Group 1 Automotive Inc (GPI) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Group 1 Automotive's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Please be advised today's conference call is being recorded.

At this time, I'd like to turn the conference call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead Mr. DeLongchamps.

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 will be referred on the call this morning 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 to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages, conditions in 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 non-GAAP financial measures to the most direct comparable GAAP measures on its website.

Participating with me on the call today, 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.

Thank you, Pete. Good morning, everyone. 2022 as a record year for Group 1 Automotive driven by outstanding after sales growth, strong margins, all-time profitability, record profitability in our U.K. operation and disciplined expense control. Adjusted net income grew 15% to a record $729 million. Adjusted EPS grew 32% to an all-time high of $45.71. 2022 was also another strong year of external growth for Group 1. We acquired nearly $1 billion of revenue in 2022 and have now acquired over $3 billion in revenues over the past 15 months. We also returned meaningful capital to our shareholders by repurchasing $521 million in shares during the calendar year. Over the past 15 months, we've now repurchased over 22% of the company's outstanding shares. Our strong cash flow and leverage position, which Daniel will cover in a moment, will continue to allow for significant capital allocation flexibility in 2023.

Turning to our fourth quarter results. I'm pleased to report that for the quarter, Group 1 generated adjusted net income from continuing operations of $158 million or $10.86 per diluted share in EPS, an increase of 15% over the fourth quarter last year. Our adjusted results exclude noncore items totaling $1.7 million of after-tax losses, which primarily resulted from the pending disposition of 2 U.S. franchise points.

Starting with our U.S. operations. As of December 31, we had 8,000 new vehicles in inventory, representing a 21-day supply up 6 days from September. This inventory increase was primarily in our domestic brands as import brands remained very constrained. 30% of our U.S. business is Toyota and Lexus, which continues to be very tight at a combined 4 days supply. We expect a gradual decline in new vehicle margins over the course of 2023 as inventory continues to recover. We do, however, expect normalized new vehicle margins to eventually settle above our pre-pandemic levels.

One of the continued challenges we faced in the quarter was the decline in industry used vehicle pricing, which resulted in a used vehicle sequential margin decline of $235 to roughly $1,350. Partially offsetting this was an 8% increase in same-store used vehicle unit sales. Our organic sourcing efforts, including the acquisition of over 10,300 vehicles from individuals through Acceleride continue to minimize our reliance on public auctions. We maintained our discipline with a 28-day supply of used inventory, which is within our target of 30 days. And the F&I business has remained strong at $2,369 per unit, showing only a minimal sequential decline. Looking forward, we do expect some modest headwinds due to pressure on finance penetration rates.

Turning to aftersales. Our U.S. performance was outstanding once again, generating double-digit same-store revenue growth following high-teen growth comps a year ago. Our customer pay business generated 13% same-store growth, collision increased 14%, warranty 8% and wholesale parts 3%. Through our technician recruiting and retention efforts, we increased our same-store technician headcount by 16% in 2022. We foresee after sales continuing to be a strength over the course of 2023 for Group 1.

We continue to maintain cost discipline despite the decline in new and used vehicle markets. Our fourth quarter U.S. adjusted SG&A as a percentage of gross profit was 61%, an increase of only 1 percentage point from the prior year and down from 71% in pre-pandemic 2019. A material portion of these cost savings will be permanent as we continue to leverage technology to drive customer and employee efficiencies.

In the fourth quarter, we sold an all-time record 10,100 vehicles through Acceleride. 15% of our total U.S. retail sales, also an all-time record. Over 75% of our customers used Acceleride in their transaction in some way in the fourth quarter, a percentage that continues to increase. We're also looking to our full integration of AcceleRide with our DMS, CRM and credit software. We continue to test it in several dealerships and expect a full rollout this year. Our early results are very positive, and we expect this will provide faster and more transparent transactions for our customers.

Now turning to the U.K. Vehicle demand remains steady and new vehicle availability is still constrained. Our new vehicle order bank at year-end was approximately 16,000 units over 6 months' worth of sales, which remained fairly consistent with the prior quarter. As a reminder, our U.K. business mix is predominantly luxury, and those consumers are more resilient during times of economic uncertainty.

