Group 1 Automotive Inc (GPI) 2024 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's second-quarter of 2024 financial results conference call. Please be advised that this call is being recorded today. I would now like to turn the 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, Joe, 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 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 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 of markets, successful integration of our pending Inchcape acquisition 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 its website.

Participating with me on today's call, 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. Despite a number of challenges, we are very pleased with our results this quarter. Our US team persevered through extreme weather events and the CDK outage. We witnessed unprecedented teamwork focused on caring for our customers, communities and our team members.

The CDK outage was most significantly affected our US operations from June 19 to June 26. The company's businesses in the UK were not impacted as we use a different dealership management system there. During the disruption, all Group 1 US dealerships continued to serve our customers using alternative processes until CDK systems were again made available.

We do believe that we could have sold more vehicles and performed additional service and repair work in the June quarter had we been operating at full capacity with our CDK dealer management systems. Once we are able to gain access to CDK on June 26, we mobilized our operations personnel to enter thousands of transactions performed during the outage into the CDK DMS, all of which were completed prior to June 30.

The superior efforts by our field employees, our accounting shared services center in Houston, and our investments in technology for transactional processing all paid tremendous dividends and enabled us to recover quickly from the outage. For example, we used our technology to process car deals, complete inventory stock ends, and post factory vendor and bank statements in an expeditious manner.

This phenomenal display of teamwork and unity by our US team allowed us to maintain our financial close timeline for the June quarter and shift our focus toward the future. We believe these actions are a key reason that we were able to minimize the financial impact of the CDK event on our profit performance. We estimate the pretax income impact of the CDK incident to be approximately $17 million or $0.97 in diluted earnings per share.

Additionally, we made $5.9 million in one-time pretax compensation payments to employees, or approximately $0.34 in earnings per diluted share. This impact is prior to any insurance or other recoveries we expect to receive in future periods.

Now I'd like to spend a few minutes discussing what we feel like differentiates Group 1. Prior to the CDK cyberattack, our disciplined execution led to great aftersales in used car performance in the second quarter. And our F&I performance and front-end gross margin retention performed well throughout the entire quarter.

Our SG&A leverage was outstanding as we continue to keep our primary cost drivers like head count in check. Daniel McHenry will outline several specific examples of this disciplined execution in his upcoming comments.

Another differentiator for Group 1 is our capital allocation strategy. We are a pure play new vehicle dealership group. While we regularly evaluate other business adjacencies, we believe in this environment, the best use of our shareholders' capital is investing in new vehicle franchise dealerships. We believe in entering other business verticals not only hurts returns, but also dilutes our focus.

This year, we have acquired dealerships with expected revenues of $1.1 billion. Our ability to integrate these businesses into our existing portfolio allowed these transactions to be accretive from day one. As previously announced, we recently completed the purchase of four Mercedes Benz dealerships north of London. We also look forward to closing the Inchcape acquisition in the third quarter.

As a reminder, we anticipate that the 54 Inchcape dealerships will add $2.7 billion in revenue to Group 1, doubling our size in the UK. The brand and geographic mix is outstanding and give us significant scale and reach and will improve our SG&A leverage. This is a transformative acquisition for Group 1, and we look forward to welcoming nearly 4,000 new teammates to the company.

An important part of our capital allocation focus is what we don't buy. While we routinely discuss acquisitions that are pending or have close, what's also important are the acquisitions that don't fit strategically or meet our investment hurdles. Some of those are in great markets with great brands. However, we will not chase revenue just for the sake of growing. Our portfolio optimization efforts are based on returns and strategic fit.

Another important element of our capital allocation strategy is evaluating share buybacks as an alternative to purchasing revenue. We continue to balance acquisitions and dispositions with repurchasing our shares. This year, we bought another 2.6% of the company back worth $100 million. Over the past 30 months, we've bought back 25% of our stock.

Lastly, we believe close partnerships with our OEM partners has never been more important. And this is certainly a differentiator for Group 1. OEMs need great retail partners now more than ever. The good ones admit that and execute against that. They need our capital, professionalism and execution to win in this ultra-competitive environment.

Our high performance on OEM scorecard metrics enables Group 1 to stay eligible to purchase more stores, something our team has done an outstanding job with the last two years. Our ability to respond to disruptive events quickly and effectively, like the CDK outage and catastrophic weather events make us more valuable partners as well.

