Group 1 Automotive Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 25, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2023 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the floor over to Mr. Pete DeLongshaw, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr.

Operator

DeLongchamps.

Speaker 1

Thank you, Jamie, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to Group 1's website. Before we begin, I'd like to make some brief remarks about forward looking statements and the use of non GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 Automotive are forward looking statements that are made pursuant for the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Speaker 1

Those risks include, but are not limited to risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturer In addition, certain non GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on the call today are Daryl Kenningham, our President and Chief Executive Officer and Daniel McHenry, Senior Vice President and Chief Financial Officer. I'd now like to hand the call over to Daryl.

Speaker 2

Good morning, everyone. In the Q3 of 2023, Group 1 Automotive reported $169,800,000 in adjusted net income, Record total quarterly revenues of $4,700,000,000 and all time quarterly revenues across all major lines of business. Our teams also delivered record quarterly adjusted diluted EPS from continuing operations of $12.07 an increase from the Q3 of 2022. Starting with our U. S.

Speaker 2

Operations, our inventory levels Remained relatively flat from the Q2 of 2023, no major shifts in mix, including from our brands affected by the UAW strike. In the Q3, Solentes was 4% of our mix, Ford 7% and General Motors 10%. On a same store basis, our U. S. New vehicle unit sales were up nearly 12%.

Speaker 2

During the Q3, 30% of our new vehicle sales in the U. S. Were pre sales, down a bit from 33% in the prior quarter. Also important to note, in a tough used vehicle environment, our used vehicle sales were up both year over year and sequentially, and our gross margins were up year over year. We saw strengthening throughout the quarter in our used vehicle margins.

Speaker 2

In addition, we saw strengthening in our CPO business to nearly 25% of our mix. CPO is Key driver of loyalty and after sales and repurchase and we continue to focus on organic sourcing including acquisitions through Acceleride, customer trades which were up in the quarter and service drive acquisitions. Our outstanding F and I team also We achieved record quarterly revenues, capitalizing on the opportunities to sell products that are both good for our customers and good for their vehicles. Our gross profit per unit sold of $2,367 only minimally declined on a to same store sequential basis. We expect some continued pressure on finance penetration due to existing interest rates and slightly tighter lender requirements for some used vehicle buyers.

Speaker 2

Now shifting to aftersales. We focus on the after sales impact on the customer journey by increasing customer attention through more convenient service hours, training of our service advisors, Selling service contracts with vehicle sales and improved customer relationship management software that allows us to provide targeted marketing to our customers. We continue to believe that aftersales is an area of underinvestment And we invest heavily and without reservation when we acquire new stores. With this focus, our parts and service team continues to achieve record results, notching the 10th consecutive quarter of record revenues at an all time quarterly high in gross profit. We continue to focus on the hiring and retention of technicians In this challenging labor market, our 4 day work week benefits our customers by extending our hours of operation during the week and a return in return leased to higher technician productivity in our shops.

Speaker 2

We continue to explore avenues to increase our capacity and drive more incremental productivity. We also continue to invest in new ways to reach our customers through 1 to 1 marketing technology and by using artificial intelligence. In the Q3, we set over 360,000 service appointments digitally and through our customer development center. We also generated over 10,000 customer appointments in just 6 brands using artificial intelligence. We believe these AI customers to be incremental and expect this initiative to grow and generate more incremental service business in the Now let's shift to SG and A.

Speaker 2

U. S. Adjusted SG and A as a percentage of Gross profit increased only 88 basis points year over year and improved sequentially, reflecting our focus on controlling costs In this inflationary environment and the structural cost improvements made since the pandemic. Current adjusted SG and A as a percentage of gross Profit of 61.4% continues to be down from 70.5% in pre pandemic 2019. Now a quick look at the UK.

