daniel: <unk>.
Daniel: When I think about overall days of supply I would say, it's very different depending on the manufacturers and the brand partners that we have but clearly still well below <unk>.
That is after.
Sale of chunk.
Chunk of the business in the third quarter.
Which was about.
About $80 million.
We're excited about 2024, we think the originations.
Daniel: Any instances the level we saw.
Daniel: And from my point of view as the industry develops this year I think we will truly see hopefully.
Could could could double.
And.
It.
Couldn't be more pleased with how the.
Daniel: How the manufacturers are thinking about the balance of their inventory and providing market conditions, because we talked a lot about this when we would deepen the pandemic I think this year, we're going to see how each OEM is going to address that some.
The business has developed over time.
I appreciate David two quick accounting follow up where does those seasonal reserves.
Alone you said theyre going to double the loan growth I guess, where does that flow through the income statement as we think about modeling out the growth in the finance business.
Daniel: It will be more disciplined and some will be less.
Daniel: Yeah.
Speaker Change: Got it.
Speaker Change: Helpful and then maybe Tom on the finance side.
It's all in that one.
Speaker Change: Mike and you both mentioned you brought out Autonation finance into all the franchise stores I'm curious if you could maybe remit to provide some stats around the loan growth in the quarter, maybe the pupil reserves youre, taking a provision for losses and then how the loans are performing and we think about the changing consumer credit backdrop today.
One line other other income and expense on the P&L.
Yes.
While growing like I said, it's probably not material enough for us to break that out I think at some point, we'll address that depending on how the growth is but it's all basically collapsing that one line.
Speaker Change: Thanks for the question Daniel.
Speaker Change: Yeah.
Great. Thank you so much guys best of luck.
Speaker Change: As everybody knows we bought.
Speaker Change: Our relationship to that.
Speaker Change: October of 2020 until we close.
Our next question comes from Rajat Gupta from Jpmorgan.
Speaker Change: It started out entirely as a third party lender mostly to subprime.
Your line is now open.
Oh, great. Thanks for taking the question.
Speaker Change: Over the course of the last year completely converted that too.
Thanks for all the color on you know on.
2024 expectation around the new business.
Speaker Change: Now supporting Autonation exclusively both in USA stores as well as the franchise stores.
The used as well.
I'm curious is there.
Speaker Change: Very little in terms of subprime. So it's it's really gone through a nice transition we love the platform.
Range.
You were targeting.
For SG&A to growth.
We are.
Speaker Change: We love the team the trends have been very very strong.
In context.
The steady decline you know some of the pressures in the US business you know how should we think about SG&A to gross.
Speaker Change: Got it.
Speaker Change: The improvement in the origin mix.
Speaker Change: Yes.
For 2024, I have a quick follow up thanks.
Speaker Change: All autonation customers FICO scores have improved between 50 and 100 basis points in terms of what we're originating on the credit quality trends at 30 day delinquencies have been really strong I mean in the third quarter, we were proud et cetera in a half a percent delinquent.
Yes.
All right.
The way that we're thinking about this is obviously in a more of a cooler coal businesses. The things that we have put in place over the last.
<unk> continues.
To have I think clear benefits.
Speaker Change: Improved by about 200 basis points.
Our SG&A also includes some of the investments that we've been that we have been making progressively in the last two years. So the percentage that we say it doesn't represent the core businesses themselves, but I think the range that we sit here now is the range that.
Speaker Change: Through the through the end of January so haynesville or a nice job in what is not an easy environment for consumer credit.
Speaker Change: So we're happy with that.
Speaker Change: The penetration rates amongst our stores, where we're present.
Speaker Change: As Ben has been growing has been very strong so it's about a $450 million portfolio.
We're going to continue to target going forward and it will fluctuate as I've said based upon the additional investments that we're making for example in mobile services for example, in our <unk> Commerce business as we as we grow those businesses. So that's kind of my view on C&I at this time.
Speaker Change: That is after.
Speaker Change: A sale of itself.
Speaker Change: Chunk of the business in the third quarter.
Speaker Change: Which was about.
Speaker Change: About $80 million.
Speaker Change: We're excited about 2024, we think the originations.
Yes, it does.
The thing I would add to that.
Speaker Change: Could could could double.
As Mike mentioned.
We do have some some investments.
Speaker Change: And we're just.
And USA is as those stores rollout you don't get to.
Speaker Change: Couldn't be more pleased with how that.
Speaker Change: The business has developed over time.
Full run rate of profitability for about a year, so that that can that Bert.
Speaker Change: I appreciate that thanks to quick accounting follow up where does the seasonal reserves.
The SG&A rate and also the investments that Mike has mentioned strategic investments and also advertising as we've seen some inflation there.
Speaker Change: Loan balance that you said theyre going to double the loan growth I guess, where does that flow through the income statement as we think about modeling out the growth in the financing.
Speaker Change: It's all in that.
Speaker Change: The one line other other income and expense on the P&L.
I would say.
We probably would be in the longer term basis, mid <unk> kind of kind of level relative.
Speaker Change: <unk>.
Speaker Change: While growing like I said, it's probably not material enough for us to break that out I think at some point we'll address.
The gross profit, but we are paying close attention.
As we mentioned.
Speaker Change: Address that depending on how the growth is but it's all basically collapsing that in that one line.
We've done some.
Taken some modest actions.
In the fourth quarter to address.
Speaker Change: Great. Thank you so much guys best of luck.
And take advantage of some delayering opportunities in the regions as well as.
Speaker Change: Our next question comes from Rajat Gupta from Jpmorgan Rajat.
Two.
<unk> some of the support functions. So it's a pretty important area for us.
Rajat Gupta: Your line is now open.
We will continue to.
Rajat Gupta: Oh, great. Thanks for taking the question.
Drive productivity, where we can.
Rajat Gupta: Thanks for all the color on.
Got it got it no that's helpful color and just on capital allocation.
Rajat Gupta: 2024 expectation around the new business.
Rajat Gupta: The use as well.
Obviously, we can see with like very steady and like elevated clinical in buybacks over the last few years.
Speaker Change: I'm curious is there is there.
Speaker Change: Range.
Speaker Change: You were targeting.
For SG&A to gross.
Speaker Change: We are.
I'm curious like how that toggle between M&A and buyback looks today.
Speaker Change: In context.
Speaker Change: The steady decline you know some of the pressures in the US business you know how should we think about SG&A to gross.
What are you seeing in the pipeline for deals.
Speaker Change: For 2024, I have a quick follow up thanks.
Really the multiple curious if.
We should expect any shift.
Yes.
And strategy there you know maybe more geared towards M&A wishes historically buyback. Thanks.
Speaker Change: Gotcha.
Speaker Change: Yeah.
Speaker Change: The way that we're thinking about this is obviously in a more of a cooler coal businesses. The things that we have put in place over the last.
Yes.
Great question I think the Great news Jonathan.
We generate a lot of cash so it gives us optionality.
Speaker Change: <unk> continues.
Speaker Change: To have I think clear benefits.
And you're probably very familiar with how we've allocated capital over the last two or three years I don't think there is a material change in how we're looking at it.
Speaker Change: Our SG&A also includes some of the investments that we've been that we have been making progressively in the last two years. So the percentage that we say it doesn't represent the core businesses themselves, but I think the range that we sit here now is the range that.
The focus is on maximizing shareholder return.
When we do see allocation opportunities, whether its entirely to capex or.
Speaker Change: We're going to continue to target going forward and it will fluctuate as I've said based upon the additional investments that we're making for example in mobile services for example, in our Commerce business as we as we grow those businesses. So that's kind of my view on SG&A at this time.
M&A opportunities, we think we're pretty disciplined in terms of.
Our analytical evaluation or our incorporation of et cetera.
Are the deals look like growth would be accretive and meet our hurdle rates and we will go after them aggressively.
But we also have had great success with.
Speaker Change: Yes, it does.
Speaker Change: The thing I would add to that.
With share repurchases.
Speaker Change: As Mike mentioned.
You'll feel that that's going to continue to be an important part of our capital allocation playbook.
Speaker Change: We do have some investments.
Speaker Change: And USA is as those stores rollout you don't get to.
Are you seeing any changes in like this.
Multiples for these deals.
Speaker Change: Full run rate of profitability for about a year, so that that can that Bert.
Any change in tone or.
Any increasing.
Speaker Change: The SG&A rate and also the investments that Mike has mentioned strategic investments and also advertising as we've seen some inflation there.
<unk> like for sellers to offload.
Like if you think of the market, where you've seen that shifted on the M&A side.
Can you clarify your muscles, a little bit in your in your question I'm sorry.
I would say.
Speaker Change: We probably would be in the.
Speaker Change: Longer term basis, mid sixty's kind of kind of level of relative.
I just wanted to ask like have you seen.
Any changes in the.
Speaker Change: The gross profit, but we are paying close attention.
The multiples or devaluation of some of your assets are out there in the market from an M&A perspective.
As we mentioned.
Speaker Change: So we've done some.
Speaker Change: We've taken some modest actions.
Over the last few months.
Speaker Change: In the fourth quarter to address.
As you can imagine sellers.
Speaker Change: And take advantage of some delayering opportunities.
Tend to have amnesia when it comes to where their prices used to be before.
Speaker Change: Our regions as well as.
Speaker Change: Two.
These run ups in the last.
Speaker Change: We're kind of on some of the support functions. So it's a pretty important area for us.
A few years, but.
I don't think theres been any market change in valuations, maybe here and there, but we're not seeing anybody walk away from.
Speaker Change: We will continue to.
Speaker Change: Drive productivity, where we can.
Speaker Change: Yeah.
Got it got it no that's helpful color and just on capital allocation.
Last year's prices per se or anything like that.
Speaker Change: Obviously, we've seen with like very steady and like elevated clinical in buybacks over the last few years.
It's also true to say that.
All conversations around the basis for peoples.
People's valuations are heavily pointed in the last 12 months and trading conditions, and our view I'll be moving forward and and.
Speaker Change: I'm curious like how that toggle between M&A and buyback looks today.
Speaker Change: <unk> what are you seeing in the pipeline.
Speaker Change: Yield really.
As we move as we move frankly throughout last year and as we move further into this year obviously.
Really the multiple curious if.
Speaker Change: We should expect any shift.
Speaker Change: And strategy, there, maybe more geared towards M&A wishes historically buyback. Thanks.
TTM is going to reflect the reality of it.
The fact that there is a normalization in margins and ultimately it will impact values and that's something we're very much looking for and something that we're talking to people about but as Tom said at this moment in time, obviously people are holding on as much as I, possibly can to 'twenty two.
Speaker Change: Yes.
Great question I think the Great news Jonathan.
Speaker Change: We generate a lot of cash so it gives us optionality.
Speaker Change: And you're probably very familiar with how we've allocated capital over the last two or three years I don't think there is a material change in how we're looking at it.
Yeah.
Got it.
Helpful color. Thank you and good luck.
Speaker Change: Our focus is on maximizing shareholder return.
Our next question comes from Michael Ward from Freedom Freedom Capital Michael Your line is now open.
Speaker Change: When we do see.
Speaker Change: Allocation opportunities, whether its entirely to capex or.
Speaker Change: M&A opportunities, we think we're pretty disciplined in terms of.
Thanks, very much good morning, everyone.
Mike I think in your comments, you mentioned that on the parts and services side complexities led.
Speaker Change: Analytical evaluation.
Speaker Change: <unk> et cetera.
Speaker Change: Are the deals look like those would be accretive and meet our hurdle rates and we will go after them aggressively.
Higher content can.
Can you quantify either some of the content, you're talking about where the retention rates, you're getting on the parts and services side with the increased complexity of vehicles.
Speaker Change: But we also have had great success with.
Speaker Change: With share repurchases.
Speaker Change: You'll feel that that's going to continue to be an important part of our capital allocation playbook.
This is a Wednesday question has been doing with his team shows us that.
Even though.
Speaker Change: Are you seeing any changes in the.
The frequency of service and repairing and all so let me say service I'll come back to repay comment in a minute.
Speaker Change: The polls for these deals.
Speaker Change: A few months any change in tone or.
Speaker Change: Any increasing.
Drops loyalty goes up fairly significantly and and the time that the vehicle is in the shop goes up significantly so.
Speaker Change: <unk> like for sellers to offload.
Speaker Change: Curious like if you think of the market, where you've seen that shifted on the M&A side.
We were thinking about this transition to electrified vehicles, we were very concerned as many people were on about a drop off in parts and services that hasnt been.
Speaker Change: Can you clarify.
Speaker Change: Your muscles, a little bit in your in your question I'm sorry.
