Group 1 Automotive Q4 2023 Earnings Call Transcript

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January 31, 2024

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 4th Quarter and Full Year 2023 Financial Results Conference Call. Please be advised for 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 Manufacturing Relations, Financial Services and Public Affairs.

Operator

Please go ahead, Mr. DeLong Shaw.

Speaker 1

Thank you, Jamie, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and the 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 the Group 1's website. Before we begin, I'd like to make some brief remarks about forward looking statements and the use 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 to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.

Speaker 1

Those risks include, but are not limited to risks associated with pricing, volume, inventory supply due to customer demand and reduce manufacturer production levels, conditions of markets and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non GAAP financial measures to the most directly comparable GAAP measures on website. Participating with me on the call today are Daryl Kenningham, our President and Chief Executive Officer and Daniel McHenry, our Senior Vice President and Chief Financial Officer.

Speaker 1

I'd now like to hand the call over to Daryl.

Speaker 2

Good morning. In the Q4 of 2023, Group 1 Automotive reported $131,200,000 in adjusted net income and delivered quarterly adjusted diluted EPS from continuing operations of $9.50 Current year total revenues of $17,900,000,000 were the highest in company history, supported by all lines of business And total gross profit exceeded $3,000,000,000 an all time record, driven by parts and service gross profit of $1,200,000,000 Start with our U. S. Operations. New vehicle units sold outpaced the industry.

Speaker 2

We were up 14% on a same store basis and up 19% on an as reported basis. During the Q4, 24% of our new vehicle sales in the U. S. Were presales, down from 30% in the prior quarter. These strong unit sales reflect the resiliency of demand and our emphasis on driving volume.

Speaker 2

Gross profits performed about as expected and continue on their slow glide path down as inventories return. In used cars, retail used vehicle GPUs performed well in the quarter, increasing $160 over the prior year quarter with unit sales remaining flat. Given the speed and depth that the industry used car valuations declined in the U. S. During the Q4, we're pleased with our ability to hold volume and increase margin.

Speaker 2

We believe this is testament to our process discipline with pricing and our use of technology. Our F and I gross profit per unit of $2,342 only minimally declined on a same store sequential quarter basis. It appears that finance Attachment rates in used cars have now leveled off, while new vehicle finance attachment is increasing again. We expect some continued pressure on finance penetration due to existing interest rates and slightly tighter lender requirements for some buyers. Our aftersales 4th quarter revenues and gross profits outperformed the prior year as customer pay was up nearly 7%.

Speaker 2

And we achieved record annual parts and service revenues and gross profit in excess of $1,000,000,000 for the full year of 2023. We continue to believe that aftersales is an area for Group 1 to differentiate and we will continue to invest in that part of our business. Our focus is on the after sales impact of the customer journey, specifically increasing customer attention through more convenient service hours, training of our service advisors and technicians, flexible work schedules, improved customer relationship management software and more innovative marketing using data science and technology to reach our customers in a more relevant and timely way. As inventories return, it's clear that some customers may trade in their vehicles rather than service them. However, we still see significant opportunities to drive after sales growth in our business.

Speaker 2

As an example, we booked over 10,000 customer appointments in the quarter using artificial intelligence, to meet our customers when and where they want to engage and to do business with us. Wrapping up the U. S, let's shift to SG and A. US adjusted SG and A as a percentage of gross increased 260 basis points to 63.8%, down considerably from pre COVID levels of around 70%. Despite this fact, we believe we can do more to provide value to our shareholders.

Speaker 2

We're renewing our focus on controlling costs in this inflationary environment and investing to add to the structural cost improvements made since the pandemic. Leveraging our local and national scale, we will engage in new actions to unlock key synergies through smart standardization across our network. Now turning to the UK. The UK underperformed in the Q4, largely due to a difficult used car market, underperformance in new vehicle sales volume and a lack of cost control. This underperformance should not overshadow what was otherwise a stellar year for our UK business.

