Group 1 Automotive Q2 2023 Earnings Call Transcript

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July 26, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2023 Second Quarter Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the floor over to Mr. Pete DeLongshot, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs.

Operator

Please go ahead, Mr. DeLongchamps.

Speaker 1

Thank you, Jamie. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and the related slide presentation that include 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 Groupon Automotive are forward looking statements that are made pursuant to the Safe Harbor business of Private Securities Litigation Reform Act of Forward looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ from forecasted results. Those risks include, but are not limited to risks associated with pricing, Volume, inventory supply due to increased customer demand and reduced manufacturer production levels due to some component shortages, Conditions of markets and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services.

Speaker 1

Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non GAAP financial measures as defined under SEC rules may be discussed on Call. As required by applicable SEC rules, the company provides reconciliations of any such non GAAP Financial measures to the most recent comparable GAAP measures on this 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 turn the call over to Daryl.

Speaker 2

Thank you, Pete. Good morning, everyone. In the Q2 of 2023, Group 1 Automotive reported 100 and $6,100,000 in adjusted net income and record total quarterly revenues of $4,600,000,000 led by all time highs in new vehicle, parts and service and finance and insurance revenues. Our parts and service team Continued to deliver record revenue levels for 9 consecutive quarters. We also set an all time record for quarterly total gross profits supported by an all time record parts and service gross of $304,100,000 We continue to deploy capital efficiently in the quarter to acquire the highly desirable Beck and Masten stores, further strengthening our strong Texas footprint with an outstanding brand.

Speaker 2

We also returned capital to our shareholders by repurchasing $31,000,000 in shares during the quarter. Our strong cash flow and leverage position, which Daniel McHenry will cover in a minute, We'll continue to allow for significant capital deployment flexibility in the remainder of 2023. Now turning to our Q2 results, starting with our U. S. Operations.

Speaker 2

We ended the quarter sequentially flat with Consistent with our comments on inventory last quarter, our domestic brands have improved slightly and import brands have remained very constrained. Approximately 28% of our U. S. Business is Toyota and Lexus, which continues to be very tight at a combined 5 day supply. Our new vehicle revenues increased an impressive 19% sequentially and 22% over the Q2 of last year.

Speaker 2

History, a 19% increase over the Q1 and 16% over the Q2 of last year. 33% of our new vehicle sales in the U. S. Were presales, down from 40% in the prior quarter. Used vehicles were challenged in the 2nd quarter with sourcing more difficult from the lack of new vehicle supply.

Speaker 2

We entered the quarter low on used vehicles. However, we picked up some ground as the quarter progressed, thanks in large part to trade ins from record low from record new vehicle Sales. Source used inventory, we continue to focus on organic sourcing efforts, including acquisitions through Acceleride, Customer Trades and service drive acquisitions. Finance and Insurance business has remained strong with same store gross profit per unit At $2,379 a sequential quarter improvement. Despite this resiliency, looking forward, We expect pressure on finance penetration rates driven by existing interest rates and slightly tighter lender requirements for some buyers.

Speaker 2

Now turning to aftersales. Our U. S. Performance was outstanding. Aftersales revenues grew double digits and same Technician headcount grew 10% in the 2nd quarter and we continue to invest in new ways to reach our customers through 1 to 1 marketing technology and by using artificial intelligence.

Speaker 2

We continue to invest in aftersales and believe parts and service will be a strength through the rest of 2023. Our 2nd quarter U. S. Adjusted SG and A as a percentage of gross profit was 61.7%, An increase of only 303 basis points from prior year and a decrease of 1.4% sequentially and down from over 70% and pre pandemic 2019. We do see some pressure from reduced margins and inflationary costs.

Speaker 2

We expect that a material portion of our SG and A savings will be permanent. Now to Accelerate, Where our customers continue to vote yes. During the Q2, we saw deeper engagement through Acceleride. Over 80% of our customers engaged in some way in their transaction through Acceleride and nearly half of our customers engaged Acceleride On at least 5 steps of the car buying process, we experienced significant year over year increases in trade ins, credit applications, F and I attachment And significantly more sales, 12,200 vehicles sold in the quarter that was up 78% year over year. Turning to the UK.