It hasnt been what we've experienced so far for those two reasons.
I just wanted to ask like have you seen.
Speaker Change: Any changes in.
And in terms of repair obviously the profile of that is changing some of the returns now.
Speaker Change: The multiples or devaluation of some of your assets are out there in the market from an M&A perspective.
Remotely.
And we really I think is still looking at that and learning about that but at this moment in time, if we look at the population of our customers in their vehicles, the combination of higher loyalties and longer time and shop.
Speaker Change: Over the last few months.
Speaker Change: Yeah as you can imagine sellers.
Speaker Change: Tend to have amnesia when it comes to where their prices used to be before.
Speaker Change: Right.
Our <unk> has been better than our expectation when we put it that way.
Okay.
Along with that could you give an update on repair Smith.
And what are your growth.
Objectives with it as you go.
Forward.
Yeah, absolutely well, we've rebranded we've had Smith, which was not unexpected and is now Autonation mobile services is integrated it is progressively being integration.
Alongside <unk> USA, because as you know many stand alone used qualified don't have enough sales provision and in the same way as we aligned Autonation financial Diane USA, we are aligning with <unk> Smith to be the provider of refurbishment and service.
Maintenance warranty needs for those customers.
We've opened up now our relationships with multiple fleet customers across the country and introducing mobile services.
Those guys and expanding the products that the fleet office I would say at this moment in time, there is a lot of work for us to do.
That integration work will probably continue through the balance of this year, we see a lot of growth, but we now need to drive up our returns.
Just last one last question on the M&A front.
You took a look at Pendragon does that suggest that as you look out over the next couple of years than expansion outside of the U S could be in the cards.
I think it goes back to Tom's comments ability summed it up really well we.
We are looking at opportunities that come across our desk in a very very consistent way.
Liked what we saw.
With Pendragon at the price that we had indicated in the marketplace.
At that point, we thought it was good but clearly that Moody's is not for us.
I would tell you that we have we have a number of opportunities at this moment in time.
Beautiful thank you very much.
Our next question comes from Bret Jordan from Jefferies.
Your line is now open.
Hey, good morning, guys.
On the mobile services question I guess, you are talking about expanding the products offered could you talk maybe a bit about the logistics of the mobile services. What can you do in that in that format and I guess from a staffing standpoint, and a cold rainy days, probably not appealing to work outdoors, but what are you seeing as far as building out that model.
Yes.
If you think about our geographic footprint.
We are in.
Largely the vast majority of our business.
In states, where you can off price full 12 months without without.
Certainly six nine.
I take your point, so obviously services maintenance and repair work as a given.
We are in the process of expanding to tie us we're in the process of expanding to glass and as you know we have we.
We have a very good.
And our collision centers and that will include calibration. So there are multiple things that they've banned so a quick can do.
And that's effectively what we're doing we have already done some pilot work on glass, which was successful and some of our Texas businesses. So that's going to be expanded throughout this year.
Tayo, there's a demand for tires.
Which can easily be done from.
Properly equipped van.
Quite an expansion in terms of products that you that we can offer them and as you can imagine as we grow autonation USA and they are as successful as they have been in terms of CFS. Many of those CFS products are associated with extended warranties or maintenance contracts and we're now able.
To completely fulfill them ourselves rather than those customers might be migrating to a competitor to have that work done so.
I'm very excited about mobile services.
It's a business that way.
As I said are centering in those markets, where we already have the entity in our customer base is now associated clearly with our brand, which I think does bring a degree of credibility, which is important when you're thinking about and planning on someone's drive and I think I think it will help us so let's see how we develop it this year.
Okay. Thanks, a quick question on domestic DSI 66 days could you talk about the sort of spread between the manufacturers and that inventory exposure.
And obviously I think there's been a lot of talk about some atlantis, maybe increasing their promotional level or decreasing pricing are you seeing anything thats sort of changing as far as.
I guess promotional cadence recently.
While I'm not saying any changes from my perspective, I think we're coming into traditional months when all of the dynamics will focus heavily on that on their own trucks.
Normal that I think.
It's something that we'll continue this different seasons in the year is not going to change I think that if.
If you think about that.
A percentage of sales by vehicle segment. It is natural that it was over.
And so you have a very high percentage of styles in trucks, whether it's light medium or heavy I going to have a higher day supply purely because of the selection required and.
Even though the length of the day supply has increased it is significantly lower than.
And it has been historically.
Great. Thank you.
As a reminder to ask a question. Please press star one on your telephone keypad.
Star one on your telephone keypad.
Our next question comes from Douglas, Doug <unk> from Evercore Douglas Your line is open.
Thanks for having me on congrats on the quarter two quick questions from me just first on the new vehicle PBR point and the normalization that we continue to see is it fair to think that there may actually be a higher trough cycle over cycle, maybe remaining at about 20% to 30% premium over 2019 levels I'm just.
If perhaps you are beginning to see some structural reasons that a decrease to pre COVID-19 levels may not be the reality given the rate of change on profit per unit has begun to slow like Tom mentioned.
As the fourth quarter was actually the best sequential and three quarters.
Yeah, Doug welcome.
Lot of moving pieces in that question is you know one of the things that I think.
Have to really watch closely this year is what's happening with battery electric vehicles and hybrid.
And as you know all of the Oems at this moment in time are working towards a set of.
G H G targets.
Which vary by state and that May well change depending on what happens.
Later, this year and as you move forward, but there is and has been a significant impact on margin as battery electric vehicles that continue to grow in terms of the share that they represent.
The beds increased share roughly double from the end of 2022 through 2023 and as a result of that.
That's had an impact on the combustion I'll now talk about margins. Obviously, so you answered your question is.
Truthfully.
I expect a return to very similar margins to 2019.
And.
And by the way that would include the impact in my view of battery electric vehicles and hybrid electric vehicles.
How that happens, it's very much going to depend on.
How the Oems are thinking about the mix of that babs their hybrid and combustion engines through the balance of this year and how they are going to achieve that target.
It's a very it is not an easy question to answer so that's that's my best effort, but.
I would say what we are doing in our businesses and our business is to really focus on those areas, where we have more control and more opportunity in those areas CFS used as we talked about obviously off the sales and how we can.
Provide more products and services to the customers that we have we have won over many many years of being in the marketplace and then to make sure that all new vehicles.
We're not an outlier either with lower margins will pull up market share.
Obviously control our costs because to a large extent, how the new vehicle market.
Developed as you can completely understand even though.
Every large player in this industry, we are still a tiny player in terms of the total.
New vehicle market. So I think we have to be realistic about the things we can do.
Okay. That's helpful color I appreciate you, giving the detail there.
Just to be Crystal clear here, a slightly lower growth from Evs as a lot of us now expect for.
Or at least 24 through maybe 'twenty five 'twenty six would actually be a positive that's the correct way to think about that.
Yeah based upon the margin we saw developed last year, that's exactly how I would think about it.
Okay. Thanks, Dave.
Our next question comes from Colin Langan from Wells Fargo.
Colin Your line is now.
Okay.
Oh, great. Thanks for taking my questions. Thank.
You mentioned in your comments the CFS is supposed to be strong I mean, how should we be thinking about that though because I mean, I think if theres more leasing I think that puts a little bit of pressure on there's possible normalization of vehicles, maybe home mass market, we might put pressure on that does that still going to be up year over year or should we think of that just.
Moderating a bit as we go into next year.
Yes.
Thanks for the question Scott.
Yeah in my commentary I was referencing.
Yeah.
Higher lease penetration.
In the CFS commentary I think on balance.
Leases are.
Accretive to what we're trying to accomplish.
Maybe you sell.
A little bit fewer products out of CFS perspective, but it's not it's not massive I mean, it is outweighed by the fact that we have a shot at getting the used car. Once it comes off lease, but also helps with vehicle affordability.
And we have <unk>.
Third party finance or thinking of residual risk.
Net net a win win for us on leasing.
And I would think of it that way, we've been able to manage through with CFS over the years with.
Higher higher leasing volume.
Got it and then just going back to your comments to the last question on expecting.
Profitability of just sort of normalized pre COVID-19 2019 levels is that already.
Pretty much there on the domestic so if I look at the Q4 margin the percent margin looks pretty similar too.
Pre COVID-19.
Is that kind of driving some of those thoughts is that those companies that have already kind of restocked onto the inventory you're already kind of back to normal levels.
Yes, the answer to your question is that it's pretty much that for some of our Oems.
No.
Got it alright, thank you taking my questions.
Hello.
We currently have no further questions. So I'd like to hand, the call back to management team for closing remarks over to you.
Firstly, thanks for thanks for your questions I'm, just going to touch on the margin question that I've received one of the things that I think is relevant and important as you think about our performance going forward.
I N USA as valuable addition, too.
Our company, our organization, particularly where we have areas of significant density.
Our used vehicle margins does not perform in the same way for obvious reasons as our franchise businesses. So when you think about the $800 that we discussed I would think about that in the context that I and USA.
Is it a source of vehicles is very different the way that they can attach manufacturing OEM programs is significantly different so their whole business model, including the capital invested is very very different.
As you think about my comments on 1800 dollar margin make sure you factor in the impact of I N USA on our average margins going forward, because they will not and have not been at that level and I don't anticipate that anytime going forward.
But with that said.
When I think about 24.
It's clearly going to have as normal mix headwinds in Taiwan.
But for me after a very significant year in 'twenty three planned leadership transitions I'm feeling positive about our development as we enter this year, we have jet parent joined documentaries.
Chief Operating officer, Tom came in last year, CMO joined Us Rich Lennox.
He joined earlier in 2023, sorry from my point of view, our leadership team that year of transition, which was planned is now complete and I think all of the members that we've added bring vast experience to the nation and these guys along with my colleagues.
Operator: Operating your call today. During this presentation, you can register to ask a question by pressing star, followed by one on your telephone keypad. I'll now hand over to your host, Derek Fiebig, Vice President of Investor Relations. Please go ahead.
Operator: Operating your call today. During this presentation, you can register to ask a question by pressing star, followed by one on your telephone keypad. I'll now hand over to your host, Derek Fiebig, Vice President of Investor Relations. Please go ahead.
With CFS, you know over the years with that.
Higher higher leasing volume.
Got it and then just going back to your comments to the last question on expecting.
On our executive leadership team I'm, certainly going to help us build on our success in the physician and position our company well for the future and really that enables us I think to me.
Derek Fiebig: Thank you, Bruno, and good morning, everyone. Welcome to AutoNation's Q4 2023 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call for questions. Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.
Derek Fiebig: Thank you, Bruno, and good morning, everyone. Welcome to AutoNation's Q4 2023 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call for questions. Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.
Profitability to sort of normalize to pre Covid 2019 levels is that already.
Much there on the domestic so if I look at the Q4 margin the percent margin looks pretty similar to.
When you look at how the investments that we've made in various parts of our businesses are performing and understand how we can get to a period of growth in some of those and in others. How we can make sure that we're driving up our margin so.
Pre COVID-19.
That kind of driving some of those thoughts is that those companies that are already kind of restocked a lot of the inventory already kind of back to normal levels.
With that thank you for joining Nicole we'll see how the year goes on I look forward to talking to many of you between now and most of you next quarter.
Yes, the answer to your question is that it's pretty much there so some of our Oems.
Okay.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Got it alright, thanks, taking my questions.
Hello.
Okay.
We currently have no further questions. So I'd like to hand, the call back to management team for closing remarks over to you.
Firstly, thanks for thanks for your questions I'm, just going to touch on the margin question that I've received one of the things that I think is relevant and important as you think about our performance going forward.
Derek Fiebig: Certain Non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations are provided in our materials and on our website at investors.autonation.com. With that, I'll turn the call over to Mike.
Derek Fiebig: Certain Non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations are provided in our materials and on our website at investors.autonation.com. With that, I'll turn the call over to Mike.
I N USA valuable addition to come.
Company or organization, particularly where we have areas of significant density.
Mike Manley: Yeah, thanks, Derek, and good morning, everybody. Thank you for joining us today. I'm on slide 3, and I'm gonna provide some opening remarks before I hand over to Tom, who's going to take you through our Q4 results in greater detail. Now, as we know, there continue to be mixed economic signals in the economy and concerns over affordability, but from our perspective, consumer demand for new vehicles remains robust. Now, during the quarter, our total new vehicle revenue increased 7% and unit sales increased 8%, and this reflected strong import growth as well as the seasonal uplift in premium luxury sales. New vehicle margins continued to decline, but the rate of moderation in Q4, which was approximately $120 per month, was more modest than earlier quarters.