Speaker 2

The UK achieved record quarterly revenues, thanks to record used vehicle performance. Vehicle demand remains resilient and new vehicle availability is still constrained, keeping vehicle pricing and GPU strong. We continue to see signs of production improvement year over year by certain manufacturers as demonstrated by the near 10% increase in same store new vehicle units sold. Despite this increase in same store units sold, we experienced vehicle delivery shortages from BMW, MINI and Volkswagen in the Q3 of 2023, limiting our upside potential for the quarter. The lack of vehicle deliveries from these manufacturers resulted in higher than anticipated SG and A as a percentage of gross profit, giving our staffing levels assuming the sale of these vehicles.

Speaker 2

As of September 30, our new vehicle order bank was approximately 17,700 units. As a reminder, our UK business mix is predominantly luxury and those consumers are more resilient during times of economic uncertainty. And now to capital allocation. We deploy a return focused capital allocation strategy that balances the use of our capital between opportunistic portfolio management, share buybacks and the return of capital to shareholders in the form of quarterly dividends. This approach continues to benefit our shareholders, allowing us to achieve all time high and adjusted diluted earnings per common share from continuing operations in the Q3.

Speaker 2

Successful portfolio management involves not only acquiring great assets, but also disposing of assets for which we believe a higher return proposition exists. In the Q3 of 2023, we disposed of 8 franchises and voluntarily terminated a 9th franchise. We intend to benefit our shareholders by using the proceeds from these sales to either buy additional dealerships or buyback additional shares. Our number one priority is growing the company. We evaluate all brands and geographies to expand our portfolio, seeking to acquire dealerships or dealership clusters in growth positioned or economically stable markets or that are economically accretive to our existing markets.

Speaker 2

In October 2023, we consummated The pending acquisition of a Subaru dealership in Manchester, New Hampshire, bringing the number of franchises owned in Manchester to 5. Our recent acquisitions of Beckett, Masten GMC and Kia dealerships as well as the Estero Bay Chevrolet in Florida serve as a reminder of the strength of this portfolio optimization approach. We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. We believe this is a critical element to our growth story, which leverages our scale and proven integration capabilities, optimizes our rooftop performance and grows the company in a meaningful and incremental manner. I will now turn the call over to our CFO, Daniel McHenry to provide a balance sheet and liquidity overview.

Speaker 2

Daniel?

Speaker 3

Thank you, Daryl, and good morning, everyone. As of September 30, we had $53,000,000 of cash on hand and another $211,000,000 invested in our floor plan offset accounts, bringing total cash liquidity to 264,000,000 We also had $463,000,000 available to borrow on our acquisition line, bringing total 2023, we generated $555,000,000 of adjusted operating cash flow and $448,000,000 of free cash flow after backing out $107,000,000 of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter, we spent $65,000,000 repurchasing approximately 246,000 shares at an average price of $261.89 The result of this repurchase activity is just over a 1.7% reduction in share count over the current quarter. Our share count as of today is down to approximately $13,800,000 Our balance sheet, Cash flow generation and leverage position will continue to support flexible capital allocation approach, including serious consideration of share repurchases in addition to pursuing external growth opportunities.

Speaker 3

Our rent adjusted leverage ratio as defined by our U. S. Syndicated credit facility was 2 times at the end of September. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floor plan interest of $16,500,000 was an increase of $10,000,000 from the prior year, entirely due to higher vehicle inventory holdings.

Speaker 3

We effectively manage our floorplan interest expense by holding excess cash in our floor plan offset accounts, reducing the balance exposed to interest as well as to our portfolio of interest rate swaps, which saved us $3,400,000 of interest expense versus a comparable prior year quarter. Non floorplan interest expense of $26,500,000 increased $6,900,000 from prior year. However, our mortgage swap portfolio saved us $3,500,000 versus the comparable period. As of September 30, approximately 65 for every 100 basis point increase in the secured overnight funding rate or SOPR, which is the benchmark referenced in our floor plan and mortgage debt instruments. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website.

Speaker 3

This concludes our prepared remarks. I will now turn the call over to the operator to begin the question and answer session. Operator?

Operator

Ladies and gentlemen, we will now begin that question and answer session. Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Speaker 4

Good morning, guys. Daryl, I just wanted to ask a question on inventory levels. You mentioned that they're tight and constraining your sales in the U. K. But I'm just curious what your take is on inventory levels here in the U.