Speaker 2

Our UK team delivered record full year revenues driven by all lines of service and record gross profit driven by new vehicles, parts and service. We believe vehicle demand remains resilient and new vehicle availability is still constrained, keeping new vehicle pricing and GPU strong. As of December 31, our new vehicle order bank was approximately 13,000 units, nearly 5 months of backlog. As a reminder, our UK business is predominantly luxury and those customers are more resilient during times of economic uncertainty. Our UK operations began of its used vehicle inventory during the Q4 that will continue into the Q1 of 2024.

Speaker 2

This rebalancing resulted in a $1300 loss per vehicle sold through our wholesale channels. UK adjusted SG and A as a percentage of gross profit increased 8.50 basis points sequentially and 10.40 basis points year over year. As a reminder, During the last half of twenty twenty three, we appointed a new UK Managing Director and a new UK CFO, both of whom are deeply experienced in the retail automotive business. During the quarter, we started to implement a number of corrective actions to address our performance. We are revamping our marketing spend and approach, launching a new digital retail initiative, restructuring our used car operations to focus on more proactive sourcing, valuation and pricing.

Speaker 2

In addition, we are consolidating our customer contact center and reducing our overall headcount by 10%. We expect these actions to produce material improvement in the months ahead. Now turning to capital allocation. We deploy a return focused capital allocation strategy that balances portfolio management and the return of capital to shareholders through quarterly dividends and share buybacks. During the year, we acquired expected annual revenues of $1,100,000,000 We spent $173,000,000 to repurchase 5.1 percent of our outstanding common shares.

Speaker 2

We paid dividends of $25,000,000 We continue to explore ways to consolidate our holdings in highly profitable, scalable dealerships and dealership clusters. As an example, in 2023, We disposed of 11 dealerships with an average revenue of $37,000,000 and we acquired 6 dealerships with an average revenue of $183,000,000 We believe the dealership business is the best use of capital and we have demonstrated our ability to successfully integrate acquisitions very quickly. We continue to explore opportunities to capture immediate growth through acquisition And we also believe divesting smaller underperforming stores and brands is a critical part of our strategy as well. We believe this approach is critical 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? Thank you, Daryl, and good morning, everyone.

Speaker 3

As of December 31, We had $57,000,000 of cash on hand and another $275,000,000 invested in our floor plan offset accounts, bringing total cash liquidity to $332,000,000 We also had $463,000,000 available to borrow on our acquisition lines bringing total immediate available liquidity to $795,000,000 In the full year 2023, We generated $720,000,000 of operating cash flow $581,000,000 of free cash flow After backing out $139,000,000 of CapEx, this capital was deployed through a combination of acquisitions, share repurchases and dividends. In the Q4 of 2023, we spent $42,000,000 repurchasing approximately 1 161,000 shares at an average price of $262.25 resulting in a 1.1 reduction in share count over the quarter. For the full year of 2023, We repurchased 729,000 shares at an average price of $236.78 resulting in a 5.1 reduction in share count over the year. Our share count As of today, it's down to approximately $13,700,000 Our balance sheet, cash flow generation and leverage position will allow us to continue to support a flexible capital allocation approach, including consideration of share repurchases in addition to pursuing growth opportunities. Our rent adjusted leverage ratio as defined by our U.

Speaker 3

S. Syndicated credit facility was 2.1 times at the end of December. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment. Our quarterly floor plan interest of $19,400,000 was an increase of $9,700,000 from the prior year due to higher Bekel inventory holdings. Current year floorplan interest of $64,100,000 was an increase of $36,800,000 We effectively manage our floorplan interest expense by holding excess cash in our floorplan set accounts, reducing the balance exposed to interest as well as through our portfolio of interest rate swaps, which saved us $2,000,000 of interest rate expense versus the comparable prior year quarter and $14,600,000 versus the comparable prior year.