Mike Manley: Yeah, thanks, Derek, and good morning, everybody. Thank you for joining us today. I'm on slide 3, and I'm gonna provide some opening remarks before I hand over to Tom, who's going to take you through our Q4 results in greater detail. Now, as we know, there continue to be mixed economic signals in the economy and concerns over affordability, but from our perspective, consumer demand for new vehicles remains robust. Now, during the quarter, our total new vehicle revenue increased 7% and unit sales increased 8%, and this reflected strong import growth as well as the seasonal uplift in premium luxury sales. New vehicle margins continued to decline, but the rate of moderation in Q4, which was approximately $120 per month, was more modest than earlier quarters.
That used vehicle margin does not fall in the same way for obvious reasons as our franchise businesses. So when you think about the ATM. The dollars that we discussed I'm thinking about that in the context of <unk> USA.
Do they sort of say vehicles is very different the way that they can attach manufacturing OEM programs is significantly different so their whole business model, including the capital invested is very very different. So as you think about my comments on 1800 dollar margin make sure you factor in the impact of I N USA on our average margins going forward because they will not.
And have not been at that level.
And I don't anticipate that anytime going forward.
With that said.
When I think about 24, just it's clearly going to have as normal mix headwinds and <unk>.
Mike Manley: Total new vehicle inventory levels of 36 days increased from 19 last year and 31 in Q3. We have 66 days of domestic brands, 29 days of luxury, and 24 days of import brands. Inventory levels are expected to continue to grow in 2024, and as such, we expect to see a continued moderation of new vehicle margin, which we anticipate will be roughly the same pace as we experienced in Q4. Turning to used vehicles, same store units decreased 8% a year ago, while total units were down 4%, which reflects the growth of AM USA stores in the year. The more recent sequential comparisons have us slightly better than the market. Now, we're managing several critical variables in the used market at the moment.
Mike Manley: Total new vehicle inventory levels of 36 days increased from 19 last year and 31 in Q3. We have 66 days of domestic brands, 29 days of luxury, and 24 days of import brands. Inventory levels are expected to continue to grow in 2024, and as such, we expect to see a continued moderation of new vehicle margin, which we anticipate will be roughly the same pace as we experienced in Q4. Turning to used vehicles, same store units decreased 8% a year ago, while total units were down 4%, which reflects the growth of AM USA stores in the year. The more recent sequential comparisons have us slightly better than the market. Now, we're managing several critical variables in the used market at the moment.
But for me after a very significant year in 'twenty three planned leadership transition I'm feeling positive about our development.
We enter this year, we have Jeff current joined our group as you know.
The Chief operating Officer, Tom came in last year, CMO joined Us Rich Lennox.
He joined earlier in 2023.
From my point of view, our leadership team that year of transition, which was planned is now complete and I think all of the members that we've added brings vast experience to the nation and these guys along with my colleagues.
When you say on our executive leadership team I'm, sorry, they're going to help us build on our success in the physician and position our company well for the future and I'm really that enables us I think to really.
Mike Manley: Firstly, we continue to see tight availability, and this has been with us throughout 2023 and will no doubt continue into 2024. Notwithstanding the inventory availability, we're seeing used vehicle depreciation, which is broadly back to normal and historical levels. Mix between price bands is also normalizing, and as a result, we've seen lower demand in higher priced used vehicles, partly because of affordability and partly because new vehicles are becoming more available with lower net transaction price, which is often accompanied by subsidized lending rates, which makes new, new products more compelling for a number of our customers. Tom's going to give you some of the specifics on unit sales by pricing band. Our inventory turns on used vehicles declined modestly during the quarter.
Mike Manley: Firstly, we continue to see tight availability, and this has been with us throughout 2023 and will no doubt continue into 2024. Notwithstanding the inventory availability, we're seeing used vehicle depreciation, which is broadly back to normal and historical levels. Mix between price bands is also normalizing, and as a result, we've seen lower demand in higher priced used vehicles, partly because of affordability and partly because new vehicles are becoming more available with lower net transaction price, which is often accompanied by subsidized lending rates, which makes new, new products more compelling for a number of our customers. Tom's going to give you some of the specifics on unit sales by pricing band. Our inventory turns on used vehicles declined modestly during the quarter.
You look at how the investments that we've made in various parts of our businesses are performing and understand how we can get to a period of growth in some of those and in others. How we can make sure that we're driving up our margin so.
With that thank you for joining Nicole we'll see how the year goes and I look forward to talking to many of you between now and most of you next quarter.
Speaker Change: Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Thank you.
Speaker Change: [music].
Mike Manley: The mix change I just noted, combined with slower turns, moderated our used PVR, and we expect these market conditions to continue into 2024. As a result, we expect our Q1 2024 used margins to be in the same range as our Q4 results. Now, we maintained our industry-leading performance in customer financial services in the quarter as the team continued to do an outstanding job to overcome a higher interest rate environment by maintaining solid growth in product sales per unit sold compared to a year ago. This performance, combined with a 2% increase in total retail units sold, resulted in higher CFS gross profit. After-Sales delivered a record fourth quarter for revenue and margin. Total store revenue was up 11%, and our gross profit was up 13%. Growth came from all major categories.
Mike Manley: The mix change I just noted, combined with slower turns, moderated our used PVR, and we expect these market conditions to continue into 2024. As a result, we expect our Q1 2024 used margins to be in the same range as our Q4 results. Now, we maintained our industry-leading performance in customer financial services in the quarter as the team continued to do an outstanding job to overcome a higher interest rate environment by maintaining solid growth in product sales per unit sold compared to a year ago. This performance, combined with a 2% increase in total retail units sold, resulted in higher CFS gross profit. After-Sales delivered a record fourth quarter for revenue and margin. Total store revenue was up 11%, and our gross profit was up 13%. Growth came from all major categories.
Speaker Change: Yeah.
Speaker Change: Yeah.
Mike Manley: The greater complexity of vehicles is leading to higher values per repair order, and this, coupled with increased numbers of repair orders from a year ago, resulted in what I think is an excellent performance. The strength of our balance sheet and cash generation, which Tom will discuss, allowed us to deploy an additional $150 million towards share repurchases during the quarter, repurchasing more than 1.1 million shares. Now, aside from the solid quarter, from a financial perspective, there are a few other highlights I'd like to touch on. We continue to focus on our customers and our work into garner a greater share of customers' wallets. As such, during the quarter, we continued integrating AutoNation Finance across our portfolio, including the launch into nearly all of our franchise stores.
Mike Manley: The greater complexity of vehicles is leading to higher values per repair order, and this, coupled with increased numbers of repair orders from a year ago, resulted in what I think is an excellent performance. The strength of our balance sheet and cash generation, which Tom will discuss, allowed us to deploy an additional $150 million towards share repurchases during the quarter, repurchasing more than 1.1 million shares. Now, aside from the solid quarter, from a financial perspective, there are a few other highlights I'd like to touch on. We continue to focus on our customers and our work into garner a greater share of customers' wallets. As such, during the quarter, we continued integrating AutoNation Finance across our portfolio, including the launch into nearly all of our franchise stores.
Mike Manley: We also continued with the rollout of our AM USA stores, opening locations in Plano, TX, and Fort Myers, FL during the quarter. We opened additional stores in Florida early this year with Wesley Chapel, FL, Sanford, FL, and Jacksonville, FL, adding to density in these markets. I think our business model is resilient, working well, and we continue to deliver a strong financial performance. Now, this performance is, of course, made possible by our 24,000-plus AutoNation associates who take care of our customers every day. I think the team efforts continue to be recognized by outside parties because of this. This year, AutoNation once again made Fortune's Most Admired list, jumping 4 spots to number 3 in the specialty retailer section. Congratulations to everybody. Thank you for the things that you do for us. With that, Tom, I'm going to hand over to you.
Mike Manley: We also continued with the rollout of our AM USA stores, opening locations in Plano, TX, and Fort Myers, FL during the quarter. We opened additional stores in Florida early this year with Wesley Chapel, FL, Sanford, FL, and Jacksonville, FL, adding to density in these markets. I think our business model is resilient, working well, and we continue to deliver a strong financial performance. Now, this performance is, of course, made possible by our 24,000-plus AutoNation associates who take care of our customers every day. I think the team efforts continue to be recognized by outside parties because of this. This year, AutoNation once again made Fortune's Most Admired list, jumping 4 spots to number 3 in the specialty retailer section. Congratulations to everybody. Thank you for the things that you do for us. With that, Tom, I'm going to hand over to you.
Tom Szlosek: ... to you. Thank you. Okay, perfect. Thanks, Mike. I'm turning to slide 4 to comment on our fourth quarter, P&L. Total revenue increased slightly as growth in new vehicle and after-sales revenue more than offset lower used vehicle revenue. As expected, gross profit was down 5% and margin was 18% for the quarter, as strong growth in after-sales partially offset declines for new, and used vehicles, which I'll address in a later slide. Adjusted SG&A increased 5% to $791 million, with stable core spending and incremental costs related to our growth initiatives. This resulted in adjusted operating income of $368 million for the quarter, which decreased 22% from a year ago.
Tom Szlosek: ... to you. Thank you. Okay, perfect. Thanks, Mike. I'm turning to slide 4 to comment on our fourth quarter, P&L. Total revenue increased slightly as growth in new vehicle and after-sales revenue more than offset lower used vehicle revenue. As expected, gross profit was down 5% and margin was 18% for the quarter, as strong growth in after-sales partially offset declines for new, and used vehicles, which I'll address in a later slide. Adjusted SG&A increased 5% to $791 million, with stable core spending and incremental costs related to our growth initiatives. This resulted in adjusted operating income of $368 million for the quarter, which decreased 22% from a year ago.
Tom Szlosek: Below the operating line, our fourth quarter results were impacted by higher interest expense for both floorplan and non-vehicle debt, and benefited from lower income tax expense. The fourth quarter floorplan interest expense of $47 million was up from $20 million a year ago, a reflection of higher rates and inventory levels as expected. As a reminder, we reflect floorplan assistance received from OEMs in gross margin. And in the fourth quarter, the increased assistance helped to offset partially the increase in floorplan interest expense. Interest expense from non-vehicle debt was $46 million for the quarter, up from $38 million a year ago. The increase reflects increased borrowing and higher rates. Income tax expense for the quarter was $62 million, compared to $91 million in 2022, reflecting lower taxable income and a modestly lower income tax rate.
Tom Szlosek: Below the operating line, our fourth quarter results were impacted by higher interest expense for both floorplan and non-vehicle debt, and benefited from lower income tax expense. The fourth quarter floorplan interest expense of $47 million was up from $20 million a year ago, a reflection of higher rates and inventory levels as expected. As a reminder, we reflect floorplan assistance received from OEMs in gross margin. And in the fourth quarter, the increased assistance helped to offset partially the increase in floorplan interest expense. Interest expense from non-vehicle debt was $46 million for the quarter, up from $38 million a year ago. The increase reflects increased borrowing and higher rates. Income tax expense for the quarter was $62 million, compared to $91 million in 2022, reflecting lower taxable income and a modestly lower income tax rate.
Tom Szlosek: All in, this resulted in adjusted net income of $216 million compared to adjusted net income of $319 million a year ago. The impact of our share repurchase activity partially offset the EPS effect of the lower net income. Total shares repurchased over the year decreased our average shares outstanding by 14% to 42.9 million shares in the fourth quarter. Our adjusted EPS was $5.02 for the quarter. Starting with slide 5, I'd like to build on the color Mike gave on the performance in our various revenue categories for the quarter. New vehicle volumes were up 8%, which includes increases of 16% on imports, 3% on premium luxury, and flat domestic units. New vehicle gross profit PVRs continued to moderate. While selling prices were stable, vehicle costs were higher.
Tom Szlosek: All in, this resulted in adjusted net income of $216 million compared to adjusted net income of $319 million a year ago. The impact of our share repurchase activity partially offset the EPS effect of the lower net income. Total shares repurchased over the year decreased our average shares outstanding by 14% to 42.9 million shares in the fourth quarter. Our adjusted EPS was $5.02 for the quarter. Starting with slide 5, I'd like to build on the color Mike gave on the performance in our various revenue categories for the quarter. New vehicle volumes were up 8%, which includes increases of 16% on imports, 3% on premium luxury, and flat domestic units. New vehicle gross profit PVRs continued to moderate. While selling prices were stable, vehicle costs were higher.