Our willingness and ability to invest in world-class facilities, professional management, and the community makes us more valuable partners. Our breadth across two major markets gives us and our OEM partners competitive leverage and performance advantages. As a new vehicle dealer, a strong relationship with our OEM partners is more critical than ever and we don't see that changing in the future.

We actually see that OEM relationship growing in importance. We believe the Inchcape acquisition allows Group 1 another outstanding opportunity to demonstrate that. And we believe that Group 1 being a great partner to our OEMs gives us significant advantages that ties directly to our capital allocation priorities.

Now, I'll turn the call over to our CFO, Daniel McHenry, for an operating and financial overview. Daniel?

Thank you, Daryl, and good morning, everyone. In the second quarter of 2024, Group 1 Automotive reported adjusted net income of $133.1 million. Quarterly adjusted diluted EPS from continuing operations of $9.80. Current quarter total revenues of $4.7 billion, a second quarter record and all-time records in new vehicle sales of $2.4 billion and F&I of $200 million.

Starting with our US operations, we achieved an all-time record in new vehicle revenues of $2 billion, driven by record new vehicle sales units sold up 7% on a reported basis. This reflects the resiliency of demand on our continued emphasis on driving volume. New vehicle GPUs were essentially flat sequentially, down only $33.

Used cars experienced a volume increase both sequentially and year over year with only slight declines from GPUs. We were pleased with our ability to hold margin and increased volume despite fluctuations in pricing between the periods.

We believe this is a testament to our process discipline and use of technology with the pricing of used vehicles. Our F&I revenues of $184 million were also a quarterly record for the US. Our F&I GPUs of $2,393 increased on a same-store basis sequentially and negligibly declined year over year. The performance by our F&I professionals has been standing to maintain GPU discipline.

Shifting gears to after-sales. Despite the CDK challenges and weather events after sales, second quarter revenues and gross profits were all-time quarterly high, outperforming sequentially and year over year. Same store customer pay and warranty revenues for May quarter to date period were up 6% and 12.5% respectively.

These gains against two tough double-digit growth comparative prior year periods demonstrate our ability to add aftersales capacity on a same-store basis. While our overall same-store US head count has declined 5% from 2019, our technician headcount is nearly up 5% in the same period.

Wrapping up the US, let's shift to SG&A. US adjusted SG&A as a percentage of gross profit decreased 130 basis points sequentially to 64.4%, demonstrating our continued focus on managing costs at below pre-COVID levels as new vehicle margins continue to normalize.

Turning to the UK. Top line revenues grew 2.1% year-over-year, driven by higher new vehicle and parts and service revenues of 8.2% and 9% respectively. While down from the prior year, new vehicle gross profit per unit slightly improved sequentially, at the same time, prices declined over the same period. Used vehicles remained challenged however, we did experience a slight improvement in GPU sequentially. Wholesale losses per unit remained flat from compared to the sequential quarter.

Regarding the UK adjusted SG&A as a percentage of gross profit, we recognize we still have some challenges to overcome, and we will continue to focus on cost control and business process efficiency as we expand our business in the UK.

Turning to our balance sheet and liquidity. Our strong balance sheet, cash flow generation, and leverage position will continue to support a flexible capital allocation approach. As of June 30, our liquidity of $644 million was comprised of assessable cash of $159 million and $486 million available to borrow on our acquisition line.

Our rent adjusted leverage as defined by our US syndicated credit facility was 2.44 times at the end of June. Cash flow generation for the first half of 2024 yielded $302 million of adjusted operating cash flow and $223 million of free cash flow after backing out $79 million of CapEx.

This capital was deployed in the same period through a combination of acquisitions, share repurchases, and dividends, including the acquisition of a $1 billion in revenues through the June 30, $100 million repurchasing approximately 353,000 shares at an average price of $282.81, resulting in a 2.6% reduction in our share count since January 1, and $12.8 million in dividends to our shareholders.

As of June 30, approximately 53% of our $4.6 billion in floorplan and other debt was fixed, resulting in an annual EPS of about $1.23 for every 100 basis points increase in secured overnight funding rate. For additional detail regarding our financial condition, please refer to the schedules of additional information in the news release, as well as our investor presentation posted on our website.