Speaker 3

Quarterly non floorplan interest expense of 27,700,000 increased $5,700,000 from the prior year and current year non floorplan interest expense of $99,800,000 increased $22,300,000 Similar to our floor plan, interest rate swaps, our mortgage swap portfolio saved us $1,600,000 in the current quarter versus the comparable period and $15,500,000 in the current year versus the comparable period. As of December 31, approximately 60% of our $3,700,000,000 in floor plan and other debt was fixed. Therefore, the annual EPS impact is only about $0.81 for every 100 basis points increase in secured overnight funding rate our SOPR, which is the benchmark rate referenced in our floor plan and mortgage debt instruments. For additional information regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted

Speaker 1

on our website.

Speaker 2

Thank you, Daniel. In 2024, we expect to aggressively pursue M and A opportunities that are accretive to our business. Our well positioned balance sheet is source of strength that we believe provides us significant runway for our more aggressive growth strategy in 2024. In addition to our balance sheet strength, we're proven integrators with a track record of extracting additional value from M and A opportunities beyond the initial economics. Thank you for your time today and we look forward to speaking with you throughout 2024.

Speaker 2

This concludes our prepared remarks. I'll now turn the call to the operator to begin the question and answer session. Jamie?

Operator

We will now begin the 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. Just I guess the first and biggest question is, Daryl, is on the UK used business and the business in general over there. What exactly is going on? I mean did the team get a little bit too extended, used vehicle inventory and weren't tight on turn to earn strategies or Is there something else sort of bigger and more problematic there? And is this the kind of thing that we'll see you work out of in the Q1 and by the Q2 were closer to normalized?

Speaker 2

I think to answer your last question first, John, this Darryl, by the way, we will yes, we will see improvement in Q1 and then hopefully it's behind us in Q2. I think there are a few things that drove the issues in the UK in the quarter. The used car market Very challenging. Saw a couple of warnings from some of the used car retailers in the UK during a quarter. And I think the process that we had in place, which we have since changed and gone to a more centralized process of valuation and pricing.

Speaker 2

That wasn't really conducive to a really dynamic market to be totally candid with you. So we've centralized that with a team of experts and better visibility and transparency and more accountable decision making and we believe that will show immediate benefits. So those are that's my take on what the issues were on used cars.

Speaker 4

Okay. And then just maybe one follow-up, just to hear back in the U. S. I mean, there's lots of Crosscurrents and Stories positively and negatively on the U. S.

Speaker 4

Consumer. I'm just curious in your showrooms, in your discussion with your GMs, What is the state of play of ops walking into dealerships or hopping online to accelerate? So what's the mood and tenor of those discussions? And I mean, what's your take on demand for this year?

Speaker 2

Move is good. Traffic counts are good. We were really pleased with our growth in the quarter, especially in new vehicle, 14 same store growth outpaced the industry, and we were encouraged, inventories, while they're returning the day supply is manageable. So the demand is soaking up that additional production. And we were ecstatic, Especially with the last few days of December, I mean, really just some really record days that we're really good to see.

Speaker 2

And so To me that portends good things for 2024. The margins have come down about what we expected about $100 a month and that's kind of where they continue to trend and you see some changes between franchises a bit, but generally it's as predicted and I would say demand looks good.

Operator

Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Speaker 5

Hey, Daryl. Hey, Daniel. Thanks for taking the question. You guys have really super strong exposure to the Japanese OEMs and they in turn very well positioned for hybrids and plug in hybrids. So I was curious your commentary on inventory levels for those vehicles that seem to be in still on tight supply.

Speaker 5

I mean, I wouldn't be shocked If you saw hybrid sales up, shoot 40%, 50%, I mean like really, really high this year. I didn't know if you want to add some color on that part of the market. And then, for dealers where you do have Electric vehicle offerings, what's your latest, on the ground from the floor Send an indicator on consumers. It seems like demand is slowing, but I didn't want to assume anything without hearing from you guys. Thanks.