We continue to believe that pent-up demand built over the past several years due to both Brexit and the very strict pandemic lockdowns will help drive strong U.K. vehicle demand throughout 2023. Our after sales growth in the U.K. has been just as strong as the U.S. with same-store gross profit growth on a local currency base of 13% for both the fourth quarter and the full year 2022. And finally, we expect the Acceleride platform in the U.K. to be fully integrated in the second quarter of this year.

Now to provide a balance sheet and liquidity overview. I'll turn the call over to our CFO, Daniel McHenry.

Thank you, Daryl, and good morning, everyone. As of December 31, we had $48 million of cash on hand and another $154 million invested in our floorplan offset accounts, bringing total cash liquidity to $202 million. We also had $437 million available to borrow on our acquisition line, bringing total immediate available liquidity to $639 million. In 2022, we generated $916 million of adjusted operating cash flow and $803 million of free cash flow after backing out $113 million of CapEx. This capital was deployed through a combination of acquisitions, share repurchases and dividends.

In 2022, we spent $521 million, repurchasing approximately 3 million shares at an average price of $172.54. And in the month, we spent an additional $13.7 million, repurchasing 76,300 shares. The result of this repurchase activity is just over a 22% reduction in our share count over the last 15 months. Our share kinds as of today is down to approximately $14.2 million. Our rent adjusted leverage ratio is defined by our U.S. syndicated credit facility was 1.9x at the end of December. Our strong balance sheet will continue to allow for meaningful and balanced capital deployment.

Our quarterly floorplan interest of $9.6 million was an increase of $2.4 million from the prior year [due] entirely to higher vehicle inventory holdings. Non-floorplan interest expense of $22 million increased $6 million from prior year, both due to the debt raised in conjunction with the Prime acquisition as well as higher interest rates. As a reminder, the majority of our debt has been fixed through interest rate swaps. As of December 31, approximately 70% of our $3.1 billion in floor plan and other debt with (inaudible). Therefore, an annual EPS impact is only about $0.50 for every 100 basis point increase in the secured overnight funding rate, which is the benchmark rate 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.

I will now turn the call back over to Daryl.

Thank you, Daniel. Related to our corporate development efforts, we expect to find additional growth opportunities in 2023. Growing our U.S. and U.K. businesses remains our top capital allocation priority. However, our balance sheet, cash flow generation and leverage position will continue to support a flexible capital allocation approach, which will likely also include serious consideration of share purchases.

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

(Operator Instructions) And our first question today comes from John Murphy from Bank of America.

I have 2 -- one core question, one follow-up. Just on new GPUs, Daryl, you mentioned you expect them to normalize over time, but still be higher than they were pre-pandemic. I'm just curious what time frame you think that happens in? I know that's a tough question, but if you could give us sort of some idea of your thought process there. And then also just the corollary savings on SG&A that just falls out as gross has come down, meaning what part of that goes out to sales comps. So I mean, is there sort of just a natural sort of hedge or savings of those GPUs come down?

John, this is Daryl. I can't tell you with any specificity when we think it will normalize other than what we've seen is a real steady glide path really since middle of last year on the gross profit decline. And we expect we'll see something similar through this year. And in some brands, our grosses are holding up quite well because they're still very tight. Inventories are still very tight. And a couple of brands we saw our grosses increased during the quarter. And then a couple of brands that we got quite a bit of inventory in our domestic, we saw the most erosion. But I can't give you a specific time other than as the inventories in total come back, we expect it to be a gradual change. And I'll ask Daniel to address the SG&A question.

On SG&A, [Orion] fills expense, in particular, John, which I think you were referring to. I think there's a couple of things out there that's really going to help us going forward. Clearly, the reduction in profitability drives SG&A as a percent of growth. But I think our use of the Acceleride platform, how we've integrated that into our dealerships. And I think importantly, the integration that we're going through and integrating Acceleride DMS, CRM and credit software, that's going to help us further increase the utilization of our sales executives going forward. And I think some of that will help reduce that SG&A impact going forward.