Speaker 4

S. And are they sufficient or are they constraining sales? And maybe kind of secondly to that, where do you think inventory levels are going so that we can understand where floorplan interest expense may go?

Speaker 2

John, good morning. I think the surprising, I guess, surprising, maybe not so Surprising thing about the inventories Q3 over Q2 is they didn't change much on a day supply basis. I think we were up 2 days and the mix Between brands didn't change very much. We saw Stellantis come down a little bit. We saw a little bit of remix with some of the leg days.

Speaker 2

But I think that it's constraining sales in Probably the import brands and when you look at our day supply is still Almost single digits in those brands and you look at the sales growth that's there and we still had 30% of our mix was basically We presold, which at this point I'm a little surprised by. And the so I think there's probably More inventory coming in those brands. I think the luxuries are probably in about the right place. I think they've got some mix Issues to deal with between EV and non EV. And then the domestics I think Are fine in terms of their total.

Speaker 2

We'll see what happens with the UAW impact, especially with the plants that were announced this week.

Speaker 4

And if I could sneak in one follow-up on F and I. I mean, it sounds like it's a slight pressure point, still doing fairly well. Could you just remind us what part of F and I PVR is product and what is it is spread based and what your sort of thoughts of that Going forward, I mean, there's a lot of good product in there, the consumer benefits from. So I'm just curious what you think that the risk or even opportunity is going forward there?

Speaker 1

Hi, John. It's Pete DeLongchow. So the we were very pleased with the overall F and And I think it continues to be the headwind with used car penetrations were down about 400 basis points year over year. A third of our revenue and gross profit comes from the spread and originations, 2 thirds from product. And I'll tell you, When I look at the overall results, our product penetrations haven't varied more than 100 basis points either way on any of our product penetration.

Speaker 1

So we're really pleased with the product sales that we've had, which has certainly helped keep our PRU numbers in line.

Speaker 2

John, one thing we do see is, as Pete mentioned, even though we're not we don't over rely on rate, When we do lose some attachment on financing, oftentimes we're able to preserve Some incrementality on the product sales. So as an example, don't take this literally, but if we lose 3 points of finance Penetration on used cars, we might only lose a point and a half or so of product penetration. So there's still some we're able to preserve.

Operator

And our next question comes from Rajat Gupta from JPMorgan. Please go ahead with your question.

Speaker 5

Great. Thanks for taking the question and congrats on the execution. I had a question on parts Services, could you help us understand or help us gauge any potential impact from the port shortages, especially General Motors and Ford, where you have a little higher exposure. Any way to quantify what that impact could be? When should we start to worry about shortages hitting your stores?

Speaker 5

Any color on that would be helpful. I have a follow-up.

Speaker 2

Rajat, this is Daryl. So far the impact has been minimal. We purchased I had and stocked up on the fastest moving parts in advance of the strike We're in advance of the contract negotiations, I should say. And so we're still able We're still living off of that extra stock. We also are able to Leverage our other stores around the country when we do have a part shortage.

Speaker 2

I don't think it's Unreasonable to think that in the next quarter we'll start to see more part shortage issues from the 2 brands you mentioned. I don't know that there'll be significant. The OEMs have been fairly responsive with being able to supply us. But I don't know that it's I think it'll probably be a bigger issue for us in Q4 Then it was in Q3, but I can't say it will be severe.

Speaker 5

Got it. Have you already started to feel that impact in the Q4 or The strike need to continue for another week or so before you start to feel that?

Speaker 2

Well, we won't have a full picture until after the quarter is over. So it's hard to say right

Speaker 5

Got it. Just on SG and A then, helpful color on the slide deck around the productivity improvements. In the past, you've given us some color around how much permanent SG and A to gross reduction You expect to see I think you'd mentioned like 300 to 400 basis points in the past, like this was probably more than a year ago. Curious As to if you have any update to that based on what you're seeing in the business, even in the UK, Any new guide rails or guardrails we should be thinking about in terms of what a normalized SG and A to gross should be for the business?