I will now turn the call over to the operator to begin the question-and-answer session. Operator?

We will now begin the question-and-answer session. (Operator Instructions)

Rajat Gupta, JPMorgan.

Great. Thanks for taking the question. Hi, and congrats on a strong execution this quarter. I wanted to just follow-up on just the CDK impact in the second quarter. And how should we think about the run rate of certain components of the P&L into July or the third quarter, if you could give us?

And really, the focus was more on SG&A to growth. And clearly, not very strong execution sequentially despite some of the deleveraging you might have seen from lost sales and lost service. So could you help like frame for us, how should we think about the SG&A to gross level into the third quarter?

And any color you could give us around how the service business is doing so far in July and your expectation for the third quarter and anything else that you might want to highlight? And I have a quick follow-up, thanks.

Rajat. Daryl. One clarification in our script. We had mentioned that our head count was down 5% from 2019, but our technician head count is up actually 20% since that time period. So I wanted to clarify that point. And that's one reason our SG&A as a percentage of gross has been good as we've done a really good job managing our overall head count and only adding where it drives capacity and after-sales effectively.

So -- and that's allowed us to maintain our aftersales growth over a period of time and control SG&A at the same time. So I think in terms of -- and I'll ask Daniel to speak to some more SG&A issues. But I think in terms of the CDK impact, I think largely, most of the impact is behind us.

The CRM came up a little later than the DMS did. So there's still some work being done to try to recover the information on those customers as we move forward. But we've seen the recovery, I would say, much of it is behind us, and I don't expect a material impact in the third quarter.

Daniel, what would you add?

Clearly, in terms of SG&A, there was that one timer of additional pay that we made to our employees, that $5.9 million. Clearly, we missed out on a chunk of growth in June that would have really helped us dilute some of our expenses and help drive some further SG&A deleverage in the quarter. Clearly, there's work still to be done in the UK, either taking on the Inchcape stores in this quarter. That should help us de-lever in the UK certainly going into 2025.

Got it. And just on SG&A growth in the US, I mean because you give us this helpful breakout of US versus UK. Given the US was still hurt from deleveraging, is it fair to assume that the 64.4% that you saw in the US, should continue to move lower from here because of some catch-up in July and just because ex-CDK, that number would have actually been better than the 64.4% reported?

And just like any color on like services into July that you can give us as well, thanks.

Tough to predict on the 64.4%. We saw our front-end margins on new vehicles stay relatively flat sequentially year over year -- I'm sorry, quarter over quarter. So that certainly helped us. And we're obviously watching that margin and that obviously impacts the SG&A number -- percentage of gross numbers.

So tough to predict if it will move lower in the near term, Rajat. We're seeing our service business. You saw it in through May, our CP was up 6% year-over-year same-store. Our warranty was up 12% year-over-year same-store. We're really happy with that.

We continue to be able to add technician capacity, which is driving that. And we expect we'll be able to continue that here into the rest of the year as well.

John Murphy, Bank of America.

Good morning, guys. I know you do some public call, but remarkable execution, very good, very impressive quarter. Just -- a first question. When we think, Daniel, about that parts and service that may have been lost during the CDK outage, is that the kind of revenue that you think could get and gross that can get picked back up or got picked back up? Or is that kind of just lost in the wind and we should see a normalization but not necessarily a catch back up in the third quarter?

John, it's Daniel here. It's kind of hard to judge so early in the quarter and we had some pretty severe weather in Houston in the first week, two weeks of the quarter. And it's harder to pick up parts and service business because that's more of a definitive hour, effectively our time slot that you've sold of the technician. So it's harder to pick that up, but I would expect there to be some pickup from that.

However, I think the vehicle pickup, that does well to be out there as well because clearly, I think a lot of those sales could have just been delayed sales with so many stores and so many operators under the CDK platform.

One thing, John, to note is our average miles driven increased again this quarter for cars coming through our service department. And the average dollars per RO continue to rise mainly, I believe, as a result of the age of the vehicle population. So that, I think, that is just good things, means good things for parts and service in the future.