Speaker 2

Vehicle demand remains resilient and new vehicle availability is still constrained, Keeping vehicle GPUs strong. New and used GPUs outpaced the prior year quarter by 7% and 5 As demonstrated by the 10% increase in same store new vehicle units sold. As of June 30, Our new vehicle order bank was approximately 19,400 units, a 10% increase over the prior quarter. As a reminder, our U. K.

Speaker 2

Business mix is predominantly luxury and those customers are more resilient during times of economic uncertainty. And our aftersales growth in the UK has been outstanding, with same store revenues and gross profit On a local currency basis, increasing 19.8% and 17.2%, respectively. Similar to our efforts in the U. S, we've worked to grow technician headcount, experiencing an approximate 10% increase over the prior year. We have also invested in improvements to our U.

Speaker 2

K. Customer contact center, streamlining operations and improving the customer experience. I will now turn the call over to our CFO, Daniel McHenry to provide a balance And liquidity overview. Daniel?

Speaker 3

Thank you, Daryl, and good morning, everyone. As of June 30, we had $23,000,000 of cash And another $268,000,000 invested in our floor plan offset accounts, bringing total cash liquidity to 291,000,000 We also had $338,000,000 available to borrow on our acquisition line, bringing total immediate available liquidity to 6 operating cash flow and $311,000,000 of free cash flow after backing out $75,000,000 of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends. During the current quarter, we spent $31,000,000 repurchasing approximately 141,000 shares at an average price of $221.52 The results of this repurchase activity It's just over 1% reduction in share count over the current quarter. Our share count as of today is down to approximately 14.1 Our rent adjusted leverage ratio as defined by our U.

Speaker 3

S. Syndicated credit facility With 2.1 times at the end of June, our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floor plan interest of $15,600,000 was an increase of $9,700,000 from the prior year entirely due to higher vehicle inventory holdings. We effectively manage our floorplan interest by holding excess cash on our floor plan offset accounts, reducing the balance exposed to interest As well as through our portfolio of interest rate swaps, which gave us $4,700,000 in interest expense versus the comparable prior year quarter. Non floorplan interest expense of $25,900,000 increased $7,400,000 from the However, our mortgage rate swap portfolio saved us $1,000,000 versus the comparable period.

Speaker 3

As of June 30, approximately 63% of our $3,400,000,000 in floor plan and other debt was fixed. Therefore, an annual EPS impact is only about $0.69 for every 100 basis point increase In the secured overnight funding rate or SOFR, which is the benchmark rate referred to in our floor plan and mortgage debt instruments. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website. I will now turn the call back over to Daryl.

Speaker 2

Thank you, Daniel. Related to our corporate development efforts, we expect to find additional growth opportunities in 2023. Growing our U. S. And UK businesses remains a top capital allocation priority.

Speaker 2

However, our balance sheet, cash flow generation and leverage position We'll continue to support a flexible and efficient capital allocation approach, which will likely include serious consideration of share repurchases in addition to pursuing external growth. This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question and answer session. Jamie?

Operator

Ladies and gentlemen, we will now begin that question and answer session. Our first question today comes from Daniel Embro from Stephens Incorporated. Please go ahead with your question.

Speaker 4

Yes. Hey, good morning, guys. Thanks for taking my question. On the I want to start actually on the used vehicle side of the house. GPU is slightly better, but units obviously have been like kind of across the Just wanted you guys maybe expound on that kind of what you're seeing on the ground.

Speaker 4

Is it more of a supply issue with a lack of late model used coming back? Is it a demand driven issue because of financing rates? And how do you think that kind of materializes in the back half of this year given what you're seeing out in the market?

Speaker 2

Hi, Daniel. It's Daryl. I don't think what we're seeing is any different than what you've heard from The rest of the industry, there's we're kind of at the peak of the COVID off lease return trough. So there's not a lot of inventory coming back into the market off lease. Also, our fastest Selling and lowest day supply vehicles continue to be cheaper vehicles and there's more pressure on those For affordability, but those people tend to move down.

Speaker 2

Our average selling price moved down almost a couple of $1,000 year over year. So it's I think more of a function of availability of inventory at the Lower levels and expect that we'll see some of that. We saw during the quarter, we saw it sequentially improve month over month over month. And I expect we'll continue to see that improve a little bit as the year progresses.

Speaker 4

Got it. And then Pete, I want to follow-up on the U. S. F and I per unit. It was above $100 sequentially.

Speaker 4

Is that driven Hi, our product attachment, I would think loan size is down, finance penetration is probably down year over year. Can you talk to what the drivers of kind So growth are and maybe how sustainable this level could be on a per unit basis?