Speaker 3

Thanks. Good morning. It's Daniel here. Yes, I think an important statistic to note that I don't think is in our investor deck is that We're still 7% down in terms of headcount in the U. S.

Speaker 3

Versus 2019 on a same store basis. And with that, we've added 11% more technicians. So the elements related to SG and A is down Even more than 7% in terms of headcount. And at this time, I don't see any of that headcount returning. Clearly, 30% additional productivity per salesperson.

Speaker 3

Again, I don't see us going back to the ways that we were pre pandemic. So I think all of that cost reduction or that people headcount that's It's Aide, it's Aide permanently. In terms of the guidance, I guess, that we've given, pre pandemic whole company, we were at 74% SG and A as a percent of growth. I don't see that ever being above 70%, all subject Recession or major changes in the industry.

Operator

Our next question comes from David Whiston from Morningstar. Please go ahead with your question.

Speaker 6

Thanks. Good morning. Really impressed by the used vehicle performance. And I wanted to just look at that both sides of it really like how are you convincing The consumer who is really struggling with use of affordability to pay over $30 but then on the procurement side, how are you keeping the GPU up as well.

Speaker 2

David, good morning, Daryl. I think we're being smarter about What we're sourcing and how we're sourcing, we implemented some new technology about a year ago, which helps us With acquisition and it helps us with pricing and it's much more responsive. It takes More of our for lack of a better word, our gut instinct out of it and relies much more heavily On data and market intelligence and on a mass basis, not just on a car by car basis. And we're, I believe, leveraging that better today than we ever have. So I think we're probably getting some incrementality out of Our used car performance that we have not seen in the past.

Speaker 2

And so I think that's the results of what you're seeing. I believe that's really the difference. We added some additional training in our dealerships around the country and some staffing around country to try to help with the execution on used cars about a year ago as well. And I think some of that is coming to fruition. So I believe those are things that are helping us.

Speaker 2

And we get I mean, you know this, we Just the advantage we have of being able to source things organically is just a real advantage for us. And so we're compared to the used car pure plays. And so we're extremely Fortunate to be able to do so.

Speaker 6

And staying on that topic, I mean, on the consumer side though, they're really struggling. Are they or have you changed your mix in any way to make it worthwhile to them to pay up or are you just a really good fit?

Speaker 2

The ASPs are down a little bit, almost $2,000 I believe year over year. So we are seeing that the pricing is coming down some And we're responding with the right stock to be able to do that and that's how we were able to preserve our gross margins. And so I think we're being more responsive with what we're stocking given the market today that there's more pressure on it from a price and payment perspective.

Operator

Our next question comes from Michael Ward from Benchmark. Please go ahead with your question.

Speaker 7

Thanks. Good morning, everyone.

Speaker 1

Good morning, Mike.

Speaker 7

First one, a quick one. Are you seeing any change at all in credit availability for consumers? And then the second question is more kind of strategic. It seems like you're selling off some of the smaller stores and you're growing some of the bigger ones. And I'm guessing like that should imply that the parts and service departments get bigger.

Speaker 7

Am I reading that correctly?

Speaker 2

Mike, I'll take your second question and then Pete will take your first question. This is Daryl. You're reading it correctly. You're reading it exactly correctly. We're looking for our portfolio.

Speaker 2

We want to generally operate in Clusters and generally with higher revenue rooftop stores where we can build and develop Scale on a better basis and that certainly helps us feed our parts and service business, which for us we consider One of our real strengths and something we invest heavily in. So yes, absolutely. And when you look at our acquisitions over the last couple of years, Whether it's back in Masten or Toyota North Austin or a Cerro based Chevrolet, they're large high revenue Stores and Rebecca Masten and Toyota North Austin, they're Right in the middle of a cluster of other stores that we own. So ability to leverage scale and ability to grow and leverage our SG and A base And drive more parts of service are all key benefits in that case. And then on the F and I question on the buyers and the lending environment, I'll ask Pete to speak to that.