Yeah. That's helpful. Just a second follow-up on interest rates. And Daniel, you mentioned the impact if rates go up, but God forbid, if the rates go back down, which hopefully they will sometime soon. Is that impact sort of linear on the downside? And then also, if we think about sort of the flow-through of rates, I mean the whole industry has faced about a 400 basis-points increase in borrowing rates at the consumer level the last 2.5 years, but pricing has been very resilient.

Grosses have come down a little bit from the peak. But how do you think about what could happen on the demand side and the pricing side as that massive surge in interest rate and expense backs off and the consumer can maybe put a little bit more money not to interest expense, but to the price of the vehicle and maybe grosses. I mean it just seems like there is a misunderstanding of how big a headwind is, this interest burden is and to the consumer and it might actually be relieved sometime soon?

John, this is Peter DeLongchamps. I think you're absolutely correct. One of the things that we're fortunate to have is a terrific financial services company attached to the OEMs that have been able to cement the rates. You look at our attachment rates now they're up to 75% penetration on new F&I. So that's a positive. And I think where we can also really pick up some business through lower rates from the used side because those penetration rates are 62%, 63%. So I think you're spot on. With lower rates, it's going to certainly help our used car business and make the new car affordability, I think better for the consumer.

John, this is Daryl. Our data says that average selling price of the new car in the third quarter was down $1,000. So if you combine that with some lower interest rates that should take some pressure off the consumer and hopefully drive some more volume.

David Whiston, Morningstar.

Thanks. Good morning. Just first, a clarification on CDK and a follow-up with that is, did you say losses of $0.97 plus $0.34 for the comps was $1.31 total?

David, this is Daniel. $1.31 total, but the disaster pay [online] was already adjusted out of the $9.80. And so the difference in the $9.80 and what you would deem to be the losses about $1.

Okay. And is it just luck that you guys got your service back -- core service back in about a week or were you able to work with CDK behind the scenes to get that back online? (laughter)

Absolutely no luck at all, David, come on.

The harder you work, David, the luckier you will get.

David, it's hard to say why. I mean one, we think our systems are architected in a way that helped us move faster, we felt comfortable being able to move with less risk. I think our team has a very good relationship with CDK. And honestly, we tried to work with all the public dealers to try to help the industry get back, honestly.

I don't know how much it helped us get back faster. But those were all things. And I think a lot of the technology on our back office really helped us get things back once we did have CDK access.

And just on capital allocation, with buybacks, very long-term, even in the next decade, should we think about you guys kind of doing what AutoNation has done for a very long time where you are just trying to get that share count as low as you possibly can?

No, we don't think about it in terms of share count necessarily. What we look at is, when we are faced with an acquisition, we want to do the math on a buyback, using that capital for a buyback or using that capital for an acquisition. And if it's close, we will do the acquisition because we want to grow the company, and we think scale is important and growing new clusters is important and things like that.

But we think about it in the context of just other uses of capital. We don't necessarily think about the share count. Daniel, you might have something to add to that?

I don't have anything further in the moment.

(Operator Instructions)

Michael Ward, Freedom Capital.

Thanks. Good morning, everyone. I'd like to clarify. I just wanted to clarify the CDK impact. So you had new and used unit sales lost, service business lost, in total that was $17 million hit pretax. You had the one-time comp charges of $5.9 million, and that's included in the SG&A number we see. Is that the right way to think about it?

That's correct. It's a one-timer charge in our SG&A.

And it's included. You didn't call that out. The $9 million you called out for catastrophic events was the weather-related impact.

That was weather and --

And the CDK, so that, let's say, ballpark, two-third CDK adjustment, a third weather.

Okay. I just wanted -- Daniel, I think you said something like the service in April and May in the US was running up 5% or 6% same-store, is that correct?

Customer pay was up 6% through the end of May, second quarter, April, May. [CP] was up 6%, warranty was up 12%.

Okay. So then in total -- so that suggests somewhere around a $20 million or $30 million hit from the CDK on the service revenue. Somewhere in that one- or two-week period in June. Is that ballpark?

It's probably.

I think that's a fair assessment.

Okay.

Mike, it's Daniel. It just took longer to process every transaction, and it took longer to process every transaction back into the system than normally it would. It was just very inefficient.

Okay. And from your performance coming out of it relative to the rest of the dealer group was much better. And so it sounds like it was the call center and AcceleRide that really contributed to that. Is that right?