Tom Szlosek: The rate of decline for the fourth quarter in gross profit PVRs was about $375 per unit, which slowed from the approximately $600 per unit sequential decline in recent quarters. This reflected the higher seasonal premium luxury mix and a more stable, although still less than ideal environment for battery electric vehicles. New vehicle inventory levels, including vehicles in transit, have increased from 18,100 units in 2022 to 35,300 units at the end of 2023. I'm moving on to slide six. In used vehicles, we had a unit volume decline of 4% from a year ago, as Mike mentioned, on a total store basis, and 8% on a same-store basis. There continues to be a shift to lower priced used vehicles.
Tom Szlosek: The rate of decline for the fourth quarter in gross profit PVRs was about $375 per unit, which slowed from the approximately $600 per unit sequential decline in recent quarters. This reflected the higher seasonal premium luxury mix and a more stable, although still less than ideal environment for battery electric vehicles. New vehicle inventory levels, including vehicles in transit, have increased from 18,100 units in 2022 to 35,300 units at the end of 2023. I'm moving on to slide six. In used vehicles, we had a unit volume decline of 4% from a year ago, as Mike mentioned, on a total store basis, and 8% on a same-store basis. There continues to be a shift to lower priced used vehicles.
Tom Szlosek: Our same-store unit sales of used vehicles priced under $20,000 increased 7%, while used vehicles over $40,000 increased 20%, and used vehicles priced from $20,000 to $40,000 were down 11%. From a segment standpoint, used unit volume performance was strongest in our import brands. Year-over-year, unit sales and gross profit PVRs in used vehicles were adversely impacted by the pricing band mix I mentioned, and reflect an overall softer used car pricing environment. Used vehicle inventory levels increased sequentially and year-over-year, reflecting our stepped-up buying activity in anticipation of the customary spike in first quarter used car volume. As Mike mentioned, we expect our first quarter PVRs to be at or slightly below fourth quarter levels, reflecting a conscious effort to align inventory levels and turn rate with the market.
Tom Szlosek: Our same-store unit sales of used vehicles priced under $20,000 increased 7%, while used vehicles over $40,000 increased 20%, and used vehicles priced from $20,000 to $40,000 were down 11%. From a segment standpoint, used unit volume performance was strongest in our import brands. Year-over-year, unit sales and gross profit PVRs in used vehicles were adversely impacted by the pricing band mix I mentioned, and reflect an overall softer used car pricing environment. Used vehicle inventory levels increased sequentially and year-over-year, reflecting our stepped-up buying activity in anticipation of the customary spike in first quarter used car volume. As Mike mentioned, we expect our first quarter PVRs to be at or slightly below fourth quarter levels, reflecting a conscious effort to align inventory levels and turn rate with the market.
Tom Szlosek: Used PVR improvement is expected late in Q1 as the Q4 inventory is fully turned. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing, and speed while optimizing customer satisfaction. I'm now on slide 7. In customer financial services, CFS remained strong and would have been even stronger absent the shifting of economics related to AutoNation Finance lending. The upfront fee previously received from non-recourse third-party lenders is now deferred over the life of the AutoNation Finance loan. New vehicle product attachment and finance penetration in CFS remained strong and increased from a year ago. We have seen an increase in leasing, which represents 23% of new sales in Q4, compared to 13% last year.
Tom Szlosek: Used PVR improvement is expected late in Q1 as the Q4 inventory is fully turned. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing, and speed while optimizing customer satisfaction. I'm now on slide 7. In customer financial services, CFS remained strong and would have been even stronger absent the shifting of economics related to AutoNation Finance lending. The upfront fee previously received from non-recourse third-party lenders is now deferred over the life of the AutoNation Finance loan. New vehicle product attachment and finance penetration in CFS remained strong and increased from a year ago. We have seen an increase in leasing, which represents 23% of new sales in Q4, compared to 13% last year.
Tom Szlosek: This is a minor headwind for CFS PVR, as leased vehicles historically have a lower CFS attachment rate. On used vehicles, there were slight decreases from a year ago on both the finance and product side of CFS, as higher interest rates consumed more of our customers' monthly payment capacity. As Mike mentioned, in addition to fully supporting all AN USA stores, we now have AutoNation Finance present in nearly all franchise stores. In the fourth quarter, we originated approximately $110 million in loans, up from $63 million in the third quarter. The AutoNation Finance business continues to improve in all dimensions, including penetration in our stores, profitability, and delinquency rate. Let's move to slide eight.
Tom Szlosek: This is a minor headwind for CFS PVR, as leased vehicles historically have a lower CFS attachment rate. On used vehicles, there were slight decreases from a year ago on both the finance and product side of CFS, as higher interest rates consumed more of our customers' monthly payment capacity. As Mike mentioned, in addition to fully supporting all AN USA stores, we now have AutoNation Finance present in nearly all franchise stores. In the fourth quarter, we originated approximately $110 million in loans, up from $63 million in the third quarter. The AutoNation Finance business continues to improve in all dimensions, including penetration in our stores, profitability, and delinquency rate. Let's move to slide eight.
Tom Szlosek: After-Sales represents about 44% of our gross, our total gross profit per quarter, and continued to grow with total store revenue increasing 11% to $1.1 billion, or 9% on a same store basis. Customer pay, warranty, and internal all experienced double-digit year-over-year growth. The value per order is improving, and our total number of repair orders has also increased. Gross profit grew 13% year-over-year on a total store basis and 12% on a same store basis. Total gross profit was up double digits for customer pay, warranty, and internal, and our gross profit margins were up more than 70 basis points to 47%, reflecting higher repair orders, higher value repair orders, and scale benefits from the increase in the number of repair orders.
Tom Szlosek: After-Sales represents about 44% of our gross, our total gross profit per quarter, and continued to grow with total store revenue increasing 11% to $1.1 billion, or 9% on a same store basis. Customer pay, warranty, and internal all experienced double-digit year-over-year growth. The value per order is improving, and our total number of repair orders has also increased. Gross profit grew 13% year-over-year on a total store basis and 12% on a same store basis. Total gross profit was up double digits for customer pay, warranty, and internal, and our gross profit margins were up more than 70 basis points to 47%, reflecting higher repair orders, higher value repair orders, and scale benefits from the increase in the number of repair orders.
Tom Szlosek: For the full year, our after-sales gross profit was more than $2.1 billion, which is up more than $500 million from 2019. This high margin business is a key part of our continued engagement with our customers, and we're focused on capacity utilization, technician development to support the continued growth of the business. Importantly, our total technician workforce increased 6% from a year ago on a same store basis and 11% in total. Moving to slide 9, our adjusted operating income was 5.4% for the quarter, down from last year, but up more than 150 basis points from pre-pandemic levels. The decrease from 2022 mostly reflects the moderation in new vehicle unit profitability, which was expected and is consistent with the industry, as well as higher SG&A.
Tom Szlosek: For the full year, our after-sales gross profit was more than $2.1 billion, which is up more than $500 million from 2019. This high margin business is a key part of our continued engagement with our customers, and we're focused on capacity utilization, technician development to support the continued growth of the business. Importantly, our total technician workforce increased 6% from a year ago on a same store basis and 11% in total. Moving to slide 9, our adjusted operating income was 5.4% for the quarter, down from last year, but up more than 150 basis points from pre-pandemic levels. The decrease from 2022 mostly reflects the moderation in new vehicle unit profitability, which was expected and is consistent with the industry, as well as higher SG&A.
Tom Szlosek: The growth in SG&A reflects investments for growth, increased advertising spend, and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic levels. During Q4, we recognized about $7 million of severance expenses as we streamlined our regional field team and rationalized some support functions. On slide 10, you can see our adjusted free cash flow for the year was $969 million compared to $1.5 billion a year ago. The change year-over-year is consistent with our change in EBITDA. A reconciliation for adjusted free cash flow is included in the appendix of this presentation.
Tom Szlosek: The growth in SG&A reflects investments for growth, increased advertising spend, and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic levels. During Q4, we recognized about $7 million of severance expenses as we streamlined our regional field team and rationalized some support functions. On slide 10, you can see our adjusted free cash flow for the year was $969 million compared to $1.5 billion a year ago. The change year-over-year is consistent with our change in EBITDA. A reconciliation for adjusted free cash flow is included in the appendix of this presentation.
Tom Szlosek: Year-over-year, our total inventory increased by approximately $1 billion, which was largely funded by higher trade floor plan financing and non-trade floor plan financing, which increased $424 million from a year ago. While we expect a continued normalization of new inventory levels, we are focused on the velocity with which we turn our overall vehicle inventory. Consistent with the expansion of AutoNation Finance, our net auto loans receivable increased by $230 million, and we expect continued growth in this portfolio. CapEx for the full year was $410 million compared to $329 million a year ago, reflecting primarily capacity growth at franchise stores, IT spending, and facility electrification infrastructure.
Tom Szlosek: Year-over-year, our total inventory increased by approximately $1 billion, which was largely funded by higher trade floor plan financing and non-trade floor plan financing, which increased $424 million from a year ago. While we expect a continued normalization of new inventory levels, we are focused on the velocity with which we turn our overall vehicle inventory. Consistent with the expansion of AutoNation Finance, our net auto loans receivable increased by $230 million, and we expect continued growth in this portfolio. CapEx for the full year was $410 million compared to $329 million a year ago, reflecting primarily capacity growth at franchise stores, IT spending, and facility electrification infrastructure.
Tom Szlosek: This resulted in an adjusted free cash flow of $969 million and a strong conversion of 94% of our adjusted net income. Slide 11 shows our capital allocation for the years 2022 and 2023. In 2023, we had a balanced mix of reinvestments and return to shareholders. CapEx of $410 million was about $80 million higher than 2022, as I mentioned. M&A investments, which occurred earlier in the year, totaled $271 million. With significant cash flow generation and a strong balance sheet, we returned $864 million to shareholders via share repurchases, reducing our shares outstanding by 13%. We have an additional $320 million remaining under our current board authorization for share repurchases.
Tom Szlosek: This resulted in an adjusted free cash flow of $969 million and a strong conversion of 94% of our adjusted net income. Slide 11 shows our capital allocation for the years 2022 and 2023. In 2023, we had a balanced mix of reinvestments and return to shareholders. CapEx of $410 million was about $80 million higher than 2022, as I mentioned. M&A investments, which occurred earlier in the year, totaled $271 million. With significant cash flow generation and a strong balance sheet, we returned $864 million to shareholders via share repurchases, reducing our shares outstanding by 13%. We have an additional $320 million remaining under our current board authorization for share repurchases.
Tom Szlosek: At quarter end, our leverage was 2.19 times EBITDA, the lower end of our 2 to 3 times target, and we continue to maintain our investment grade credit rating. Moving forward, we'll continue to allocate capital to maximize shareholder value, considering both near-term market conditions, the M&A landscape, particularly for core franchise operations, and the longer-term direction of the industry. Now I'll turn the call back over to Mike to provide some commentary regarding 2024.
Tom Szlosek: At quarter end, our leverage was 2.19 times EBITDA, the lower end of our 2 to 3 times target, and we continue to maintain our investment grade credit rating. Moving forward, we'll continue to allocate capital to maximize shareholder value, considering both near-term market conditions, the M&A landscape, particularly for core franchise operations, and the longer-term direction of the industry. Now I'll turn the call back over to Mike to provide some commentary regarding 2024.
Mike Manley: Yeah, thanks, Tom. Yeah, we thought it would be helpful just to provide some thoughts regarding 2024 and how we see things maybe progressing. On the new side of the business, as we know, vehicle supply is gonna continue to return to pre-pandemic levels, and I think leasing and retail incentives are clearly gonna pick up through the year, but I think will remain below pre-pandemic levels in total. So existing inventory levels will continue to increase over the course of 2024, but we expect demand to be robust. Battery electric vehicle product introduction and customer interest in these vehicles is clearly gonna be a key dynamic this year. As widely reported, BEV PVRs consistently fell during 2023, and in most instances are lower than similar combustion engine vehicles.
Mike Manley: Yeah, thanks, Tom. Yeah, we thought it would be helpful just to provide some thoughts regarding 2024 and how we see things maybe progressing. On the new side of the business, as we know, vehicle supply is gonna continue to return to pre-pandemic levels, and I think leasing and retail incentives are clearly gonna pick up through the year, but I think will remain below pre-pandemic levels in total. So existing inventory levels will continue to increase over the course of 2024, but we expect demand to be robust. Battery electric vehicle product introduction and customer interest in these vehicles is clearly gonna be a key dynamic this year. As widely reported, BEV PVRs consistently fell during 2023, and in most instances are lower than similar combustion engine vehicles.