Speaker 1

Sure, Daniel. Thanks. We feel good about the overall Performance of F and I, our product penetrations were either up or held steady year over year and sequentially improved. So I think there's been a lot of focus on the finance pen, which we've seen an improvement in new. Used vehicle still is a headwind clearly and I think that's a result of rates.

Speaker 1

Our rates are up about 2.50 basis points Year over year. So we're focusing on the product and we've had I think really good Partnerships with our major lenders, which has been helpful.

Operator

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Speaker 5

Good morning, guys. I just wanted to touch on parts and service where you continue to outperform at least our expectations and it's a very I mean, it's This is happening quarter after quarter. I'm just curious how sustainable you think that is, if this is just an issue of getting More techs and you'll be able to continue to grow over time and how you're getting all these techs. I mean adding 10% in the quarter is pretty Impressive. I know that the 4 day flexible work week is helping to some degree, but it seems like there's some other secret sauce that might you guys might be using here to get all those folks.

Speaker 5

So just kind of expand on the parts and service strength and the potential going forward?

Speaker 2

John, this is Daryl. We invest heavy in parts and service and we find when we acquire Dealerships, which we've done quite a bit of acquisition over the last couple of years, we almost always find underinvestment in parts and service And that is the first place we invest, whether it's capacity, equipment, staffing, training, and we do that as quickly as Possible with all the new acquisitions and given all the stores we've acquired over the last couple of years, I think that's part of the puzzle. Another part of the puzzle is the technician recruiting. We have significant efforts underway there and the 4 day work week is certainly part of it. We have other programs that we do that support tuitions and training and Uniform sponsorships and mentoring programs and we have Career pathing is in place for our technicians.

Speaker 2

And so I think there's a whole combination of things. I can't tell you there's a We just try to put a lot of focus on a number of areas. And then we really What I see happening right now is, we're all benefiting probably from some pricing in the market Over the last couple of years, which I think has come to an end and coming to an end, and I think the game is turning to throughput again here in the future. And a lot of our focus and efforts will be towards that. And we still see a lot of demand out there.

Speaker 2

Car parks still really aged. There's still a lot of repairs to be done on vehicles that have been that are older units, older vehicles. And so I believe that there's still the outlook for parts and service is still bright, Really bright, so opportunistic.

Speaker 5

And just one follow-up on Acceleride. You made mention that 50% of your customers We're going through 5 steps of the transaction with Accelerate. I'm just wondering if you can kind of explain what Exactly those 5 steps are, how many steps there are that you count in a transaction and when will this ultimately start Saving you costs or helping you maybe reduce headcount and I don't know if you can quantify that, but how do you think about that potential savings over time?

Speaker 2

Well, we saw We saw productivity improvements in the quarter. We didn't mention them in the script, but we did see productivity improvements with our sales teams Year over year and we attribute that to Acceleride. We also there's about 10 steps in Acceleride And the thing we want to do is engage customers as much as we can through Accelerate. And so And we're testing a few things around the country. We don't we've done some a few things here in the last 6 months or so where We are focused on the way we've been using Acceleride and then we're also trying a few new things in some markets Determine how that affects engagement, how it affects closing rates, how it affects the customer experience as well.

Speaker 2

We're still in the early days of Acceleride, we feel like. I don't I can't tell you what a number is. I don't think we'll see a day where 100% of our customers are going 100% of the time through Acceleride. We've designed it so that customers can choose where they engage and Don't engage, we try not to make it lockstep and we try not to make it where if they want to take another path they can. And so it's flexible.

Speaker 2

So long winded answer to your question, John, but I think we're still learning as we go.

Speaker 3

John, just it's Daniel here. And just to add to what Daryl had said, To put it into perspective, salesperson productivity has increased by 32%. That's the average number of units a salesperson would sell Versus pre pandemic. And as Daryl said, we see that continuing to increase.

Operator

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

Speaker 6

Thanks. Good morning. Just going back to the service technicians, particularly the UK headcount increase. I know you've got some good initiatives like the 4 day work week and whatnot, but I'm just curious in the UK market, what else may have helped there? Are people perhaps more eager to work Than they were a year or 2 ago, just any other labor market dynamics you can share specific to that market?

Speaker 6

Thanks.