Well, I think there was a number of things that contributed, I think the technology, both at our customer contact center as well as our digital retail solution and our back office processes. I think all of that helped plus we had some alternative technology we could use in the service drive, and that helped us as well. So I think a lot of the technology really did help us. Yes.

Ron Jewsikow, Guggenheim Securities.

Good morning and congrats on the quarter, team. It's really impressive, on the CDK outage. On inventory levels, you called out, you expect it to normalize post, I think the June number that looks like it was pretty heavily impacted by CDK in terms of the new day supply. Is that the right way to think about that? And should we assume if it goes back towards like 45 days, that is the right way to estimate the new vehicle sales impact as well that you have?

Ron, it's Daniel here in our investor deck in page 5, we've laid it out pretty deeply. At the end of March, we had 43 day supply, end of April we have 46 day supply, end of May, we had 45 day supply. And assuming that we would have had a normal sales rate, run rate in June, I would have imagined that would have increased significantly over that ballpark.

Now to put the total thing into perspective and absolute unit inventories at the end of March, we had 19,896 vehicles in inventory. At the end of June, we had 23,412 vehicles in inventory and about 1,000 vehicles are currently on stop sale of that 23,400. That's an 18% increase quarter on quarter. So my expectation is with an increased sales run rate, we will see the days' supply come down pretty quickly.

Okay. That's super helpful. And then on new profit per unit was really impressive this quarter in terms of the pretty much stabilization versus the first quarter. How much of that do you think is attributable to either your internal efforts or brand mix where I think you really do probably have the best brand mix in the industry in terms of what consumers want today. But how much is that, and how much do you think is reflective of the industry as a whole, seeing more stabilization?

Well, I think -- this is Daryl. I think our brand mix helps. Toyota's performing well. Their hybrid mix helps. Hybrid is in total, our most profitable vehicle to sell. So I think that certainly helps. But I do think there's some moderation across the board on the decline.

So I believe we'll see that. And we saw some improvement in things like EV gross margin, even though it's a very small part of our mix. We did see some strengthening in EV margins this quarter, and that was good to see because they were really tough in the first quarter. I think there seems to be a sort of a leveling, which I think is probably a bit of an indication on the health of the consumer as well. Anything you guys would add on that?

No.

Glenn Chin, Seaport Research Partners.

Thank you. Congrats team. Daryl, maybe just a follow-on to that, just around the consumer. We have been getting a lot of mixed signals out of the consumer. We are seeing it in restaurants, consumer discretionary, especially higher dollar. Are you guys detecting any change in consumer strength or consumer behavior?

We haven't, Glenn, we haven't seen a shift of material shifts in -- like brand mix as a result of resistance. I would look at our used car performance was we were pleased with it and the gross has held up. And usually that's where you'll see pressure from the mix versus the -- used car mix versus 2019 is still changing quite a bit.

People are buying cheap cars, but that's not a new thing. So I don't think -- I can't -- looking at our data for Group 1 say that we saw -- are seeing any changes in the consumer -- any material changes in the consumer.

And also maybe just follow on to that, Daryl. So no change in I guess evidence of consumers maybe downsizing or training down trim levels or de-contenting or otherwise?

Well, we saw a $1000 decline in average selling price versus the last quarter. We went like $52,000 to $51,000. $51,169 is our average selling price in the quarter, were over $52,000 last year. So there's a -- we see that. Now there is more OEM subvention on rates this year than it was last year. So I'm sure that that probably maybe holds that up a little bit. So that's what we're seeing.

I don't know that we've seen a material change from high trim levels, of mid trim level, a low trim level that we've been able to see. You know there's the pickup truck mix is down a little bit, and that's through the industry. I know some people believe at a time that that's due to pricing pressure, but the SUV mix is still as strong as ever, and SUVs are not cheap as you know.

Glenn, it's Daniel here. There's only one thing that I would add to all of that is I think, you know, part of our capital allocation strategy and the geographies that we currently operate in, they tend to be fairly demographically strong. And I think that's really helped with our GPUs and just our total operations.

And with no remaining questions, we will conclude today's question-and-answer session in addition to today's call. Thank you very much for attending today's presentation, and you may now disconnect your lines.