And then just one kind of follow-up on parts and service. You said 16% growth in tech in 2022. Am I correct to read the gating factor on same-store sales growth in parts and service is those tech and what was sort of the cadence of the hiring of those techs through the course of the year? Because I mean, if you kind of assume they happen during the course of the year, you might on a same-store basis, have 8% more tech in '23 versus '22, right? And assuming you have the were hired smoothly through the year. I just kind of understand that, that cadence so we can think about where you even capacity sits right now.

We picked up more in the second half of the year than we did in the first half, John. And I expect as they get assimilated, our belief is adding capacity and after sales drives our ability to service more customers when they want to do business with us. And so I expect we'll see that ability with these technicians we've added in 2023, and we're continuing to press to hire more texts beyond the number that you see there as well.

And our next question comes from Michael Ward from Benchmark.

Daniel, I wonder if you can walk me through that Slide 11 that you have in your handout. Just on what you're doing as far as the floor plan swap and the layers and the impact of higher interest rates because I think that's unique relative to the rest of the group.

Mike, it's Daniel. Let me just call out Slide 11. Yes, you're correct. We've got layers of interest rate swaps all the way out to 31. We have -- what that's enabled us to do is to fix a big proportion of our interest you can see the layers in the deck and the rates that we've fixed in and the rate out to 31 is at 0.67%. So I think that's going to help with a differentiator for us versus our competitors.

So if interest rates go up on the floor plan, the number that we see, the 9.6%, whatever it was in the quarter, we won't see that increase at the same rate that we see others. Do the swap costs offset or the benefits?

That is correct. Mike, 70% of our debt is at a fixed rate. So we will not see the same increase as our competitors.

Our next question comes from David Whiston from Morningstar.

You mentioned the really tight Toyota Lexa supply. And I'm just curious if you think that the worst of their production stoppages from either COVID absenteeism are more like -- more easier to predict maybe the chip shortage, but is there still -- are you much more confident about 2023 product allocation for them? Or is there still a little or no visibility from the factory on that?

We're more optimistic, David, with Toyota. They're telling us they have more optimism in their plans. And I think the thing that Toyota is really [finding] is they have such a pent-up demand for their brand with customers. And if you look at our presales, typically presales and pipeline orders are typically kind of luxury brand kind of things, except for our Toyota stores, and we have significant numbers of presales in our Toyota store. So I expect they'll have a higher production this year, but I also expect much of that will get soaked up by some of these presales that are still out there.

Okay. And on new vehicle affordability, there's a lot of attention given the poor used vehicle affordability, but all the automakers CEOs don't seem to be concerned about the high price of new vehicles. What about you guys at the consumer level? Are you at all concerned?

Well, I think it's -- when you bundle everything interest rates plus the average selling price I think it's certainly something to think about. The cost of vehicle ownership is probably down a bit given that gas prices are down versus a year ago quite a bit in some parts of the country. And we're seeing a little more support in terms of incentives from the OEMs. So I think maybe publicly some of them are saying they're not worried about it. But from internally, we're seeing more support. I saw an announcement this morning from one of the OEMs on some interest rate support as a matter of fact, on some of their vehicles. And I would expect you will continue to see that, especially in those brands that have built inventory.

Our next question comes from Rajat Gupta from JPMorgan.

Great. Could you give us a bit of a view into January and how that started, particularly in both new and used GPUs? And anything you've seen in terms of impact on demand for your brands from the fairly sizable price cuts on test dugs? And I have a follow-up.

On January, tough for us to comment on January, Rajat. What was the second half of your question, you cut out on our speaker.

Any impact on demand for your brands from the sizable price cuts on the desk labs?

Not that we can tell.

Got it. Maybe on the used car business, execution was pretty strong. GPUs are still above pre-pandemic levels and inventory under 30 days. Can you give us a sense of how you're managing the current pricing environment? Maybe any comment on your approach on GPUs versus volumes? And do you see GPUs falling below pre-pandemic levels temporarily during this pricing transition period at all?