Speaker 2

Sure thing, Adam. This is Daryl. And I'll encourage Daniel to chime in as well. To answer your question on hybrids, hybrids are fabulous. And I use Toyota as an example.

Speaker 2

One of the hottest vehicles we have anywhere in our dealerships is Toyota Sienna, it's an all hybrid power plant and believe it or not a minivan being one of the hottest vehicles we've got. The new Camry is coming out with an hybrid powertrain, which I think is an indication of what it is. The General Motors announced new plug in hybrids coming to the country soon. They announced that yesterday, I believe. So hybrid demand is really good And across the brands that we have and that's what we see.

Speaker 2

EV, We see softening in EV. We do see some moderation in the production levels, but we do definitely see softening, especially in the UK. And we've that's what drove some of the new car issues for us around London in December and Q4 was This is a much softer U. K. Demand on EVs.

Speaker 2

And in the U. S, I don't know that I'm going to give you any perspective that you don't already have on it, but Definitely a softening. We see pressure on gross margins on EVs that we certainly don't see on hybrids or ICE vehicles

Speaker 3

Adam, it's Daniel here. Just to add to what Daryl says. In terms of a percentage of our total inventory units, EV in quarter 3 was 6.5% and it's still 6.5% today. So we haven't seen any particular increase as a percentage of total inventory in terms of EV.

Speaker 5

I appreciate that. If I can just squeeze in one more on floor plan interest. I didn't know if you had a blended Daniel, a blended view on what your floor plan interest is today and kind of where it might be might have moved. My check suggests that it was looking kind of scary in the fall, maybe it's moderated a bit, maybe on the leading edge, maybe coming down a bit, Following the market rates, but I just wanted to know if you could put a number on that.

Speaker 3

Sure, Adam. In terms of our inventory, in terms of day supply, it hasn't increased As much as you may well have expected, we have seen total units increase by 35% in that term and Our floor plan will increase exactly by that in mind effectively. We've seen some moderation in interest, but It's fairly low. It's going to continue on a constant basis.

Operator

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

Speaker 6

Great. Thanks for taking the question. I had a first question just on parts and services. It did look like the revenue growth on a same store basis did slowdown there quite a bit in the Q4, both in the U. S.

Speaker 6

And U. K. Curious if you're able Dissect that a little bit more for us, how much of that slowdown was traffic versus ticket? How much was like From the selling days, lower selling days, I know you have the 4 day work week, but I don't know if the selling days had an impact at all or Yes. Just if you could like just help break that apart for us would be helpful.

Speaker 2

One of the things that's, I think important to think about is For us, we focus heavily on customer pay, which is up 7%, which you're right, Rajat, that's not normally We normally double digit increases. We're lapping 2 really good 4th quarters. Last year, we're up 13%, year as much and that's something that we're focused on now. And what we saw after COVID, one trend that we have really seen was our Saturday business. After COVID, the Saturday business didn't come back as quickly as the rest of our business and We're really trying to put a lot more focus and attention.

Speaker 2

Our service departments are open all day Saturday, which is fairly unique in the industry. You don't see that in A lot of dealerships. And so we're putting a lot more focus and emphasis on that with our customers. And then later in quarter, we started to see that volume really increase on Saturdays, which I expect we'll see that continue through the quarter Good year, I'm sorry.

Speaker 6

Got it. And was there any impact from the strike at all that you experienced in the quarter?

Speaker 2

Not that we could discern. There was a few parts things for us, but the strike itself, honestly, I wish I could blame something on that, We didn't see any material impact other than a few parts delays here.

Operator

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

Speaker 7

Thanks. Good morning. I want to go back to the U. K. As I'm sure you guys know, the U.

Speaker 7

K. Used vehicle market been soft for everybody for a while now. I'm just curious in Q4, did things get a lot worse? Or has it just been finally up to a point where you finally decided we have to do headcount reductions. I'm just trying to figure out if anything really changed severely negatively in Q4.