Mike Manley: As with all things, it's about balance, and it does appear OEMs are adjusting their plans and actions to match demand more closely, and frankly, this will be well received. Our hybrids are doing well in the marketplace, and we have good exposure to this portion of the market based upon our brand mix, and we expect our new margins to continue to moderate over the course of 2024, but at a somewhat slower pace than we experienced in 2023. The used vehicle market will likely remain constrained as late model used vehicle availability remains limited and additional new vehicles are available. The key is going to be our effectiveness, as always, in purchasing, pricing, and turning our inventory, and we're gonna remain nimble in our approach to those things in the market as it develops.
Mike Manley: As with all things, it's about balance, and it does appear OEMs are adjusting their plans and actions to match demand more closely, and frankly, this will be well received. Our hybrids are doing well in the marketplace, and we have good exposure to this portion of the market based upon our brand mix, and we expect our new margins to continue to moderate over the course of 2024, but at a somewhat slower pace than we experienced in 2023. The used vehicle market will likely remain constrained as late model used vehicle availability remains limited and additional new vehicles are available. The key is going to be our effectiveness, as always, in purchasing, pricing, and turning our inventory, and we're gonna remain nimble in our approach to those things in the market as it develops.
Mike Manley: I expect our CFS to continue to perform well, even with pressures coming from overall monthly payments, vehicle mix, and OEM actions to support unit sales. As you've seen, it's a very consistent and clear strength of our organization. After-sales has been, and will remain a significant area of focus for us. We saw the results in our Q4 outcome. After strong growth in 2023, obviously, our year-over-year comps will moderate, but we expect this area of our business to continue to grow attractively. We will, as always, be focused on managing the controllable variables, which includes cash flow and capital deployment. With that, Tom, let's hand it over to, to Derek to get some questions.
Mike Manley: I expect our CFS to continue to perform well, even with pressures coming from overall monthly payments, vehicle mix, and OEM actions to support unit sales. As you've seen, it's a very consistent and clear strength of our organization. After-sales has been, and will remain a significant area of focus for us. We saw the results in our Q4 outcome. After strong growth in 2023, obviously, our year-over-year comps will moderate, but we expect this area of our business to continue to grow attractively. We will, as always, be focused on managing the controllable variables, which includes cash flow and capital deployment. With that, Tom, let's hand it over to, to Derek to get some questions.
Derek Fiebig: Yeah, Bruno, if you could please remind the audience how to get in queue for question and answer, please.
Derek Fiebig: Yeah, Bruno, if you could please remind the audience how to get in queue for question and answer, please.
Operator: Sure. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad. To withdraw the question, star followed by two, and please do also remember to unmute your microphone when it's your turn to speak. Okay, we do have our first question. Our first question comes from John Murphy from Bank of America. John, your line is now open.
Operator: Sure. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad. To withdraw the question, star followed by two, and please do also remember to unmute your microphone when it's your turn to speak. Okay, we do have our first question. Our first question comes from John Murphy from Bank of America. John, your line is now open.
John Murphy, Managing Director, Bank of America: Good morning, guys. Just wanted to ask the first question, Mike, on After-Sales. I mean, it's obviously a bright spot. It seems like the efforts there to hire techs is really paying off. You know, you keep talking about share of wallet, you know, increasing. This seems like the area where, you know, share of wallet for the consumer is, you know, there's obviously the most opportunity, other than getting to the second and third turn of the used vehicle. So as you think about this in 2024, a maybe even just beyond, in a sort of a strategic standpoint, you know, what do you think you need to do to continue to drive that significantly higher? Is it just a function of hiring more techs? Is it increasing connectivity?
John Murphy: Good morning, guys. Just wanted to ask the first question, Mike, on After-Sales. I mean, it's obviously a bright spot. It seems like the efforts there to hire techs is really paying off. You know, you keep talking about share of wallet, you know, increasing. This seems like the area where, you know, share of wallet for the consumer is, you know, there's obviously the most opportunity, other than getting to the second and third turn of the used vehicle. So as you think about this in 2024, a maybe even just beyond, in a sort of a strategic standpoint, you know, what do you think you need to do to continue to drive that significantly higher? Is it just a function of hiring more techs? Is it increasing connectivity?
John Murphy, Managing Director, Bank of America: Is it, you know, getting involved in the second and third used vehicle, you know, turn? I mean, what's the key strategy there? And what are the, you know, the opportunities to drive that faster or farther?
John Murphy: Is it, you know, getting involved in the second and third used vehicle, you know, turn? I mean, what's the key strategy there? And what are the, you know, the opportunities to drive that faster or farther?
Mike Manley: So, John, it's probably a combination of all of the, you know, all of the above. If I think about our franchise business, firstly, we have a penetration in the vehicle parks that we're responsible for. So that's our areas of operation that our franchises represent, are probably around 50% ±. And what we know is that customers move on to other sources for their service when their vehicles get 7 years old or they are 25 miles beyond the radius. So there's a lot of opportunity within the territories that we have, and then we're providing channels and access to our customers who would have migrated to a different source for their servicing and repairs through things such as our mobile service, which, as you know, is a new addition to us.
Mike Manley: So, John, it's probably a combination of all of the, you know, all of the above. If I think about our franchise business, firstly, we have a penetration in the vehicle parks that we're responsible for. So that's our areas of operation that our franchises represent, are probably around 50% ±. And what we know is that customers move on to other sources for their service when their vehicles get 7 years old or they are 25 miles beyond the radius. So there's a lot of opportunity within the territories that we have, and then we're providing channels and access to our customers who would have migrated to a different source for their servicing and repairs through things such as our mobile service, which, as you know, is a new addition to us.
Mike Manley: So, I think partly in terms of our installed assets, we have sufficient bay capacity. We saw, from memory, I think it was a 5 or 6% increase in our technicians during the period. There is opportunity for us to continue to grow that, adding services onto it, and then we'll backfill with mobile services for those customers that don't, for whatever reason, have moved away from the franchise environment. So that's going to be a big focus for us this year. There's plenty of opportunity. It's not easy to unlock because once, a customer has migrated, they obviously form a relationship. And that leads me to the last thing, and that is, we have a fantastic brand.
Mike Manley: So, I think partly in terms of our installed assets, we have sufficient bay capacity. We saw, from memory, I think it was a 5 or 6% increase in our technicians during the period. There is opportunity for us to continue to grow that, adding services onto it, and then we'll backfill with mobile services for those customers that don't, for whatever reason, have moved away from the franchise environment. So that's going to be a big focus for us this year. There's plenty of opportunity. It's not easy to unlock because once, a customer has migrated, they obviously form a relationship. And that leads me to the last thing, and that is, we have a fantastic brand.
Mike Manley: I think last time we checked our brand, which we do relatively regularly, it was the most known automotive brand in the United States. And I think we can do a better job of communicating all the products and services to our customers to help them understand that we can increasingly look after a broader set of needs that they have, not just for themselves, but also in their family.
Mike Manley: I think last time we checked our brand, which we do relatively regularly, it was the most known automotive brand in the United States. And I think we can do a better job of communicating all the products and services to our customers to help them understand that we can increasingly look after a broader set of needs that they have, not just for themselves, but also in their family.
John Murphy, Managing Director, Bank of America: Okay, that's helpful. And then just a second question on the used car business. Obviously, GPUs are down. Sounds like there's a little bit of mix going on, also sort of a little bit of inventory management. Is this the kind of thing that you think is really a function of the next couple of quarters, and then you get back to the normal GPUs? Or is there something happening here sort of cyclically or on a secular basis that would keep these numbers, you know, low?
John Murphy: Okay, that's helpful. And then just a second question on the used car business. Obviously, GPUs are down. Sounds like there's a little bit of mix going on, also sort of a little bit of inventory management. Is this the kind of thing that you think is really a function of the next couple of quarters, and then you get back to the normal GPUs? Or is there something happening here sort of cyclically or on a secular basis that would keep these numbers, you know, low?
Mike Manley: No, absolutely. As Tom mentioned, I think, you know, one of the things that as we came into 2023, our inventory levels were very low, and we felt that we missed out on some of the marketplace. We put in place a number of initiatives, middle of last year through the end of last year, to enable us to source the vehicles that we need. And we did that very, very effectively. At the same time, I think some of the market dynamics were changing. You know, one of the things that had increased dramatically during the COVID period was the percentage mix of vehicles above, say, 35,000, and Tom gave you the mix.
Mike Manley: No, absolutely. As Tom mentioned, I think, you know, one of the things that as we came into 2023, our inventory levels were very low, and we felt that we missed out on some of the marketplace. We put in place a number of initiatives, middle of last year through the end of last year, to enable us to source the vehicles that we need. And we did that very, very effectively. At the same time, I think some of the market dynamics were changing. You know, one of the things that had increased dramatically during the COVID period was the percentage mix of vehicles above, say, 35,000, and Tom gave you the mix.
Mike Manley: And we're seeing those customers who maybe came into the high end of the used car market because they couldn't get new, now returning back to the new car market with, with lower transaction prices and more incentives for manufacturers. And what we need to be is very, very agile to make sure that as the market changes, and I think it will continue to change, that we are ahead of those mix changes. We have some work to do. We started that work in, before the end of last year. It continued through January. I think that work will be largely completed by the end of Q1, very early Q2. So it's, in my mind, it's transitory.
Mike Manley: And we're seeing those customers who maybe came into the high end of the used car market because they couldn't get new, now returning back to the new car market with, with lower transaction prices and more incentives for manufacturers. And what we need to be is very, very agile to make sure that as the market changes, and I think it will continue to change, that we are ahead of those mix changes. We have some work to do. We started that work in, before the end of last year. It continued through January. I think that work will be largely completed by the end of Q1, very early Q2. So it's, in my mind, it's transitory.
Mike Manley: The good news is that each one of those unit sales comes with phenomenal CFS performance, and obviously is, is going straight into our aftersales, our aftersales database for us to be able to look after them. So, every customer comes now with, from our perspective, with a great opportunity, not just in the sale.
Mike Manley: The good news is that each one of those unit sales comes with phenomenal CFS performance, and obviously is, is going straight into our aftersales, our aftersales database for us to be able to look after them. So, every customer comes now with, from our perspective, with a great opportunity, not just in the sale.
John Murphy, Managing Director, Bank of America: ... So Mike, when you get, when you get the turn and earn back, being efficient, would it be fair to say that that $1,800 range on PVR is, is something that we, we should think about sort of mid to long term as we get through the course of this year and, and, and beyond?
John Murphy: ... So Mike, when you get, when you get the turn and earn back, being efficient, would it be fair to say that that $1,800 range on PVR is, is something that we, we should think about sort of mid to long term as we get through the course of this year and, and, and beyond?
Mike Manley: Yeah, I think that's a very- I think that's an achievable number for sure. Yeah.
Mike Manley: Yeah, I think that's a very- I think that's an achievable number for sure. Yeah.
John Murphy, Managing Director, Bank of America: Great. Thank you very much.
John Murphy: Great. Thank you very much.
Mike Manley: Thanks, John.
Mike Manley: Thanks, John.
Operator: Our next question comes from Daniel Imbro from Stephens Inc. Daniel, you may proceed with your question.
Operator: Our next question comes from Daniel Imbro from Stephens Inc. Daniel, you may proceed with your question.
Daniel Imbro, Managing Director, Stephens Inc.: Yeah. Hey, good morning, everybody. Thanks for taking our questions. Mike, I wanted to start maybe on the new vehicle side. Obviously, you know, a little bit lighter moderation. Your commentary suggested that's going to continue into 2024. Curious if you can update us how the OEM conversations are going. Are you seeing any change in tone, especially at some of the brands where inventory maybe has built? And then I'm curious, given your experience on the OEM side, what leverage do you think the OEMs hold? Do you see them cut MSRP? Kind of how do you think they navigate through some of the heavier inventory situations out there?
Daniel Imbro: Yeah. Hey, good morning, everybody. Thanks for taking our questions. Mike, I wanted to start maybe on the new vehicle side. Obviously, you know, a little bit lighter moderation. Your commentary suggested that's going to continue into 2024. Curious if you can update us how the OEM conversations are going. Are you seeing any change in tone, especially at some of the brands where inventory maybe has built? And then I'm curious, given your experience on the OEM side, what leverage do you think the OEMs hold? Do you see them cut MSRP? Kind of how do you think they navigate through some of the heavier inventory situations out there?
Mike Manley: Yes. Thanks, Daniel. Well, even though, and I mentioned this in my opening commentary, and earlier, Tom, we're seeing some increases in terms of retail incentive rates and leasing back up to 23%. You know, we're still not at the levels that we had, we had seen, before, and I think as we begin to see inventory build, we will see continued action in that area from the OEMs. Leasing, in my view, by the end of this year, early next year, will be back to pre-pandemic levels. And I think we've seen much more subsidized finance with, obviously, with the interest rates that we have, and that will continue as we get deep into 2024.