Well, on the trade-off on volume in GPUs, we want to make air on the side of volume, not that it's volume at all costs. That's never something we want to do. We price based on market value of those vehicles, and we reprice constantly daily, more often than daily in many cases. And we want to be at the market or better all the time. And then we want the volume because of the F&I attachment, which is a real strength for us. Also that puts more units in operation out there for our stores and another opportunity for us to do parts of service business with those customers. So philosophically, we like that volume versus GPU trade-off for that reason.

Moving forward, if you look at on a macro basis over the next couple of years, what firms like Cox are saying, which I tend to agree with them is I believe we're going to see somewhat of a shortage on used cars because of the pandemic-related SAAR declines that we saw for 3 years. And that will take some used cars out of the market for the coming 3 or 4 -- couple of years anyway. And I believe that could support PRUs over the next couple of years. So that's something we think is probably going to happen as the way we see it.

And our next question comes from Daniel Imbro from Stephens Inc.

This is Joe Enderlin on for Daniel. Just looking at the U.K. vehicle backlog, it sounds like that took a slight step down this quarter. Just wondering, do you think demand remains relatively consistent there? Have you seen any noticeable changes in the consumer backdrop from last quarter?

Joe, no, we haven't seen any material change at all. And we've seen strength in that backlog and just minor changes. I wouldn't take the changes quarter-over-quarter as anything meaningful or anything indicative of a different trend than what we've seen.

Got it. As a follow-up, looking at the slides, it looks like customer retention has increased from about 70% to 88% using AcceleRide over the course of this year. Could you maybe provide some color on how much sure you think that platform is? How much optimization you have left? And then if you have any goals for next year?

We believe we're in the first couple of innings of the AcceleRide baseball game. And we feel like it's a customer platform that will help us drive retention and drive value and transparency for customers in a number of areas of our business, not just in buying new cars or used cars but in buying them selling their used cars to us transacting with us digitally payments. We believe there's so much more we can do with our -- with Acceleride to make that customer experience even better. And we believe that retention number you're looking at is just indicative of how much customers value that experience with AcceleRide.

We continue to see the usage go up every month, almost just every single month, it's going up. 75% of our customers use AcceleRide right now in their transaction in some way. So we believe there's still a long way to run with AcceleRide. We're really happy with where we are.

And our next question comes from Adam Jonas from Morgan Stanley.

Just a couple of questions. First, Tesla, those price cuts, I don't remember anyone cutting price like 20%. That's kind of a maybe you'd agree, a pretty unusual situation. And while it doesn't necessarily compete directly with all the nameplates that you guys are selling. Some of the stores you might have a little more head-to-head with that type of products. I'm curious if this wasn't already covered, whether you saw any real-time impact after those cuts (inaudible) follow-up.

Adam, this is Daryl. We looked at our used Teslas and inventory immediately after their announcement, and we repriced -- we didn't have very many honestly. But we did reprice. And so I would say there was an impact from that perspective, but the numbers are like less than 100 for us across the country. And then in the segments where we do sell EVs or we sell luxury cars, and there's some cross shop between Teslas and luxury ICE vehicles. And we haven't seen a material impact yet on that per se, but that was -- it was a bold move they made that's for sure. And we're watching it every day with what they're doing.

Okay. Appreciate that. Just a couple of little housekeeping ones then for me. Any comments on interest expense, either on the floor plan side or other interest expense, just kind of seeing where we are today versus pre-COVID and given the rate environment, just not asking you to guide specifically, but something directional or particularly on floor plan as you kind of get the units rebuilt with the rates kind of creeping up.

Sure, Adam, it's Daniel. At the moment, we have 70% of our debt swapped out. That's fixed – and that's fixed mortgages as well as floor plan. As the -- for as inventory continues to rebuild, we will see some increase in interest expense. But at the current rate, we see that at $0.50 of EPS per 100 bps increase in interest.

Our next question comes from Glenn Chin from Seaport Research Partners.