Speaker 2

We're experimenting with 4 day work week There, David. We are it's not nearly as ingrained there as it is in the U. S. The work schedules in the UK are different At retail. So the value of a 4 day work week is different there than it is in the U.

Speaker 2

S. But The things we're trying to do are make sure that our compensation is certainly at A competitive level and we're working to try to ensure that we're kind of the workplace of choice For our team, we've also added some significant resources in our aftersales team at a corporate level in the UK, which Has helped us significantly put some more focus and emphasis on technician recruiting.

Speaker 6

Thanks. And on used, obviously, it's a struggle for everybody, but your metrics to me, they didn't The year over year deltas just didn't seem as large of a decline as I remember seeing at some of the other dealers. And I'm just curious, Maybe are you not cutting prices right now quite as hard there as prices are coming down or are you just procuring inventory smarter than in the past?

Operator

Well, I'd

Speaker 2

love to say we're smarter. I would say we're trying to be disciplined. We And it's a new technology about a year ago that I think is really helping us with one of our partners and it's helping us stay more disciplined on our pricing And I believe that's helping us quite a bit. The old days of where a used car manager will go and price their inventory, we're kind of trying to get away from that because we want the technology to help us lead that. And so we implemented some things about a year ago to help us do that and I believe that's paying some dividends.

Operator

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

Speaker 7

Great. Thanks for taking the questions. I just wanted to like ask a broader picture question just in terms of consumer, Health of consumer, obviously, you talked about the interest rate impact and how that's impacting news and like your financing. But In general, we have seen new car volumes holding much better than expected so far year to date. Curious, What do you think might be driving that in context of the pricing and the rate environment?

Speaker 7

And what is your sense of how it can persist through the course of the year? And tied to that, is there a range you can give us in terms of how you think the new car GPUs might play out into the 3rd quarter and maybe into the I have a follow-up. Thanks.

Speaker 2

Rizat, in terms of the consumer, We see consumers just looking at the order banks in the UK, looking at the presales in the U. S, I mean to us that indicates a pretty healthy strong consumer. Looking at the after sales pull through, We see evidence of a pretty strong consumer. We're seeing a little pressure in F and I, but it's just a little bit honestly. I mean, It's $100 I mean, so from a consumer perspective, we see good things there.

Speaker 2

And I don't know that that will change. In terms of the gross profit trends you asked about on new cars, I don't believe we will see anything different than what we have seen over the last couple of 3 quarters where it's a gradual decline from where it's been, but nothing we don't see any cliffs Fair at all.

Speaker 7

Got it. That's helpful. And maybe just on capital allocation priorities, buyback, Buyback has been a little lighter this year relative to what you did in the last couple of years. Obviously, you've spent a little more on M and A here. Curious how you're thinking about balancing that in the second half.

Speaker 7

Maybe any comment Around just the M and A environment, what kind of deals are flowing into the pipeline, how the multiples are, Just like how the activity is and willingness for deals to close, that would be all. Thanks.

Speaker 2

We believe we want to deploy capital efficiently. We want to buy the right kind of deals. And if you look at our last 5 or 6 Deals, that's really indicative of the kind of purchases we're looking for. In Toyota of North Austin and our big Chevy deal we did in Florida and the big Beck and Maxta acquisition here in Houston and Down in South Texas. So those are the type of acquisitions we want to do and Those are the kind we are looking for in growth market.

Speaker 2

And we if we can't find those, then we will deploy Capital towards stock buybacks, which you saw a great example of that last year, when we bought quite a bit of the company back. So We believe that that's still an opportunity, but we want to grow the company and that's a priority for us. So that comes first, but not at any

Operator

Our next question comes from Daniela Higgins from Morgan Stanley. Please go ahead with your question.

Speaker 8

Thank you all. So I wanted to ask about rising EV inventory. Do you have any comments around incremental Demand for EVs from the start of the year to now, any sense of change in demand recent weeks or just any commentary on inventory levels rising overall?

Speaker 2

REV day supply is 61 days. And So it's a little higher. It's a small universe for us. We have 11,000 roughly units in stock, 700 of those, 7.40 of those are EVs. So and it's hard To draw conclusions about general trends based on that small of a number, but we have It's concentrated in just a few brands and in some of the brands there's a More support for sales to sell them and in other brands there's a bit of a struggle, but that's the difference between our EV and our ICE

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Group 1 Automotive Q2 2023
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