Mike Manley: Yes. Thanks, Daniel. Well, even though, and I mentioned this in my opening commentary, and earlier, Tom, we're seeing some increases in terms of retail incentive rates and leasing back up to 23%. You know, we're still not at the levels that we had, we had seen, before, and I think as we begin to see inventory build, we will see continued action in that area from the OEMs. Leasing, in my view, by the end of this year, early next year, will be back to pre-pandemic levels. And I think we've seen much more subsidized finance with, obviously, with the interest rates that we have, and that will continue as we get deep into 2024.
Mike Manley: When I think about overall days of supply, obviously it's very different depending on the manufacturers and the brand partners that we have, but clearly still well below, in many instances, the level we saw. And from my point of view, as the industry develops this year, I think we will truly see, hopefully, how the manufacturers are thinking about the balance of their inventory and prevailing market conditions. Because we talked a lot about this when we were deep in the pandemic. I think this year we're going to see how each OEM is going to address that, and some will be more disciplined, some will be less.
Mike Manley: When I think about overall days of supply, obviously it's very different depending on the manufacturers and the brand partners that we have, but clearly still well below, in many instances, the level we saw. And from my point of view, as the industry develops this year, I think we will truly see, hopefully, how the manufacturers are thinking about the balance of their inventory and prevailing market conditions. Because we talked a lot about this when we were deep in the pandemic. I think this year we're going to see how each OEM is going to address that, and some will be more disciplined, some will be less.
Daniel Imbro, Managing Director, Stephens Inc.: Got it. That, that's helpful. And then maybe, Tom, on the finance side, I think Mike and, and you both mentioned you've rolled out AutoNation Finance into all the franchise stores. Curious if you could, or maybe we missed it, provide some stats around the loan growth in the quarter, maybe the usual reserves you're taking or provision for losses, and then how those loans are performing as we think about the changing consumer credit backdrop today.
Daniel Imbro: Got it. That, that's helpful. And then maybe, Tom, on the finance side, I think Mike and, and you both mentioned you've rolled out AutoNation Finance into all the franchise stores. Curious if you could, or maybe we missed it, provide some stats around the loan growth in the quarter, maybe the usual reserves you're taking or provision for losses, and then how those loans are performing as we think about the changing consumer credit backdrop today.
Tom Szlosek: Thanks for the question, Daniel. You know, it's as everyone knows, we bought AutoNation Finance in October 2022, we closed. It started out entirely as a third-party lender, mostly to subprime. We've, over the course of the last year, completely converted that to now supporting AutoNation exclusively, both AN USA stores as well as the franchise stores. Very little in terms of subprime, so it's really gone through a nice transition. We love the platform. We love the team. The trends have been very, very strong. We've got, as I said, an improvement in the origin mix. You know, with all AutoNation customers, FICO scores have improved between 50 and 100 basis points in terms of what we're originating.
Tom Szlosek: Thanks for the question, Daniel. You know, it's as everyone knows, we bought AutoNation Finance in October 2022, we closed. It started out entirely as a third-party lender, mostly to subprime. We've, over the course of the last year, completely converted that to now supporting AutoNation exclusively, both AN USA stores as well as the franchise stores. Very little in terms of subprime, so it's really gone through a nice transition. We love the platform. We love the team. The trends have been very, very strong. We've got, as I said, an improvement in the origin mix. You know, with all AutoNation customers, FICO scores have improved between 50 and 100 basis points in terms of what we're originating.
Tom Szlosek: On the credit quality trends, the thirty-day delinquencies have been really strong. I mean, in Q3, we were, you know, probably 7.5% delinquent. We've seen that improve by about 200 basis points, you know, through the end of January. So the team's doing a nice job in what is not an easy environment for consumer credit. So, you know, we're happy with that. The penetration rates amongst our stores where we're present has been growing; it has been very strong. So it's about a $450 million portfolio, and that is after, you know, a sale of a chunk of the business in Q3, which was, it was about $80 million.
Tom Szlosek: On the credit quality trends, the thirty-day delinquencies have been really strong. I mean, in Q3, we were, you know, probably 7.5% delinquent. We've seen that improve by about 200 basis points, you know, through the end of January. So the team's doing a nice job in what is not an easy environment for consumer credit. So, you know, we're happy with that. The penetration rates amongst our stores where we're present has been growing; it has been very strong. So it's about a $450 million portfolio, and that is after, you know, a sale of a chunk of the business in Q3, which was, it was about $80 million.
Tom Szlosek: We're excited about 2024. We think the originations, you know, could double. And, you know, we're just, you know, couldn't be more pleased with how the business has developed over time.
Tom Szlosek: We're excited about 2024. We think the originations, you know, could double. And, you know, we're just, you know, couldn't be more pleased with how the business has developed over time.
Daniel Imbro, Managing Director, Stephens Inc.: Appreciate that. Just a quick accounting follow-up. Where do those useful reserves as the loan balance, you said they're going to double the loan growth, I guess. Where does that flow through the income statement as we think about modeling out the growth in the finance business?
Daniel Imbro: Appreciate that. Just a quick accounting follow-up. Where do those useful reserves as the loan balance, you said they're going to double the loan growth, I guess. Where does that flow through the income statement as we think about modeling out the growth in the finance business?
Tom Szlosek: It's all in that, you know, one line, other income expense on PNL. We've, you know, while growing, like I said, it's probably not material enough for us to break that out. I think at some point we'll, you know, address that depending on how it grows, but it's all basically collapsed in that one line.
Tom Szlosek: It's all in that, you know, one line, other income expense on PNL. We've, you know, while growing, like I said, it's probably not material enough for us to break that out. I think at some point we'll, you know, address that depending on how it grows, but it's all basically collapsed in that one line.
Daniel Imbro, Managing Director, Stephens Inc.: Great. Thank you so much, guys. Best of luck.
Daniel Imbro: Great. Thank you so much, guys. Best of luck.
Operator: Our next question comes from Rajat Gupta from J.P. Morgan. Rajat, your line is now open.
Operator: Our next question comes from Rajat Gupta from J.P. Morgan. Rajat, your line is now open.
Rajat Gupta, Equity Research Analyst, J.P. Morgan: Great. Thanks for taking the question. You know, thanks for all the color on, you know, you know, on 2024 expectations around, you know, the new business, you know, the news as well. But curious, is there a range you're targeting for SG&A to gross for the year? You know, in context of, you know, the steady new GP decline, you know, some of the pressures in the used business, you know, how should we think about SG&A to gross for 2024? And I have a quick follow-up. Thanks.
Rajat Gupta: Great. Thanks for taking the question. You know, thanks for all the color on, you know, you know, on 2024 expectations around, you know, the new business, you know, the news as well. But curious, is there a range you're targeting for SG&A to gross for the year? You know, in context of, you know, the steady new GP decline, you know, some of the pressures in the used business, you know, how should we think about SG&A to gross for 2024? And I have a quick follow-up. Thanks.
Mike Manley: Yeah, Raja, the way that we're thinking about this is obviously in what I would call our core businesses, the things that we have put in place over the last three years-two years continues to have, I think, clear benefits. Our SG&A also includes some of the investments that we have been making progressively in the last two years. So the percentage that we see doesn't represent the core businesses themselves. But I think the range that we sit in now is the range that we're gonna continue to target going forward. And it will fluctuate, as I said, based upon the additional investments that we are making, for example, in mobile services, for example, in our parts commerce business, as we grow those businesses. So that's kind of my view on SG&A at this time.
Mike Manley: Yeah, Raja, the way that we're thinking about this is obviously in what I would call our core businesses, the things that we have put in place over the last three years-two years continues to have, I think, clear benefits. Our SG&A also includes some of the investments that we have been making progressively in the last two years. So the percentage that we see doesn't represent the core businesses themselves. But I think the range that we sit in now is the range that we're gonna continue to target going forward. And it will fluctuate, as I said, based upon the additional investments that we are making, for example, in mobile services, for example, in our parts commerce business, as we grow those businesses. So that's kind of my view on SG&A at this time.
Tom Szlosek: Yeah, the thing I would add to that, Raja, is, as Mike mentioned, we do have some investments in AN USA as those stores roll out. You know, you don't get to a full run rate of profitability for about a year or so. That can dampen the SG&A rate and also the investments that Mike has mentioned, strategic investments. And also advertising is, you know, we've seen some inflation there. I would say we probably would be in the longer term basis mid-sixties kind of level relative to gross profit. But we are paying close attention.
Tom Szlosek: Yeah, the thing I would add to that, Raja, is, as Mike mentioned, we do have some investments in AN USA as those stores roll out. You know, you don't get to a full run rate of profitability for about a year or so. That can dampen the SG&A rate and also the investments that Mike has mentioned, strategic investments. And also advertising is, you know, we've seen some inflation there. I would say we probably would be in the longer term basis mid-sixties kind of level relative to gross profit. But we are paying close attention.
Tom Szlosek: As we mentioned, you know, we've taken some modest actions, you know, in the fourth quarter to, you know, address and take advantage of some delayering opportunities in the regions, as well as, you know, to, you know, economize some of the support functions. So it's a pretty important area for us, and we, you know, continue to, you know, drive productivity where we can.
Tom Szlosek: As we mentioned, you know, we've taken some modest actions, you know, in the fourth quarter to, you know, address and take advantage of some delayering opportunities in the regions, as well as, you know, to, you know, economize some of the support functions. So it's a pretty important area for us, and we, you know, continue to, you know, drive productivity where we can.
Rajat Gupta, Equity Research Analyst, J.P. Morgan: Got it. Got it. That's helpful color. And just on capital allocation, you know, obviously, we've seen looks like very steady and, like, pretty elevated spend on buybacks over the last, you know, few years. Curious, like how that toggle between M&A and buyback looks today, based on, you know, what you're seeing in the pipeline, you know, for deals and related multiples. Curious if we should expect any shift in strategy there, you know, maybe more toward M&A versus, you know, historically buyback. Thanks.
Rajat Gupta: Got it. Got it. That's helpful color. And just on capital allocation, you know, obviously, we've seen looks like very steady and, like, pretty elevated spend on buybacks over the last, you know, few years. Curious, like how that toggle between M&A and buyback looks today, based on, you know, what you're seeing in the pipeline, you know, for deals and related multiples. Curious if we should expect any shift in strategy there, you know, maybe more toward M&A versus, you know, historically buyback. Thanks.
Tom Szlosek: Yeah, it's a great question. Thank you. The great news, Raja, is that we generate a lot of cash, so it gives us, you know, optionality. And you're probably very familiar with how we've allocated capital the last two or three years. I don't think there is any material change in how we're looking at it. The focus is on maximizing shareholder return. When we do see allocation opportunities, whether it's internally to CapEx or to M&A opportunities, we think we're pretty disciplined in terms of, you know, our analytical evaluation and our incorporation of synergies. And, you know, where the deals look like they could be accretive and meet our hurdle rates, and we'll go after them aggressively.
Tom Szlosek: Yeah, it's a great question. Thank you. The great news, Raja, is that we generate a lot of cash, so it gives us, you know, optionality. And you're probably very familiar with how we've allocated capital the last two or three years. I don't think there is any material change in how we're looking at it. The focus is on maximizing shareholder return. When we do see allocation opportunities, whether it's internally to CapEx or to M&A opportunities, we think we're pretty disciplined in terms of, you know, our analytical evaluation and our incorporation of synergies. And, you know, where the deals look like they could be accretive and meet our hurdle rates, and we'll go after them aggressively.
Tom Szlosek: But we also have had great success with share repurchases and, you know, feel that that's gonna continue to be a, an important part of our capital allocation playbook.
Tom Szlosek: But we also have had great success with share repurchases and, you know, feel that that's gonna continue to be a, an important part of our capital allocation playbook.
Rajat Gupta, Equity Research Analyst, J.P. Morgan: Are you seeing any changes in, like, just multiples for these deals the last few months? You know, any change in tone or, you know, any increasing, you know, propensity, like, for sellers to offload? Curious, like if anything in the market, whether you've seen that shifted on the M&A side?
Rajat Gupta: Are you seeing any changes in, like, just multiples for these deals the last few months? You know, any change in tone or, you know, any increasing, you know, propensity, like, for sellers to offload? Curious, like if anything in the market, whether you've seen that shifted on the M&A side?
Tom Szlosek: Rajat, can you clarify? You were muffled a little bit in your question. I'm sorry.