Speaker 3

David, it's Daniel here. I'll take the first part of that question. In terms of used inventory, we came out of September probably too much inventory. September is traditionally the big registration month in the UK. You get a lot of trades in that month specifically.

Speaker 3

Rolling into October, November December, the drop that was seen at the auction prices was over 10% in the UK over those 3 months. So I think that was a change that was seen there in that period that hadn't been seen historically. So I would say that was a market correction or a one time hit effectively that happened in the UK. I'll let Daryl pick up on the headcount reductions and costs.

Speaker 2

Yes. We're addressing the headcount Honestly, David, because our headcount crept up last year over the last couple of years actually in the UK, And it got beyond the level that we were comfortable with. And given the challenge in the Q4 in used vehicles and Some other areas, we felt like it was the right thing to do. We've had better discipline in the U. S.

Speaker 2

On that than we have in the UK and So it wasn't necessarily related specifically to used cars, it was just a general overall resource allocation.

Speaker 7

Okay. And switching gears here to Fisker and some others have talked about wanting to franchise now. Just curious if you guys are interested in any of the EV startups and getting a franchise or are they too early in their life cycle for

Speaker 2

We've looked at a couple of them over the last couple of years. It's really hard to get into pencil and I think that math is getting harder.

Operator

And our next question comes from Daniel Imbro from Stephens Inc. Please go ahead with your question.

Speaker 8

Yes. Thanks guys. I answered the question.

Speaker 4

I want to start on

Speaker 8

the cost side actually. I guess 2 quick SG and A clarifiers. 1, you mentioned the 10% headcount reduction. Any way you could size up the annual cost savings, is this $15,000,000 to $20,000,000 Is it $30,000,000 plus like any sizing on that? And then you're lowering SG and A in the Is there a risk you find yourself in the same position in the U.

Speaker 8

S. In maybe a year or 2 as the industry continues to normalize? Or how do you think about the cost base here as profitability

Speaker 3

So I'll take the first part of that question. It's Daniel here. Daniel, regarding the absolute dollar number that we would Expect to take out in terms of headcount. That's somewhere between $8,000,000 $10,000,000 The other thing that we're laser focused on Our loaner car fleet demonstrator fleet because clearly they're taking big drops in valuation at the moment. We see that being somewhere around $3,000,000 saving.

Speaker 8

Great. And then any Daniel on. Thanks, Anthony.

Speaker 2

A little more on the headcount. We're still down versus 2019 in the U. S. On headcount on a same store basis, down quite a bit 7%. So In the UK, we were not.

Speaker 2

We were heavier in the UK on a relative basis versus 2019 same store. So we had opportunity in the UK. Would that ever hit us in the U. S? Well, who knows?

Speaker 2

I mean, it depends on what business conditions do. We've done a better job in our U. S. Business managing the headcount than we have in the U. K.

Speaker 2

Business.

Speaker 8

Helpful. And then maybe on the U. K, another follow-up. I think last quarter you mentioned almost 18,000 units in the backlog. This morning you mentioned still 5 months of backlog.

Speaker 8

Can you help us reconcile that with the 2% decline in same store units? I guess There was an expectation that, that level of backlog would help insulate results and you can keep growing despite the market slowing. So any you can provide on me why that didn't play out and how we should think about growth going forward despite this backlog?

Speaker 2

Well, We didn't keep up with the new car industry in the Q4 in the UK. And we built inventory in the new car side, even though we still have a fairly robust order bank. And we'd have to do a better job With our throughput of our inventory, that's one of the reasons that we've taken a hard look at how we're marketing, are we driving the right traffic, are we focused on the right vehicles and the right brands. And so that's part of our actions that we're taking in the UK, because honestly, while we over performed in the U. S.

Speaker 2

On exactly that metric, we underperformed in the UK on We have some work to do around driving more customer demand to our store.