Great. So just some more follow-up on pricing. I understood that fourth quarter was 4, the Tesla price cuts came in, but some third-party providers suggest that ASPs continue to increase through the quarter. Can you confirm that they continue to reach new highs through December? And then is that a function of price, mix or both?

Are you talking about on -- I assume you're talking about new cars?

Correct.

We didn't necessarily see an increase through the quarter on new car pricing.

Okay. And then just on parts and service, margins ticked down slightly. Is that a function of mix? Sequentially.

I'd have to look at it more to see if parts drove some of that, which I probably did, but we can take a look at that and get back to you.

And our next question comes from John Murphy from Bank of America.

So, I just have one follow-up on leverage Daniel. I mean you mentioned 1.9x as your current leverage. I'm just curious if you saw a good acquisition either in the U.K., in the U.S. where you would potentially take that up to and what kind of capacity you think you have to do potentially a small, mid or even large acquisition?

For us, I think what we've said out is that we would be prepared to go to 3.5x leverage. Our credit facility allows us to go to 5.75%. If it was a really big acquisition are something that we were really interested in doing. We would be prepared to go to 4x. But that would be on the provisor that we would reduce that back down again to 3 or under 3 x pretty quickly.

But you're comfortable at 3 -- I mean, so you can jump to 3.5 to 4 on an acquisition, you would want to grind that back to 3, but you're very comfortable with 3, meaning there's a turn of leverage here that's just up for grabs depending on some of the best way to go.

Absolutely, John. We would be happy to go to 3. Clearly, pre-pandemic, we were above those levels, and we were okay at those levels as well.

Our next question comes from Rajat Gupta from JPMorgan.

Are you able to comment at all if the consumer backdrop does remain weak, be higher interest rates, you're seeing some delinquency defaults picking up. And we don't see any improvement in new and used car units. Are you able to comment on what you would see as trough earnings for the company based on today's revenue base and the new share count or any puts and takes or guardrails around that, if you could provide.

Rajat as you know, we don't give guidance. I guess you have modeled it within your model. And I think the model that you have put out there effectively goes back to 2019 levels. But that's as far as we would be prepared to comment on that.

And our next question comes from David Whiston from Morningstar.

I wanted to go back to the 16% increase in tech headcount. You talked a couple of years ago about how you were -- I remember it was doing some new initiatives to get more talent like a 4-day work week. Could you just briefly summarize what are the main things you've been doing to have success in getting people? And then also of the things you're doing, what has been the most top 1 or 2 things that candidates are saying they like the best and why they chose to work at Group 1.

We pay at market or above market is a real key thing for us. We keep our technicians full of work, busy because philosophically, we keep our schedules wide open for our customers. We don't make our customers do business with us when it's convenient for us. We do it when it's convenient for the customers, which usually means they want to do business right now, which puts pressure on our stores because that creates a lot of traffic in the stores. And then the 4-day work week, we continue to work that. We're in 80 stores today, which is about half of our rooftop count in the U.S. That's an important thing.

We are looking at different compensation schemes in, I'd say, schemes, compensation plans across our footprint to determine ways to make it an even better place to work. And we're not ready to comment on those specifically, but that's something that is front and center in our thinking right now as well. So also, we have mentoring programs that we have in a number of markets and a number of stores across the country and relationships with a number of technical schools and training schools that help feed tax to us. So we are -- we have a number of different things that we do in a number of different things. Never end.

You said the 4-day work week is in about half of stores. Do you see that getting drastically higher over the?

Yes, we continue to find ways to put that in more and more servers over time. And we invest. One of the things that when we bought $3 billion in revenue in the last 1.5 years. Inevitably, what we find when we buy a store is there's underinvestment in after sales. And that usually means equipment. That means training, that means staffing and facilities and one of the very first things we do when we integrate a new dealership as we invest in after sales in all of those areas. And we think that pays off for us in tech recruitment tech retention as well.

And ladies and gentlemen, in showing no further questions. We'll be ending today's question-and-answer session as well as today's presentation. Call has now concluded. We do thank you for attending. You may now disconnect your lines.