Tom Szlosek: Rajat, can you clarify? You were muffled a little bit in your question. I'm sorry.
Rajat Gupta, Equity Research Analyst, J.P. Morgan: Yeah, I just wanted to ask, like, have you seen any changes in, you know, the multiples or the valuation of some of the assets that are out there in the market, from an M&A perspective over the last few months?
Rajat Gupta: Yeah, I just wanted to ask, like, have you seen any changes in, you know, the multiples or the valuation of some of the assets that are out there in the market, from an M&A perspective over the last few months?
Tom Szlosek: Yeah, as you can imagine, sellers, you know, tend to have amnesia when it comes to where their prices used to be before, you know, you know, all these run-ups in the last, you know, few years. But, yeah, I don't think there's been any market change in valuations. Maybe here and there, but, you know, we're not seeing anybody walk away from, you know, last year's prices per se or anything like that.
Tom Szlosek: Yeah, as you can imagine, sellers, you know, tend to have amnesia when it comes to where their prices used to be before, you know, you know, all these run-ups in the last, you know, few years. But, yeah, I don't think there's been any market change in valuations. Maybe here and there, but, you know, we're not seeing anybody walk away from, you know, last year's prices per se or anything like that.
Mike Manley: No, but it's also true to say that, you know, our conversations around the basis for people's valuations are heavily pointed at the last 12 months, trading conditions, and our view moving forward. As we moved, frankly, throughout last year and as we move further into this year, obviously, the TTM is gonna reflect the reality of the fact that there's a normalization in margins, and ultimately, it will impact values. And that's something we're very much looking for and something that we're talking to people about. But as Tom said, at this moment in time, obviously, people are holding on as much as they possibly can to 2022.
Mike Manley: No, but it's also true to say that, you know, our conversations around the basis for people's valuations are heavily pointed at the last 12 months, trading conditions, and our view moving forward. As we moved, frankly, throughout last year and as we move further into this year, obviously, the TTM is gonna reflect the reality of the fact that there's a normalization in margins, and ultimately, it will impact values. And that's something we're very much looking for and something that we're talking to people about. But as Tom said, at this moment in time, obviously, people are holding on as much as they possibly can to 2022.
Rajat Gupta, Equity Research Analyst, J.P. Morgan: Got it. Got it. That's, that's helpful color. Thank you, and good luck.
Rajat Gupta: Got it. Got it. That's, that's helpful color. Thank you, and good luck.
Operator: Our next question comes from Michael Ward from Freedom Capital Markets. Michael, your line's now open.
Operator: Our next question comes from Michael Ward from Freedom Capital Markets. Michael, your line's now open.
Michael Ward, Managing Director, Freedom Capital Markets: Thanks very much. Good morning, everyone. Mike, I think in your comments you mentioned that on the parts and services side, complexity has led to higher content. Can you quantify either some of the content you're talking about or the retention rates you're getting on the parts and services side with the increased complexity vehicles?
Michael Ward: Thanks very much. Good morning, everyone. Mike, I think in your comments you mentioned that on the parts and services side, complexity has led to higher content. Can you quantify either some of the content you're talking about or the retention rates you're getting on the parts and services side with the increased complexity vehicles?
Mike Manley: So the work that Christian's been doing with his team shows us that even though the frequency of service and repair in our, so let me tell you service, I'll come back to the repair comment in a minute, drops. Loyalty goes up fairly significantly, and the time that the vehicle is in the shop goes up significantly. So as we were thinking about this transition to electrified vehicles, we were very concerned, as many people were, about the drop off in parts and services. That hasn't been what we've experienced so far for those two reasons. In terms of repair, obviously, the profile of that is changing. Some of the repairs now are done remotely. And we really, I think, are still looking at that and learning about that.
Mike Manley: So the work that Christian's been doing with his team shows us that even though the frequency of service and repair in our, so let me tell you service, I'll come back to the repair comment in a minute, drops. Loyalty goes up fairly significantly, and the time that the vehicle is in the shop goes up significantly. So as we were thinking about this transition to electrified vehicles, we were very concerned, as many people were, about the drop off in parts and services. That hasn't been what we've experienced so far for those two reasons. In terms of repair, obviously, the profile of that is changing. Some of the repairs now are done remotely. And we really, I think, are still looking at that and learning about that.
Mike Manley: But at this moment in time, if we look at the population of our customers and their vehicles, the combination of higher loyalties and longer time in shop is outweighing or has been better than our expectation. Let me put it that way.
Mike Manley: But at this moment in time, if we look at the population of our customers and their vehicles, the combination of higher loyalties and longer time in shop is outweighing or has been better than our expectation. Let me put it that way.
Michael Ward, Managing Director, Freedom Capital Markets: Along with that, could you give an update on RepairSmith and where that stands, and what are your growth objectives with it as you go forward?
Michael Ward: Along with that, could you give an update on RepairSmith and where that stands, and what are your growth objectives with it as you go forward?
Mike Manley: Yeah, absolutely. Well, we rebranded RepairSmith, which was not unexpected, and it's now AutoNation Mobile Service. It's integrated. It's progressively being integrated alongside AN USA, because, as you know, many standalone used car sites don't have an After-Sales provision. And in the same way, as we aligned AutoNation Finance with AN USA, we were aligning RepairSmith to be the provider of refurbishment and service, maintenance warranty needs for those customers. We've opened up now our relationships with multiple fleet customers across the country and introducing mobile services to those guys and expanding the products that the fleet offers. I would say at this moment in time, there's a lot of work for us to do. That integration work will probably continue through the balance of this year. We see a lot of growth, but we now need to drive up our returns.
Mike Manley: Yeah, absolutely. Well, we rebranded RepairSmith, which was not unexpected, and it's now AutoNation Mobile Service. It's integrated. It's progressively being integrated alongside AN USA, because, as you know, many standalone used car sites don't have an After-Sales provision. And in the same way, as we aligned AutoNation Finance with AN USA, we were aligning RepairSmith to be the provider of refurbishment and service, maintenance warranty needs for those customers. We've opened up now our relationships with multiple fleet customers across the country and introducing mobile services to those guys and expanding the products that the fleet offers. I would say at this moment in time, there's a lot of work for us to do. That integration work will probably continue through the balance of this year. We see a lot of growth, but we now need to drive up our returns.
Michael Ward, Managing Director, Freedom Capital Markets: Just one last question on the M&A front. You took a look at Pendragon. Does that suggest that as you look out over the next couple of years, that expansion outside of the US could be in the cards?
Michael Ward: Just one last question on the M&A front. You took a look at Pendragon. Does that suggest that as you look out over the next couple of years, that expansion outside of the US could be in the cards?
Mike Manley: I think it goes back to Tom's comments. I thought he summed it up really well. We are looking at opportunities that have come across our desk in a very, very consistent way. We liked what we saw with Pendragon at the price that we had indicated in the marketplace. And, you know, at that point, we thought it was good, but clearly, that one was not for us. So I would tell you that we have an eye to a number of opportunities at this point in time.
Mike Manley: I think it goes back to Tom's comments. I thought he summed it up really well. We are looking at opportunities that have come across our desk in a very, very consistent way. We liked what we saw with Pendragon at the price that we had indicated in the marketplace. And, you know, at that point, we thought it was good, but clearly, that one was not for us. So I would tell you that we have an eye to a number of opportunities at this point in time.
Michael Ward, Managing Director, Freedom Capital Markets: Beautiful. Thank you very much.
Michael Ward: Beautiful. Thank you very much.
Operator: Our next question comes from Bret Jordan, from Jefferies. Bret, your line's now open.
Operator: Our next question comes from Bret Jordan, from Jefferies. Bret, your line's now open.
Bret Jordan, Managing Director, Jefferies: Hey, good morning, guys. On the mobile services question, I guess you're talking about expanding the products offered. Could you talk maybe a bit about the logistics of the mobile services? What can you do in that, in that format? And I guess from a staffing standpoint, you know, cold, rainy days, probably not appealing to work outdoors, but, you know, what are you seeing as far as building out that model?
Bret Jordan: Hey, good morning, guys. On the mobile services question, I guess you're talking about expanding the products offered. Could you talk maybe a bit about the logistics of the mobile services? What can you do in that, in that format? And I guess from a staffing standpoint, you know, cold, rainy days, probably not appealing to work outdoors, but, you know, what are you seeing as far as building out that model?
Mike Manley: Yeah, well, the good news is that if you think about our geographic footprint, we are in, we are, we are largely, the vast majority of our business falls in states where you can operate full 12 months without, without, certainly six for us now. Well, I take your point. Obviously, services, maintenance and repair work is a given. We are in the process of expanding to tires. We are in the process of expanding to glass. As you know, we have a very good business in our collision centers, and that will include calibration. There are multiple things that these vans, so equipped, can do, and that's effectively what we're doing.
Mike Manley: Yeah, well, the good news is that if you think about our geographic footprint, we are in, we are, we are largely, the vast majority of our business falls in states where you can operate full 12 months without, without, certainly six for us now. Well, I take your point. Obviously, services, maintenance and repair work is a given. We are in the process of expanding to tires. We are in the process of expanding to glass. As you know, we have a very good business in our collision centers, and that will include calibration. There are multiple things that these vans, so equipped, can do, and that's effectively what we're doing.
Mike Manley: We had already done some pilot work on glass, which was successful in some of our Texas businesses, so that's going to be expanded throughout this year. Tires, there's a demand for tires, which can easily be done from a properly equipped van. So there's quite an expansion in terms of products that we can offer. And as you can imagine, as we grow AutoNation USA, and they are as successful as they have been in terms of CFS, many of those CFS products are associated with extended warranties or maintenance contracts, and we're now able to completely fulfill them ourselves, rather than those customers may be migrating to a competitor to have that work done. So I'm very excited about mobile services.
Mike Manley: We had already done some pilot work on glass, which was successful in some of our Texas businesses, so that's going to be expanded throughout this year. Tires, there's a demand for tires, which can easily be done from a properly equipped van. So there's quite an expansion in terms of products that we can offer. And as you can imagine, as we grow AutoNation USA, and they are as successful as they have been in terms of CFS, many of those CFS products are associated with extended warranties or maintenance contracts, and we're now able to completely fulfill them ourselves, rather than those customers may be migrating to a competitor to have that work done. So I'm very excited about mobile services.
Mike Manley: It's a business that we are, as I said, centering in those markets where we already have density in the customer base. It's now associated clearly with our brand, which I think does bring a degree of credibility, which is important when you think about a van turning up on someone's drive. And I think it will help us. So let's see how we develop it this year.
Mike Manley: It's a business that we are, as I said, centering in those markets where we already have density in the customer base. It's now associated clearly with our brand, which I think does bring a degree of credibility, which is important when you think about a van turning up on someone's drive. And I think it will help us. So let's see how we develop it this year.
Bret Jordan, Managing Director, Jefferies: Okay, thanks. And a quick question on domestic DSI, 66 days. Could you talk about the sort of spread between the, the manufacturers and that inventory exposure? And, and obviously, I think there's been a lot of talk about Stellantis maybe increasing their promotional level or decreasing pricing. Are you seeing anything that's sort of changing as far as, I guess, promotional cadence recently?
Bret Jordan: Okay, thanks. And a quick question on domestic DSI, 66 days. Could you talk about the sort of spread between the, the manufacturers and that inventory exposure? And, and obviously, I think there's been a lot of talk about Stellantis maybe increasing their promotional level or decreasing pricing. Are you seeing anything that's sort of changing as far as, I guess, promotional cadence recently?
Mike Manley: ... I'm not seeing any changes from my perspective. I think, you know, we're coming into traditional months where all of the domestics will focus heavily on their trucks. That's normal. That I think is something that will continue. There's the different seasons in the year is not gonna change. I think that, you know, if you think about the percentage of sales by vehicle segment, it is natural that those OEMs who have a very high percentage of sales in trucks, whether it's light, medium or heavy, are gonna have a higher day supply purely because of the selection required. And, you know, even though Stellantis' day supply has increased, it is significantly lower than it's been historically.
Mike Manley: ... I'm not seeing any changes from my perspective. I think, you know, we're coming into traditional months where all of the domestics will focus heavily on their trucks. That's normal. That I think is something that will continue. There's the different seasons in the year is not gonna change. I think that, you know, if you think about the percentage of sales by vehicle segment, it is natural that those OEMs who have a very high percentage of sales in trucks, whether it's light, medium or heavy, are gonna have a higher day supply purely because of the selection required. And, you know, even though Stellantis' day supply has increased, it is significantly lower than it's been historically.
Colin Langan: Great. Thank you.
Bret Jordan: Great. Thank you.