Operator

Our next question comes from Mike Ward from Freedom Capital Markets. Please go ahead with your question.

Speaker 9

On the parts and service side in the U. S, I think you mentioned that the customer pay was up 7%. What were the how did collision or warranty or wholesale do?

Speaker 2

Collision was down a tick 1.8, CP was up 6.5 as you mentioned, the warranty was up a little over 4.

Speaker 9

Okay. So the weak spot was a collision. So was that regional or is it just a tough comp?

Speaker 2

No, I think it's a tough comp. We've seen collision grow at 25%, 30% over the last year, 2 years basically. Also collisions are real smart part of our business. I mean, it's $5,000,000 in gross profit a month. For us, it's not much.

Speaker 2

It's like less than 3%, 4% of our business or something.

Speaker 9

Okay. And on the UK side, it sounds like Some of the adjustment on used vehicle was almost one time in nature. It sounds like you liquidated some inventory that you were holding on to a little bit too long. Is that the right read?

Speaker 2

Yes.

Speaker 9

Okay. And that was the 1300 units, I think you said, something like that?

Speaker 2

$1300 per unit.

Speaker 9

Oh, dollars 1300 a unit. Okay. Okay. That contributed to it. Okay.

Speaker 9

And then just one last thing on the U. K. March is another big registration month. Any indications on orders you have for March or is that part of the 13 1,000 backlog, what can we expect as we go into Q1?

Speaker 2

Well, it's part of the backlog. We haven't broken it down which is March on the Jazz Inc. We can get that information. The SAAR in the UK is expected to grow about 10% this year. And so to us that's encouraging and we have inventory going into the end of March, which is nice to have.

Speaker 2

Hopefully, we'll be able to take advantage of it, Mike.

Operator

And our next question is a follow-up from Rajat Gupta from JPMorgan. Go ahead with your follow-up.

Speaker 6

Great. Thanks for squeezing me in again here. I had a question on new GPUs. One of them was, could you help us dissect the sequential moderation across different Like import, domestic, luxury. And you also mentioned like the $100 a month was consistent with what you had expected.

Speaker 6

I mean, is that something you expect to continue here in the Q1 as well? Just want to clarify those two points.

Speaker 2

I guess the answer to all of that is yes, Rajat. We saw there was Nothing that really stood out as one brand going completely different way than every other brand. But we saw we're down $12.12 year over year in PRUs on the new car side. So that and that trend has seemed to just continue since we've come out of COVID. And so We're still seeing that.

Speaker 2

It's generally across the board on the brands. With Stellantis, we're heavy there. So there's a little pressure on that, obviously. But we are only 4% mix of Stellantis. So hopefully that won't hurt us too bad.

Speaker 6

Got it. That's helpful. Thank you.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session as well as today's presentation.

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Key Takeaways

  • Group 1 Automotive reported Q4 adjusted net income of $131.2 million and EPS of $9.50, while full-year revenues reached a record $17.9 billion and gross profit topped $3 billion.
  • U.S. operations outpaced the industry with same-store new vehicle sales up 14%, a $160 year-over-year increase in retail used vehicle GPU, and record parts & service revenues and gross profit driven by AI-booked appointments as customer pay rose nearly 7%.
  • The U.K. business underperformed in Q4 due to a weak used-car market and cost control issues, prompting new leadership appointments, a 10% headcount reduction, digital retail initiatives and centralized pricing to drive a turnaround by Q2.
  • Capital allocation combined growth and shareholder returns with $1.1 billion in dealership acquisitions, $173 million in share repurchases (5.1% of shares), $25 million in dividends, plus ongoing divestitures of smaller underperforming stores.
  • The balance sheet remains strong with $332 million cash, $795 million total liquidity, $581 million free cash flow, a 2.1× leverage ratio and 60% of debt fixed to limit EPS impact to $0.81 per 100 bps rate rise.
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Earnings Conference Call
Group 1 Automotive Q4 2023
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