Speaker 1

Mike, what we've seen with credit is, it's certainly available. And I think that our strategy of partnering with The big banks in all different credit tiers is certainly paying a dividend for us right now. There has been some tightening clearly on loan Value and some of their metrics, but with the way we run our business with audit and compliance, our loss ratios are In line or better than with all of our lenders. So we've had great partnerships and I ask our operators all the time, we Car deals due to credit and that's a resounding no.

Speaker 2

You're also seeing the OEM captives really get more aggressive right now. And I think that really helps us as new car dealers obviously give us an avenue to be able to rely on and support from them that They've stepped up with some additional programs and support as well.

Speaker 7

So if I could follow-up on the

Speaker 6

dealership issue, you have a

Speaker 7

couple of Shubhishu, you have a couple of good charts and slides in there about the parts business and the growth and the benefits of Acceleride and EV sales. As vehicles become more complex, especially on the battery electric side, the service has to be done at the dealers because there is no independent aftermarket. Are your stores able to service some of these other start up EV companies that are service constrained, call it like a Rivian?

Speaker 2

Well, I hope that we have all the work we can do with our own brands. We haven't had any discussions with anybody like Rivian or anything like that around any repair work or warranty work or anything like that. Could we I'm certain that if we work on the brands we do, we could work on those. But our focus is on the brands That we have relationships with today, Mike.

Speaker 3

Mike, can I just add one thing to that? It's Daniel here. We do collision work For the EV, so we are approved at some of our collision centers for work and those start up companies Or more established EV operators.

Operator

Our next question comes from Daniel Imbro from Stephens Incorporated. Please go ahead with your question.

Speaker 8

Yes. Hey, good morning guys and congrats on the quarter.

Speaker 7

Thank you. Daryl, I want

Speaker 8

to start or follow-up on the service side. Obviously, trends remain strong there. You talked about parts availability. I want to talk about the labor side. So you've been able to hire and retain for a while here with the 4 day work week, but I think you guys have been testing some new comp plans.

Speaker 8

Just curious how the reception has been? Is that helping you kind of maintain your lead On the hiring side, has anything changed materially on the technician availability or retention?

Speaker 2

Daniel, thank you. Yes, we are still focused on attracting Technicians and have had some success over the last year attracting them. Our turnover rate with technicians is down Year over year. And then we are also piloting some different compensation plans that are We hope we'll make us a more attractive place to work and we hope we'll give Technicians more certainty in their compensation and Right now, we've got that in about 4 stores that we're piloting and measuring. We want to make sure we maintain our productivity and our throughput As well as employee retention and engagement obviously are super important there.

Speaker 2

So yes, we're testing that. We're also taking a hard look at our Shop productivity, Daniel. There's traditional metrics around how much Work we can put through our existing shop base, but then are there some other levers we can pull To either increase the capacity of those shops or increase the throughput and productivity of those shops. So we're taking a look at some things we might be able to do there. So we at the end of the day, we still see lots of room to run and after sales, we see lots of Opportunity in aftersales and we continue to want to invest there and think that there's going to be continued growth there for a long time into the future.

Speaker 8

That's helpful. I appreciate it. And then maybe one driving over cap allocation. So you've made good progress Obviously, on the portfolio optimization, but curious what you're seeing. Are seller multiples continuing to compress In the M and A market as we move further from peak same store earnings?

Speaker 8

And I guess with the stock multiple compressing and the cash flow generation, does share repurchases kind of fall in your capital priorities from here just as you look at how to spend that free cash?

Speaker 3

Daniel, as Daryl said, our key priority is to continue to grow the company. I think it's fair to say there's A lot of potential acquisitions on the market at the moment. I think the market is more buoyant at the moment Than probably it has ever been. Quality acquisitions are still More expensive. And I think that the prices will continue to compress.

Speaker 3

We're going to remain balanced in terms of capital allocation as and when we think it's opportunistic To buy our stock back, we'll continue to buy our stock back and I think that was clearly messaged in our prepared remarks.

Operator

We do thank everyone for joining today's conference. You may now disconnect your lines.

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Group 1 Automotive Q3 2023
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