Operator: As a reminder, to ask a question, please press star one on your telephone keypad. Star one on your telephone keypad. Our next question comes from Douglas Dutton from Evercore. Douglas, your line is now open.
Operator: As a reminder, to ask a question, please press star one on your telephone keypad. Star one on your telephone keypad. Our next question comes from Douglas Dutton from Evercore. Douglas, your line is now open.
John Saager: Hi, team. Thanks for having me on. Congrats on the quarter. 2 quick questions from me. Just first, on the new vehicle PVR point and the normalization that we continue to see, is it fair to think that there may actually be a higher trough cycle over cycle, maybe remaining at about a 20 to 30% premium over 2019 levels? I'm just curious if perhaps you are beginning to see some structural reasons that a decrease to pre-COVID levels may not be the reality, you know, given the rate of change on profit per unit has begun to slow, like Tom mentioned, as the fourth quarter was actually the best sequential in 3 quarters.
Douglas Dutton: Hi, team. Thanks for having me on. Congrats on the quarter. 2 quick questions from me. Just first, on the new vehicle PVR point and the normalization that we continue to see, is it fair to think that there may actually be a higher trough cycle over cycle, maybe remaining at about a 20 to 30% premium over 2019 levels? I'm just curious if perhaps you are beginning to see some structural reasons that a decrease to pre-COVID levels may not be the reality, you know, given the rate of change on profit per unit has begun to slow, like Tom mentioned, as the fourth quarter was actually the best sequential in 3 quarters.
Mike Manley: Yeah, Doug, welcome. A lot of moving pieces in that question, as you know. One of the things that I think we have to really watch closely this year is what's happening with battery electric vehicles and hybrids. And as you know, all of the OEMs at this moment in time are working towards a set of GHG targets, which vary by state, and that may well change depending on what happens later this year and as we move forward. But there is and has been a significant impact on margin, as battery electric vehicles have continued to grow in terms of the share that they represent. I mean, they- the BEVs increased share, roughly double from the end of 2022 through to 2023. And as a result of that, that's had an impact on the combustion-- on our total margins, obviously.
Mike Manley: Yeah, Doug, welcome. A lot of moving pieces in that question, as you know. One of the things that I think we have to really watch closely this year is what's happening with battery electric vehicles and hybrids. And as you know, all of the OEMs at this moment in time are working towards a set of GHG targets, which vary by state, and that may well change depending on what happens later this year and as we move forward. But there is and has been a significant impact on margin, as battery electric vehicles have continued to grow in terms of the share that they represent. I mean, they- the BEVs increased share, roughly double from the end of 2022 through to 2023. And as a result of that, that's had an impact on the combustion-- on our total margins, obviously.
Mike Manley: So the answer to your question is, truthfully, I expect a return to very similar margins to 2019. And by the way, that would include the impact, in my view, of battery electric vehicles and hybrid electric vehicles. How that happens is very much gonna depend on how the OEMs are thinking about the mix of their BEVs, their hybrids, and their combustion engines through the balance of this year and how they're gonna achieve their targets. It's a very—it is not an easy question to answer, so that's my best effort. But I would say what we are doing in our business is to really focus on those areas where we have more control and more opportunity.
Mike Manley: So the answer to your question is, truthfully, I expect a return to very similar margins to 2019. And by the way, that would include the impact, in my view, of battery electric vehicles and hybrid electric vehicles. How that happens is very much gonna depend on how the OEMs are thinking about the mix of their BEVs, their hybrids, and their combustion engines through the balance of this year and how they're gonna achieve their targets. It's a very—it is not an easy question to answer, so that's my best effort. But I would say what we are doing in our business is to really focus on those areas where we have more control and more opportunity.
Mike Manley: Those areas are CFS, used, as we talked about, obviously after sales, and how we can provide more products and services to the customers that we have, we have won over many, many years of being in the marketplace. And then to make sure that our new vehicles, we're not an outlier, either with lower margins or poor market share, that we obviously control our costs, because to a large extent, how the new vehicle market develops, as you can completely understand, even though we're a, we're a very large player in this industry, we're still a tiny player in terms of the total new vehicle market. So I think we have to be realistic about the things we can do.
Mike Manley: Those areas are CFS, used, as we talked about, obviously after sales, and how we can provide more products and services to the customers that we have, we have won over many, many years of being in the marketplace. And then to make sure that our new vehicles, we're not an outlier, either with lower margins or poor market share, that we obviously control our costs, because to a large extent, how the new vehicle market develops, as you can completely understand, even though we're a, we're a very large player in this industry, we're still a tiny player in terms of the total new vehicle market. So I think we have to be realistic about the things we can do.
John Saager: Okay, that's helpful color. I, I appreciate you giving the detail there. Just to be crystal clear here, a slightly lower growth from EVs, as, as a lot of us now expect, for at least 2024 through maybe 2025, 2026, would actually be a positive. That's, that's the correct way to think about that?
Douglas Dutton: Okay, that's helpful color. I, I appreciate you giving the detail there. Just to be crystal clear here, a slightly lower growth from EVs, as, as a lot of us now expect, for at least 2024 through maybe 2025, 2026, would actually be a positive. That's, that's the correct way to think about that?
Mike Manley: Yeah, based upon the margins we saw develop last year, that's exactly how I would think about it.
Mike Manley: Yeah, based upon the margins we saw develop last year, that's exactly how I would think about it.
John Saager: Okay. Thanks, team.
Douglas Dutton: Okay. Thanks, team.
Operator: Our next question comes from Colin Langan from Wells Fargo. Colin, the line is now open.
Operator: Our next question comes from Colin Langan from Wells Fargo. Colin, the line is now open.
Colin Langan: Oh, great! Thanks for taking my questions. I think you mentioned in your comments, that CFS is supposed to be strong. I mean, how should we be thinking about that, though? Because, I mean, I think if there's more leasing, I think that puts a little bit of pressure on... There's possible normalization of vehicles, maybe it'll mass market, we might put pressure on that. But is that still gonna be up year-over-year, or should we think of that just moderating a bit as we go into next year?
Colin Langan: Oh, great! Thanks for taking my questions. I think you mentioned in your comments, that CFS is supposed to be strong. I mean, how should we be thinking about that, though? Because, I mean, I think if there's more leasing, I think that puts a little bit of pressure on... There's possible normalization of vehicles, maybe it'll mass market, we might put pressure on that. But is that still gonna be up year-over-year, or should we think of that just moderating a bit as we go into next year?
Mike Manley: Yeah, thanks for the question, Colin. Yeah, in my commentary, I was referencing you know, a little bit higher lease penetration in the CFS commentary. I think on balance, you know, leases are you know, accretive to you know, what we're trying to accomplish. Yeah, I mean, maybe you sell a little bit fewer you know, products on a CFS perspective, but it's not, it's not massive. I mean, and it is outweighed by the fact that we have a shot at getting the used car once it comes off lease. It also helps with vehicle affordability. We have you know, typically third-party financials taking a residual risk. So it's a net, net, a win-win for us on leasing. And you know, I would think of it that way.
Mike Manley: Yeah, thanks for the question, Colin. Yeah, in my commentary, I was referencing you know, a little bit higher lease penetration in the CFS commentary. I think on balance, you know, leases are you know, accretive to you know, what we're trying to accomplish. Yeah, I mean, maybe you sell a little bit fewer you know, products on a CFS perspective, but it's not, it's not massive. I mean, and it is outweighed by the fact that we have a shot at getting the used car once it comes off lease. It also helps with vehicle affordability. We have you know, typically third-party financials taking a residual risk. So it's a net, net, a win-win for us on leasing. And you know, I would think of it that way.
Mike Manley: We've been able to manage through, you know, with CFS, you know, over the years with, you know, higher, higher leasing value.
Mike Manley: We've been able to manage through, you know, with CFS, you know, over the years with, you know, higher, higher leasing value.
Colin Langan: Got it. And then just going back to your comments to the last question on expecting, you know, profitability to sort of normalize to pre-COVID 2019 levels. Is that already pretty much there on the domestics? If I look at the Q4 margin, the percent margin looks pretty similar to pre-COVID. So is that kind of driving some of those thoughts? Is that those companies that have already kind of restocked a lot of the inventory are already kind of back to normal levels?
Colin Langan: Got it. And then just going back to your comments to the last question on expecting, you know, profitability to sort of normalize to pre-COVID 2019 levels. Is that already pretty much there on the domestics? If I look at the Q4 margin, the percent margin looks pretty similar to pre-COVID. So is that kind of driving some of those thoughts? Is that those companies that have already kind of restocked a lot of the inventory are already kind of back to normal levels?
Mike Manley: Yeah, the answer to your question is that it's pretty much there for some of our OEMs.
Mike Manley: Yeah, the answer to your question is that it's pretty much there for some of our OEMs.
Colin Langan: Got it. All right, thanks for taking my questions.
Colin Langan: Got it. All right, thanks for taking my questions.
Mike Manley: You're welcome.
Mike Manley: You're welcome.
Operator: We currently have no further questions, so I'd like to hand the call back to management team for closing remarks. Over to you.
Operator: We currently have no further questions, so I'd like to hand the call back to management team for closing remarks. Over to you.
Mike Manley: So firstly, thanks for, thanks for your questions. I'm just going to touch on the margin question that I received earlier. One of the things that I think is relevant and important as you think about our performance going forward. AN USA, a valuable addition to our company, our organization, particularly where we have areas of significant density. Their used vehicle margin does not perform in the same way, for obvious reasons, as our franchise businesses. So when you think about that $1,800 that we discussed, don't think about that in the context of AN USA. The way that they source their vehicles is very different. The way that they can attach manufacturer and OEM programs is significantly different. So their whole business model, including the capital invested, is very, very different.
Mike Manley: So firstly, thanks for, thanks for your questions. I'm just going to touch on the margin question that I received earlier. One of the things that I think is relevant and important as you think about our performance going forward. AN USA, a valuable addition to our company, our organization, particularly where we have areas of significant density. Their used vehicle margin does not perform in the same way, for obvious reasons, as our franchise businesses. So when you think about that $1,800 that we discussed, don't think about that in the context of AN USA. The way that they source their vehicles is very different. The way that they can attach manufacturer and OEM programs is significantly different. So their whole business model, including the capital invested, is very, very different.
Mike Manley: So as you think about my comments on $1,800 margin, make sure you factor in the impact of AN USA on our average margins going forward, because they will not, and have not been at that level. And I don't anticipate that anytime, going forward. But with that said, you know, when I think about 2024, just that it's clearly gonna have its normal mix of headwinds and tailwinds. But for me, after a very significant year in 2023 of planned leadership transitions, I'm feeling positive about our development as we enter this year. You know, we have Jeff Parent joined our group, as you know, as the chief operating officer. Tom came in last year, CMO joined us, Rich Lennox, who joined earlier in 2023.
Mike Manley: So as you think about my comments on $1,800 margin, make sure you factor in the impact of AN USA on our average margins going forward, because they will not, and have not been at that level. And I don't anticipate that anytime, going forward. But with that said, you know, when I think about 2024, just that it's clearly gonna have its normal mix of headwinds and tailwinds. But for me, after a very significant year in 2023 of planned leadership transitions, I'm feeling positive about our development as we enter this year. You know, we have Jeff Parent joined our group, as you know, as the chief operating officer. Tom came in last year, CMO joined us, Rich Lennox, who joined earlier in 2023.
Mike Manley: So from my point of view, our leadership team, that year of transition, which was planned, is now complete. And I think all of the members that we've added bring vast experience to AutoNation. And these guys, along with their colleagues, who sit on our executive leadership team, are certainly gonna help us build on our success and the position our- and position our company well for the future. And, and really, that enables us, I think, to really look at how the investments that we've made in various parts of our businesses are performing and understand how we can get to a period of growth in some of those, and, and in others, how we can make sure that we're driving up our margins. So, with that, thank you for joining the call.
Mike Manley: So from my point of view, our leadership team, that year of transition, which was planned, is now complete. And I think all of the members that we've added bring vast experience to AutoNation. And these guys, along with their colleagues, who sit on our executive leadership team, are certainly gonna help us build on our success and the position our- and position our company well for the future. And, and really, that enables us, I think, to really look at how the investments that we've made in various parts of our businesses are performing and understand how we can get to a period of growth in some of those, and, and in others, how we can make sure that we're driving up our margins. So, with that, thank you for joining the call.
Mike Manley: We'll see how the year goes, and I look forward to talking to many of you between now and most of you at next quarter.
Mike Manley: We'll see how the year goes, and I look forward to talking to many of you between now and most of you at next quarter.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.